Mr. MARSHALL. And, as a member of the board of directors of the Air Force Exchange Service, you will vote on this request. Isn't this a conflict of interest?

General TALLMAN. I think I can handle it, sir.

Mr. MARSHALL. Because you are on one board requesting money and on another board requesting money.

General TALLMAN. I think we are out for the same thing.

Mr. MARSHALL. I hope so. Thank you.

Mr. NICHOLS. One final question.

I was amazed at the amount of losses, bad checks and so forth. We visited Southeast Asia, Vietnam in particular, in January. We were extremely concerned to find that the losses were as excessive as they were. I recognized that the last fiscal year we lost, in bad checks alone, in our Army installations in Vietnam, in excess of $1 million.

The practice seemed to prevail that a GI would go in in the last few days he was in Vietnam and get his check cashed, come back to the States, be processed out, be separated, and be in a civilian job by the time the check got turned down and the Army started looking for him. Of course, no attorney is going to take a $50 check against a GI, you know.

Now, have you experienced such situations in Tan Son Nhut and your other places there in Vietnam?

General TALLMAN. Of course, our figures are much less than the Army. We have a problem but not what I consider unmanageable. The loss was around $60,000 worldwide in 1971 due to uncollectable checks. This is out of a total dollar value of $726 million, 33 million checks cashed.

Mr. NICHOLS. Would you submit for the record your losses in Vietnam for the past year percentagewise and how much of the $60,000 was actually lost in Vietnam?

General TALLMAN. All right, sir.

(The following information was received for the record:)

In 1971, Air Force clubs and messes cashed 5,226 checks with a value of $132,667 which were returned. $111,073 of this amount was recovered. Approximately $10,000 remains open for collection. $11,716 has been written off as worthless checks. Data is not available to determine the percentage of worthless checks against the total dollar value of checks cashed in Vietnam.

Mr. NICHOLS. We appreciate your appearance here before the committee and I think you answered most of our questions.

Those you couldn't answer, we look to you to provide them for the

record.

The subcommittee will meet again on Thursday at 10 o'clock, and at that time we will hear from witnesses of the Marine Corps.

We stand in recess until Thursday morning.

(Whereupon, at 4 p.m., Tuesday, May 16, 1972, the subcommittee was recessed, to reconvene at 10 a.m., Thursday, May 18.)

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ARMED SERVICES,

SPECIAL SUBCOMMITTEE ON NONAPPROPRIATED FUND
ACTIVITIES WITHIN THE DEPARTMENT OF DEFENSE,

Washington, D.C., Thursday, May 18, 1972. The subcommittee met, pursuant to notice, at 10 a.m. in room 2212, Rayburn House Office Building, Hon. Bill Nichols, chairman of the subcommittee, presiding.

Mr. NICHOLS. The subcommittee will come to order.

Continuing our hearings this morning in the area of nonappropriated funds, our first witness will be Rear Adm. C. F. Rauch, Jr., Assistant Chief of Naval Personnel for Personnel Affairs. U.S. Navy. Following the admiral, we will hear testimony from Brig. Gen. Harvey Spielman, Assistant Director, Personnel for Marine Corps Headquarters, U.S. Marine Corps.

Admiral Rauch, did I pronounce that right, sir?
Admiral RAUCH. We pronounce it Rauch.

Mr. NICHOLS. Admiral Rauch, you may proceed at this time.

STATEMENT OF REAR ADM. C. F. RAUCH, JR., ASSISTANT CHIEF OF NAVAL PERSONNEL FOR PERSONNEL AFFAIRS, U.S. NAVY Admiral RAUCH. Mr. Chairman, I welcome the opportunity to present a review of the administration of the Navy leisure time activities program.

Before I continue, I would like to introduce Captain Kash, who works with me as Director of Special Services Division.

For clarification, my remarks will apply to the activities encompassed by the Navywide recreation and mess programs assigned to the Chief of Naval Personnel for supervision, as the agent for the Chief of Naval Operations, by Chief of Naval Operations Instruction 7010.2A.

My comments will not include the programs administered by the Marine Corps, the Navy Resale System Office, or civilian nonappropriated fund activities and private organizations such as Boy Scouts, mutual aid societies or credit unions.

The Navy feels a vigorous and effective welfare and recreation program is tied inextricably to retention. The welfare and recreation programs contribute significantly to the morale and contentment of military men and their families thereby improving the probability of retention.

The investment of relatively small sums in improving the quality of service life is merely a means of protecting the Navy's training investment and reflects sound business practice. The basic philosophy that a well-rounded morale, welfare, and recreational program should be provided through appropriated funds, supplemented by nonappro priated funds, has been acknowledged and accepted for many years by both the Department of Defense and the Congress.

Within Navy, demands for appropriated funds in support of operating commitments have resulted in dependence on nonappropriated

funds to underwrite the major portion of the recreation and mess ongoing programs. Nonappropriated funds have been inadequate, however, to satisfy open mess and recreation facility deficiencies which are currently placed in excess of $500 million. This financial situation is the result of decreasing resources and forces rather than a conscious change in philosophy.

The nonappropriated funds supervised by the Chief of Naval Personnel can logically be viewed in three segments: the Central Recreation Fund, the Mess System, and the recreation program.

The Chief of Naval Personnel is responsible for the equitable distribution of recreation funds throughout the Navy. The Bureau of Naval Personnel Central Recreation Fund, which is currently administered as five distinct recreation and mess accounts, is the vehicle through which financial assistance and services are provided to Navy recreation and mess programs worldwide.

Income to the Central Recreation Fund in fiscal year 1971, amounting to approximately $23 million was derived from Navy Exchange System profits, assessments on ships' store and mess sales, assessments on slot machine net profits, and from interest earned on short-term securities held by the fund.

Expenditures in support of centralized programs in fiscal year 1971 approximated $8 million. These programs included the Navy motion picture program, Mess and Recreation Management Training, Centralized Accounting Functions, Field Assistance/Audit Teams, the Navy sports program, nonappropriated fund employee benefits program and a composite insurance program. The Headquarters staff cost approximately $700,000 in fiscal year 1971.

The balance of fiscal year 1971 income was allocated to the support of command and unit recreation fund operating programs, and the construction and renovation of mess and recreation facilities and Navy temporary lodges.

Management control over expenditures and distributions from the Central Recreation Fund is exercised through an annual budget and 5-year financial plan which is reviewed and approved for the Chief of Naval Personnel by the Deputy.

As a participant in the centralized accounting and consolidated banking system for Navy recreation funds, the Central Recreation Fund is subject to the same financial and internal controls as are prescribed for activity recreation funds, for example, separation of accounting and cash control functions.

The nature of these controls will be discussed in a subsequent section of this statement. Periodic audits and inspections of the accounts in the central recreation fund are conducted by the Navy Audit Service, the Navy Inspector General, and a certified public accountant's firm under contract to the Chief of Naval Personnel.

With regard to the nonappropriated fund facility construction program: approved, but unfunded, military construction recreation proj ects are considered for nonappropriated funding. The Central Recreation Fund Board of Administrators, of which I am chairman, develops a priority list within the funding constraints of the annual budget.

This list is approved by the Chief of Naval Personnel. In effect, recreation and mess facility deficiencies which have "failed" military construction funding compete for the nonappropriated fund construction dollar., In recent years, nonappropriated funds have been the major source of construction funds, for example, in fiscal year 1971, 87 percent of total leisure time activity construction funding came out of the central recreation fund.

Approved facility projects receive either a loan or a grant as resources become available. Grants are generally made in those cases where the activity does not have the income potential to repay a loan. The central recreation fund and 213 other separate funds, accounting for approximately 90 percent of the Navy's recreation funds dollar-wise participate in a centralized accounting and consolidated banking system.

A central checking account is maintained for day-to-day operations, including all receipts to, and disbursements from, the system. Profits generated by Navy exchanges are deposited monthly to the credit of the individual funds. A savings account is maintained at a level sufficient to meet emergency or unusual needs for funds beyond day-to-day requirements. The remaining funds are invested at the highest available rate of return in bank-time deposits, U.S. Government securities, or such U.S. Government agencies securities as are approved by the Comptroller of the Navy, for use by Government instrumentalities.

As of April 15, 1972, approximately $46 million in nonappropriated funds was invested at interest rates ranging from 4.5 to 6.25 percent. Of this figure, $20 million represented assets of the central recreation fund and $26 million were assets of individual recreation funds.

Investment advice is received from the Bankers Trust Co. of New York, which is a major participant in the world money market. The current portfolio of $46 million consists primarily of certificates of deposit with a maturity range of from 65 to 365 days.

We have no long term investments. As funds become available for investment or reinvestment, bids from three sources are obtained and recorded. In this connection, at least one minority-owned bank is solicited for each potential transaction.

The Navy is in the process of implementing a centralized accounting system for Navy messes ashore which largely parallels the centralized recreation fund accounting system I just described.

This system will increase accountability and internal controls due to the further separation of cash and accounting functions, the requirement for daily cash deposits and an improved capability for meeting the annual certified public accountants open mess audit requirement by making financial reports and supporting documents available at one central point. With the implementation of this system, we anticipate an overall increase of about $20 million in our investment program.

I shall now turn to the administration of the Navy's mess system.

Technical direction of officers' and petty officers' messes ashore is assigned to the Chief of Naval Personnel. As of June 30, 1971, there were 438 messes in operation. These messes reported total income from sales, and to a minor extent from dues, of approximately $143.8 million with a result of operations of $8.6 million or 6 percent of sales. Navy messes are categorized by membership and designated as open, closed, and closed with social functions. Specific criteria for the designation of messes by type and membership eligibility are spelled out in the Manual for Messes Ashore, published by the Chief of Naval Personnel.

In general, however, open messes are operated primarily to provide a social and recreational atmosphere, in addition to meals and refreshments, for Navy personnel on active duty.

Closed messes are operated primarily to discharge the Navy's responsibility for providing essential lodging and food service for resident bachelor personnel. However, the privileges of a closed mess may be extended to military nonresidents if facilities permit.

When there is no officers' open mess on a station or at a nearby activity, the commanding officer may authorize the use of officers' closed messes for social functions such as the sale of alcoholic beverages of private parties. Other than open messes authorized to charge dues, 24 in total, there is no question of membership. Eligible patrons are considered members of the various types of open messes.

Within the United States, packaged alcoholic beverages may be sold in Navy messes only at such locations as have been approved by the Secretary of the Navy.

Normally, package stores are operated as a department of each separate officers' or petty officers' open mess on a station. At very small stations, the commanding officer may designate one mess to operate the package store, in which case profits from sales are divided among the various messes and the enlisted men's club in proportion to the volume of purchases by patrons of each type of mess or club. If there is no enlisted men's club on the station, this share of profits is transferred to the local recreation fund.

As a generalization, eligibility to purchase packaged liquor is extended to all active duty and retired military personnel and their dependents, except that alcoholic beverages are not sold to persons who, because of age, are prohibited by local law from purchasing alcoholic beverages. Beer, with an alcoholic content of not more than 3.2 percent, may be sold to military personnel regardless of age.

Because of the level of congressional interest in overseas slot machine operations, I would like now to take a few minutes to discuss this subject.

Net income to Navy messes in fiscal year 1971 from overseas slot machine operations amounted to $2.6 million, 50 percent of which was retained by the individual mess, the balance being transferred to central mess accounts of the Bureau of Navy Personnel Central Recreation Fund.

Intensive investigations conducted by the Navy during the past 2 years did not reveal that the availability of slot machines at Navy activities constituted a corrupting influence.