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in connection with any function or activity of any other department or organization within the Department of Defense (National Military Establishment) and charge upon vouchers the proper appropriation or appropriations of the other department or organization: Provided, That all said expenditures shall subsequently be adjusted in settlement of disbursing officers' accounts.


“SEC. 412. The Secretary of Defense shall cause property records to be maintained in the three military departments, so far as practicable, on both a quantitative and monetary basis, under regulations which he shall prescribe. Such property records shall include the fixed property, installations, and major items of equipment as well as the supplies, materials, and equipment held in store by the armed services. The Secretary shall report annually thereon to the President and to the Congress.


"SEC. 413. All laws, orders, and regulations inconsistent with the provisions of this title are repealed insofar as they are inconsistent with the powers, duties, and responsibilities of the Secretary of Defense under this title shall be administered in conformance with the policy and requirements for administration of budgetary and fiscal matters in the Government generally, including accounting and financial reporting, and that nothing in this title shall be construed as eliminating or modifying the powers, duties, and responsibilities of any other department, agency, or officer of the Government in connection with such matters."



Mr. EBERSTADT. I would like to acknowledge my appreciation of your very friendly remarks and flattering exaggerations. Both are appreciated.

The CHAIRMAN. They were in the field of understatement on my part, but, nevertheless, we like to see modesty reinforced.

Mr. EBERSTADT. Thank you. We have set a schedule for laying before you today the bill with an explanation, section by section. With

our permission, I would like to read the statement which I have prepared, whereupon Mr. McNeil will undertake an explanation of the proposed amendment, section by section.

The CHAIRMAN. Go ahead, sir.

Mr. EBERSTADT. When former President Hoover appeared before your committee in connection with S. 1269, he recommended that you include in this bill provisions aimed at improving the form of the military budget as well as the organizational, procedural, and accounting mechanisms involved in its preparation and execution. The Hoover Commission and its several task forces charged with studies in this field came to the same conclusion. When I had the privilege of

. I appearing before your committee on March 29, 1949, I made a similar suggestion.

In this area lies a great opportunity to promote clarity and unity of purpose, as well as economy and efficiency, throughout the Military Establishment. To this end, we propose a means of furnishing a clear picture of military requirements so that they may be kept in realistic relationship to our national security needs and economic


capacities. In essence, our recommendations provide for the socalled "performance budget" with congressional appropriations geared to readily identifiable programs and for better information for the Secretary of Defense, the President, the Bureau of the Budget, the Congress, and the public. This is of vital importance to all of us in conserving our resources for use in the best advantage in dealing with the grave problems of national security that now face us.

Since my appearance before your committee, in response to your request, I have assisted in preparing a draft of a proposed new title IV to the National Security Act of 1947 dealing with these matters, which can be incorporated in the present bill. Others who participated in this work are Gen. Verne D. Mudge and Mr. John H. Sims, of your staff, Dr. Henry P. Siedemann, consultant to the Hoover Commission, and Mr. Franz Schneider, who handled these matters for our taskforce committee on National Security Organization of the Hoover Commission. Secretary of Defense Johnson generously put at our disposal the services of Mr. W. J. McNeil, Special Assistant to the Secretary of Defense, Mr. McNeil's counsel, Mr. N. H. Goodrich, and Mr. John H. Adams. I take this opportunity to acknowledge publicly my appreciation of their contributions, without which I could not have accomplished the job.

We also had the benefit of the advice of Mr. T. Coleman Andrews, chairman of the committee on Federal Government accounting of the American Institute of Accountants and who directed the accounting phases of the work of the Hoover Commission's task force on budgeting and accounting of which Mr. John W. Hanes wa schairman.

Early drafts of the proposed new title IV were reviewed with representatives of the Bureau of the Budget, the Treasury Department, and the General Accounting Office of the Comptroller General. Their suggestions were valuable and constructive and, with a few exceptions, have been incorporated in the document now presented to you. So that you might have their views authoritatively and at first hand, I requested each of them to communicate directly with your chairman.

. Mr. Chairman, I am happy to be in a position to deliver to you letters relating to the proposed amendment from the Bureau of the Budget, Secretary Johnson, the Treasury Department, and the Comp troller General.

The CHAIRMAN. I wish you would come to all our meetings and anticipate our difficulties and relieve us of these things beforehand.

Mr. EBERSTADT. I think these letters will add but very modestly to those burdens.

The CHAIRMAN. They will clear up a lot of misunderstandings at the start. We will put those in the record at this point, if you desire.

Mr. EBERSTADT. Very well.
(The letters referred to are as follows:)


Washington, May 4, 1949. Hon. MILLARD E. TYDINGS, Chairman, Committee on Armed Services,

United States Senate, Washington, D. C. MY DEAR MR. CHAIRMAN : Representatives of this Department have had an opportunity to consider and discuss with the staff of your committee a draft of legislation intended to become title IV of S. 1269, a bill to amend the National Security Act of 1947. It is my understanding that the committee intends to consider this draft at a meeting on Thursday, May 5.


In discussing the matter with the Secretary of the Treasury, he indicated that he would favor, in principle, legislation represented by the draft dated April 30, 1949. The Secretary expressed the desire, however, that if any general provision is included for the repeal of laws, orders, and regulations, it be made perfectly clear in the legislation that there is no intention to eliminate or modify the powers, duties, and responsibilities of any other department, agency, or officer of the Government. He also expressed the opinion that the legislation should indicate congressional intention that the functions provided for in title IV be administered in conformance with the over-all budgetary, financial, and accounting policy and requirements of the Government. I observe that these two points have been covered in the latest draft dated May 3, 1949.

The objectives of developing a performance budget, good financial control, and consistent, reliable, and more useful accounting results for the whole National Military Establishment are unquestionably sound. It is observed that the proposed legislation contains certain special features regarding the establishment of working-capital funds, management funds, and authority for making transfers between appropriations, all advocated in the interest of more flexible management. I do not think that these provisions are undesirable, provided, first, that the Congress is made fully aware of the significance of the provisions, and, second, that the authority requested is properly implemented through sound accounting and control practices on the part of the National Military Establishment and effective independent audit by the Comptroller General of the United States. Very truly yours,

E. F. BARTELT, Fiscal Assistant Secretary.


Washington 25, May 4, 1949. Hon. MILLARD E. TYDINGS, Chairman, Committee on Armed Services,

United States Senate. MY DEAR MR. CHAIRMAN : Reference is made to your letter of April 27, 1949, acknowledged informally April 28, transmitting a copy of proposed amendments to S. 1269 and a detailed explanation and analysis of the provisions of the proposed amendments. A copy of the proposed amendments had been sent to Mr. Walter F. Frese, Chief of the Accounting Systems Division of my Office, by the chief clerk of your committee on April 26, 1949, to expedite arrangements for a preliminary conference.

Since receipt of the proposed amendments in the General Accounting Office, several conferences have been held in which representatives of this Office participated with those of the National Military Establishment, the Treasury Department, and the Bureau of the Budget, and on Monday, May 2, with Mr. Eberstadt and staff of your committee. A good many changes have been tentatively adopted, and my comments will be directed in general to the draft dated April 30, 1949.

The limited time available has not permitted a detailed analysis of the many provisions of the amendments. However, the proposed provisions which add a new title IV to the National Security Act of 1947, dealing with the promotion of economy through establishment of uniform budgetary and fiscal procedures and organizations, are in general a substantial step in the right direction. The provisions of sections 401 and 402, providing for comptrollers for the National Military Establishment and for each of the three military departments, represent an especially important feature, considering the increased authority and responsi: bility over finances granted to the National Military Establishment by the remaining provisions of the amendments. It is understood that there has been some discussion over the exact form of the provisions with respect to the Comptroller, but I wish to emphasize that it is important, in my opinion, that the legislation stress the functions to be performed by the Comptroller. My views on this matter are set forth more fully in the attached copy of my letter of April 15, 1948, to the Administrator of the Economic Cooperation Administration.

The provisions of section 403 dealing with the setting up of a performance budget for the National Military Establishment are forward-looking and hold great promise. They are in line with efforts of the Bureau of the Budget in which this office has cooperated covering the Government generally. I am much interested in seeing accounting and budgeting for appropriations develop in the direction of reflecting a clear disclosure of the costs of goods and services actually used in connection with the performance of various functions together with the amounts of resources acquired which are available for future use (such as, inventories). The proposed amendments should provide the foundation for constructive efforts in this direction in the National Military Establishment. The provisions of section 403 (b), authorizing transfers and adjustments within each military department for a limited period to expedite the conversion from present budget and accounting methods to the performance basis contemplated, are rather broad, but some such authority appears necessary in order to gain the desired objective.

Section 407 provides for the establishment, capitalizing, and use of working capital funds in the National Military Establishment for the purpose of financing inventories of such stores, supplies, materials, and equipment, and providing working capital for such industrial-type activities, and for such commercialtype activities as provide common services within or among the departments and agencies of the Establishment, as the Secretary of Defense may designate. The provisions of this section will enable more effective control of inventories in the National Military Establishment, more efficient use of supplies and equipment, and better accounting control and results with respect to commercial and industrial operations carried on in the military departments. They are likewise a step in the right direction toward financial information showing the cost of operations.

These provisions will make possible substantial economies and increased efficiency under proper administration and can result in a net saying in the amount appropriated to the National Military Establishment through better use of existing stocks of supplies and materials. Of particular significance are the provisions of subsection (c), authorizing reimbursement from available appropriations for the cost of stores, supplies, materials, or equipment furnished and of services rendered or work performed, including administrative expenses; and those of subsection (f) providing that no greater cost shall be incurred by the requisitioning agency for stores, supplies, materials, or equipment drawn from inventories, and for services rendered or work performed by the industrialtype or commercial-type activities for which working capital funds are authorized than the amount of appropriations or funds available for such purposes.

These provisions contemplate that the appropriation current when work is actually performed for or supplies are actually issued to an agency in the National Military Establishment will be charged with the cost of such work or supplies. The closer such costs can be related to the actual use of the materials by the requisitioning agency, the better results will be achieved in reflecting under the respective appropriations the actual results of operations for the fiscal year.

The provisions of subsection (d), authorizing the Secretary of Defense to provide capital for such working capital funds by capitalizing inventories on hand, will further the desired objective. The additional provisions of that subsection, authorizing the Secretary of Defense, with the approval of the President, to provide capital by transfer until December 31, 1954, from unexpended balances of any appropriations of the military departments not carried to the surplus fund of the Treasury, will have the effect of enabling the Secretary to use for setting up the working capital funds moneys which may originally have been appropriated by the Congress for other purposes.

A further effect of this authority would be to extend the availability of funds which otherwise would revert to the surplus fund of the Treasury. I feel that the attention of the committee should be called to these factors. However, the subsection provides a safeguard by prescribing that no deficiency shall be incurred as a result of any such transfer. This method will furnish a means of capitalizing the working capital funds initially without additional appropriations by the Congress, and will contribute to a gradual building up of the working capital funds during the transitional period.

The provisions of subsection (f) will act as a further safeguard by limiting the use of the stores in inventory under the working capital funds or of services performed under such funds to those uses for which appropriations are made by the Congress. Thus, the main effect of the transfer provisions is to authorize a holding fund to be built up outside the normal appropriation process, under which stores can be accumulated subject to later authorized use. Also, the section requires that reports of the condition and operations of such funds shall be made annually to the President and to the Congress.

The provisions of subsection (h) of section 407, authorizing the appraised value of stores returned to working capital funds to be charged to such funds and credited to the current appropriations concerned, would leave the door open to possible abuse through the issuance of supplies to appropriations near the

close of one fiscal year and the return of such supplies to the working capital fund in the following fiscal year, thus making additional funds available in the appropriations for the second fiscal year to the extent of the value of the supplies. However, it has been explained that some provision of this nature is necessary in order to persuade the various agencies in the Military Establishment to return to common-stock property not needed in their current operations and make such property available for the most economic over-all use.

Section 408 provides for management funds in each of the three military departments for the purpose of facilitating economical and efficient conduct of operations financed by two or more appropriations where the costs of such operations are not susceptible of immediate distribution as charges to such appropriations. I wish to call attention to the provisions of subsection (b), which in the case of the Army management fund and the Air Force management fund would make available $1,000,000 each from any unobligated balance of any appropriation available to the respective departments. My comments with respect to the transfer of unexpended balances under section 407 apply likewise to this subsection. Under proper circumstances, the use of the proposed management funds could assist in the efficient administration of activities carried on under more than one appropriation in the National Military Establishment and should lead to more adequate disclosure of the cost of such activities.

With the advent of a full-performance budget based on functions and activities, the need for the use of management funds should diminish, but it is understood to be anticipated that such need would never entirely cease because of the unpredictable nature of some of the operations necessarily carried out. Other provisions of section 408 are aimed at preventing the use of the management funds for any obligation not properly chargeable to available funds under the National Military Establishment and the requiring at least once each fiscal year of a settlement on a cost basis with the respective appropriations involved.

Both sections 407 and 408 will broaden the audit responsibilities of the General Accounting Office in considerable measure and will require adaptation of audit methods and techniques to the accounting and internal control procedures developed in the National Military Establishment. However, there should be an ultimate opportunity, through increased effectiveness of internal controls and availability of reliable financial information, for a fuller and more adequate disclosure of the financial operations concerned.

I regard the provisions of section 413, as tentatively modified, as of the highest importance in placing the powers, duties, and responsibilities vested in the National Military Establishment by title IV within the Government's general budgetary, fiscal, and accounting framework. Those provisions, while repealing laws, orders, and regulations inconsistent with the provisions of title IV, are intended to make it plain that the powers, duties, and responsibilities of the Secretary of Defense under the title are to be administered in conformance with the policy and requirements for administration of budgetary and fiscal matters in the Government generally, including accounting and financial reporting, and that nothing in the title will affect or disturb the authority in these matters of the Secretary of the Treasury, the Director of the Bureau of the Budget, the Comptroller General, or any other Government official outside the National Military Establishment under existing law. I believe the National Military Establishment and others concerned are in complete agreement on this point, and I would recommend that the committee report on the bill, if the amendments should be adopted, include language to emphasize this intent.

We are continuing our discussions with the interested group on these amendments and will be glad to make any further suggestions which might contribute to the technical improvement of the language. I will be glad to have representatives of the Office appear before the committee, if you so desire, and answer any questions or present further information.

The whole program contemplated by the proposed amendments is of tremendous significance in relation to the joint accounting program now being carried on by the General Accounting Office, the Treasury Department, and the Bureau of the Budget in cooperation with all other Government agencies. If the amendments should be enacted, it will be our purpose to work in close collaboration with the National Military Establishment to the end that the accounting machinery developed may be responsive to internal management needs and requirements, and also consistent with principles and standards of accounting developed for the Government generally. Sincerely yours,


CO er General of the United States. 89469—49-14

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