FINANCIAL MANAGEMENT OF THE VIETNAM CONFLICT 1962-1972

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CHAPTER I
Planning for Financial Management of Limited War

 

The primary purpose of this treatise is to discuss financial management of the Army operation and maintenance appropriation in the Vietnam War. In order to complete the picture, however, it will be necessary to cover some of the activities prior to our deep involvement in Southeast Asia and the plans which had been made to conduct financial support of this area of the world under the circumstances which evolved.

The Roots of U.S. Involvement

A poll of individuals in the United States would probably show that the average citizen believes that we were not supporting a war effort in Vietnam prior to the early 1960s. Some of the more enlightened might estimate its start in 1955, when President Dwight D. Eisenhower pledged matériel and advisory assistance to the newly formed country of South Vietnam, but, in fact, the United States had been contributing to the war since the late 1940s because of treaties with France. When the French attempted to re-establish their rule after World War II, they were, met with an insurgency well organized to fight the invaders during the war. The United States supplied weapons and supplies to assist the French until their defeat at Dien Bien Phu. With the subsequent resolution of the situation by the Geneva Accords of 1954, American advisory groups began entering Vietnam as the French troops were sent home, and direct support began.

The costs of these advisers as well as the supplies and matériel furnished the South Vietnamese at this time were funded in the Military Assistance Program, much like that in existence today in many countries around the world. At the time, there was little if any direct impact on the operation and maintenance appropriation, since the primary effort of any advisory group is to furnish weapons and train individuals in their use. The pay and allowances of the advisers were budgeted in the Army military personnel appropriation and the cost of weapons and equipment covered by the Army

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procurement of equipment and missiles appropriation. The other minor supplies were negligible and unidentifiable in the overall appropriation expenditures of the Department of the Army for operations and maintenance. The budgets submitted during these early years show no direct support of Vietnam and little indication that the conflict which eventually evolved was considered.

While no thought was given on how to manage the funds for a war effort specifically for Vietnam, the climate in the political arena at the time dictated that the United States re-evaluate its position with respect to the conduct of war. During the late 1940s and 1950s, it was generally agreed that strategic weapons were all that were needed to prevent war. The concept of limited war began to gain general acceptance late in this period and the shift in planning was evident. Under the previous concept there was very little need for planning the best method of conducting general war, since the prevalent feeling had always been that a "blank check" would be available and that financial management would be relegated to keeping track of what had happened, with no real attempt being made to budget or to implement any other method of control of funds and expenditures. The parameters of a limited war included budgeting to the best extent possible, prudent use of resources, and something less than total mobilization of the economy.

The Need for Plans

The Army recognized the challenges of such an environment and began developing a plan for financial management in the late 1950s. The basic elements of the plan included the ability to react quickly to divert funds from currently approved programs to finance an emergency until Congress could be asked for additional money. In order to facilitate this program, certain deviations from what are considered normal procedures were envisioned. The most important of these, in my opinion, was a recommendation that when such an emergency arose, one service would be given the sole responsibility for the funding of all activities in the emergency area, to include furnishing all supplies and equipment that were common to all services. Those items unique to a service required by the forces in the limited war area would be specifically identified by the individual service concerned and a complete picture could be presented to Congress which would provide an adequate basis for restoration of the funds taken from other programs. Another important point in the plan was the provision which would allow the services to exceed current authorizations should the conflict deplete available funds. This plan was submitted to the Assistant

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Secretary of Defense, Comptroller, the Honorable Franklin B. Lincoln, Jr., on 18 February 1960 for approval.

Certain aspects of this plan would have required some rather radical departures from normal procedures, including temporary relief from certain statutory limitations. The primary law which would have required modification was Revised Statute 3679, 31 U.S. Code 665. The provisions of this law form the basis for obligating the United States government to pay for supplies and services. Strict limitations are outlined as well as severe penalties for failure to comply with the prescribed method of obligation of funds. Additionally, Congress has traditionally imposed the limitation of $25,000 on minor construction from the operations and maintenance appropriation. A waiver of this requirement would have provided much needed flexibility. Finally, the normal budget submission with specific items identified to the respective service, under the Army proposal, could only have been accomplished after the fact.

On 31 May 1961, Mr. William F. Schaub, Assistant Secretary of the Army for Financial Management, restated the potential problem in a memorandum to the Assistant Secretary of Defense, the Honorable Charles J. Hitch, entitled, Budgeting and Financing for Emergency Conditions. In this he re-emphasized the critical nature of approval of some definitive plan for limited war in these words: "The Army has the demonstrated ability to react rapidly to emergency situations in a physical sense (e.g., in the movement of personnel, equipment, and supplies) and to take effective and positive action with all systems and organizations geared for emergency operations with one exception: the budget and financing system. The problem in budget and financing wit ' h regard to emergency operations stems principally from the rigidity and austerity of the budget, especially the O&M (operations and maintenance), which includes the consumer funds required for supplies to support all types of activities, routine and emergency." Even though at the time, Mr. Schaub was not considering Vietnam, per se, his words were almost prophetic of the situation which occurred. He made the following specific suggestions for meeting the problem:

a. The adoption of emergency financial procedures appropriate to the three services similar to the procedures which were submitted to your office on 18 February 1960 under the title Department of the Army Financial Management Plan for Emergency Conditions.
b. The use of the Contingency Fund of the Department of Defense (DOD). This would probably require language clarification and an increase in the amount of this appropriation as well as procedures for its use.
c. The determination of what requirements could and should be included in normal budgetary programs.

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He closed the memorandum with, "The Department of the Army will be glad to assist in any way possible to reach a solution to this problem." Unfortunately, there is no evidence to indicate that this plea for action was given serious consideration until after the buildup in Vietnam was under way. Failure to act on this proposal created an inadequate and incomplete financial management picture.

The Army continued to push for some approval of a plan for financing emergencies such as a limited war. On 30 November 1962, a memorandum from the Secretary of the Army, the Honorable Cyrus R. Vance, again stressed the need for a definite plan for this type of funding. Although the primary purpose for the memorandum was to request additional funds, he stated, "Emergency situations involving Army participation, without a designated source of funds therefor, prevent responsible personnel at all levels from properly administering previously approved and still necessary programs. Considerable turbulence is caused in major field commands when they are faced with the financing of immediate emergency actions within funds currently available to them. The Commander is faced with the dilemma of seriously impairing already approved programs upon which his future combat readiness is based in order to finance an unforeseen contingency which may or may not develop into a national emergency." He further requested authority to work directly with the Comptroller to develop possible solutions to this problem in specific terms. Here again, Mr. Vance was not specifically addressing Vietnam, but he recognized the fact that normal budgeting and funding procedures combined with the stringent laws regarding obligations were not flexible enough to cope with emergency situations. A need existed for financial planning for military activities short of general war and exceeding peacetime funding levels.

Army Efforts

In keeping with the intent of the above memorandum, the Comptroller of the Army, Lieutenant General Robert Hackett, studied the problem, and on 25 November 1964, Mr. Edmund T. Pratt, Jr., the Assistant Secretary of the Army for Financial Management, forwarded his recommended actions which could be taken by the Secretary of the Defense to increase flexibility for the Comptroller. None of the six recommended actions required approval of the Congress, but were within authority already possessed by the Secretary of Defense.

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The first of these actions is that the Secretary of Defense may authorize unlimited reprograming within appropriations. Under existing agreements with Congressional Committees, certain reprograming actions require advance approval by such committees. However, this is not legally binding on the Secretary of Defense, and he would undoubtedly take action in emergencies without awaiting approval. This type of authority is of little benefit near the end of a fiscal year, when funds are largely obligated and therefore not available for transfer. However, it can be useful at other times, particularly when Congress is not in session, to appropriate additional funds. It has the disadvantage of merely deferring a request for a supplemental appropriation to replace the funds diverted from normal uses to meet the emergencies. What often happens is that the delay in processing a supplemental appropriation request makes it impossible to obligate new funds within the fiscal year, and the Army is required to absorb the diverted amounts at the expense of other necessary programs.

Second, the Secretary of Defense may transfer funds between appropriations. This authority is limited to $200 million a year, and not more than 7 percent of any appropriation may be transferred to another. This is a useful device, since there are usually unobligated funds in the procurement appropriations, which may be transferred to the operating appropriations, normally required for emergency purposes. In addition, it permits fund transfers from one military department to another. However, the fiscal year end problem still exists, since an emergency near the end of the fiscal year may find the Secretary of Defense's transfer authority completely exhausted.

The third recommendation is that the Secretary of Defense may authorize incurring of deficiencies for costs of increased military strength beyond the numbers appropriated for. This requires a determination by the President that the increase is necessary. It would cover all military personnel, Army (MPA), and operation and maintenance, Army (OMA), costs incident to the strength increase, as well as other operating appropriations. In theory, it would also permit incurrence of deficiencies in the capital appropriations, such as procurement of equipment and missiles, Army (PEMA), for equipment, and military construction, Army (MCA), for minor construction up to $200,000 per project, if sufficient unobligated funds were not available in those accounts.

Fourth, the Secretary of Defense may authorize the incurring of deficiencies for subsistence: fuel including petroleum, oils, and lubricants; transportation; clothing; quarters; and medical supplies

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free of the limitations now contained in Department of Defense Directive 7220.8. Although the military departments now have the authority to incur deficiencies for these purposes, they are required by the cited directive to make a certificate, in advance of incurring obligations, that the amounts authorized are only to cover the period of emergency. Obviously it is not feasible to forecast the duration and fund needs of emergencies affecting national defense. The directive also requires an immediate effort to obtain funds. This is not feasible where it is necessary to exceed the total of the appropriation, and Congress is not in session to enact a supplemental.

The final recommendation is that the Secretary of Defense amend the Department of Defense stock fund regulations to permit issue of stock fund property for use in emergencies without full reimbursement. Current Department of Defense directives permit such issue for short-term activities normally not over 90 days, such as maneuvers and training exercises and reserve forces field activities. Upon return of the property to the stock fund, reimbursement is made only for repair and reconditioning costs, or for losses of property not returned. It would appear that similar provision could be made for issue of equipment to troop units in emergencies, greatly minimizing the fund impact of such issues.

The basic purpose of forwarding these actions which could be taken was to urge the Secretary of Defense to delegate some of these authorities to the services in order for them to be able to take immediate action in case of emergencies. Mr., Pratt stressed the need for action in these words, "Recent experience in the handling of financial problems associated with the action in South Vietnam has not lessened my feeling that the procedures for. giving authority to the command on the ground do not result in the kind of expeditious response that should take place in such a situation. Accordingly, I again urge that this matter be made an item of more urgency than has been accorded to it during recent years."

During the approximate time frame in which the Department of the Army was attempting to obtain additional flexibility from the Secretary of Defense, the headquarters of the United States Army, Pacific (USARPAC), developed a plan for financial management within that theater of operations. The plan was in three parts, with one specifically devoted to limited war. In this section, the need was recognized for deviations from normal procedures in this manner:

Whenever forces of any USARPAC subordinate command become involved in combat operations or support thereof, Headquarters, USARPAC will immediately request Department of the Army, on

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behalf of that command, for such of the following as is considered appropriate to the scale of operations involved:
a. Relief from the requirements to cite consumer funds on requisitions with concurrence transfer of funding responsibilities to depots for direct issues to the affected command.
b. Establishment of a general allotment for the funding of requirements, and the discontinuance of accounting for and reporting of obligations prior to payment.
c. Relief from all cost accounting requirements and from the preparation and submission of cost and performance summaries.
d. Elimination of financial inventory accounting and reporting requirements.
e. Elimination of requirements to maintain financial records of accounts receivable, accounts payable, fixed assets, accrued liabilities, revenues, and expenses.
f. Authority to drop stock fund-owned inventories from financial accountability and to close stock fund accounting records.

This plan was forwarded to Headquarters, Department of the Army, for information. Some of the recommended actions would have required Congressional approval. The authorization of a general allotment would have been one of the most beneficial procedural changes, but Congress would have to agree. I can find no evidence that the U.S. Army, Pacific, ever asked for this provision, nor that it was seriously considered at the Department of Army or the Department of Defense. The authorization of this type of funding would have solved many of the subsequent problems which arose in management of resources. For example, under a general allotment concept there would have been no need for the separation of construction projects from those which should have been funded from operation and maintenance, Army, appropriation. It would have removed the restriction that minor construction from operation and maintenance funds could not exceed $25,000. This one provision in the regulation will haunt the Army for years to come as the General Accounting Office conducts more extensive investigations into certain projects in Vietnam. The office will undoubtedly find that many projects which were begun using operation and maintenance funds eventually cost more than the limit. This is not to say that funds were misused intentionally. When these projects were begun, it was most often the honest estimate of those involved that the projects could be completed within the limitation or that they were required for emergency operation purposes. Many factors contributed to excessive costs, and in some cases attempts were made to hide the total costs simply to avoid criticism. By a simple modification of a peacetime regulatory requirement to fit the situation in Vietnam, the potential for this type of activity would have been

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avoided. The difficulties encountered in arriving at a meaningful budget and the restrictions imposed on the use of funds will be covered in more depth in a later chapter, but it is obvious that had these plans been adopted, many problems would have been solved.

Another of the recommended actions would have eliminated the need for one service to reimburse another service for supplies and equipment. Approval of the common service supply system for all types of supplies, which was envisioned as a necessity in all of the Army planning, would have negated the need for a reimbursement program at all. I will devote another chapter of this monograph to the myriad of problems which this caused and the tremendous amount of paperwork which it generated, with little value to anyone. As long as costs are accumulated and Congressional needs for information met, it would seem that identification of the specific service which uses the resources is unnecessary. As a matter of fact, it is my opinion that if Congress had been asked to approve this type of funding early in the buildup phases, approval would have been granted.

Prophetic Planning

In all aspects of planning for financial management under conditions which later existed in Vietnam, the envisioned problems were identified which later became reality. The primary difficulty seemed to be that these plans were not taken seriously; at least they were not accorded the intense study and approval granted combat and logistics plans. Had they been, we would have been able to provide more effective management of resources. without the turmoil which resulted and further would have been able to provide the field commander with the needed flexibility without fear of criticism for violation of regulatory and statutory requirements which were designed for a peacetime situation. By specifically identifying the allotment which would cover all costs associated with Vietnam, we would have been more responsive to Congressional interests concerning the total war cost which increased steadily from year to year and which will be the subject of discussions for years to come.