those who live in a free government would have to give of their services as well as of their goods to support and defend it. We feel that it is a very important psychological advantage of having Reserve units in operation all over the country, that they are there in the civilian community teaching that lesson to the young people coming along. Mr. RILEY. Thank you very much, gentlemen. Your testimony has been very helpful to the committee. Colonel CARLTON. Thank you, Mr. Riley and Mr. Sikes, for your encouragement. TUESDAY, MARCH 21 1961. STOCK AND INDUSTRIAL FUNDS, AIR FORCE WITNESSES LT. GEN. JOE W. KELLY, COMMANDER, MILITARY AIR TRANSPORT SERVICE MAJ. GEN. R. J. FRIEDMAN, DIRECTOR OF BUDGET, HEADQUARTERS, USAF COL. ALLEN JONES, OFFICE, DEPUTY CHIEF OF STAFF, COMPTROLLER, HEADQUARTERS, MATS LT. COL. SAM W. ALDERSON, DIRECTORATE OF TRANSPORTATION, HEADQUARTERS, USAF ROBERT HAMMOND, DIRECTORATE OF BUDGET, HEADQUARTERS, USAF Mr. MAHON. We shall resume our hearing on the Air Force budget. We have some very distinguished witnesses before us today. We will consider the various revolving and management funds within the Air Force. Obviously, the one with which we are most concerned is the industrial fund within which MATS is operated. GENERAL STATEMENTS Without objection, we shall insert in the record a brief introductory statement by General Friedman and a statement of Colonel Alderson, after which we shall hear General Kelly on the Military Air Transport Service. (The prepared statements follow:) STATEMENT OF MAJ. GEN. ROBERT J. FRIEDMAN, DIRECTOR of Budget, HEADQUARTERS, USAF, ON AIR FORCE WORKING CAPITAL FUNDS BIOGRAPHICAL SKETCH OF WITNESS Born February 19, 1913, Bethpage, N.Y. Bachelor of science, aeronautical engineering, from Alabama Polytechnic Institute. Various assignments in materiel prior to, and including, service in European theater of operations. Various duties in operations, plans, and programing, including assignment to Headquarters, Far East Air Forces, during Korean conflict. Assistant and Acting NO NEW APPROPRIATIONS REQUIRED Mr. Chairman and members of the committee, the Air Force stock and industrial funds are self-sustaining again through the budget year. In fact, as I mentioned in my fiscal aspect statement, we propose a transfer of an additional $25 million from the stock fund to the "Military personnel" appropriation in 1962. This will make a total of $105 million excess cash which has been transferred during the past 3 years from the stock fund thus obviating the necessity of requesting new obligating authority in this amount for military personnel expenses. The transfers have been made possible through inventory reductions and actions we have undertaken to improve our materiel and financial management of the fund. AIR FORCE STOCK FUND This fund currently includes such items as uniform and organizational clothing, textile items, medical-dental items, aviation fuels and lubricants, food, Air Force Academy cadets' personal and school supplies, and certain general supply items. In our continuing program of reviewing stock funded and nonstock funded areas to insure proper utilization, we have determined that the method of initially financing some items should be changed. These are organizational clothing and medical-dental supplies and equipment. Continued stock funding of these items is not consistent with, and to some extent is duplicative within the established Air Force supply and financial management systems. Accordingly, our estimates reflect their transfer to general appropriation financing in fiscal year 1962. In addition, in the establishment of the single managers for military industrial supplies (Navy) and military general supplies (Army), a number of items will be deleted from the Air Force General Supplies Division. In 1961 military industrial supplies, such as paints, brushes, sealers, sheet metal, amounting to $13 million, were transferred to the Navy from the General Supplies Division. The plan for transfer of military general supplies, such as furniture, office supplies, cleaning equipment, and packaging material, is still in the formulative stages and the item identification has not been completed. Therefore, the impact of the transfer of the latter category upon the General Supplies Division in 1962 cannot be determined at this time. After known transfers, the Air Force stock fund will finance approximately 71,000 different items and will have a Government investment of $534 million. STOCK FUND IMPROVED FUNDING CONCEPT Although the committee has been provided a brochure on the working capital funds in accordance with its request, there are a few significant points worthy of mention before summarizing for you our programs and anticipated financial results for the stock and industrial funds. I advised you last year that we had begun a new inventory and capital control management concept in the Commissary Division. Under this concept, control is exercised by prescribing levels of inventory on hand, procurement on order and net capital. This was the first undertaking to operate the stock fund on a truly revolving basis. Since establishment of this new system, it has been possible to reduce the value of commissary stock on-hand and on-order from approximately $108 million as of the end of fiscal year 1959 to $102 million by end of fiscal year 1960. During this same time period, our sales increased from $421 million to $447 million and we have not been faced with the lack of capability of providing the necessary food items due to the fiscal restraints on procurement. By the end of fiscal year 1962 we anticipate that the investment in food stocks will be reduced to $100 million while the sales in 1962 are expected to increase to $451 million. This system has proven most satisfactory and beginning with 1961, approval was was obtained to operate the Air Force Academy Division on the same basis. We have also proposed that the Air Force apply this improved management system to individual clothing items beginning with fiscal year 1962 operations. ACTIVITY AND FINANCIAL STATUS Our basic program elements are sales, inventories, and procurement. This chart (chart 1) illustrates the relationships for the 3 fiscal years. CHART 1.-Air Force stock fund program elements, fiscal years 1960-62 SALES, INVENTORY AND PROCUREMENT As indicated by the legend, the first inventory bar for each year is distributed by division, and the second bar is distributed by type of stock. Starting with $1.337 billion in fiscal year 1960, sales decrease to $1.290 billion in fiscal year 1961 and $1.242 billion in fiscal year 1962. The lower sales in 1961 are due primarily to lower consumption of aviation fuels and the reduced general supplies coverage. The lower sales in fiscal year 1962 reflect the reduced scope after deletion of the medical and organizational clothing items. The total inventory of $390 million on June 30, 1960, will be reduced to $310 million by June 30, 1961, because of the deletion of medical and organizational clothing and transfers to the Navy. There will be a further reduction to $304 million by June 30, 1962, due primarily to drawdowns in general supply inventory, In fiscal year 1960 procurement amounted to $1.241 billion. The planned procurement in fiscal year 1961 is $1.303 billion, the increase resulting primarily from the significant inventory drawdown in aviation fuels in 1960, which had to be restored in 1961, and an increase in materiel on order. Procurement decreases to $1.235 billion in fiscal year 1962 primarily because of the transfers of the logistic responsibility previously mentioned. The stock fund financial status (table I) as of the end of each fiscal year follows: TABLE I.—Air Force stock fund, statement of financial condition You will note that total assets of $809 million as of June 30, 1960, decreased to $709 million by June 30, 1961. This decrease is caused by the reduction in inventories previously discussed, reduced accounts receivable and a cash transfer of $30 million to the "Military personnel" appropriation as authorized in the 1961 DOD Appropriation Act. A further reduction in assets to $672 million is anticipated by June 30, 1962. The decrease in 1962 is primarily related to the $25 million transfer to the "Military personnel" appropriation proposed in the 1962 budget. On the liability and capital side, the decreases are in capital investment, related to the deletion of organizational clothing and medical items, transfers of the military industrial supplies to the Navy and a cash transfer to the "Military personnel" appropriation. The retained deficit of $208 million as of the end of fiscal year 1962 is caused primarily by downward revisions of standard prices for items initially capitalized and losses sustained on the disposals of excess and surplus stocks. All but 5 percent of this deficit occurred prior to fiscal year 1962. AIR FORCE INDUSTRIAL FUND Currently financed under the Air Force industrial fund are printing and duplicating facilities, laundry and dry cleaning facilities, and the airlift portion of the Military Air Transport Service. PRICING POLICY Each activity currently financed under the Air Force industrial fund is reimbursed for costs incurred in providing services based upon orders received and accepted, with the objective of maintaining the cash working capital established in the fund. Predetermined rates or standard prices are used to recover all authorized expenses as prescribed by the Department of Defense. Generally, authorized expenses include civilian pay and allowances, supplies and materials, day-to-day maintenance of plant and equipment, and other costs associated with the production of end items or services. FINANCIAL OPERATIONS AND STATUS Revenue of $303.8 million exceeded expenses in fiscal year 1960 by $12 million, or 3.9 percent (table II). This excess revenue is primarily attributable to the airlift service which is being presented separately. Of this amount, the total profit realized by the airlift service-$11.8 million-has been transferred to the Treasury as miscellaneous receipts in partial satisfaction of section 631 of the 1960 DOD Appropriation Act (73 Stat. 383)-$10 million was transferred in fiscal year 1960, and the balance of $1.8 million in fiscal year 1961. There was an additional transfer to the Treasury during fiscal year 1960 in the amount of $1.6 million. This transfer relates to fiscal year 1959 operations and represents the balance required to satisfy section 634 of the 1959 DOD Appropriation Act (72 Stat. 729). Revenue and expenses are expected to be equal at $337.1 million in fiscal year 1961, and $342.3 million in fiscal year 1962. The increase in expenses in 1961 of $45 million is due primarily to inclusion for the first time of the cost of commercial airlift of military airmail to oversea areas ($25.4 million), and increased depot maintenance costs of airlift service aircraft ($12.5 million). The specifics of these increases are being covered in the airlift service presentation. With respect to the increase in revenue anticipated for fiscal year 1961, the majority of the increase relates also to inclusion for the first time of commercial airlift of DOD airmail. The $5 million increase in expenses in fiscal year 1962 over 1961 results primarily from currently estimated increases for commercial airlift augmentation, offset by decreased aircraft depot maintenance costs. TABLE II.—Air Force industrial fund, statement of revenue and expenses |