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can be solved in a manner that fits into the framework of the performance-type budget, by the use of working-capital funds.
Under the authority granted in title IV, industrial- and commercialtype functions are to be identified and separated from purely administrative and military functions. An operating or working-capital fund is established for the operation of such activities, eliminating entirely the many sources of funds used in the past to finance the day-to-day operations. All costs of the operation of this industrial or commercial-type activity are to be paid from the working-capital fund, utilizing standard, accepted, and approved commercial practices for the distribution of direct or indirect costs of jobs in process. In effect, working capital is made available to those who actually run or administer an industrial- or commercial-type activity performing common services—making those officials fully responsible for direct accounting for the money they spend, the cost of each job, and the most economical method of accomplishing the work.
Any activity which places a work order with an industrial- or commercial-type activity would establish proper commitments and obligations against moneys appropriated to it under the performance budget-generally in the same manner as would be followed if the order were placed for the work to be done by a private concern. The industrial plant would enter the order and distribute the work in the plant by its own job orders--a fundamentally sound procedure. When the work is completed and the cost of the job ascertained, the plant will invoice or bill the cost to the ordering agency and its proper appropriation and budget program. The invoice charges would include items of cost for labor, material, and current operating expense. In this way the cost of products or services rendered result in a clean-cut charge to the proper budget or project or program.
Under such an operation, it is possible to compare costs to develop a healthy spirit of cost competition between activities of a similar nature. If the billing costs of one activity are higher than the billing costs of another similar activity, action can be taken immediately to determine the reason for the higher costs at the competing installation. The best yardstick for measuring efficiency is the billing cost of accomplishing repetitive work. An incentive to efficiency and economy is provided.
The amount of work to be performed in such an industrial- and commercial-type activity under this working-capital concept is directly controlled by orders placed within the limits of moneys appropriated for such work; and, therefore, control of the basic projects or programs remains with the Congress.
An example of a commercial-type activity which was recently placed under working capital is the consolidated printing plant in Washington. Excellent results have already been shown in this pilot operation in which 25-percent reduction in personnel has been already effected, with a corresponding reduction in cost.
The CHAIRMAN. Is that what the Secretary spoke of a while ago?
Mr. McNEIL. He touched on one of the examples. The minute that the cost of doing a job was readily apparent in the billing for the work, immediately there was consternation, and never again, I think, will that group order in that way.
The Chairman. In other words, when the procuring or ordering agency becomes more conscious of the expenditure involved and
knows it will be charged against its account, therefore, it is more conservative.
Mr. McNEIL. That is correct. They are more conservative in their requests because they have information that is right in front of them; the cost of the job is right in front of them at the time they order the work done.
The CHAIRMAN. If they deplete the funds that have been appropriated to them, they would have to dispense with other activities that they had intended to carry out.
Mr. McNEIL. That is correct, sir. It is a different concept and a different approach than has been followed many times in the past, where on over-all plant existed, a printing plant existed, and every one in the agency sent down printing to have it done. “It doesn't cost anything; so, let's have it done. In this way the cost is billed to the person in charge of that project or program and is reflected then in clean-cut expenditures from a program authorized by Congress.
The CHAIRMAN. It seems so me that is the practice with Members of Congress who make a good speech and want to have it printed and circulated. They request the printing of thousands of copies, and they are advised in advance what the cost will be. It is customary to deposit a check in advance.
Mr. McNEIL. That has not been true, Mr. Chairman, throughout the Government as whole.
The CHAIRMAN. We hesitate sometimes to order more copies than we have constituents.
Mr. McNEIL. There is really nothing new in what we have in title IV, but it is the application to our operations of proven concepts of business practices. Studies are under way which will convert at an early date
operation of a large industrial plant to a working-capital basis. This major industrial plant will serve as the pilot for the extension of this system throughout the Department of Defense. The provisions of this whole section might well be of benefit to the operation of certain activities of other governmental agencies.
The Department of Defense frequently is required to carry on projects some of which are of short-time emergency nature-which require the participation of two or more organizational divisions of the three military Departments. When the operation is to be carried out under the direction of a single military commander or manager, it is advantageous to provide him with a single source of funds with which to accomplish his mission. For this reason, authority was granted in title IV for so-called management funds. Management funds, as distinguished from working-capital funds, are not continuing or revolving funds. They constitute an allotment of money to a common pool for a special purpose only. They thus provide a management tool for economical and efficient administration of specific joint operations, or operations requiring financial support from two or more appropriations.
Subsequently, a distribution of costs is made to the activities and appropriations chargeable. Thus, during an operation there is a single account, administered with clear accountability, followed by a clear-cut statement of costs which subsequently are distributed and recorded against the proper projects and activities.
Restrictions confine the use of such an account to appropriated funds of the departments specifically available for the projects in question. In this way, control is retained by the Congress of projects as they were initially authorized. This procedure is helpful for operations such as joint amphibious maneuvers, the A-bomb tests at Eniwetok, and for administrative functions, such as a joint inspection service. Here, again, is authority which may be of real benefit to other agencies of Government, which have a rather complex organizational structure.
Another provision in title IV which is helpful is the section entitled “Adjustment of accounts." This section is intended to facilitate accounting and to provide for the transfer of funds from one appropriation to another, within the Department of Defense, when a function or activity is reassigned under authority of law,
The CHAIRMAN. May I inquire whether title IV, "Amendments to the National Security Act," gives authority to the Secretary to transfer funds within some percentage from one function to another, as is provided in the pending bill?
Mr. McNeil. It does not, sir.
The CHAIRMAN. The only authority you have on that is where you transfer a function or a service from one agency to another division, and you similarly transfer the funds that were appropriated.
Mr. McNEIL. That is right, sir. Title IV, as it passed the Senate, also contained provision for 5-percent transfer authority between appropriations. That was stricken in the House. I was informed at the time that it was contrary to House practices and rules. I was also informed then that, if we thought we needed it, it should appear in the annual appropriation bill. Inasmuch as we felt it would be very helpful, we would like to have it. I think it is helpful to any agency which has to predict its operations 18 months to 2 years ahead.
The CHAIRMAN. You do not have it in the act that you are operating under. We do have to decide whether that provision is advisable in this bill. Do you state that it is, in your opinion, desirable not only to your Department but to any department to have that transfer authority in law?
Mr. McNeil. It would be desirable to us and, I am sure, to every department that has its work financed by a number of appropriations.
The Chairman. Do you think this percentage, 5 percent, would be adequate for that purpose?
Mr. McNeil. I do. I think, in my opinion, it should not be great. Five percent, I think, would be satisfactory. If there were any greater deviations, I think there probably would be sufficient change in basic programs to require appearance before your committees and have it authorized. I think that 5 percent represents a fair balance.
The CHAIRMAN. I did not really mean to interrupt your statement, but I knew that transfer provision was in this bill and I did not recall about title IV. I wondered whether you requested it or whether you thought it desirable in the Defense Department. It seems to me that your Department is one where it probably would be most desirable, because you have to meet changed conditions more rapidly, probably, than in any other department. It is more difficult for you to anticipate just where funds will need to be expended.
Mr. McNEIL. That is correct, sir; and it is one thing that has helped the appropriation committees, the Bureau of the Budget, and the
Department of Defense, which have worked on that problem. To give you an example, the Air Force might explain it better than anything I can think of at the moment. All of their funds for maintenance and operation of air stations and aircraft are in one appropriation. Within that appropriation their work is divided into about 190 programs. Inasmuch as the one appropriation is provided for 190 programs, there is automatically flexibility between them. So, only in the case of transfers between “Maintenance and operation of air facilities” and “Aircraft and procurement” would this authority now be used in the case of the Air Force.
The CHAIRMAN. May I ask you, after your study of the pending measure, if that transfer provision were enacted in this bill, would it be applicable to the Defense Department? In other words, would the provision in this bill be applicable to the Defense Department and grant the same authority to it that it does to other departments if this bill were enacted?
Mr. McNEIL. May we include that in our report on the repeal provisions?
The CHAIRMAN. We should like to know that. You say it is desirable, and I am just wondering if the provisions of this bill would grant you transfer authority if this bill were enacted.
Mr. McNEIL. We shall give you our best views on that, sir.
(The information requested appears at the conclusion of Mr. McNeil's statement.)
Of concern only to the military departments is the section providing authority for the common use of the disbursing facilities of the respective military departments. Inasmuch as it is not applicable
. to other Government departments, I shall not for this reason discuss this section.
The last important provision of title IV is that calling for reports on property. This section authorizes the Secretary of Defense to require the three departments to maintain property records, so far as practicable, or both a quantitative and monetary basis. The property records are to include the real proprety, such as fixed installations and their equipment; items of equipment in use, such as aircraft, tanks, ships, weapons, and ammunition. Earlier I discussed the operation of inventories under working-capital accounts. In the military departments it is contemplated that these working-capital accounts will, for the present at least, be limited to standard-stock common-use items. Similar accounts, although not carried under working-capital funds, are to be established to include items such as technical equipment of a highly obsolescent nature or ammunition which may be considered as a war reserve. Under the operation of inventory accounts as contemplated under this section, it is possible to have a measure of the rate of consumption of this specialized type of material. Material items to be procured for such inventories will generally be those wherein specific identification of equipment will be made in a procurement program separately set out in the budget presentation.
The Navy has had considerable experience with this type of appropriation and property account. Tentative systems are now being tested at pilot installations of the Army and the Air Force. The experience gained from these tests, in conjunction with previous Navy experience, is providing the information necessary for the full and
adequate development of uniform property accounting policies and procedures in all three military Departments.
As we brought out in the hearings on title IV, the Office of the Comptroller General, the Treasury Department, and the Bureau of the Budget all participated in the development of these provisions and all concurred in the type and character of the fiscal and accounting framework to be established. This is pointed out as an illustration of the progress that can be made through the cooperative effort of the legislative and executive branches in the development and implementation of improved methods and procedures.
I would like to interpolate there, if I may, and say that, when I first had some experience in the executive branch, one thing that seemed to be lacking was teamwork and a cooperative approach. I think there is a great change in the last 3 or 4 years. One of the things that impressed me was the way the Comptroller General, the appropriations committees, the Armed Forces Committee here, the Department of Defense, Bureau of the Budget, and the Treasury all worked on the development of what we think is a very sound basic fiscal structure for our operation, which does cover a sizable portion of the Federal effort.
Our task of bringing order and clarity to the complex and diversified operations of the three military departments is far from complete. The pattern has, however, been established and real progress has been made. Some of the progress to date has already paid substantial dividends and has carried us part way toward our goal of maximum security at a minimum of expense.
The CHAIRMAN. Could you point out the amount of savings or indicate some idea of the amount of savings that you think have accrued or are accruing by reason of this change in the budgeting system?
Mr. McNEIL. I would say that to break it down specifically by provisions I would have difficulty. However, the authority granted to us or to the Department of Defense in the National Security Act, the provisions that are the basic authority, and the change in the organizational structure, the provision of title IV and the action that has been taken—I don't know how to divide between the two-have resulted in substantial savings. Many of the benefits that we expect from title IV will come in the future as we get our industrial activities on a sound basis and when we commence to get this management concept all the way through the Department. We have a report ready for Congress, a portion of which at least will be available at the end of this week, which will identify savings, many of which can be attributed to the machinery provided by this act.
The CHAIRMAN. I am sure it hasn't reached its full development yet by any means, but have you progressed sufficiently far that you can state with assurance that great savings are going to result from this change?
Mr. McNEIL. Sir, the minute that the report is available, if I may send this committee several advance copies, I think it may answer your question. I prefer, if I may, not to answer that question until the report is released.
The CHAIRMAN. I did not mean to ask you to give out the information prematurely, but I thought you might state in general terms that