Congressional Research Service ˜ The Library of Congress

CRS Report for CongressReceived through the CRS Web

Order Code RL32776

Navy Ship Procurement: Alternative Funding Approaches — Background

and Options for Congress

Updated July 26, 2006

Ronald O’RourkeSpecialist in National Defense

Foreign Affairs, Defense, and Trade Division

Navy Ship Procurement: Alternative FundingApproaches — Background and Options for Congress

Summary

Some observers have proposed procuring Navy ships using incremental fundingor advance appropriations rather than the traditional full funding approach that hasbeen used to procure most Navy ships. Supporters believe these alternative fundingapproaches could increase stability in Navy shipbuilding plans and perhaps increasethe number of Navy ships that could be built for a given total amount of ship-procurement funding. The issue for the 109th Congress is whether to maintain orchange current practices for funding Navy ship procurement. Congress’s decisioncould be significant because the full funding policy relates to Congress’s power ofthe purse and its responsibility for conducting oversight of defense programs.

For Department of Defense (DOD) procurement programs, the full fundingpolicy requires the entire procurement cost of a usable end item (such as a Navy ship)to be funded in the year in which the item is procured. Congress imposed the fullfunding policy on DOD in the 1950s to strengthen discipline in DOD budgeting andimprove Congress’s ability to control DOD spending and carry out its oversight ofDOD activities.

Under incremental funding, a weapon’s cost is divided into two or more annualincrements that Congress approves separately each year. Supporters could argue thatusing it could avoid or mitigate budget spikes associated with procuring veryexpensive ships such as aircraft carriers or “large-deck” amphibious assault ships.Opponents could argue that using it could make total ship procurement costs lessvisible and permit one Congress to budgetarily “tie the hands” of future Congresses.

Under advance appropriations, Congress makes a one-time decision to fund theentire procurement cost of an end item. That cost can then be divided into two ormore annual increments that are assigned to (in budget terminology, “scored in”) twoor more fiscal years. Supporters could argue that using advance appropriations couldavoid or mitigate budget spikes without some of the potential disadvantages ofincremental funding. Opponents could argue that advance appropriations retains (oreven expands) a key potential disadvantage of incremental finding — that of tyingthe hands of future Congresses.

Using incremental funding or advance appropriations could, under certaincircumstances, marginally reduce the cost of Navy ships. Under certain othercircumstances, however, it could increase costs. Options for Congress includemaintaining current ship-procurement funding practices; strengthening adherence tothe full funding policy; increasing the use of incremental funding; beginning to useadvance appropriations; and transferring lead-ship detailed design and nonrecurringengineering costs to the research and development account. Arguments could bemade in support of or against each of these options. This report will be updated asevents warrant.

Contents

Introduction and Issue for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Full Funding Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Advance Procurement (AP) Payments Under Full Funding . . . . . . . . . 3“One Decision for One Pot of Money” . . . . . . . . . . . . . . . . . . . . . . . . . 5

Incremental Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5“Multiple Decisions for Multiple Pots of Money” . . . . . . . . . . . . . . . . . 6Advantages and Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Split Funding In Proposed FY2007 Budget . . . . . . . . . . . . . . . . . . . . . . 7Earlier Navy Proposal for Funding Lead Ships . . . . . . . . . . . . . . . . . . . 7

Advance Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8“One Decision for Multiple Pots of Money” . . . . . . . . . . . . . . . . . . . . . 9Advantages and Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Navy Advocacy in 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Potential for Reducing Instability in Ship-Procurement Plans . . . . . . . . . . 11Potential for Increasing Number of Ships Procured . . . . . . . . . . . . . . . . . . 12

Options for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Maintain Current Funding Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Strengthen Adherence to Full Funding Policy . . . . . . . . . . . . . . . . . . . . . . . 14Increase Use of Incremental Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Begin Using Advance Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Transfer Lead-Ship DD/NRE Costs to R&D Account . . . . . . . . . . . . . . . . 16

Legislative Activity for FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18H.R. 5122/S. 2766 (FY2007 Defense Authorization Bill . . . . . . . . . . . . . . 18

House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

H.R. 5631 (FY2007 Defense Appropriations Bill) . . . . . . . . . . . . . . . . . . . 20House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Legislative Activity for FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21H.R. 1815/P.L. 109-163 (FY2006 Defense Authorization Bill) . . . . . . . . . 21

House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Conference Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

H.R. 2863/P.L. 109-148 (FY2006 Defense Appropriations Bill) . . . . . . . . 25House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Conference Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

H.Con.Res 95 (Concurrent Resolution on FY2006 Budget) . . . . . . . . . . . . 27Conference Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27S.Amdt. 146 to S.Con.Res. 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Appendix A. Recent Ships Procured with Incremental Funding . . . . . . . . . . . . . 28DOD LMSR-Type Sealift Ships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28SSN-23 Attack Submarine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29LHD-6 Amphibious Assault Ship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30LHD-8 Amphibious Assault Ship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30CVN-78 Aircraft Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Appendix B. Funding for Lead DDG-1000 and Lead LCS . . . . . . . . . . . . . . . . 32DDG-1000 Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Appropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

LCS Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Appropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

1 CRS Report RL31404, Defense Procurement: Full Funding Policy — Background, Issues,and Options for Congress, by Ronald O’Rourke and Stephen Daggett. (Hereafter cited asCRS Report RL31404.)

Navy Ship Procurement:Alternative Funding Approaches —

Background and Options for Congress

Introduction and Issue for Congress

Some observers have proposed procuring Navy ships using funding approachesother than the traditional full funding approach that has been used to procure mostNavy ships since the 1950s. These alternative funding approaches includeincremental funding, which has been used to fund a few Navy ships in recent years,and advance appropriations, which has not been used for Navy ship procurement.Supporters of these alternative funding approaches believe they could increasestability in Navy shipbuilding plans and perhaps increase the number of Navy shipsthat could be built for a given total amount of ship-procurement funding.

The issue for Congress is whether to maintain current practices for fundingNavy ship procurement or change them by, for example, increasing the use ofincremental funding or starting to use advance appropriations. Congress’s decisionon this issue could be significant because the full funding policy relates to Congress’spower of the purse and its responsibility for conducting oversight of Department ofDefense (DOD) programs. Consequently, the issue can be alternately expressed ashow to procure Navy ships economically while maintaining key congressionalprerogatives. Congress’s decision on ship funding approaches could also affectfuture Navy capabilities, annual Navy funding requirements, and the shipbuildingindustrial base.

The following section of this report provides background information on the fullfunding policy, incremental funding, and advance appropriations. The section thatfollows presents options for Congress that arise out of these three fundingapproaches. Portions of this report are adapted from another CRS report thatdiscusses the full funding policy in DOD procurement generally.1

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Background

Full Funding Policy

General Description. Most Navy ships procured since the late 1950s havebeen funded in accordance with the full funding policy. Before then, many Navyships were procured with incremental funding, which is discussed in the next section.

For DOD procurement programs, the full funding policy requires the entireprocurement cost of a usable end item (such as a Navy ship) to be funded in the yearin which the item is procured. The policy applies not just to Navy ships, but to allweapons and equipment that DOD procures through the procurement title of theannual DOD appropriations act.

In general, the full funding policy means that DOD cannot contract for theconstruction of a new weapon or piece of equipment until funding for the entire costof that item has been approved by Congress. Sufficient funding must be available fora complete, usable end item before a contract can be let for the construction of thatitem. Under traditional full funding, no portion of a usable end item’s procurementcost is funded in a year after the year in which the item is procured.

Congress imposed the full funding policy on DOD in the 1950s to make the totalprocurement costs of DOD weapons and equipment more visible and therebyenhance Congress’s ability to understand and track these costs. Congress’s intent inimposing the policy was to strengthen discipline in DOD budgeting and improveCongress’s ability to control DOD spending and carry out its oversight of DODactivities. Understanding total costs and how previously appropriated funds are usedare key components of Congress’s oversight capability.

The full funding policy is consistent with two basic laws regarding governmentexpenditures — the Antideficiency Act of 1870, as amended, and the Adequacy ofAppropriations Act of 1861. Regulations governing the full funding policy are foundin Office of Management and Budget (OMB) Circular A-11 and DOD Directive7000.14-R, which provide guidelines on budget formulation. OMB Circular A-11states, among other things, that

Good budgeting requires that appropriations for the full costs of asset acquisitionbe enacted in advance to help ensure that all costs and benefits are fully takeninto account at the time decisions are made to provide resources. Full fundingwith regular appropriations in the budget year also leads to tradeoffs within thebudget year with spending for other capital assets and with spending for purposesother than capital assets. Full funding increases the opportunity to useperformance-based fixed price contracts, allows for more efficient work planningand management of the capital project (or investment), and increases theaccountability for the achievement of the baseline goals.

When full funding is not followed and capital projects (or investments) or usefulsegments are funded in increments, without certainty if or when future fundingwill be available, the result is sometimes poor planning, acquisition of assets not

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2 OMB Circular A-11 (July 2003), Appendix J, Section C, Principle 1 (of four principles forfinancing capital assets).3 For a detailed discussion of the origins, rationale, and governing regulations of the fullfunding policy, as well as examples of where Congress, GAO, and DOD have affirmed theirsupport for the policy, see Appendix A of CRS Report RL31404.4 Note that the funding discussed here is advance procurement funding, which is not to beconfused with the alternate funding approach called advance appropriations, discussed later.

fully justified, higher acquisition costs, cancellation of major investments, theloss of sunk costs, or inadequate funding to maintain and operate the assets.2

Support for the full funding policy has been periodically reaffirmed over theyears by Congress, the Government Accountability Office (GAO), and DOD.3

Advance Procurement (AP) Payments Under Full Funding. Theexecutive branch regulations that implement the full funding policy for DODprocurement programs permit two circumstances under which advance procurement(AP) “down payments” on a usable end item can be provided in one or more yearsprior to the item’s year of procurement:4

! AP funding may be used to pay for “long-lead items” — componentsof a usable end item that have long manufacturing lead times — ifneeded to ensure that these items will be ready for installation intothe end item at the appropriate point in the end item’s constructionprocess.

! AP funding may also be used to pay for “economic order quantity”(EOQ) procurement of a set of long-lead items for a set of weaponsbeing acquired under a multiyear procurement (MYP) arrangement.

Each of these is discussed below.

AP Payments For Long-Lead Items. Long-lead items are oftenmanufactured not at the end item’s final assembly facility (such as a shipyard) but atseparate supplier firms. In Navy shipbuilding, AP payments have most commonlybeen used to pay for nuclear-propulsion components of nuclear-powered aircraftcarriers and submarines.

Congress in recent years has occasionally approved AP funding forconventionally powered Navy ships, such as destroyers and amphibious ships, forwhich the Navy did not request any AP funding for long-lead items. Congress inrecent years has also occasionally approved AP funding for “advance construction”work on certain ships, which apparently refers to early shipyard activities for buildingthe basic structure of a ship, as opposed to manufacturing long-lead components tobe installed into the ship. The use of AP funding for shipyard advance constructionactivities is not recognized in executive branch budget regulations on the full fundingpolicy, at least not in the same way as these regulations recognize the use of APfunding for long-lead components.

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5 10 USC 2306b(i)(4)(B) states: “The Secretary of Defense may obligate funds appropriatedfor any fiscal year for advance procurement under a contract for the purchase of propertyonly for the procurement of those long-lead items necessary in order to meet a planneddelivery schedule for complete major end items that are programmed under the contract tobe acquired with funds appropriated for a subsequent fiscal year (including an economicorder quantity of such long-lead items when authorized by law).”

Congressional decisions to approve AP funding for ships for which the Navy didnot request such funding, or for shipyard advance construction activities, could beaimed at one or more of the following goals:

! generating shipyard construction work (and thus shipyard revenuesand jobs) on a particular ship in a year prior to that ship’s year ofprocurement;

! creating an early financial commitment to procuring a ship that isplanned for procurement in a future year, which can enhance jobsecurity for construction workers at the yard that would build theship;

! reducing the total construction cost of a ship through improvedsequencing or year-to-year balancing of shipyard construction work;and

! reducing the portion of a ship’s cost to be funded in the year ofprocurement.

AP Payments for EOQ under Multiyear Procurement. Most DODprocurement programs use annual contracting, under which DOD lets one or morecontracts for each year’s worth of procurement of a given item. Multiyearprocurement is a special contracting authority, approved by Congress on aprogram-by-program basis, that permits DOD to use a single contract to procure a setof end items that are scheduled to be procured across a series of up to five fiscal years(i.e., the budget year in question, plus up to four future years). An MYP arrangementapproved for the Navy’s F/A-18E/F strike-fighter program, for example, permittedthe Navy to use a single contract for a total of 198 to 224 F/A-18E/Fs procuredduring the five-year period FY2000-FY2004. Congress over the years has grantedMYP authority for a relatively small number of procurement programs.

The law governing MYP arrangements is set forth in 10 U.S.C. § 2306b. Thisprovision permits AP funding to be used to finance, at the outset of an MYParrangement, the procurement of long-lead components for all of the end items to beprocured under the MYP arrangement. The MYP arrangement to procure a total offive Virginia (SSN-774) class nuclear-powered attack submarines over the five-yearperiod FY2004-FY2008, for example permits the Navy to procure, in the first yearsof the arrangement, five sets of long-lead nuclear-propulsion components. This up-front batch procurement of long-lead items is called an “economic order quantity”(EOQ) because it procures (i.e., places an order for) these items in the form of a batchthat can be manufactured in an efficient (i.e., economic) manner.5

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6 When Congress approves AP funding for an item, it does so through a funding decision forthat year that is separate from the decision that Congress subsequently makes, in the item’syear of procurement, to fund the remainder of the item’s procurement cost. Items procuredwith AP funding thus involve two or more funding decisions from Congress — one or moredecisions to approve AP funding in one or more years prior to the year of procurement, plusa final decision, in the item’s year of procurement, to fund the remainder of the item’sprocurement cost. A decision by Congress to approve AP funding for an item does notcreate an obligation on the part of Congress to approve the remainder of the item’sprocurement cost in some future year, but it usually indicates that Congress anticipatesdoing so.7 LHA-6 is the first of the LHA (Replacement), or LHA(R) ships.

“One Decision for One Pot of Money”. Although some DOD weaponsand equipment are procured with AP funding provided in prior years, most DODprocurement items are funded through a single decision by Congress to provide theentire cost of the item in the item’s year of procurement. For this reason, the fullfunding policy for DOD procurement programs can be described in simplified termsas “one decision for one pot of money.”6

Incremental Funding

General Description. In spite of the existence of the full funding policy, afew Navy and DOD ships have been procured in recent years, are currently beingprocured, or are proposed to be procured, with incremental funding. Examplesinclude DOD sealift ships, the attack submarine SSN-23, the amphibious assaultships LHD-6, LHD-8, and LHA-6,7 the aircraft carrier CVN-78, and the first twoDDG-1000 (formerly DD(X)) destroyers. The DOD sealift ships were procuredthrough the National Defense Sealift Fund (NDSF), a DOD revolving andmanagement fund that is outside the procurement title of the DOD appropriations actand therefore not subject to the full funding policy in the same way as DODprocurement programs funded through the procurement title. LHD-8 wasincrementally funded by explicit legislative direction. SSN-23, LHD-6, LHA-6,CVN-78, and the first two DDG-1000s amount to cases of de facto incrementalfunding. (For additional information on some of these ships, see Appendix A of thisreport.) These ships constitute recent exceptions to the use of full funding in theprocurement of Navy ships. Prior to the imposition of the full funding policy in the1950s, however, much of DOD weapon procurement was accomplished throughincremental funding.

Under incremental funding, a weapon’s cost is divided into two or more annualportions, or increments, that can reflect the need to make annual progress paymentsto the contractor as the weapon is built. Congress then approves each year’sincrement as part of its action on that year’s budget. Under incremental funding,DOD can contract for the construction of a weapon after Congress approves only theinitial increment of its cost, and completion of the weapon is dependent on theapproval of the remaining increments in future years by that Congress or futureCongresses. A key feature of incremental funding is that a portion of the ship’s costis provided in one or more years beyond the item’s year of procurement.

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8 For an explanation and discussion of unobligated balances, see CRS Report RL30002, ADefense Budget Primer, by Mary T. Tyszkiewicz and Stephen Daggett.

“Multiple Decisions for Multiple Pots of Money”. Since incrementalfunding divides the procurement cost of an end item into two or more annualincrements, and since Congress typically approves one of these increments each year,incremental funding can be described in simplified terms as “multiple decisions formultiple pots of money.”

Advantages and Disadvantages.

Potential Advantages. Supporters of incremental funding could argue that,compared to full funding, using incremental funding in DOD procurement can beadvantageous because it can do one or more of the following:

! permit very expensive items, such as large Navy ships, to beprocured in a given year while avoiding or mitigating budget“spikes” (i.e., lumps) that could require displacing other programsfrom that year’s budget, which can increase the costs of thedisplaced programs due to uneconomic program-disruption start-upand start costs;

! avoid a potential bias against the procurement of very expensiveitems that might result from use of full funding due to the item’slarge up-front procurement cost (which appears in the budget)overshadowing the item’s long-term benefits (which do not appearin the budget) or its lower life cycle operation and support (O&S)costs compared to alternatives with lower up-front procurementcosts;

! permit construction to start on a larger number of items in a givenyear within that year’s amount of funding, so as to achieve betterproduction economies of that item than would have been possibleunder full funding;

! recognize that certain DOD procurement programs, particularlythose incorporating significant amounts of advanced technology,bear some resemblance to research and development activities(which can be funded in increments), even though they are intendedto produce usable end items;

! reduce the amount of unobligated balances associated with DODprocurement programs;8

! implicitly recognize potential limits on DOD’s ability to accuratelypredict the total procurement cost of items, such as ships, that takeseveral years to build; and

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! preserve flexibility for future Congresses to stop “throwing goodmoney after bad” by halting funding for the procurement of an itemunder construction that has become unnecessary or inappropriate dueto unanticipated shifts in U.S. strategy or the international securityenvironment.

Potential Disadvantages. In spite of its potential advantages, Congressreplaced incremental funding with the full funding policy in the 1950s, and hasperiodically reaffirmed the full funding policy since then, on the grounds thatincremental funding did (or could do) one or more of the following:

! make the total procurement costs of weapons and equipment lessvisible to Congress and more difficult for Congress to understandand track;

! permit one Congress to “tie the hands” of one or more futureCongresses — a kind of action that Congress traditionally tries toavoid — by providing initial procurement funding for a weaponwhose cost would have to be largely funded by one or more futureCongresses;

! create a potential for DOD to start procurement of an item withoutnecessarily understanding its total cost, stating that total cost toCongress, or providing fully for that total cost in future DODbudgets — the so-called “camel’s-nose-under-the-tent” issue; and

! increase weapon procurement costs by exposing weapons underconstruction to potential uneconomic start-up and stop costs that canoccur when budget reductions or other unexpected developmentscause one or more of the planned increments to be reduced ordeferred.

Split Funding In Proposed FY2007 Budget. Split funding is a two-yearform of incremental funding. Under split funding, a weapon’s procurement cost isdivided into two portions, one of which is funded in the item’s year of procurement,the other the following year. The Navy is proposing in its FY2007 budgetsubmission to procure LHA-6 and the first two DDG-1000s with split funding inFY2007 and FY2008, and to procure CVN-78 using split funding in FY2008-FY2009.

Earlier Navy Proposal for Funding Lead Ships. As part of its proposedFY2005 budget and FY2005-FY2009 Future Years Defense Plan (FYDP), the Navyin 2004 proposed funding the procurement of the lead DDG-1000 destroyer and thelead Littoral Combat Ship (LCS) program in the Navy’s research and development(R&D) account rather than the Navy’s ship-procurement account, which is knownformally as the Shipbuilding and Conversion, Navy (SCN) account. Funding theprocurement of lead ships through the R&D account would permit them to beincrementally funded without violating the full funding policy.

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9 Use of advance appropriations in the federal budget is summarized in the appendix volumeof each year’s U.S. government budget. For the FY2006 version, see U.S. Executive Officeof the President. Office of Management and Budget. Appendix [to the] Fiscal Year 2006Budget of the U.S. Government. Washington, U.S. Govt. Print. Off.., 2005, p. 1241-1242.10 Advance appropriations can also be used to fund the entire cost of an item and have thatentire cost assigned to a single future fiscal year.

OMB Circular A-11 defines advance appropriations as appropriations that are:! Enacted normally in the current year;! Scored after the budget year (e.g., in each of one, two, or more later years,

depending on the language); and! Available for obligation in the year scored and subsequent years if

specified in the language.

(OMB Circular A-11 (July 2003 version), Appendix J (Principles of Budgeting forCapital Asset Acquisitions), Section E (Glossary).)

Congress, in acting on the Navy’s proposed FY2005 and FY2006 defensebudgets, rejected the Navy’s proposal to procure the lead DDG-1000 through theNavy’s research and development account, directed the Navy to fully fund the leadDDG-1000 in the Navy’s ship-procurement account, and fully funded the two leadLCSs in the Navy’s research and development account. For excepts from committeeand conference report language, see Appendix B.

Advance Appropriations

General Description. Advance appropriations have not been used in Navyship procurement, but have been used by other executive branch agencies to fundvarious programs.9

Advance appropriations is an alternate form of full funding that is permittedunder executive branch budget regulations. As a funding approach, it can be viewedas lying somewhere between traditional full funding and incremental funding.Advance appropriations is not to be confused with advance procurement (AP)funding that can occur under traditional full funding.

Under advance appropriations, as under traditional full funding, Congress makesa one-time decision to fund the entire procurement cost of an end item. That cost,however, can then be divided into two or more annual increments, as underincremental funding, that are assigned to (in budget terminology, “scored in”) two ormore fiscal years.10

In contrast to incremental funding, under which Congress must take a positiveaction each year to approve each year’s funding increment, under advanceappropriations, Congress, following its initial decision to fund the item, would needto take a positive action to cancel or modify an annual funding increment in a future-year budget. In this sense, advance appropriations can be thought of as a legislativelylocked in form of incremental funding: the future-year funding increments will occurunless Congress takes action to stop them.

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11 OMB Circular A-11 (July 2003), Appendix J, Section C, Principle 2 (of four principlesfor financing capital assets). Italics as in the original.

OMB Circular A-11 allows for the use of advance appropriations to help financecapital assets under certain circumstances:

Regular appropriations for the full funding of a capital project or a usefulsegment (or investment) of a capital project in the budget year are preferred. Ifthis results in spikes that, in the judgment of OMB, cannot be accommodated bythe agency or the Congress, a combination of regular and advance appropriationsthat together provide full funding for a capital project or a useful segment or aninvestment should be proposed in the budget.

Explanation: Principle 1 (Full Funding) is met as long as a combination ofregular and advance appropriations provide budget authority sufficient tocomplete the capital project or useful segment or investment. Full funding in thebudget year with regular appropriations alone is preferred because it leads totradeoffs within the budget year with spending for other capital assets and withspending for purposes other than capital assets. In contrast, full funding for acapital project (investment) over several years with regular appropriations for thefirst year and advance appropriations for subsequent years may bias tradeoffs inthe budget year in favor of the proposed asset because with advanceappropriations the full cost of the asset is not included in the budget year.Advance appropriations, because they are scored in the year they becomeavailable for obligation, may constrain the budget authority and outlays availablefor regular appropriations of that year.

If, however, the lumpiness caused by regular appropriations cannot beaccommodated within an agency or Appropriations Subcommittee, advanceappropriations can ameliorate that problem while still providing that all of thebudget authority is enacted in advance for the capital project (investment) oruseful segment. The latter helps ensure that agencies develop appropriate plansand budgets and that all costs and benefits are identified prior to providingresources. In addition, amounts of advance appropriations can be matched tofunding requirements for completing natural components of the useful segment.Advance appropriations have the same benefits as regular appropriations forimproved planning, management, and accountability of the project(investment).11

“One Decision for Multiple Pots of Money”. Because advanceappropriations involves a one-time decision by Congress to approve the entireprocurement cost of the end item, which can then be divided into two or moreincrements that are assigned to two or more fiscal years, advance appropriations canbe described in simplified terms as “one decision for multiple pots of money.”

Advantages and Disadvantages. Supporters of advance appropriationscould argue that it offers many of the potential advantages of incremental fundingoutlined earlier — including avoiding or mitigating budget spikes — while avoidingsome of its potential disadvantages, such as the risk of increasing weaponprocurement costs created by uneconomic start-up and stop costs that can occur whenbudget reductions or other unexpected developments cause planned increments to bereduced or deferred.

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12 Source: Slides for May 3, 2001 Navy briefing to CRS, Advance Appropriations for NavyShipbuilding, pages 19-21. The Navy also argued that current law, contrary to someassertions, does not prohibit the use of advance appropriations. Specifically, the Navyargued that:

! 31 USC 1341, [the] “Anti-Deficiency Act,” prohibits writing a contractwhich “involves the government in a contract or obligation for thepayment of money before an appropriation is made unless authorized bylaw.”

! 10 USC 2306b [the provision covering multi-year procurement contracts]allows [DOD and certain other federal agencies] to enter into multi-yearcontracts for the purchase of weapon systems, as long as [there is] “areasonable expectation that throughout the contemplated contract periodthe head of the agency will request funding for the contract at the levelrequired to avoid contract cancellation.”

! 31 USC 1105 [a provision relating to the contents of the federal budgetand its submission to Congress] requires that [the executive branch]identify in advance of need future appropriations that will have to beapproved in order to complete the contract. These advance appropriationshave to be specifically approved by Congress to allow [the executivebranch] to obligate the government in advance of receipt of funds. (Slidesfor May 3, 2001 Navy briefing to CRS, Advance Appropriations for NavyShipbuilding, page 16. Emphasis as on the briefing slide.)

13 Christian Bohmfalk, “O’Keefe: Advance Appropriations, If Used Correctly, Could HelpNavy,” Inside the Navy, Nov. 26, 2001; Christian Bohmfalk, “Stevens Promotes AdvanceAppropriations To Boost Ship Production,” Inside the Navy, Sept. 10, 2001; Mike

(continued...)

Opponents of advance appropriations could argue that it retains (or evenexpands) one of the key potential disadvantages of incremental finding — that oftying the hands of future Congresses — by committing a portion of one or morefuture-year budgets to the financing of an item procured in a prior year and requiringa positive action from future Congresses to undo those commitments. Opponentscould also argue that compared to full funding, advance appropriations under certaincircumstances could increase ship-construction costs by causing work on a ship tostop and then be restarted. Specifically, they could argue, if a given increment ofconstruction work on the ship is completed before the end of a fiscal year and thatyear’s funding increment is entirely expended, the Navy might have to halt work onthe ship and wait until the start of the next fiscal year to access the next increment offunding and resume work. Under full funding, in contrast, the Navy would haveaccess to funding for the ship’s entire construction cost and consequently would nothave to halt work until the start of the next fiscal year, avoiding the additional costsof halting and then resuming work.

Navy Advocacy in 2001. In 2001, some Navy officials advocated the use ofadvance appropriations for Navy ship procurement, noting at that time that thisfunding approach is used by several federal agencies other than DOD.12

Although use of advance appropriations for Navy ship procurement wassupported by some Navy officials and some Members of Congress,13 the Navy in

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13 (...continued)McCarthy, “CNO Advocates Advance Funding of Ships,” Defense Week, July 16, 2001, p.2; Christian Bohmfalk, “Senior Navy Leaders Describe Benefits of AdvanceAppropriations,” Inside the Navy, Apr. 16, 2001; Christopher J. Castelli, “Congress WeighsUsing ‘Advance Appropriations’ For Shipbuilding,” Inside the Navy, Apr. 9, 2001; DaleEisman, “Plan Would Boost Navy Shipbuilding,” Norfolk Virginian-Pilot, Apr. 5, 2001.14 Dale Eisman, “White House Rejects Proposal To Stretch Shipbuilding Funds,” NorfolkVirginian-Pilot, Sept. 6, 2001; Christian Bohmfalk, “Advance Appropriations, Not Part ofFY-02 Request, May Resurface,” Inside the Navy, July 16, 2001.15 H.Rept. 107-298, p. 119.16 “Large-deck” amphibious assault ships, which carry the designations LHA or LHD, arelarge amphibious ships that are designed to embark and operate a total of about two dozenMarine Corps helicopters and VSTOL (vertical-short takeoff and landing) airplanes. Theyhave a flight deck that runs the entire length of the ship and consequently look like medium-sized aircraft carriers.

2001 apparently did not receive approval from the Office of Management and Budget(OMB) to use the approach for ship procurement, and did not officially propose itsuse as part of its FY2002 budget submission to Congress.14 Congress in 2001 did notadopt advance appropriations as a mechanism for funding Navy ships. The HouseAppropriations Committee, in its report (H.Rept. 107-298 of November 19, 2001) onthe FY2002 defense appropriations bill (H.R. 3338), stated that it was

dismayed that the Navy continues to advocate the use of alternative financingmechanisms to artificially increase shipbuilding rates, such as advancedappropriations, or incremental funding of ships, which only serve to decreasecost visibility and accountability on these important programs. In attempting toestablish advanced appropriations as a legitimate budgeting technique, thoseNavy advocates of such practices would actually decrease the flexibility of futureAdministrations and Congresses to make rational capital budgeting decisionswith regard to shipbuilding programs. Accordingly, the Committee bill includesa new general provision (section 8150) which prohibits the Defense Departmentfrom budgeting for shipbuilding programs on the basis of advancedappropriations.15

The general provision mentioned above (Section 8150) was not included in the finalversion of the bill that was passed by Congress and signed into law (H.R. 3338/P.L.107-117 of January 10, 2002).

Potential for Reducing Instability in Ship-Procurement Plans

Could using incremental funding or advance appropriations reduce instabilityin Navy ship-procurement plans?

Using incremental funding or advance appropriations could help reduceinstability in Navy ship-procurement plans by avoiding or mitigating budget spikesthat can occur when traditional full funding is used to procure ships that are veryexpensive and are procured once every few years. The ships that best fit thisdescription are aircraft carriers and “large-deck” amphibious assault ships.16

Accommodating budget spikes for such ships within an overall ship-procurement or

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Department of the Navy budget for a given fiscal year can require the Navy to moveto other fiscal years other ships that the Navy would have preferred to procure in thespike year, or, conversely, require the Navy to move the carrier or amphibious assaultship from a preferred year of procurement to a less-preferred year that happens tohave fewer other Navy ships in it. Such movements of planned ship procurementscan be a source of instability in Navy ship-procurement planning.

Potential for Increasing Number of Ships Procured

Could using incremental funding or advance appropriations increase thenumber of Navy ships that can be built for a given total amount of ship-procurement funding?

Using incremental funding or advance appropriations could marginally increasethe number of ships that could be built for a given total amount of ship-procurementfunding (or, conversely, marginally reduce the total cost to procure a given numberof ships). By avoiding instances in which budget spikes caused ships to be movedfrom one year to another in ship-procurement plans, using incremental funding oradvance appropriations can avoid perturbations in the production schedules for theseships. Such perturbations can increase the cost of a ship, reducing at the margin thetotal number of ships that can be procured for a given total amount of ship-procurement funding.

In addition, if a situation arises in which annual funding for ship procurementlimits ship-procurement in the near term to low rates with poor production economiesof sale, but is expected to rise in future years to levels that would be more thanadequate to support higher, economic rates of ship procurement, then usingincremental funding or advance appropriations could permit construction to begin onadditional ships in the near term, improving near-term production economies of sale,while still permitting the Navy to procure ships in future years at economic rates ofproduction. Improving near-term production economies of scale while preservingacceptable production economies of scale in later years might result in marginallyhigher average economies of scale for the entire period in question and therebyreduce, at the margin, the collective cost of all the ships procured in the near term andthe later years.

This second scenario, however, is dependent on realizing the expected increasein ship-procurement funding in the later years. If this increase is not realized, thenusing incremental funding or advance appropriations could simply trade poorproduction economies of scale in the near term for poor production economies ofscale in future years. Put another way, it would simply trade an inability to affordsomething now for an inability to afford something later.

In discussing the potential effects of using incremental funding or advanceappropriations, it is possible to construct presentations showing how a decision todayto begin using incremental funding or advance appropriations can increase, perhapsdramatically, the number of ships on which construction can be started in the nearterm. This is simply because using incremental funding or advance appropriationswould defer much of the procurement cost of the ships in question to future years.In those future years, the remainder of the cost of these ships would still have to be

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paid. As a result, other things held equal, the number of new ships that could beprocured in those future years for a given amount of ship-procurement funding willbe reduced because portions of those future-year budgets would now be needed topay for the ships on which construction had started in prior years.

Presentations that show a dramatic near-term increase in the number of ships onwhich construction can begin by starting to use incremental funding or advanceappropriations — if not tempered by cautions that it would also reduce the numberof new ships that can be procured in future years for a given amount of shipbuildingfunding — can mislead audiences into concluding that using incremental funding oradvance appropriations can dramatically increase the total number of ships that canbe procured over the long run for a given total amount of ship-procurement funding.Incremental funding or advance appropriations, by avoiding perturbations in shipproduction schedules or improving average production economies of scale over aperiod of several years, can marginally reduce ship-procurement costs and therebymarginally (rather than dramatically) increase the total number of ships that can beprocured over the long run for a given amount of ship-procurement funding. Thereduction in ship-procurement costs might be sufficient, for example, to increasefrom 20 to 21 the total number of ships that could be fully paid for with a certain totalamount of funding.

Under certain other circumstances, using incremental funding or advanceappropriations could increase rather than reduce ship-procurement costs. Asdiscussed earlier, using incremental funding can increase the procurement cost of aship if one of more of the ship’s funding increments is reduced or deferred and theship’s production schedule is consequently disrupted. In addition, if budgetcircumstances require reducing the ship-procurement budget for a given year andsome portion of that year’s budget is already devoted to paying for ships started inprior years with incremental funding or advance appropriations, then preserving thatportion of the budget so as to avoid disrupting the production schedule of those prior-year ships would mean that the budget reduction would fall more heavily on theremaining part of the ship-procurement budget. This could increase the chance thatthe reduction would lead to a decision to defer to a future year the procurement of aship planned for that year, which could increase the procurement cost of that ship.

Lastly, if Congress decides to make more use of incremental funding or to startusing advance appropriations, and then decides at a later point to return to a moreexclusive reliance on full funding, it could temporarily reduce the number of newships that could be procured because the full costs of new ships being procured andportions of the costs of ships started in prior years under incremental funding oradvance appropriations would need to be funded at the same time.

Options for Congress

Options for Congress that arise out of proposals to make greater use ofincremental funding or begin using advance appropriations for procuring Navy shipsinclude (but are not limited to) the following:

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17 For discussion of proposals in recent years to procure aircraft with incremental funding,see CRS Report RL31404.

! maintain current ship-procurement funding practices;

! strengthen adherence to the full funding policy in ship procurement;

! increase the use of incremental funding in ship procurement;

! begin using advance appropriations in ship procurement; and

! shift lead-ship detailed design/nonrecurring engineering (DD/NRE)costs to the Navy’s research and development (R&D account).

Each of these is discussed below.

Maintain Current Funding Practices

Current ship-procurement funding practices can be summarized as procuringalmost all ships with full funding, procuring a small number (e.g., aircraft carriersand large-deck amphibious assault ships) with de facto or explicit incrementalfunding, and approving, for some ships being fully funded, advance procurement(AP) funding that the Navy did not request, or for purposes of shipyard advanceconstruction activities rather than long-lead components.

Supporters of this option could argue that current funding practices give DODand the Congress the flexibility to use incremental funding on a limited basis forcertain ships while not formally abandoning the full funding policy. They couldsimilarly argue that current funding practices provide Congress with flexibility forusing AP funding for purposes other than funding long-lead items requested by DOD.Such flexibility, they can argue, is important for meeting policy goals such aspreserving the shipbuilding industrial base within available funding.

Opponents of this option could argue that current practices weaken adherenceto the full funding policy by making even limited use of incremental funding and byusing AP funding for purposes other than funding long-lead items requested by DOD.Such practices, they could argue, increase the chance that supporters of other kindsof procurement items, such as aircraft, could seek to have them funded usingincremental funding, and that such proposals have been made.17

Strengthen Adherence to Full Funding Policy

This option would involve reducing or eliminating the use of incrementalfunding in Navy ship procurement and reducing or eliminating the use, in ships beingfully funded, of AP funding for purposes other than funding the procurement of long-lead items requested by DOD.

Supporters could argue that this option, by strengthening adherence to the fullfunding policy, would reduce the chance that supporters of other kinds of DOD

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procurement items, such as aircraft, would seek to have them funded usingincremental funding. Budget spikes associated with procuring aircraft carriers orlarge-deck amphibious assault ships, they could argue, can be anticipated years inadvance, permitting their effects to be carefully managed. They could argue thatstability in Navy ship-procurement plans can be increased by encouraging the Navyand DOD to better define their thinking regarding Navy requirements, and that ship-procurement costs can be reduced through measures other than incremental fundingor advance appropriations, such as multiyear procurement, contracts that arestructured to provide incentives to shipbuilders to control costs, and investment inimproved shipyard production capabilities.

Opponents of this policy could argue that it would deprive Congress of theflexibility it has under current funding practices to use incremental funding on alimited basis when absolutely necessary and to use AP funding for purposes otherthan funding long-lead items requested by DOD. Congress, they could argue, shouldnot deprive itself of tools that might help improve stability in Navy shipbuildingplans, reduce ship-procurement costs, and preserve the shipbuilding industrial basewithin available funding. Congress, they could argue, has recently taken steps todiscourage the spread of incremental funding to DOD procurement items other thanships, and can continue doing this while preserving some flexibility for itself infunding ship procurement.

Increase Use of Incremental Funding

This option could involve explicitly (rather than tacitly) using incrementalfunding for aircraft carriers, using incremental funding to procure all (not just some)large-deck amphibious assault ships, or both. It could also involve funding theprocurement of the lead ships of each new class of Navy ships in the Navy’s researchand development account rather than the ship-procurement account, as the Navy hasproposed in previous years.

Supporters of this option could argue that it would take maximum advantage ofopportunities for avoiding or mitigating budget spikes associated with theprocurement of these ships. They could also argue that it could strengthen the fullfunding policy by making it clear to observers that only certain ships, and no otherDOD procurement items, may be procured with incremental funding. They couldargue that current funding practices — under which aircraft carriers and selectedother ships can be funded with incremental funding (either de facto or explicit) —can send confusing signals regarding adherence to the full funding policy, and thata clear, explicit policy of using incremental funding only for certain ships would senda clear signal that these ships represent special exceptions to an otherwise strictpractice of adhering to the full funding policy.

Opponents of this option could argue that any use of incremental fundingweakens the full funding policy, increasing the likelihood of proposals to use it forfunding other DOD procurement items. Incremental funding, they could argue,should be used to avoid or mitigate budget spikes only when doing so is necessaryto avoid disruptions in ship-procurement programs that would substantially increaseprocurement costs. Depending on the composition of the ship-procurement plan,they could argue, the budget spike associated with a carrier or large-deck amphibious

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18 For additional discussion of the options of using incremental funding or advanceappropriations for procuring aircraft carriers or other Navy ships, see Irv Blickstein andGiles Smith, A Preliminary Analysis of Advance Appropriations as a Budgeting Method forNavy Ship Procurements, RAND, Santa Monica (CA), 2002. 45 pp. (RAND NationalDefense Research Institute, MR-1527-Navy); and John Birkler et al., Options for FundingAircraft Carriers, RAND, Santa Monica (CA), 2002. 58 pp. (RAND National DefenseResearch Institute, MR-1526-Navy). The second report also discusses a third option forfunding aircraft carriers called capital account funding. The report describes this as anapproach “in which Congress commits to a specific level of annual funding (adjustable fromtime to time) sufficient to support all carrier-construction activities over the long term. Theaccount could serve as a source of either incremental funding or full funding.” (p. xi)

assault ship might or might not lead to a disruption that substantially increasedprocurement costs, and that such increases in any event would have to be weighedagainst the risk of an increase in cost of an incrementally funded ship due to adecision in a future year to reduce or delay a funding increment.

Begin Using Advance Appropriations

This option could involve starting to use advance appropriations for ships suchas aircraft carriers or large-deck amphibious assault ships.

Supporters could argue that this option, like the previous one, would takemaximum advantage of opportunities for avoiding or mitigating budget spikesassociated with the procurement of these ships. Since advance appropriations is aform of full funding, they could argue that this option would not weaken the fullfunding policy. They could also argue that compared to the previous option, thisoption would create less risk of an increase in the cost of an aircraft carrier or large-deck amphibious assault ship due to a decision to reduce or defer a funding incrementbecause, under advance appropriations, funding increments occur automaticallyunless Congress takes a positive actions to stop them.

Opponents of this option could argue that even though advance appropriationsis a form of full funding, introducing its use into Navy ship procurement would stillamount to a relaxation of the application of the full funding concept to DODprocurement that could serve as a precedent for subsequent proposals to relax itsapplication still further. This option, they could argue, is unnecessary because abudget spike associated with the procurement of an aircraft carrier or large-deckamphibious assault ship can be accomplished through the currently accepted practiceof occasionally using incremental funding. Starting to use advance appropriationsfor aircraft carriers or large-deck amphibious assault ships, they could argue, createsa risk of increasing the procurement cost of other ships as a result of concentratingpotential reductions in future-year ship-procurement budgets on those ships.18

Transfer Lead-Ship DD/NRE Costs to R&D Account

In Navy ship-procurement programs, the detailed design and nonrecurringengineering (DD/NRE) costs for each class of ship — the cost to create the detailedplans for building the class — are included in the procurement cost of the lead shipin the class. Since the DD/NRE costs for a complex combatant can be significant,

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including them in the procurement cost of the lead ship can make the lead shipsignificantly more expensive to procure than the second and subsequent ships in theclass.

Including DD/NRE costs in the procurement cost of the lead unit is a practicethat is not followed by other DOD procurement programs, such as programs forprocuring aircraft, ground vehicles, and missiles. If it were, the lead units of theseother types of procurement programs would be significantly more expensive toprocure.

One response to the challenge of paying for lead ships whose procurement costincludes significant DD/NRE costs, would be to fund the procurement of lead shipsthrough the Navy’s research and development (R&D) account rather than the Navy’sship-procurement account, as the Navy has proposed in 2004 and 2005. Thisapproach, which would permit both DD/NRE costs and the hands-on constructioncosts of lead ships to be funded incrementally while not violating the full fundingpolicy, can be viewed as an example of the previously -discussed option of increasingthe use of incremental funding.

As discussed earlier, Congress, in acting on the Navy’s proposed FY2005 andFY2006 defense budgets, rejected the Navy’s proposal to procure the lead DDG-1000through the Navy’s research and development account, directed the Navy to fullyfund the lead DDG-1000 in the Navy’s ship-procurement account, and fully fundedthe two lead LCSs in the Navy’s research and development account.

An alternative approach to the challenge of paying for lead ships whoseprocurement cost includes significant DD/NRE costs would be to treat DD/NREwork as the final stage of the R&D process and transfer DD/NRE costs to the Navy’sR&D account. Under this option, the DD/NRE costs for a ship class could beincrementally funded without violating the full funding policy, while the actualhands-on construction cost of the lead ship would be fully funded, in conformancewith the full funding policy.

This option can be viewed as an intermediate approach that is between thecurrent practice of fully funding both DD/NRE costs and the lead ship’s hands-onconstruction costs, and incrementally funding both these costs in the R&D account,as would occur under the Navy’s proposal.

Supporters of this option could argue that DD/NRE work is best viewed as thefinal stage of research and development and should be treated as such in the budget,and that shifting these costs to the R&D account would make Navy ship-procurementprograms look more like DOD procurement programs for things such as aircraft,ground vehicles, and missiles.

Opponents could argue that NN/NRE work is more closely related to productionthan to research, and that the current practice of including DD/NRE costs in theprocurement cost of the lead ship makes these costs more visible to Congress, whichis important because detailed design costs for certain past Navy ships haveexperienced significant cost growth.

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Legislative Activity for FY2007

H.R. 5122/S. 2766 (FY2007 Defense Authorization Bill)

House. In its report (H.Rept. 109-452 of May 5, 2006) on H.R. 5122, theHouse Armed Services Committee recommended approval of the Navy’s proposeduse of split funding FY2007 and FY2008 for procuring LHA-6, but did notrecommend approval of the Navy’s proposal to use split funding in FY2007 andFY2008 for procuring the two lead DDG-1000s. The committee for FY2007 insteadrecommended full funding for one DDG-1000, and design funding for a second. Thecommittee’s report states:

The budget request recommends incremental funding for 3 of the 7 ships in therequest, including for the first time construction of a surface combatant, thenext-generation destroyer DD(X). Furthermore, during the consideration of theNational Defense Authorization Act for Fiscal Year 2006 (Public Law 109-163), theNavy sought and was granted the authority to use incremental funding for the nextaircraft carrier [CVN-78], which will be recorded as procured in 2008.

The committee remains concerned that the use of incremental funding is nota solution to the Navy’s problem in funding shipbuilding. While incrementalfunding can allow the Navy to smooth out the dramatic spikes in shipbuildingfunding required as a result of aircraft carrier construction every four or fiveyears, it does not fundamentally increase the number of ships that a given amountof money will purchase. During the committee’s hearings on shipbuilding, allwitnesses emphasized the importance of program and funding stability as the toppriority for reducing the cost of shipbuilding and sustaining the shipbuildingindustrial base. The committee notes that Congress adopted the full fundingpolicy in the 1950s in part because of a concern that incremental funding wasdetrimental to funding stability. Future congresses may find themselvesunwilling, or unable, to fund completion of ships begun in prior years and onlypartially funded. The committee remains convinced that the full funding policyis the correct policy for funding shipbuilding.

The committee understands that the Department of Defense this year consideredsubmission of a legislative proposal that would permanently authorize the use of“split funding” for aircraft carriers and large deck amphibious ships, and theNavy’s fiscal year 2007 shipbuilding plan already assumes such authority for thesecond LHA class amphibious assault ship. The committee has approved the useof split funding for certain ships in certain cases. However, the committee doesnot believe that a blanket policy supporting incremental funding for any class ofship is appropriate, and has not included such a provision in the bill. (Pages 68-69)

Senate. Section 121 of S. 2766 would authorize the use of four-yearincremental funding for procuring CVN-78 and future aircraft carriers, rather thansplit funding (i.e., 2-year incremental funding) as proposed by the Navy. Under 4-year incremental funding, the main portion of the procurement cost of CVN-78, forexample, would be divided into four increments that would be provided in FY2008,the ship’s year of procurement, and the three following years.

Section 121 would also authorize the Navy to contract in FY2007 for theprocurement long-lead items for CVN-79 and CVN-80, aircraft carriers that the Navy

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plans to procure in FY2012 and FY2016, respectively. This authority resembles aneconomic order quantity (EOQ) arrangement, except that EOQs normally take placewithin the context of a multiyear procurement (MYP). These ships have not beenapproved for MYP, and under past practice would not qualify for it under therequirements set forth in the law governing MYP arrangements. MYP arrangementsare permitted to cover items to be procured over a period of up to five years, whilethe authority granted under Section 121 would cover three ships that the Navy wantsto procure over a period of nine years (FY2008-FY2016).

In its report (S.Rept. 109-254 of May 9, 2006) on S. 2766, the Senate ArmedServices Committee recommended approval of the Navy’s proposed use of splitfunding FY2007 and FY2008 for procuring LHA-6 and the two lead DDG-1000s.

The report states:

The committee recommends a provision that would authorize the Secretaryof the Navy to incrementally fund procurement of CVN-21 class aircraft carriersover four year periods, commencing with CVN-78 procurement in fiscal year2008. The budget request included $739.1 million in Shipbuilding andConversion, Navy (SCN) for CVN-78 advance procurement and $45.1 millionin SCN for CVN-79 advance procurement. The provision would also authorizeadvance procurement for CVN-80, commencing in fiscal year 2007.

In reviewing the budget request for fiscal year 2006, the committee receivedtestimony from the Navy and industry that the low rate of shipbuilding wasdriving higher costs, which in turn further reduced shipbuilding rates, creatinga downward spiral. The committee believes that stable ship requirements,increased funding in the shipbuilding budget, and increased flexibility forfunding large capital ships are critical elements of any strategy to reverse thistrend.

The Secretary of the Navy’s fiscal year 2007 report to Congress on thelong-range plan for the construction of naval vessels identifies a requirement toprocure the CVN-21 class aircraft carriers at 4-year intervals, commencing infiscal year 2008. The Navy originally planned to procure the first CVN-21 classaircraft carrier, CVN-78, in fiscal year 2006. Since then, the Navy has delayedprocurement to 2008, which has delayed fielding this vital capability, whilesignificantly increasing the aircraft carrier’s procurement cost. The committeebelieves that procuring and delivering the CVN-21 class aircraft carriers over4-year periods in accordance with the Navy’s long-range plan is vital to theNational Defense Strategy, and is vital to the affordability of these capital ships.

Elsewhere in this report, the committee has expressed concern with costgrowth on the CVN-77 program, and has urged the Navy and the shipbuilder toidentify opportunities to improve affordability of future aircraft carriers.Procurement delays, excess inflation, and material escalation have been reportedas significant contributors to CVN-77 cost growth. The shipbuilder has proposedto achieve significant CVN-21 class program savings through a stableprocurement plan, and through procurement of economic order quantity materialfor CVN-79 and CVN-80 in conjunction with CVN-78 procurement.

In view of the potential for significant program savings, the committeerecommends an increase of $50.0 million in SCN for CVN-21 class advance

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procurement, and directs the Secretary of the Navy to review economic orderquantity and long lead time material procurement for the CVN-21 class. TheSecretary is to submit a report to the congressional defense committees with thefiscal year 2008 budget request, outlining the advance procurement requirementsto potentially optimize economic order quantity savings and escalation avoidance(to include offsetting factors) for the first three vessels of the CVN-21 class. Ofthe amount authorized to be appropriated for advance procurement for CVN-79and CVN-80, none of the funds are available for obligation prior to 30 daysfollowing receipt of the Secretary’s report. (Page 67)

H.R. 5631 (FY2007 Defense Appropriations Bill)

House. In its report (H.Rept. 109-504 of June 16, 2006) on H.R. 5631, theHouse Appropriations Committee recommended approval of the Administration’sproposed use of split funding FY2007 and FY2008 for procuring the amphibiousassault ship LHA-6, but did not recommend approval of the Administration’sproposal to use split funding in FY2007 and FY2008 for procuring the two leadDDG-1000 destroyers. The committee for FY2007 instead recommended fullfunding for one DDG-1000. The committee’s report states:

For fiscal year 2007, the Committee faces several challenges inrecommending appropriations for the Department of Defense and the intelligencecommunity. First, the President's budget proposes an unorthodox approach tofunding two major procurement programs, the F-22 fighter of the Air Force andthe DD(X) destroyer of the Navy. In both cases, the budget request includesincremental or partial funding, for these two programs. In the case of the F-22,incremental funding is requested in the middle of the production run.

The use of incremental funding mortgages the future of the procurementbudget of the Defense Department in a manner that is not acceptable to theCommittee. In addition, the precedent of incremental funding for these programscould be applied to a variety of other procurements, leading to a loss of budgettransparency and reducing the ability to perform oversight. Therefore, therecommendations in this bill include full funding for one DD(X) destroyer andthe F-22 fighter program.

Funding of $2,568,111,000 is recommended to complete full funding of oneDD(X) vessel. This is the same level as the funding request for this item, butunder the President's budget these funds would have been allocated on anincremental basis against two ships. (Page 4)

The report also states:

The Committee recommends $2,568,111,000 for the procurement of 1DD(X) destroyer. The budget requested $2,568,111,000 to incrementally fund2 ships, with the balance of funding to be provided in fiscal year 2008. TheCommittee cannot support such a far-reaching policy change which hasimplications beyond the Navy's shipbuilding program. Further, the Navy'sproposal requires special legislative authority to be executed, and this authorityis not included in the House-passed National Defense Authorization Act, 2007(H.R. 5122). (Page 139)

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Senate. In its report (S.Rept. 109-292 of July 25, 2006) on H.R. 5631, the SenateAppropriations Committee recommends approving the Navy’s request for FY2007procurement funding for the first two DDG-1000 destroyers. The report states:

Consistent with the Senate-passed authorization bill and the Navy’s currentacquisition strategy, the Committee recommendation supports the budget requestof $2,568,111,000 for dual lead ships. The Committee reminds the Navy thatthis is a unique acquisition strategy and should not be used as a precedent forincrementally funding any future DDG–1000 or any other shipbuilding program.(Page 115)

The report recommends funding the procurement of one Littoral Combat Ship,or LCS (rather than the requested two) in FY2007, and rescinding funding (in Section8043) for one of the three LCSs procured in FY2006. The report states:

With the fiscal year 2007 budget submission of $520,670,000 for the fifthand sixth LCS flight 0 ships, the Navy revealed the LCS unit cost estimate usedas a basis for last year’s appropriation was exclusive of contract change orders,planning and engineering services, program management support and other costsnot included in the ship construction contract ... As a result, the Navy is unableto procure both the third and fourth LCS flight 0 ships without the availabilityof additional funding. The Committee is troubled by this revelation andrecommends rescinding the insufficient fiscal year 2006 funds currently allocatedto the fourth LCS flight 0 vessel.

The Committee is further troubled by reports that the first two LCS flight0 ships under construction are exceeding their cost as previously budgeted.... Asa result, the Committee believes the fiscal year 2007 budget request isinsufficient to procure two ships and recommends $300,670,000 to fully fundprocurement of one LCS seaframe, which is a reduction of $220,000,000 and oneseaframe from the request. The Committee notes that this recommendation putsthe Navy on its previously established path of procuring four LCS flight 0 shipsby the end of fiscal year 2007. (Pages 115-116)

Legislative Activity for FY2006

H.R. 1815/P.L. 109-163 (FY2006 Defense Authorization Bill)

House. In its report (H.Rept. 109-89 of May 20, 2005) on H.R. 1815, theHouse Armed Services Committee states:

[Chief of Naval Operations] Admiral [Vernon] Clark, in his posturestatement before the House Committee on Appropriations, Subcommittee onDefense stated, “We need to partner with Congress and industry to regain ourbuying power. Acquisition and budget reforms, such as multi-year procurement,economic order quantity, and other approaches help to stabilize the productionpath, and in our view, reduce the per unit cost of ships and increase ourshipbuilding rate.” The committee does not agree that creative financingmethodologies that delay recognizing the true cost of shipbuilding or that provideever-increasing amounts of funding to cover the explosion in ship costs areresponsible actions. Incremental funding, advanced procurement, multiyear

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procurement, and various creative shipyard work allocation arrangements havefailed to control the cost growth of vessel classes such as the Virginia classsubmarine, the replacement amphibious assault ship (LHA(R)), the future majorsurface combatant ship (DD(X)), and the future aircraft carrier CVN-21. (Page63)

Section 1004 of the bill as reported by the committee states:

SEC. 1004. REPORTS ON FEASIBILITY AND DESIRABILITY OF CAPITALBUDGETING FOR MAJOR DEFENSE ACQUISITION PROGRAMS.

(a) Capital Budgeting Defined- For the purposes of this section, the term `capitalbudgeting’ means a budget process that —

(1) identifies large capital outlays that are expected to be made in future yars,together with identification of the proposed means to finance those outlays andthe expected benefits of those outlays;

(2) separately identifies revenues and outlays for capital assets from revenuesand outlays for an operating budget;

(3) allows for the issue of long-term debt to finance capital investments; and

(4) provides the budget authority for acquiring a capital asset over severalfiscal years (rather than in a single fiscal year at the beginning of suchacquisition).

(b) Reports Required- Not later than July 1, 2006, the Secretary of Defense and theSecretary of each military department shall each submit to Congress a reportanalyzing the feasibility and desirability of using a capital budgeting system for thefinancing of major defense acquisition programs. Each such report shall address thefollowing matters:

(1) The potential long-term effect on the defense industrial base of the UnitedStates of continuing with the current full up-front funding system for majordefense acquisition programs.

(2) Whether use of a capital budgeting system could create a more effectivedecisionmaking process for long-term investments in major defense acquisitionprograms.

(3) The manner in which a capital budgeting system for major defenseacquisition programs would affect the budget planning and formulation processof the military departments.

(4) The types of financial mechanisms that would be needed to provide fundsfor such a capital budgeting system.

Senate. Section 122 of the FY2006 defense authorization bill (S. 1042) asreported by the Senate Armed Services Committee (S.Rept. 109-69 of May 17, 2005)would permit the aircraft carrier CVN-78 to be procured with split funding (i.e.,incremental funding) during the period FY2007-FY2010. The section states:

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SEC. 122. SPLIT FUNDING AUTHORIZATION FOR CVN-78 AIRCRAFTCARRIER.

(a) AUTHORITY TO USE SPLIT FUNDING- The Secretary of the Navy isauthorized to fund the detail design and construction of the aircraft carrier designatedCVN-78 using split funding in the Shipbuilding and Conversion, Navy account infiscal years 2007, 2008, 2009, and 2010.

(b) CONDITION FOR OUT-YEAR CONTRACT PAYMENTS- A contract enteredinto for the detail design and construction of the aircraft carrier designated CVN-78shall provide that any obligation of the United States to make a payment under thecontract for a fiscal year after fiscal year 2006 is subject to the availability ofappropriations for such fiscal year. *

* For more on CVN-78, see CRS Report RS20643, Navy CVN-21 Aircraft CarrierProgram: Background and Issues for Congress, by Ronald O’Rourke.

Section 123 of the bill would permit an amphibious assault ship LHA(R) to beprocured with split funding (i.e., incremental funding) in FY2007 and FY2008. Thesection would also permit FY2006 funding to be used for advance construction of theship. The section states:

SEC. 123. LHA REPLACEMENT (LHA(R)) SHIP.

(a) AMOUNT AUTHORIZED FROM SCN ACCOUNT FOR FISCAL YEAR2006- Of the amount authorized to be appropriated by section 102(a)(3) for fiscalyear 2006 for shipbuilding and conversion, Navy, $325,447,000 shall be availablefor design, advance procurement, and advance construction with respect to theLHA Replacement (LHA(R)) ship.

(b) AMOUNTS AUTHORIZED FROM SCN ACCOUNT FOR FISCAL YEARS2007 AND 2008- Amounts authorized to be appropriated for fiscal years 2007 and2008 for shipbuilding and conversion, Navy, shall be available for constructionwith respect to the LHA Replacement ship.

(c) CONTRACT AUTHORITY-

(1) DESIGN, ADVANCE PROCUREMENT, AND ADVANCECONSTRUCTION- The Secretary of the Navy may enter into a contractduring fiscal year 2006 for design, advance procurement, and advanceconstruction with respect to the LHA Replacement ship.

(2) DETAIL DESIGN AND CONSTRUCTION- The Secretary may enter intoa contract during fiscal year 2007 for the detail design and construction of theLHA Replacement ship.

(d) CONDITION FOR OUT-YEAR CONTRACT PAYMENTS- A contractentered into under subsection (c) shall provide that any obligation of the UnitedStates to make a payment under the contract for a fiscal year after fiscal year 2006is subject to the availability of appropriations for that purpose for such fiscalyear.*

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* For more on the LHA(RE) program, see CRS Report RL32513, Navy-Marine CorpsAmphibious and Maritime Prepositioning Ship Programs: Background and OversightIssues for Congress, by Ronald O’Rourke.

S.Rept. 109-69 states:

The CVN-78 will be a new class of aircraft carrier, incorporating numerous newtechnologies. This budget request reflects the second one-year slip in theprogram in recent years. This slip would cause a delay in the delivery of theCVN-78 until fiscal year 2015, with the ship it is scheduled to replace, the USSEnterprise (CVN-65), scheduled to be decommissioned in fiscal year 2013.Additionally, this slip translates into a cost growth for CVN-78 of approximately$400.0 million, according to the Navy.

The committee is concerned about this delay. The committee has been toldthere is no technical reason for the delay, but that the delay was driven by budgetconsiderations. Both the Secretary of the Navy and the Chief of Navaloperations testified that large capital assets such as aircraft carriers are difficultto fund under the traditional full-funding policy, and that more flexible methodsof funding must be found and used. The program of record for CVN-78 has thedetail design and construction funding split between two years. This provisionwould authorize that same funding to be split over four years, thereby allowingneeded funding flexibility. The committee directs the Navy to provide anupdated funding profile, fully funding the remaining costs of the ship from fiscalyears 2007 through 2010, with delivery of the fiscal year 2007 budget request.

Conference Report. Section 128 of the conference report (H.Rept. 109-360of December 18, 2005) on H.R. 1815/P.L. 109-163 of January 6, 2006 authorizes theuse of incremental funding in FY2007, FY2008, and FY2009 for the procurement ofthe aircraft carrier CVN-78, subject to the availability of appropriations for thosefiscal years. The provision states:

SEC. 128. CVN-78 AIRCRAFT CARRIER.

(a) Authority to Use Multiple Years of Funding. — The Secretary of the Navy isauthorized to enter into a contract for detail design and construction of the aircraftcarrier designated CVN-78 that provides that, subject to subsection (b), funds forpayments under the contract may be provided from amounts appropriated forShipbuilding and Conversion, Navy, for fiscal years 2007, 2008, and 2009.

(b) Condition for Out-Year Contract Payments. — A contract described in subsection(a) shall provide that any obligation of the United States to make a payment under thecontract for a fiscal year after fiscal year 2006 is subject to the availability ofappropriations for that purpose for that fiscal year.

Section 129 of the conference report authorizes the use of incremental fundingin FY2007 and FY2008 for the procurement of the LHA(R) amphibious assault ship,subject to the availability of appropriations for those fiscal years. The provisionstates:

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SEC. 129. LHA REPLACEMENT (LHA(R)) SHIP.

(a) Amount Authorized From SCN Account for Fiscal Year 2006. — Of the amountauthorized to be appropriated by section 102(a)(3) for fiscal year 2006 forshipbuilding and conversion, Navy, $200,447,000 shall be available for design,advance procurement, advance construction, detail design, and construction withrespect to the LHA Replacement (LHA(R)) ship.

(b) Amounts Authorized From SCN Account for Fiscal Years 2007 and 2008. —Amounts authorized to be appropriated for fiscal years 2007 and 2008 forshipbuilding and conversion, Navy, shall be available for construction with respectto the LHA Replacement ship.

(c) Contract Authority. —

(1) DESIGN, ADVANCE PROCUREMENT, AND ADVANCECONSTRUCTION. — The Secretary of the Navy may enter into a contractduring fiscal year 2006 for design, advance procurement, and advanceconstruction with respect to the LHA Replacement ship.

(2) DETAIL DESIGN AND CONSTRUCTION. — The Secretary may enter intoa contract during fiscal year 2006 for the detail design and construction of theLHA Replacement ship.

(d) Condition for Out-Year Contract Payments. — A contract entered into undersubsection (c) shall provide that any obligation of the United States to make apayment under the contract for a fiscal year after fiscal year 2006 is subject to theavailability of appropriations for that purpose for such fiscal year.

(e) Funding as Increment of Full Funding. — The amounts available undersubsections (a) and (b) for the LHA Replacement ship are the first increments offunding for the full funding of the LHA Replacement (LHA(R)) ship program.

H.R. 2863/P.L. 109-148 (FY2006 Defense Appropriations Bill)

House. In its report (H.Rept. 109-119 of June 10, 2005) on H.R. 2863, theHouse Appropriations Committee stated, in the section on Navy shipbuilding, thatit “supports the LHA(R) [amphibious assault ship] program, and it directs the Navyto reconsider its proposal to request split funding for LHA(R) over the FY2007-08timeframe, and instead follow the full funding principle for this ship class, to ensurean adequate budget is in hand before contract award.” (Page 146)

Senate. In its report (S.Rept. 109-141 of September 29, 2005) on H.R. 2863,the Senate Appropriations Committee stated:

The Committee remains gravely concerned about the overall health andstability of Navy shipbuilding. Fleet inventory and capability requirementsremain unstable as do program performance and costs.

Of primary concern are soaring cost overruns. The Committee findsunanticipated cost overruns to be the root cause of much of the instability in theprogram. Until budget estimates become more realistic, requirements stabilizeand penalties for exorbitant cost overruns are exercised, ship construction costs

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are unlikely to improve. The Committee is aware that the new Chief of NavalOperations [CNO] is actively reviewing shipbuilding programs and isconsidering several options for controlling long-term costs. In an effort to assistthe Navy in the short-term, the Committee recommends providing the Navyfinancial management authorities that have previously been denied.

For fiscal year 2006, the Committee recommends providing the Navyadditional reprogramming authority. This authority allows the Navy, throughabove threshold reprogramming procedures, to increase funding for programsexperiencing unforeseen shortfalls. The Committee understands that in fiscalyear 2005 after exhausting the $100,000,000 of the transfer authority theCongress provided, the Navy sought to use dollars specifically appropriated foroutfitting and post delivery to address funding shortfalls. The Committee isconcerned about this change in Navy policy as it will only further obscure actualprogram costs. The new reprogramming authority is provided only with theunderstanding that this change will not be implemented in the future.

The additional reprogramming authority essentially provides the Navy areactive mechanism or approach to cost management. The Committee believesthe situation requires more proactive program, budgetary and contractmanagement and encourages the Department of Defense to consider whetherusing advance appropriations in future budgets will improve the shipbuildingprogram. (Page 126)

The committee also stated:

The fiscal year 2006 President’s budget requests $225,427,000 for [the]DDG-51[destroyer program] for what the Navy describes as “program completionrequirements and shutdown costs.” These funds are requested for a mix of Classand ship specific plan, basic construction, ordnance, certification, and inspectioncosts. Such costs are traditionally included in the budget request for each ship.However, when signing the multiyear contract for the construction of the finalDDGs of the Class, the Department decided to change its policy and budget forthese costs after the last ship was appropriated. The Committee finds thisdecision troubling. First, budgeting for such costs after procurement of the lastvessel obscures the actual cost to procure each ship and overstates savingsattributable to the multiyear contract authority under which these ships werepurchased. The Congress approved the Navy’s request for multiyearprocurement authority in fiscal year 2002 assuming a level of savings to thetaxpayer that are now not being realized. Most disconcerting about this changein policy and resultant budget request is the Navy’s assertion that if these costsare not funded, the Navy will not be able to meet its contractual obligations andthe Chief of Naval Operations will not be able to accept delivery of these ships.The Committee is alarmed that the Navy would knowingly sign a multibilliondollar contract for ships that would be both non-operational and undeliverableunless additional dollars, outside the contract, were provided. The Committeedirects the Secretary of the Navy to provide a detailed report of all the costsrequired to complete each of the remaining 11 ships and a rationale for such acontractual arrangement by December 1, 2005. Until sufficient explanation isprovided, the Committee recommends only providing funds for plans and thosecosts directly attributable to ships scheduled to deliver in the near-term. As suchthe Committee recommends reducing the budget request by $195,654,000. (Page127)

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19 For additional discussion, see “Collins, Warner Team To Fund Shipbuilding,” DefenseToday, March 17, 2005; and Christopher J. Castelli, “Warner Amendment On AdvanceAppropriations For Ships Is Withdrawn,” Inside the Navy, March 21, 2005.

Conference Report. The conference report (H.Rept. 109-359 of December18, 2005) on H.R. 2863 states:

The conferees do not agree with House direction urging the Navy toreconsider split funding for the LHA(R) Program. The conferees agree toconsider either split funding or full funding if proposed by the Administration.

H.Con.Res 95 (Concurrent Resolution on FY2006 Budget)

Conference Report. The conference report (H.Rept. 109-62 of April 28,2005) on H.Con.Res 95, the budget resolution for FY2006, states:

The conference conferees understand the Navy may review whetheradvance appropriations can improve its procurement of ships and provide savingsas it designs its 2007 budget. In addition, the conferees intend to request theGovernment Accountability Office [GAO] to assess the implications of usingadvance appropriations to procure ships.

The report notes that

Section 401 [of H.Con.Res 95] reflects an overall limit on advanceappropriations of $23.158 billion in fiscal year 2007, which is the same limit onadvance appropriations as has been included in all previous limitations onadvance appropriations in past budget resolutions.

The report includes the Shipbuilding and Conversion, Navy (SCN)appropriation account in the list of accounts identified for advance appropriations inthe Senate.

S.Amdt. 146 to S.Con.Res. 18. S.Con.Res 18 is the earlier Senate versionof the budget resolution. Senate Amendment (S.Amdt 146) to S.Con.Res. 18 wassponsored by Senator Warner, co-sponsored by several other members, and submittedon March 15, 2005. It would amend Section 401 of S.Con.Res. 18 — the section thatrestricts use of advance appropriations — to increase the amount of advanceappropriations in FY2007 and FY2008 by $14 billion, to $37.393 billion. Theamendment would also insert a new provision (Section 409) that would include theShipbuilding and Conversion, Navy (SCN) appropriation account on a list ofaccounts identified for advance appropriations in the joint explanatory statement ofthe managers to accompany S.Con.Res. 18. The amendment was ordered to lie onthe table. The Senate passed S.Con.Res. 18 on March 17, 2005.19

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20 Sealift ships are cargo ships that transport military equipment and supplies from one landmass to another. Government-owned sealift ships are operated by the Military SealiftCommand using mostly civilian crews.21 Congress created the NDSF through Section 1024 of the FY1993 defense authorizationact (H.R. 5006; see pages 178-181 of H.Rept. 102-966 of October 1, 1992, the conferencereport on the act), as amended by Title V of the FY1993 defense appropriations act (H.R.5504).22 The first 3 ships in the Navy’s 12-ship Lewis and Clark (TAKE-1) class auxiliary shipprogram were procured in the SCN account using full funding. DOD, starting with itsFY2003 defense budget and FY2003-FY2007 FYDP, proposed to fund the remaining 9ships in the program during the years FY2003-FY2007 in the NDSF, where they would notbe subject to the full funding provision as traditionally applied to DOD procurementprograms. This proposal was consistent with congressional interest for this approachexpressed in action on the FY2001 defense budget. (See H.Rept. 106-616 of May 12, 2000,the House Armed Services Committee report on the FY2001 defense authorization bill [H.R.4205], page 89; S.Rept. 106-292, the Senate Armed Services Committee report on theFY2001 defense authorization bill [S. 2549], page 93; and H.Rept. 106-945, the conferencereport on the FY2001 defense authorization bill [H.R. 4205], p. 35 [Sec. 127].) TAKE-1class ships since FY1993 have been funded by Congress in the NDSF.23 CRS Report 96-257 F, Sealift (LMSR) Shipbuilding and Conversion Program:Background and Status, by Valerie Bailey Grasso. (Archived report; copies availabledirectly from Ronald O’Rourke.)

Appendix A. Recent Ships Procured withIncremental Funding

This appendix discusses Navy and DOD ships that have been procured in recentyears or are currently being procured using incremental funding.

DOD LMSR-Type Sealift Ships

As part of its action on the FY1993 defense budget, Congress created theNational Defense Sealift Fund (NDSF) — a revolving fund in the DOD budget forthe procurement, operation, and maintenance of DOD-owned sealift ships20 — andtransferred procurement of new military sealift ships and certain Navy auxiliary shipsfrom the Shipbuilding and Conversion, Navy (SCN) appropriation account, wherethey traditionally had been procured, to the NDSF.21 Since the NDSF is outside theprocurement title of the defense appropriation act, sealift ships procured sinceFY1993, including DOD’s Large, Medium-Speed, Roll-on/Roll-off (LMSR) ships(as well as Navy Lewis and Clark (TAKE-1) dry cargo ships procured sinceFY200322) have not been subject to the full funding policy as traditionally applied toDOD procurement programs.

As discussed in a 1996 CRS report,23 although individual LMSRs wereostensibly fully funded each year by Congress, like ships procured in the SCNaccount, DOD in some cases actually applied LMSR funding provided in a givenyear to partially finance the construction of LMSRs authorized in various years. Forexample, although Congress ostensibly approved $546.4 million in FY1995 for theprocurement of two LMSRs, the FY1995 funds were actually applied to help finance

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24 DOD information paper on strategic sealift acquisition program provided to CRS by U.S.Navy Office of Legislative Affairs, Jan. 25, 1995, p. 1.25 The Navy subsequently decided to build SSN-23 to a lengthened configuration that

(continued...)

portions of 16 LMSRs whose construction contracts were awarded between FY1993and FY1997. In explaining its use of funds in the LMSR program, DOD stated:

The National Defense Sealift Fund (NDSF) is not a procurement appropriationbut a revolving fund. Dollars appropriated by Congress for the fund are notappropriated to purchase specific hulls as in the case of, for example the Navy’sDDG-51 program. Rather, dollars made available to the NDSF are executed onan oldest money first basis. Therefore, full funding provisions as normallyunderstood for ship acquisition do not apply.24

SSN-23 Attack Submarine

The Jimmy Carter (SSN-23), the third and final Seawolf (SSN-21) class attacksubmarine, was originally procured in the FY1992 defense budget, which Congresspassed in 1991. In early 1992, the George H. W. Bush Administration terminatedprocurement of further Seawolf-class submarines and proposed rescinding funds forboth the second Seawolf-class boat (SSN-22, which had been procured in FY1991)and SSN-23. In acting on this proposal, Congress rejected the request to rescindfunding for SSN-22 (i.e., Congress affirmed the procurement of SSN-22), effectivelysuspended the procurement of SSN-23, and gave the Secretary of the Navy the choiceof whether to reinstate procurement of SSN-23. In 1993, as part of its Bottom-UpReview (BUR) of U.S. defense policy and programs, the Clinton Administrationdecided to reinstate procurement of SSN-23 in FY1995 or FY1996 (it later settled onFY1996). By this point, $382.4 million had already been obligated and expended onSSN-23. Congress’s action on the 1992 rescission proposal also made an additional$540.2 million in funding available for obligation to SSN-23. As a consequence,completing the approximate $2.4 billion cost of SSN-23 would require about $1.5billion in additional funding.

The Administration requested $1,507.5 million in FY1996 to complete the costof SSN-23. Congress approved the procurement of SSN-23 in FY1996, but providedonly $700 million in procurement funding, leaving about $807.5 million to completethe cost of the ship.

Rather than requesting all $807.5 million or so in FY1997, the Administrationrequested $699.1 million in FY1997 for SSN-23 and deferred the final $105 millionor so needed to complete the cost of the ship (as adjusted) to FY1998. Congress, aspart of its action on the FY1996 defense budget, approved $649.1 million (rather than$699.1 million) for SSN-23, leaving about $155 million to complete the cost of theship.

The Administration requested $153.4 million in FY1998 to complete the costof SSN-23 (as adjusted); Congress approved this amount. Thus, of the approximately$2.4 billion cost of SSN-23 as then estimated,25 a total of $802.5 million — about

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25 (...continued)included an approximately 100-foot additional mid-hull section. This section increased theestimated cost of SSN-23 by roughly $900 million.26 H.Rept. 102-1015 of October 5, 1992, p. 101.

one-third of the total estimated cost of the ship — was appropriated by Congress inthe two years (FY1997 and FY1998) following the year (FY1996) in which SSN-23was (for a second time) procured.

LHD-6 Amphibious Assault Ship

Going into the conference on the FY1993 defense appropriation bill, the Househad recommended fully funding procurement of the Wasp (LHD-1) class amphibiousassault ship Bonhomme Richard (LHD-6) — a ship the Administration had notrequested for procurement — at a cost of $1.205 billion, while the Senaterecommended $1.050 billion. During the conference, however, competition amongvarious programs for defense funding resulted in an agreement in which LHD-6 wasapproved for procurement in FY1993 but only $305 million in FY1993 funding wasprovided. The conference report on the bill stated:

The conferees agree to provide $305,000,000 in funds to initiate the purchase ofone LHD-1 class amphibious assault ship. The conferees have providedauthority for the Navy Secretary to enter into a contract for this ship even thoughfull funding has not yet been provided to the Navy. The conferees request thatthe Navy award a contract for the construction of this vessel and include theadditional funds required for this program in its fiscal year 1994 budget request.26

The $893.8 million needed to complete the funding of the ship (as adjusted) wasrequested by the Administration in FY1994 and approved by Congress. Thus, LHD-6 was split-funded, with about three-quarters of the cost of LHD-6 provided the yearafter the ship’s year of procurement.

LHD-8 Amphibious Assault Ship

Congress included a provision in the Shipbuilding and Conversion, Navy (SCN)sections of both the FY2000 and FY2001 defense appropriations acts stating “Thatthe Secretary of the Navy is hereby granted the authority to enter into a contract foran LHD-1 [class] Amphibious Assault Ship which shall be funded on an incrementalbasis.” The ship in question is LHD-8, which was funded on an incremental basis,with the final increment provided in FY2006. DOD records the ship in its budgetpresentations as having been procured in FY2002.

CVN-78 Aircraft Carrier

The Administration is proposing to procure CVN-78, the Navy’s next aircraftcarrier, using split funding in FY2008-FY2009. In addition, CVN-78 has receivedAP funding since FY2001, and the total amount of AP funding to be provided during

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27 For more on CVN-78, see CRS Report RS20643, Navy CVN-21 Aircraft CarrierProgram: Background and Issues for Congress, by Ronald O’Rourke.

the period FY2001-FY2007 equates to roughly one-third of the cost of the ship.27

Funding for CVN-78 is thus to be provided through a series of increments startingin FY2001 and ending in FY2009, with roughly one-third of the cost of the ship tobe provided in years prior to the year of procurement, about one-third in the year ofprocurement, and about one-third in the year following the year of procurement.

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Appendix B. Funding for Lead DDG-1000 and LeadLCS

Congress, in acting on the Navy’s proposed FY2005 defense budget, rejectedthe Navy’s proposal to procure the lead DDG-1000 (formerly DD(X)) through theNavy’s research and development account, directed the Navy to fully fund the leadDDG-1000 in the Navy’s ship-procurement account, and fully funded the lead LCSin the Navy’s research and development account. This appendix presents excerptsfrom committee and conference report language on concerning the funding of thelead DDG-1000 and lead LCS.

DDG-1000 Program

Authorization. The House Armed Services Committee, in its report(H.Rept. 108-491 of May 14, 2004) on the FY2005 defense authorization bill (H.R.4200), stated:

The committee has observed the increasing use of funds designated forresearch and development (R&D) purposes to acquire operational platforms.The fiscal 2005 budget proposal would take the practice to unprecedented levels,with three DD(X) and two LCS ships, three E-2C aircraft, and eleven VH-XXhelicopters proposed for acquisition with R&D funds.

The use of R&D funds for prototypes and truly developmental items is bothproper and prudent. This practice also makes sense when, following thecompletion of testing, a test asset still has useful capability to bring to theoperational fleet. However, it is difficult to believe that nearly half of theVH-XX fleet, for example, qualifies as prototypes or dedicated test assets. Thefact that the platforms may occasionally be used for some testing purposes doesnot, in the committee’s view, qualify them as research craft. Indeed, thecommittee would be surprised were the department actually proposing toregularly carry the President on prototype aircraft.

While the committee recognizes the increased flexibility of R&D funds inacquiring platforms, there is concern that placing acquisition programs in theR&D budget, particularly at their early, least stable stage, threatens otherprograms, particularly in science and technology. The R&D budget is a verysmall pool from which to fund acquisitions of large items like ships, and asprocurements are must-pay bills, typical procurement cost-growth would put therest of the R&D budget at risk.

The committee’s action with regard to particular programs funded in R&Dshould therefore be seen not only as a reflection of the merits of those items, butalso as an expression of concern over the rapidly expanding portion of the R&Dbudget being used for purposes other than R&D. (Pages 248-249)

The Senate Armed Services Committee, in its report (S.Rept. 108-260 of May11, 2004) on the FY2005 defense authorization bill (S. 2400), stated:

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The committee believes that if the flexibility provided by using RDTE,N fundsfor the lead ship at the lead shipyard is justified, that same flexibility is necessaryfor the follow ship at the second shipyard as well. (Pages 130-131)

Appropriation. The Senate Appropriations Committee, in its report(S.Rept. 108-284 of June 24, 2004) on the FY2005 defense appropriations bill (S.2559), stated:

The Committee recommends supporting the President’s budget request forthe DD(X) Destroyer program but holds that construction of the ship should befunded within the shipbuilding and conversion account in a manner consistentwith prior shipbuilding programs. The Committee is encouraged by the Navy’swillingness to propose nontraditional means of overcoming the enormousfinancial burden that ship cost overruns and prior year bills place upon theshipbuilding budget, but finds that such costs would not be eliminated but ratherobscured by funding ship construction in the research and development account.Therefore, the Committee recommends transferring $221,116,000 of researchand development funding to the Shipbuilding and Conversion, Navy account anddirects the Navy to fund future ship construction programs within theshipbuilding and conversion account. In addition, the Committee recommendsproviding $99,400,000 in advance procurement funding for the second DD(X)ship to be constructed at a second source shipyard. (Page 83.)

The conference report (H.Rept. 108-622 of July 20, 2004) on H.R. 4613 (P.L.108-287 of August 5, 2004) stated:

The conferees agree to provide a total of $305,516,000 for advanceprocurement for the DD(X) class of ships instead of $320,516,000 as proposedby the Senate and no appropriation as proposed by the House. The confereesdirect the Navy to include future funding requests for the DD(X) in theShipbuilding and Conversion, Navy appropriation.

Within the funds provided, $221,116,000 is only for design and advanceprocurement requirements associated with the first ship of the DD(X) class and$84,400,000 is only for design and advance procurement requirements associatedwith construction of the second ship at an alternative second source shipyard....

The conferees direct that full funding of the remaining financialrequirement for these ships, not including traditional advance procurementrequirements, shall be included in a future budget request. (Page 188.)

LCS Program

Appropriation. The House Appropriations Committee, in its report(H.Rept. 108-553 of June 18, 2004) on the FY2005 defense appropriations bill (H.R.4613), stated:

The Committee remains impressed with the Navy’s initiative in pursuingthe LCS program, which promises to address significant operational gaps inNavy capability while presaging new ways of developing and fielding technologyto the Fleet. The Committee has agreed to the Navy’s request to fundconstruction of LCS in the research, development, test and evaluationappropriation, recognizing the Navy’s desire to more readily accommodate

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potential changes to the program. The Committee approves this request becauseit views the Flight 0 ship as a prototype of a completely new class of ship. Oncethe Navy has completed and tested the prototype, it should proceed with thepreliminary design and construction of the first Flight 1 ship.

The Committee recommendation includes increasing the budget request for theconstruction of the first Flight 0 LCS by $107,000,000, fully funding thisconstruction effort at $214,000,000. The fiscal year 2005 request included only$107,000,000 for the first increment of the LCS construction. Budgetdocumentation indicates the Navy plans to request an additional $107,000,000for the second and final increment for the first ship in fiscal year 2006. TheCommittee strongly opposes incremental funding of ship construction andtherefore has provided a total of $214,000,000 in 2005 for construction of thefirst LCS, fully funding the construction requirement in one year. (Pages 288-289.)

The Senate Appropriations Committee, in its report (S.Rept. 108-284 of June24, 2004) on the FY2005 defense appropriations bill (S. 2559), stated:

The Committee supports the budget request for the Littoral Combat Shipand consents to the Navy’s request to fund construction of the first prototype shipfor each of two ship designs in the Research and Development, Navy account.Approval for funding LCS in the research and development account is strictlybased on the acknowledgment of the prototypical nature and high level oftechnical risk inherent in this program. The Committee finds LCS to be uniqueand unlike any other shipbuilding program the Navy has previously pursued; andtherefore, grants the Navy’s request for the increased flexibility that fundingwithin the research and development account affords. However, the Committeedirects that all follow-on ships beyond one prototype for each LCS ship designbe fully funded in the Shipbuilding and Conversion, Navy account.... In addition,the consent to build the LCS prototype ships with research and developmentfunding should in no way be interpreted as approval for other ship constructionprograms to be funded within the Research and Development, Navy account.(Pages 156-157)

The conference report (H.Rept. 108-622 of July 20, 2004) on H.R. 4613 (P.L.108-287 of August 5, 2004) includes a provision (Section 8092) that states in part:

None of the funds provided in this Act may be obligated to prepare a fiscal year2006 budget request for a third vessel under the Littoral Combat Ship programin fiscal year 2006: Provided, That funds for the second vessel shall be for asecond source supplier: Provided further, That all subsequent ships shall bepurchased with “Shipbuilding and Conversion, Navy” funds beginning in fiscalyear 2007.

The conference report stated:

The conferees agree with the Senate that all follow-on ships, beyond one of eachprototype design, should be fully funded in the Shipbuilding and Conversion,Navy appropriation. (Page 310)