(The following was submitted for the record:)

[PUBLIC LAW 329, 81ST CONGRESS]

[CHAPTER 626, 1ST SESSION]

In determining the gross cost incurred by any agency in repairing, rehabilitating, or modifying any excess equipment furnished under this Act, all parts, accessories, or other materials used in the course of such repair, rehabilitation, or modification shall be priced in accordance with the current standard pricing policies of such agency. For the purpose of this subsection, the gross cost of any equipment or materials taken from the mobilization reserve means either the actual gross cost to the United States of that particular equipment or materials or the estimated gross cost to the United States of that particular equipment or materials obtained by multiplying the number of units of such particular equipment or materials by the average gross cost of each unit of that equipment and materials owned by the furnishing agency.

Mr. ENGEL. That is exactly what I was getting at. In this particular case that you cited, of antiaircraft guns, you are not doing that. You are only charging against the program the rehabilitation cost. When that bill was discussed on the floor of the House I recall that that same question was discussed.

General LEMNITZER. Mr. Engel, the definition of "value" is in the legislation, as well as the formula to determine the amount of equipment that can be transferred under the ceiling of $450,000,000. Each of them was established by the Congress last year.

Mr. ENGEL. I know, but we have been running up against this continously in similar programs. Instead of charging up against the appropriation the fair value of the equipment, particularly in this case where it is new equipment, or practically new, we charge nothing for that, but charge only for rehabilitation. Of course, in that way, they are getting many times $450,000,000 of equipment from us. Congress, as I understood the act when it went through, was told that a good deal of the money would not have to come out of the Treasury for that type of an item, that we could pay for this assistance in part by military equipment which we had on hand.

Mr. OHLY. This is equipment that we have on hand. What General Lemnitzer meant was that it had never been used. It is completely new equipment in our reserves but it is in excess of our own requirements.

Mr. ENGEL. Surely. The equipment had never been used and it was in excess of our requirements. We are turning it over to them for nothing instead of charging the cost of that equipment against the appropriation. We are not charging them cost plus rehabilitationwe are only charging rehabilitation. So that that gives them far in excess of the amount that Congress intended they should have under the act as passed.

Mr. MAHON. I do not think so, Mr. Engel. If you will turn to page 5 of the act I think you will find that the contrary is true.

General LEMNITZER (reading):

Reimbursement shall be made by or to any agency from funds available for the purpose of this Act for any equipment and materials, services, or other assistance furnished or authorized to be furnished under authority of this Act from, by, or through any agency.

And then:

with respect to any excess equipment or materials furnished under this Act, the gross cost of repairing, rehabilitating, or modifying such equipment or materials prior to being so furnished

That is the amount charged against the appropriation,

Mr. ENGEL. You reimburse the agency?

General LEMNITZER. That is right.

Mr. MAHON. The agency is the Department of the Army?
General LEMNITZER. The Army, the Navy, or the Air Force.

Mr. ENGEL. Yes; but should not the original cost be charged against the appropriation?

Mr. OHLY. The statute defines the value to be placed on any equipment transferred and that is the amount to be charged against the appropriation. The statute says:

The term "value", as used in subsection (b) of this section, means

(1) with respect to any excess equipment or materials furnished under this Act, the gross cost of repairing, rehabilitating, or modifying such equipment or materials prior to being so furnished.

That is what the statute says. And for purposes of excess equipment, the quantity of equipment which may be transferred under this formula is subject to a limitation of $450,000,000.

Mr. MAHON. It says excess equipment. The emphasis is on the word "excess." Of course, you used an example of equipment which was new. Do you not mean equipment that was new 5 years ago? Does it not have to be rehabilitated? Of course, the cost of transportation and packing is involved.

General Lemnitzer. That is right. If it is in a storage status it requires a considerable amount of servicing before it can be placed in operable condition.

DIFFERENCE BETWEEN EXCESS AND SURPLUS EQUIPMENT

Mr. ENGEL. What is the difference between excess equipment and surplus equipment? You are making no charge for the equipment but making a charge only for rehabilitation.

General LEMNITZER. We are only dealing with excess equipment. We are not involved in surplus equipment here. If a piece of equipment comes from reserve-an antiaircraft fire director to use the example I was just talking about-if that comes from reserve, the Services are reimbursed for the replacement cost of that particular piece of equipment.

Mr. ENGEL. Right there, when you say excess equipment, excess as of what date? I recall that we were going to demilitarize a great deal of equipment and ammunition in the Ordnance Division and then when this trouble came items that had been declared in excess of requirements were put back into the requirements classification. They even stopped demilitarizing some of the old ammunition at that time. So the question is: Excess equipment as of what date?

General LEMNITZER. The pricing is determined as of the date of the transfer of the equipment.

Mr. RABAUT. How do you decide what is excess and what is surplus, briefly?

Mr. OHLY. The Joint Chiefs of Staff determine what should be the size and level of the mobilization reserve for various types of equipment required for the Services. Anything under that level is considered reserve equipment. Anything which is over the level fixed by the Joint Chiefs of Staff is excess. That line will fluctuate from time to time. It is fluctuating right now as operational requirements in the far eastern theater take things from excess supplies and out of reserve stocks, and therefore you have to build up again in order to have a certain level of stocks.

Mr. RABAUT. Evidently, then, it was the intent of this law that much more, in dollars-and-cents value, was to be made available under this than is apparent upon the face of it.

Mr. MAHON. The law points out that $450,000,000 of excess equipment may be transferred.

General LEMNITZER. That is the ceiling.

Mr. RABAUT. $450,000,000 of excess equipment that would just have to be packed, and so forth; is that the idea? If it is excess all

that you have to do is to rehabilitate it and ship it?

General LEMNITZER. Yes, sir.

Mr. ENGEL. According to your interpretation, then, the $450,000,000 excess equipment-the amount would only represent the packing and rehabilitation cost?

General LEMNITZER. Mr. Engel, there are two computations required by the legislation for charges against the appropriation. First is the charge which I have indicated here, the cost of rehabilitating, repairing, modifying the equipment. That is a charge against the appropriation. Congress fixed a ceiling to insure that there would not be large amounts of excess equipment over and above what they felt was desirable to transfer; that limits to $450,000,000 worth the equipment that could be transferred under the act.

Mr. ENGEL. When you say $450,000,000 worth of equipment, you are not referring to the value of the equipment at all. You are only talking about the rehabilitation cost?

General LEMNITZER (reading):

Not to exceed $450,000,000 worth of excess equipment and materials may be furnished under this Act or may hereafter be furnished under the Act of May 22, 1947, as amended. For the purposes of this subsection, the worth of any excess equipment or materials means either the actual gross cost to the United States of that particular equipment or materials or the estimated gross cost to the United States of that particular equipment or materials obtained by multiplying the number of units of such particular equipment or materials

is the language of the law.

Mr. ENGEL. In that case you would take this antiaircraft equipment, take the gross cost of that and charge it against your appropriation?

Mr. OHLY. Not against the appropriation, against the $450,000,000 limitation on excess that we are allowed to transfer without charge to the appropriation. What is charged to the appropriation—that is, to the $1,300,000,000-is the cost of rehabilitation, transportation, and packing.

69887-50-pt. 2--21

Mr. SIKES. You mean do you not that the $450,000,000 is in addition to the $1,300,000,000?

Mr. MAHON. Yes. That was definitely understood when we passed the law.

General LEMNITZER. It is a ceiling, sir.

Mr. SHEPPARD. When you say "gross," you cover the whole water front. Gross is gross in any man's books. General LEMNITZER. That is right.

NEW PROCUREMENT

Mr. MAHON. You may proceed with your statement, General. General LEMNITZER. Going into new procurement, sir, the charge against the appropriation is the cost of equipment obtained under new procurement. I might point out here that the amount of excess equipment availability is decreasing as we are drawing on it heavily for these programs. The amount obtainable under reserves from our own mobilization reserves is also decreasing as we draw on them. So the bulk of the money involved in this supplemental program will have to go into new procurement.

Mr. MAHON. It would be interesting to know how much money has thus far actually gone into new procurement.

General LEMNITZER. We can give you that, sir.

Mr. MAHON. As we go through the justifications we will get those figures.

General LEMNITZER. All right, sir.

Mr. MAHON. As I understand it, you have obligated the great bulk of funds made available to you under the original act?

General LEMNITZER. That is right, sir.

Mr. MAHON. But you have not actually delivered all these sums, because it requires new procurement and that takes time?

General LEMNITZER. It takes time for that and it also takes time to rehabilitate equipment.

Mr. MAHON. The new program is going to be almost exclusively— that is, the new $4,000,000,000 program-is going to be almost exclusively new equipment which will have to be ordered?

General LEMNITZER. I would say largely, not almost exclusively; because there are still quantities of equipment in excess and in our reserves although they are declining.

ALLOCATION OF EQUIPMENT FOR DELIVERY

Mr. MAHON. Let us suppose that this program provides for X item which has to be supplied on order; and suppose that we already have on order large quantities of this material which we ourselves needthis X material. When will these countries who participate in the program get delivery of the equipment which they are being supplied by us? Will all of our orders be met or will we supply them with some on hand and we ourselves wait for the actual delivery of the X weapon which will be provided under this $4,000,000,000 appropriation?

General LEMNITZER. The allocation of the equipment is in three general priorities, related to our own purposes. To distinguish between the operational requirements in Korea at the moment, and

this military-aid program, the allocation between these requirements is now entrusted to each of the services-the Army, the Navy, and the Air Force. They procure the equipment under this program just as they do for their own needs. And as the equipment comes off the line, they distribute it in accordance with the priorities existing at the time. If our forces need this equipment it probably would go to our own forces. The urgent operational requirement in Korea is receiv ing high priority at the present time. The deliveries of equipment to our own forces and to this program is accomplished by each service in accordance with the requirements of the situation. It is a day-today operation.

To cite an example-and I would like to have this off the record. (Statement off the record.)

METHOD OF CHARGING COST OF DELIVERED EQUIPMENT AGAINST APPROPRIATION AND OTHER ACCOUNTS

Mr. SHEPPARD. I would like to ask the witness some questions. You are dealing under a specific law which relates to the international aspect, and you are comparing that with the military domestic requirements, are you not?

General LEMNITZER. Yes, sir; that is right.

Mr. SHEPPARD. And in so doing, your method of accounting would take into consideration the separation of the two? General LEMNITZER. That is right.

Mr. SHEPPARD. When you have established as your gross cost of, hypothetically, a tank, as being $100,000, and the cost of rehabilitation, $20,000 for that particular tank to put it in operational condition, that becomes the gross cost of that particular article, does it not? Mr. OHLY. The gross cost for all purposes?

Mr. SHEPPARD. The problem we are discussing here. First, I have established by your answer, that you are handling your accounts for a specific operation, as it applies to the international picture and not the domestic picture, is that correct?

General LEMNITZER. That is correct.

(Discussion off the record.)

Mr. SHEPPARD. My approach to the situation is this. In any kind of auditing that I have ever been associated with or have known of, there is a fundamental premise upon which you start and, as I grasp this situation—perhaps I am wrong and if I am I want you gentlemen to correct me-is this. As to any article or articles with which you have to deal, from the point of view of bookkeeping or auditing, you establish the original cost to the Federal Government as your original premise. Let us take the hypothetical tank that cost $100,000 when you bought it—is that right?

General LEMNITZER. That is right.

Mr. SHEPPARD. Now, to follow through. You have to rehabilitate that tank, remodify it, or what not, at an additional cost of $20,000. Then your gross cost of that tank is $120,000. Is that correct or is that an improper assumption?

Mr. O'HARA. May I answer that, Mr. Sheppard?

Mr. SHEPPARD. Anybody may answer it. I have no interest in selection of witnesses. I am only interested in getting the answer.