As you well know, and as this committee certainly well knows, they have certainly followed the DCA, we were established in May of 1960. Unlike the DIA and the DSA, as I understand it no functions were transferred from the services to us with people as was the case, I understand, in the case of DIA and DSA.

It took us a little time to get off the ground, about 9 months as a matter of fact. So we really mark up from the 7th of March as our implementation date, the day we took over the operational control now referred to as operational direction of the defense communication system. Starting at that time, we started planning what had to be done to effect an improvement in the overall system as well as the economies everyone was looking for.

CONSOLIDATION AND INTEGRATION OF CERTAIN NETWORKS

So, to simplify, we are planning certain consolidations of facilities. These include Army, Navy, and Air Force facilities. We are planning the integration of certain networks.

I refer to SCAN, which I believe the Army mentioned the other day during a hearing before this committee, as well as the NORAD voice. switching network. These we are planning to integrate.

We are also planning, sir, to interconnect certain existing facilities so we can just get more communications capacity out of the complexes that are in operation today. We think that the net result over a period of certain months, the next couple of years, will be a savings in manpower and money.

Mr. FORD. I think it would be well for DCA to keep a little logbook on what you think you have accomplished, both dollarwise and manpowerwise. Certainly it sounds encouraging at the present time. If you have any such information based on your experience to date, I think the committee would like to have it in the record.

SAVING OF MANPOWER SPACES

I am also impressed with your comment, Major, on the 3,000 manpower spaces that you expect to save by the end of fiscal year 1963. Can you tell us where those would be accomplished? Just put it in the record. It would be helpful to see.

Major EwELL. We have already earmarked 1,907 of these spaces with the three big commands to come up: SAC, TAC, and ADC. Mr. FORD. With no loss of efficiency or operational capability? Major EWELL. No, sir.

Mr. MAHON. Thank you very much.

(Additional information follows:)

MANPOWER SPACES

A total of 1,907 communications manpower spaces, primarily military, can be currently identified as personnel savings accruing as a result of integration of communications operations, maintenance, and planning functions in the Air Force Communications Service from the Caribbean Air Command, Alaskan Air Command, Military Air Transport Service, Air University, Headquarters Command, Air Training Command, Air Force Logistics Command, Pacific Air Force, Air Force Systems Command, U.S. Air Forces in Europe and the former Airways and Air Communications Service. This figure also includes spaces saved as the result of the base level consolidation of communications in the Pacific Air Forces and Alaska Air Command areas just prior to the activation of Air Force Communica

tions Service. An additional 1,175 manpower spaces have been identified as potential savings when the communications functions of the Strategic Air Command, Tactical Air Command, and Air Defense Command are integrated into the Air Force Communications Service.

WEDNESDAY, FEBRUARY 21, 1962.

WORKING CAPITAL FUNDS

AFMATS

WITNESSES

MAJ. GEN. JACK G. MERRELL, DIRECTOR OF BUDGET, HEADQUARTERS, USAF

LT. GEN. JOE W. KELLY, COMMANDER, MILITARY AIR TRANSPORT SERVICE

MAJ. GEN. LEE W. FULTON, DEPUTY CHIEF OF STAFF, MATERIEL, HEADQUARTERS, MATS

JOHN F. SHEA, ASSISTANT DEPUTY CHIEF OF STAFF, PLANS, HEADQUARTERS, MATS

HERBERT SUFIT, CHIEF, WORKING CAPITAL FUNDS, PROCUREMENT DIVISION, DIRECTORATE OF BUDGET, HEADQUARTERS, USAF

COL. LESTER R. FERRISS, DIRECTORATE OF TRANSPORTATION, DEPUTY CHIEF OF STAFF, SYSTEMS AND LOGISTICS, HEADQUARTERS, USAF

ROBERT B. HAMMOND, INDUSTRIAL FUNDS BRANCH, PROCUREMENT DIVISION, DIRECTORATE OF BUDGET, HEADQUARTERS, USAF

Mr. MAHON. This afternoon we shall consider the Air Force working capital funds. The largest part of the working capital funds for the Air Force is in the Military Air Transport Service account.

Without objection we shall place in the record General Merrell's opening summary statement and proceed directly with the MATS

statement.

(The statement follows:)

GENERAL STATEMENT ON AIR FORCE WORKING CAPITAL FUNDS

Mr. Chairman and members of the committee, no new appropriations required. Again this year, the Air Force is not requesting any appropriations for the working capital funds. As was mentioned in an earlier presentation, we are, in fact, proposing an additional transfer of $35 million to the "Military personnel" appropriation. This will make a total of $129 million which has been transferred during the past 3 years from these funds, with comparable decrease in the amount of new obligating authority requested for military personnel expenses. The transfers have been made possible through inventory reductions and improved financial management of the funds. Our purpose here today is to provide you a summary of our progress and plans in the Air Force industrial and stock funds. As you are aware, these funds were authorized by the National Security Act Amendments of 1949 to more effectively control and account for the cost of programs and work performed in the Department of Defense. Basically, they represent the application of commercial-type financing to certain industrial or common item programs. The Air Force has utilized these management tools for over a decade now, and endorses their use when this concept of financing is the most practical, efficient, and economical means of insuring highly responsive and effective logistical support. Let me now discuss each fund briefly.

AIR FORCE INDUSTRIAL FUND

The

An industrial fund is a revolving fund which finances the cost of operating industrial or commercial-type activities producing either items or services. fund is reimbursed for the costs of production by selling such items or services to authorized customers. The industrial fund technique was established in the Air Force on July 1, 1950, with the initiation of a test operation in one printing plant. Currently financed under the Air Force industral fund are printing and duplicating facilities, laundry and drycleaning facilities, and the airlift portion of the Military Air Transport Service.

CRITERIA FOR INDUSTRIAL FUNDS

The criteria used in determining the appropriateness of financing an activity under an industrial fund are whether it will—

(a) Provide a more effective means for controlling the cost of goods and services required to be produced or furnished.

(b) Provide a more effective and flexible means for financing, budgeting and accounting for such costs.

(c) Involve a buyer-seller relationship between the industrialized activity and those activities which budget for and order goods or services.

(d) Provide the manager of the industrialized activity the financial authority and flexibility required to procure and use manpower, materials, and other resources effectively.

(e) Encourage more cross-servicing among the military departments and among their operating agencies, with the aim of obtaining more economical use of facilities.

(f) Support the performance concept by facilitating budgeting and reporting for costs of end products, and thus underlining the cost consequences of decisionmaking.

PRICING POLICY

Each activity currently financed under the Air Force industrial fund is reimbursed for costs incurred in providing services based upon orders received and accepted. We use predetermined rates or standard prices to recover all authorized expenses as prescribed by the Department of Defense. The objective is to establish rates at a level which will result in a break-even operation, i.e., no profit or loss. Authorized expenses include civilian pay and allowances, supplies and materials, day-to-day maintenance of plant and equipment, and other costs associated with the production of end items or services. The cost of plant and equipment and military pay and allowances are not authorized industrial fund expenses and therefore not included in the rate computation.

FINANCIAL OPERATIONS

As indicated in the following table (I), expense of $327.3 million exceeded revenue in fiscal year 1961 by $2.9 million, or less than 1 percent mainly as a result of the operation of the airlift service. This operating loss was offset by adjustments to prior year revenue and expense in the amount of $2.6 million so that the net decrease to retained earnings amounted to $300,000. As we advised you last year, $1.8 million of the profit realized by the Airlift Service as a result of fiscal year 1960 operations was returned to the Treasury as miscellaneous receipts in accordance with section 631 of the 1960 Department of Defense Appropriation Act. This section required procurement of commercial augmentation in the amount of $85 million. The balance was transferred to fiscal year 1961 as retained earnings. In fiscal year 1961 the actual procurement of commercial airlift totaled $113.1 million which thereby fulfilled the stipulation of section 531 of the 1961 Department of Defense Appropriation Act which required procurement of commercial airlift in the amount of $80 million.

Based upon the pricing policy of incurring neither profit nor loss, revenue and expense are expected to be equal at $362.2 million in fiscal year 1962 and $358.4 million in fiscal year 1963. The increase in expense for these 2 years over the fiscal year 1961 level is the direct result of increasing the capability of the Airlift Service by assignment of new and more modern aircraft to the strategic airlift force. The offsetting increase in revenue reflects added emphasis on training and responsiveness through large-scale strategic mobility exercises in conjunction with the Army. By means of realistic joint exercises the Airlift Service develops and maintains an effective ability to support the requirements of limited as well as general war plans.

80406-62-pt. 3- -33

TABLE I.-Department of the Air Force Air Force industrial fund, statement of revenue and expense

Table II which follows shows the financial status of the Air Force industrial fund on the last day of the past fiscal year and the status anticipated for both fiscal years 1962 and 1963.

During fiscal year 1961, the cash balance of the industrial fund increased by $14.7 million; a net result of $1.8 million transfer to the Treasury offset by $16.5 million which is the amount by which collections from customers exceeded disbursements for materials, salaries, etc., required to provide services. The cash balance will decrease during fiscal year 1962 by $13.0 million as a result of a transfer of $20.0 million to the "Military personnel" appropriation authorized in the 1962 Department of Defense Appropriation Act, offset by an excess of coll ctions over disbursements in the amount of $7.0 million. Collections and disbursements are expected to be equal in fiscal year 1963.

Government investment will decrease from $81.7 million at June 30, 1961, to $61.7 million at June 30, 1962, and remain at that level. The reduction which occurs during fiscal year 1962 relates to the $20.0 million cash transfer to the "Military personnel" appropriation previously mentioned.

TABLE II.-Department of the Air Force-Air Force industrial fund statement of financial condition

The stock fund basically differs from the industrial fund in that inventories are procured, stocked, and sold, rather than a service being provided or an endproduct manufactured. The purpose of the stock fund is threefold:

(a) To provide a simplified means for consolidated management, financing, control, and accounting for the procurement and stocking of those supplies which are issued to a number of consuming activities.

(b) To facilitate improved financial control of consumption through budgeting, funding, and accounting for the use of such stocks at base level.

(c) To provide a means for financing the procurement and stockage of supplies which are sold to individuals or other agencies outside of the Air Force.

Thus, in the stock fund we have a management technique which enables us to centrally procure and manage a significant block of our inventory, without loss of necessary local consumption control and support.

The Air Force stock fund, by the end of fiscal year 1963, finances approximately 13,000 items, including such categories as individual clothing, aviation fuels and lubricants, food, Air Force Academy cadets' personal and school supplies, and certain propellant items. Operations in these categories can be summarized as follows:

CLOTHING DIVISION

Uniform clothing and related items are sold directly to airmen and other authorized customers through clothing sales stores. Sales at clothing sales stores are normally on a cash basis paid for by the purchasing individual. Funds to obtain uniform clothing are provided the individual through a monetary allowance system paid by the "Military personnel" appropriation. Under this system, each airman is required, except for his initial outfit, to purchase his uniform clothing and certain parts of his work clothing. Upon entry into the service, a credit is established on the pay record of each airman for his initial outfitting. The initial issue of clothing bag items is charged against the credit established. After an airman completes the sixth month of service, he receives a monthly maintenance allowance with which to purchase replacement clothing and pay for alterations and repairs.