Defense Working Capital Fund: Improvements Needed for Managing	 
the Backlog of Funded Work (30-MAY-01, GAO-01-559).		 
								 
This report examines the working capital fund activities for the 
Department of Defense (DOD) to (1) identify any potential changes
in current management processes or policies that, if made, would 
result in a more efficient operation and (2) evaluate various	 
aspects of the DOD policy that allow Defense Working Capital Fund
activities to carry over a 3-month level of work from one fiscal 
year to the next. GAO found that DOD does not have a sound	 
analytical basis for its current 3-month carryover standard. DOD 
established a 3-month carryover standard for most working capital
fund activity groups, although it has not performed the analysis 
necessary to support the 3-month standard. Without a validation  
process, neither DOD nor congressional decisionmakers can be	 
assured that the 3-month standard is achieving its intended goal 
of providing activity groups with reasonable amounts of carryover
to ensure a smooth transition from one fiscal year to the next or
whether the carryover is excessive. In addition, carryover	 
information currently reported under the 3-month standard is not 
comparable between services and is misleading to DOD and	 
congressional decisionmakers. Specifically, because the military 
services use different methods to calculate the number of months 
of carryover, their results can differ markedly. Further	 
complicating the congressional budget review of carryovers is	 
that some activity groups have underestimated their budgeted	 
carryover year after year, thereby providing decisionmakers with 
misleading year-end carryover information and resulting in more  
funding being provided than was intended. GAO also reviewed the  
potential financial impact of reducing the amount of fiscal	 
year-end carryover permitted by DOD policy. GAO's analysis showed
that if a 30-day, 60-day or 75-day carryover policy had been in  
effect during the fiscal year 2001 budget review process, the	 
amount of budgeted customer orders could have been reduced by	 
about $2.9 billion, $1.6 billion, or $1.0 billion, respectively. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-559 					        
    ACCNO:   A01066						        
  TITLE:     Defense Working Capital Fund: Improvements Needed for    
             Managing the Backlog of Funded Work                              
     DATE:   05/30/2001 
  SUBJECT:   Defense budgets					 
	     Financial management				 
	     Reporting requirements				 
	     Industrial funds					 
	     DOD Defense Working Capital Fund			 

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GAO-01-559
     
Report to Congressional Committees

United States General Accounting Office

GAO

May 2001 DEFENSE WORKING CAPITAL FUND

Improvements Needed for Managing the Backlog of Funded Work

GAO- 01- 559

Page i GAO- 01- 559 Defense Working Capital Fund Letter 1

Appendix I Scope and Methodolgy 22

Appendix II The Military Services Have Inconsistently Implemented DOD?s
Carryover Guidance 25

Appendix III Comments From the Department of Defense 28

Appendix IV GAO Contacts and Staff Acknowledgments 31

Tables

Table 1: Navy Activity Groups? Fiscal Year- End 2001 Budgeted Carryover
Before and After Adjustments 10 Table 2: Number of Months of Fiscal Year-
End Carryover Reported

by the Army Depot Maintenance and Ordnance Activity Groups From Fiscal Year
1996 Through Fiscal Year 2001 14 Table 3: Number of Months of Fiscal Year-
End Carryover Reported

by the Air Force Depot Maintenance (In- House and Contract) From Fiscal Year
1996 Through Fiscal Year 2001 15

Figure

Figure 1: DOD Carryover Computation Based on the Fiscal Year 2002 Budget 9
Contents

Page 1 GAO- 01- 559 Defense Working Capital Fund

May 30, 2001 Congressional Committees Section 1051 of the National Defense
Authorization Act For Fiscal Year 2001 (Public Law 106- 398) requires that
we review the working capital fund activities of the Department of Defense
(DOD) to (1) identify any potential changes in current management processes
or policies that, if made, would result in a more efficient operation and
(2) evaluate various aspects of the DOD policy that allow Defense Working
Capital Fund activities to carry over a 3- month level of work from one
fiscal year to the next. This report is the first in a series of reports
that responds to this requirement and addresses the working capital fund
fiscal year- end workload funding issue generally referred to as
?carryover.?

According to DOD?s fiscal year 2001 budget estimates, working capital fund
industrial activities will have about $7 billion of funded work that will be
carried over from fiscal year 2001 into fiscal year 2002. 1 The
congressional defense committees recognize that these industrial activities
need some carryover to ensure a smooth flow of work during the transition
from one fiscal year to the next. However, past congressional defense
committee reports raised concerns that the level of carryover may be more
than is needed for this purpose. Excessive amounts of carryover financed
with customer appropriations are subject to reductions by DOD and the
congressional defense committees during the budget review process. To the
extent that carryover is high, the Congress may redirect the funds gained
from such reductions to other priority initiatives.

This report assesses the working capital fund policies and practices related
to carryover. Specifically, our objectives were to review (1) the basis for
DOD?s 3- month carryover policy, (2) the military services? implementation
of this policy, (3) the military services? budgeted versus reported actual
carryover amounts and whether there were any instances when the reported
year- end carryover exceeded the 3- month policy, and (4) the potential
financial and operational impact of reducing the amount of permitted
carryover.

1 The carryover amount includes work for which obligations have been made
but which has not yet started and the cost to complete work that has been
started.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 559 Defense Working Capital Fund

We limited the scope of our review to selected depot maintenance, research
and development, and ordnance activity groups because their budget reports
show that they will have the most carryover at the end of fiscal year 2001.
DOD?s budget estimates that these activity groups will have about $6.3
billion of carryover at the end of fiscal year 2001- about 90 percent of the
Defense Working Capital Fund?s $7 billion total carryover. Our review was
performed from September 2000 through April 2001 in accordance with U. S.
generally accepted government auditing standards. However, we did not
validate the accuracy of the accounting and budget information referred to
in this report, all of which was provided by DOD. Further details on our
scope and methodology can be found in appendix I. DOD comments on a draft of
this report are reprinted in appendix III.

DOD does not have a sound analytical basis for its current 3- month
carryover standard. DOD established a 3- month carryover standard for most
working capital fund activity groups, 2 although it has not performed the
analysis necessary to support the 3- month standard. DOD officials informed
us that the 3- month standard was based on management judgment and has been
in effect for many years. Without a validation process, however, neither DOD
nor congressional decisionmakers can be assured that the 3- month standard
is achieving its intended goal of providing activity groups with reasonable
amounts of carryover to ensure a smooth transition from one fiscal year to
the next or whether the carryover is excessive. Because the activity groups
perform different types of work and have different business practices, the
use of the same carryover standard for all activity groups is likely not
appropriate.

In addition, carryover information currently reported under the 3- month
standard is not comparable between services and is misleading to DOD and
congressional decisionmakers. Specifically, because the military services
use different methods to calculate the number of months of carryover, their
results can differ markedly. For example, in developing the fiscal year 2001
budget, the Navy calculated its carryover balance using adjustments that
reduced its reported year- end carryover balance for some

2 The 3- month standard applies to all activity groups except for Air Force
contract depot maintenance operations, for which DOD established a 4. 5-
month carryover standard. Results in Brief

Page 3 GAO- 01- 559 Defense Working Capital Fund

activity groups by 2 to 4 months. The Army?s methodology involved
adjustments that reduced its reported year- end carryover balance by less
than 1 month. The Air Force?s year- end carryover balance was not affected
because it did not make any adjustments. Because the Navy?s adjustments
significantly lowered its reported year- end carryover balances and reduced
them to less than 3 months, the Congress did not reduce the Navy?s budget. 3
On the other hand, because the Army?s adjustments were minimal (less than 1
month) and the Air Force did not make any adjustments, some of their
activity groups? year- end carryover balances exceeded the 3- month
standard. As a result, the Congress reduced the Army?s appropriation by
$40.5 million and the Air Force?s appropriation by $52.2 million.

Further complicating the congressional budget review of carryover is that
some activity groups have underestimated their budgeted carryover year after
year, thereby providing decisionmakers with misleading year- end carryover
information and resulting in more funding being provided than was intended.
Specifically, since fiscal year 1998, the Army depot maintenance and
ordnance activity groups and the contract portion of the Air Force depot
maintenance activity group have frequently budgeted for carryover balances
to be less than the carryover standard. However, their reported actual year-
end carryover figures exceeded the standard several times during this time.
For example, the Army ordnance activity group budgeted for 1.9 months of
carryover at the end of fiscal year 2000, while the reported actual balance
was 5.2 months- 3.3 months higher than its budget estimate. The budgeted and
reported actual year- end carryover balances for the Navy activities we
reviewed have generally been less than the 3- month standard since fiscal
year 1996. However, this result was achieved mainly due to the adjustments
the Navy made in calculating its carryover balances, as discussed in the
preceding paragraph.

We also reviewed the potential financial impact of reducing the amount of
fiscal year- end carryover permitted by DOD policy. Our analysis showed that
if a 30- day, 60- day, or 75- day carryover policy had been in effect during
the fiscal year 2001 budget review process, the amount of budgeted customer
orders could have been reduced by about $2.9 billion, $1.6 billion, or $1.0
billion, respectively. In discussing this matter with Army,

3 The Congress affects a DOD entity?s budget through the annual
authorization and appropriations processes. In this report when we refer to
the Congress reducing an entity?s budget we mean statutory reduction in
either the authorization act or appropriation act.

Page 4 GAO- 01- 559 Defense Working Capital Fund

Navy, and Air Force officials, they stated that reducing the carryover
standard to 30 days would have a number of potential negative impacts on the
operations of the working capital fund activities. According to the military
service officials, negative impacts could include (1) the refusal of new
orders during the fourth quarter of the fiscal year to ensure that actual
carryover levels do not exceed the 30- day standard, (2) insufficient work
available during the first quarter of the next fiscal year, adversely
impacting the planning and scheduling of work, and (3) working capital fund
operating losses and a cash drain due to the lack of direct workload and
revenue, which are necessary to finance salaries and overhead costs.
However, because (1) DOD has not performed the analysis necessary to
validate its existing 3- month carryover standard and (2) the actual impact
would depend on a number of unknown factors- such as the amount and type of
work requested by customers and the timing of the requests- it is difficult,
if not impossible, to predict the operational impact of reducing the
carryover levels.

We are making recommendations to the Secretary of Defense to improve DOD?s
management of the working capital fund carryover, including (1) determining
the appropriate carryover standard for the depot maintenance, ordnance, and
research and development activity groups based on the type of work performed
by the activity group and its business practices, (2) clarifying DOD?s
policy on calculating months of carryover, (3) ensuring that the services
calculate carryover in a consistent manner so that the carryover figures are
comparable, and (4) providing better information on budgeted carryover. In
its comments DOD agreed with our recommendations and briefly outlined its
planned actions for addressing them.

A working capital fund relies on sales revenue rather than direct
appropriations to finance its continuing operations. A working capital fund
is intended to (1) generate sufficient revenue to cover the full costs of
its operations and (2) operate on a break- even basis over time- that is,
not make a profit nor incur a loss. Customers use appropriated funds,
primarily Operations and Maintenance appropriations, to finance orders
placed with the working capital fund. DOD estimates that in fiscal year
2001, the Defense Working Capital Fund- which consists of the Army, Navy,
Air Force, Defense- wide, and Defense Commissary Agency working capital
funds- will have revenue of about $74.3 billion. Background

Page 5 GAO- 01- 559 Defense Working Capital Fund

The Defense Working Capital Fund finances the operations of two
fundamentally different types of support organizations: stock fund
activities, which provide spare parts and other items to military units and
other customers, and industrial activities, which provide depot maintenance,
research and development, and other services to their customers. Because
carryover is associated only with industrial operations, this report
discusses the results of our review on Defense?s Working Capital Fund
industrial operations. 4

Carryover is the dollar value of work that has been ordered and funded
(obligated) by customers but not yet completed by working capital fund
activities at the end of the fiscal year. Carryover consists of both the
unfinished portion of work started but not yet completed, as well as
requested work that has not yet commenced. To manage carryover, DOD converts
the dollar amount of carryover to months. This is done to put the magnitude
of the carryover in proper perspective. For example, if an activity group
performs $100 million of work in a year and had $100 million in carryover at
year- end, it would have 12 months of carryover. However, if another
activity group performs $400 million of work in a year and had $100 million
in carryover at year- end, this group would have 3 months of carryover.

The congressional defense committees and DOD have acknowledged that some
carryover is necessary at fiscal year- end if working capital funds are to
operate in an efficient and effective manner. For example, if customers do
not receive new appropriations at the beginning of the fiscal year,
carryover is necessary to ensure that the working capital fund activities
have enough work to ensure a smooth transition between fiscal years. Too
little carryover could result in some personnel not having work to perform
at the beginning of the fiscal year. On the other hand, too much carryover
could result in an activity group receiving funds from customers in one
fiscal year but not performing that work until well into the next fiscal
year or subsequent years. By minimizing the amount of carryover, DOD can use
its resources in the most effective manner and minimize the ?banking? of
funds for work and programs to be performed in subsequent years.

4 The various components making up the Working Capital Fund are referred to
by DOD as activity groups. For example, depot maintenance work is performed
by the depot maintenance activity group. This group consists of individual
depot maintenance activities that actually perform the work. What Is
Carryover and

Why Is It Important?

Page 6 GAO- 01- 559 Defense Working Capital Fund

DOD has a 3- month carryover standard for all but one working capital fund
activity group, 5 but Office of the Under Secretary of Defense (Comptroller)
and military service officials could not provide, and we could not identify,
any analytical basis for this standard. We did not determine how much
carryover individual activity groups would need in order to ensure a smooth
flow of work at the end of the fiscal year. However, because the activity
groups perform different types of work and have different business
practices, the use of the same carryover standard for all activity groups is
likely not appropriate.

Military service officials and activity group managers also questioned the
use of a uniform standard. For example, because the Army?s ordnance activity
group is involved in the manufacture and assembly of munitions and weapon
systems and requires a long lead time to obtain material, Army officials
believe that group?s carryover standard should be more than 3 months.
Similarly, much of the work that customers request from Navy research and
development activities is actually accomplished by contractors.
Consequently, Navy research and development activity group managers believe
they should be able to subtract work that is to be accomplished by
contractors from their reported carryover balances or, if they must include
this work in their totals, to have a longer carryover period.

A 1987 DOD carryover study also raised questions about the use of a uniform
carryover standard. This study defined the optimum level of carryover as
?the minimum amount of work needed in order to ensure that there is no
interruption of the average work cycle.? As part of its 1987 carryover
study, DOD asked the military departments to provide information on their
working capital fund activity groups. Specifically, for each activity group
they were to provide (1) information on the types of services provided and
(2) data on the average time between commencement and completion of
projects. Data developed for Army, Air Force, and DOD- wide activity groups
6 showed that (1) the minimal carryover level varied significantly from one
activity group to another and

5 The one exception is that DOD established a 4. 5- month carryover standard
for the Air Force?s contract depot maintenance operations. 6 Neither the
Navy nor the Marine Corps provided the data requested by DOD prior to the
completion of the study. DOD Does Not Have a

Sound Analytical Basis for Its 3- Month Carryover Standard

Page 7 GAO- 01- 559 Defense Working Capital Fund

(2) in some instances the minimal carryover level was considerably less than
3 months. However, the study noted that its analysis did not consider either
administrative or material lead times and acknowledged that both of these
factors could have a significant impact on carryover requirements.

When we discussed the 3- month carryover standard with officials of the
Office of the Under Secretary of Defense (Comptroller), they acknowledged
that they do not have an analytical basis for it. They informed us that the
3- month standard (1) was based on management judgment and that 3 months
(one- fourth of the fiscal year) should be enough time to ensure a smooth
flow of work during the transition from one fiscal year to the next, (2) had
been in effect for many years, and (3) was reviewed during a 1996 DOD
carryover study when DOD representatives visited various working capital
fund activities to solicit the opinions of managers regarding the carryover
standard and reviewed data substantiating those opinions. They also said
that only in unusual situations should an activity group need more than 3
months of carryover. Finally, they questioned the benefit of performing an
analysis for each activity group since it would require time and effort and
would need to be updated periodically. However, without a sound analytical
basis for carryover standards, we believe questions will continue to be
raised about how much carryover is needed.

The military services have not consistently implemented DOD?s guidance for
determining whether an activity group has exceeded the 3- month carryover
standard. One contributing factor for the inconsistency is that DOD?s
guidance is vague concerning how certain items should be treated and/ or
calculated. Specifically, DOD?s guidance is not clear regarding what is to
be included or not included in the contractual obligation and the revenue
dollar amounts used in the formula for determining the number of carryover
months. As a result, year- end carryover data provided to decisionmakers who
review and use this data for budgeting- the Office of the Under Secretary of
Defense (Comptroller) and congressional defense committees- are misleading
and not comparable across the three services. For example, our analysis of
the fiscal year 2001 budget estimates showed that policy changes that
affected the use of certain adjustments to the calculations had (1) no
impact on the Air Force?s reported year- end carryover because the Air Force
did not make any adjustments, (2) reduced the Army?s reported year- end
carryover by less than 1 month, and (3) reduced the Navy?s reported year-
end carryover balance for some activity groups by 2 to 4 months. Further
details on the The Military Services

Have Inconsistently Implemented DOD?s Carryover Guidance

Page 8 GAO- 01- 559 Defense Working Capital Fund

methods used by the services to calculate carryover can be found in appendix
II.

Prior to 1996, if working capital fund activity groups? budgets projected
more than a 3- month level of carryover, their customers? budgets could be,
and sometimes were, reduced by the Office of the Secretary of Defense and/
or congressional defense committees. However, in 1996, the Under Secretary
of Defense (Comptroller) directed a joint Defense review 7 of carryover
because the military services had expressed concerns about (1) the
methodology used to compute months of carryover and (2) the reductions that
were being made to customer budgets to help ensure that activity groups did
not exceed the 3- month carryover standard.

Based on the work of the joint study group, DOD decided to retain the 3-
month carryover standard for all working capital fund activity groups except
Air Force contract depot maintenance. 8 For Air Force contract depot
maintenance, it set a 4.5- month carryover standard because of the
additional administrative functions associated with awarding contracts.
Furthermore, based on the joint study group?s work and concerns expressed by
the Navy, DOD also approved several policy changes that had the effect of
increasing the carryover standard for all working capital fund activities.
Specifically, under the policy implemented after the 1996 study, certain
categories of orders, such as those from non- DOD customers, and contractual
obligations, such as Army arsenals? contracts with private sector firms for
the fabrication of tool kits, can be excluded from the carryover balance 9
that is used to determine whether the carryover standard has been exceeded.

These policy changes were documented in an August 2, 1996, DOD decision
paper that provided the following formula for calculating the number of
months of carryover (see figure 1).

7 This joint study group included representatives from the Office of the
Secretary of Defense, the Office of the Joint Chiefs of Staff, and each of
the military services. 8 The Air Force is the only service that contracts
out significant amounts of depot maintenance work through the working
capital fund. 9 Adjusted carryover is the obligated balance of budget
authority carried over from one fiscal year to the next and adjusted for
contractual obligations and certain categories of orders such as those from
non- DOD customers. Defense Carryover Policy

Is Based on 1996 Joint Study and Navy Concerns

Page 9 GAO- 01- 559 Defense Working Capital Fund

Figure 1: DOD Carryover Computation Based on the Fiscal Year 2002 Budget

The impact of DOD?s 1996 decision to exclude contract obligations and
certain categories of orders from reported carryover varied significantly
among the services. For example, our analysis of the military services?
fiscal year 2001 budget estimates showed that this change (1) had no effect
on the Air Force depot maintenance activity group?s reported year- end
carryover balance because the Air Force did not make any adjustments, (2)
resulted in a $70.1 million reduction in the Army depot maintenance and
ordnance activity groups? reported year- end carryover, and (3) as
Implementation

Differences Distort Carryover Data and Can Affect Congressional Decisions

Page 10 GAO- 01- 559 Defense Working Capital Fund

illustrated in table 1, allowed the Navy to reduce its depot maintenance and
research and development activity groups? reported year- end carryover by
about $1.9 billion.

Table 1: Navy Activity Groups? Fiscal Year- End 2001 Budgeted Carryover
Before and After Adjustments

Dollars in millions

Before adjustments After adjustments Activity group Dollars Months Dollars
Months

Naval Air Warfare Center $ 574.0 3. 2 $292.7 1. 6 Naval Surface Warfare
Center 1,106.0 5. 8 506.3 2. 6 Naval Research Laboratory 128.3 2. 8 27.0 0.
6 Naval Undersea Warfare Center 222.2 3. 9 151.2 2. 6 Space & Naval Warfare
Systems Center 566.7 5. 4 264.1 2. 5 Naval aviation depots 450.7 3. 1 299.0
2. 0 Naval shipyards 733.9 4. 7 356.8 2. 3

Total $3,781.8 N/ A $1,897.1 N/ A

Source: Navy budget and accounting reports. We did not validate the
information for accuracy.

Our work showed that these differences were due primarily to the fact that
the military services have treated contract obligations differently when
calculating carryover. This problem, in turn, is due to the fact that DOD
has not provided clear guidance on whether (1) the revenue used in the
carryover formula should be reduced when adjustments are made for contract
obligations and (2) material requisitions submitted to DOD supply activities
should be considered contract obligations. Because the Army and Navy are
reducing the amount of carryover but not the amount of revenue, the number
of months of carryover they are reporting is understated.

We found differences in the way the military services make adjustments for
contractual services. DOD?s formula for calculating months of carryover is
based on the ratio of adjusted orders carried over to revenue. The formula
specifies that carryover should be reduced by the amount of contractual
obligations. However, the policy does not address whether downward
adjustments for the revenue associated with these contractual services
should also be made. Unless this is done, the number of months will be
understated.

The Army and Navy reduced their carryover balances by the amount of
contractual obligations, but they did not reduce the revenue associated with
these contractual services. On the other hand, the Air Force depot
maintenance activity group in effect did reduce the revenue associated

Page 11 GAO- 01- 559 Defense Working Capital Fund

with contractual obligations because (1) it segregates its contract
operations? carryover and revenue from its in- house operations? carryover
and revenue and (2) DOD has established separate carryover standards for the
Air Force in- house and contract depot maintenance operations.

The Air Force depot maintenance activity group?s approach ensures that data
on in- house operations is not distorted by data on contract operations. On
the other hand, the Army and Navy?s approach allows activity groups to
reduce their reported months of carryover by simply increasing the amount of
work contracted out. Our work showed that the months of carryover reported
by the Army and Navy activity groups would more accurately reflect the
actual backlog of DOD in- house work if adjustments for contractual
obligations affected both contract carryover and contract revenue. In
discussing this matter with officials from the Office of the Under Secretary
of Defense (Comptroller), they stated that we had a valid point and
indicated that DOD would need to review its carryover policy to determine
whether it needs to be revised.

Similarly, we found that differences in the way the military services treat
outstanding material requisitions 10 has a significant effect on the dollar
value of carryover that is reported. Specifically, our analysis showed that
Navy activity groups and some Army activities 11 consider material
requisitions to be contract obligations and that they, therefore, subtract
the dollar value of outstanding requisitions from their carryover balances.
However, the Air Force depot maintenance activity group, which had about
$448 million of material on requisition as of September 30, 2000, did not
make any such adjustments. Office of the Under Secretary of Defense
(Comptroller) officials informed us that outstanding material requisitions
were not intended to be included as contractual obligations for carryover
purposes. In fact, they told us that when the policy to allow carryover to
be adjusted for contract obligations was established in 1996, the intent was
that only contracts with private industry would be included as contract
obligations when calculating the number of months of carryover.

The inconsistencies in the military services? implementation of DOD?s 1996
guidance affected the actions that congressional decisionmakers took on

10 Outstanding material requisitions are orders to buy inventory from DOD
supply activities that have not been filled at fiscal year- end. 11 Our work
showed that there are significant implementation differences not only among
the services but also among individual activities within the Army.

Page 12 GAO- 01- 559 Defense Working Capital Fund

fiscal year 2001 budget estimates. For example, the Air Force?s fiscal year
2001 budget showed that the unadjusted months of year- end carryover for in-
house depot maintenance operations was 3.3 months. Because the 3- month
carryover standard was exceeded, the Congress reduced the Air Force?s
Operation and Maintenance appropriation by $52.2 million. However, our
analysis showed that the Air Force?s estimate would have been less than
DOD?s 3- month standard if it had subtracted the dollar value of outstanding
material requisitions from its carryover estimates- as the Navy does.
Because the Navy adjusted its year- end carryover estimates for both
contract obligations and certain types of orders, its reported yearend
carryover balances were less than the 3- month standard. As a result no
action was taken on the Navy?s budget.

DOD policy requires each individual working capital fund activity to record
as carryover any unfilled work orders the activity has accepted. Some of
these orders are received from other working capital fund activities. For
example, a Navy working capital fund activity (activity 1) may perform part
of the work a customer has ordered and ?subcontract?

part of the work out to another working capital fund activity (activity 2).
In this situation, both activities- the activity originally accepting the
customer order (activity 1) and the activity receiving part of the work to
be performed (activity 2)- record the unfilled order as carryover. In order
to eliminate any double counting of carryover, DOD?s policy allows an
activity, as shown in figure 1, to adjust or reduce its carryover for orders
received from other working capital fund activities (inter/ intra fund
orders). However, Navy working capital fund activities and some Army
activities categorized orders they sent to other working capital fund
activities as contract obligations and used these obligations to reduce
reported year- end carryover. As a result, not only did the Navy and Army
eliminate the double counting of such orders, they eliminated all these
orders from its calculation to determine the number of months of carryover
and, thereby, did not follow DOD guidance on calculating carryover for
inter/ intra fund orders. Army and Navy Did Not

Follow DOD Guidance on Calculating Carryover for Inter/ Intra Fund Orders

Page 13 GAO- 01- 559 Defense Working Capital Fund

Further complicating the congressional budget review of carryover is that
some activity groups have underestimated their budgeted year- end carryover
year after year, thereby providing decisionmakers misleading carryover
information and resulting in more funding being provided than was intended.
As previously discussed, the 3- month standard has never been validated and
the services do not use the same method for calculating carryover.
Therefore, the number of months of budgeted and actual carryover that the
services have reported are not comparable. Nevertheless, each year, the
services? budget submissions include information on budgeted and actual
year- end carryover for each activity group. Decisionmakers in the service
headquarters, Office of the Under Secretary of Defense (Comptroller), and
congressional defense committees use this information to determine whether
the activity groups have too much carryover. If the groups do, the
decisionmakers may reduce the customer budgets that finance new orders.

Actual reported year- end carryover levels for the Army and Air Force depot
maintenance activity groups and the Army ordnance activity group exceeded
DOD?s carryover standard many times during fiscal years 1996 through 2000.
12 Further, our analysis showed that in many of these instances, the budget
estimate for year- end carryover was less than the DOD standard. If
carryover estimates for the Army?s activity groups and the Air Force?s
contract depot maintenance operations had been more accurate, the service
headquarters, the Office of the Under Secretary of Defense (Comptroller),
and/ or the congressional defense committees might have taken action to
reduce customer funding for new orders as has been done in the past.

Table 2 shows that the actual reported year- end carryover for Army?s depot
maintenance and ordnance activity groups exceeded the 3- month carryover
standard consistently from fiscal year 1996 through fiscal year 2000. Table
2 also shows that the Army?s budget consistently underestimated the amount
of actual year- end carryover for each year from fiscal year 1998 through
fiscal year 2000 for the two activity groups. Since the Army?s budgeted
year- end carryover exceeded the 3- month

12 Navy budget and accounting reports showed that, with one exception, the
Navy aviation depots, shipyards, and research and development activity
groups? carryover balances have been less than or equal to the 3- month
standard since fiscal year 1996 mainly due to the adjustments the groups
made in calculating their carryover balances as discussed in the previous
section. Inaccurate Budget

Estimates Further Complicate Review of Carryover Levels

Army Reports Showed That Certain Activity Groups Exceeded the 3- Month
Carryover Standard

Page 14 GAO- 01- 559 Defense Working Capital Fund

standard for fiscal year 2001, the Department of Defense Appropriations Act,
2001, reduced the Army?s fiscal year 2001 Operation and Maintenance
appropriation by $40.5 million.

Table 2: Number of Months of Fiscal Year- End Carryover Reported by the Army
Depot Maintenance and Ordnance Activity Groups From Fiscal Year 1996 Through
Fiscal Year 2001

Depot maintenance Ordnance Fiscal year Budget Actual Budget Actual

1996 a 3.6 a 6.8 1997 a 3.2 a 6.8 1998 2.6 3. 4 3.0 5. 6 1999 2.5 4. 4 4.2
7. 1 2000 2.9 4. 2 1.9 5. 2 2001 3.3 b 3.2 b a Information was not available

b Information will not be available until after the end of fiscal year 2001
Source: Army budget and accounting reports. We did not validate the
information for accuracy.

Concerning the Army depot maintenance activity group, Army officials
provided us several reasons to explain why the reported actual year- end
carryover exceeded the 3- month carryover standard and budget projections.

 For fiscal year 1998, Army officials could not explain why the actual
fiscal year- end carryover for the depot maintenance activity group was
above the 3- month standard and budget projection. They stated that the
detailed data needed to determine the reasons had not been retained.

 For fiscal year 1999, Army officials stated that the depot maintenance
activity group (1) received an inordinate number of new orders at year- end
and (2) was unable to adjust its production schedules to mitigate the effect
of the late receipt of new orders.

 For fiscal year 2000, Army officials stated that there were four reasons
that the actual reported year- end carryover balance exceeded the standard
and budget projection.

 Some depots could not obtain the parts needed in a timely manner, so that
less work was performed than planned.

 Some depots did not accurately estimate the time and resources needed to
complete jobs.

 Emergency situations, such as unplanned orders to perform safety- offlight
work, delayed work on orders already accepted by the depots.

Page 15 GAO- 01- 559 Defense Working Capital Fund

 The composition and size of the workload changed from the budget
projections due to changes in customer funding and priorities.

Concerning the Army ordnance activity group which also exceeded the 3- month
carryover standard, Army officials informed us that the group?s primary
focus is on manufacturing and that the 3- month standard should not apply.
They stated that a longer carryover time frame is needed to accommodate the
longer time needed for the manufacturing process and the long lead- time
involved in buying certain types of material.

Table 3 shows that several times since fiscal year 1996 the Air Force?s
actual reported carryover for (1) in- house depot maintenance operations
exceeded the 3- month standard and (2) contract depot maintenance operations
exceeded the 4.5- month standard. Table 3 also shows that the Air Force?s
budget for contract depot maintenance underestimated the amount of actual
year- end carryover for fiscal years 1997, 1999, and 2000. As stated
previously, because the budgeted year- end carryover exceeded the carryover
standard for fiscal year 2001, the Department of Defense Appropriations Act,
2001, reduced the Air Force fiscal year 2001 Operation and Maintenance
appropriation by $52. 2 million.

Table 3: Number of Months of Fiscal Year- End Carryover Reported by the Air
Force Depot Maintenance (In- House and Contract) From Fiscal Year 1996
Through Fiscal Year 2001

Depot maintenance in house operations Depot maintenance

contract operations Fiscal year Budget Actual Budget Actual

1996 3.9 3. 8 4.9 4. 9 1997 2.9 3. 5 3.4 3. 9 1998 3.0 2. 9 4.5 4. 1 1999
2.5 3. 3 4.1 6. 2 2000 3.5 2. 8 3.7 4. 8 2001 3.3 a 6.4 a a Information will
not be available until after the end of fiscal year 2001

Source: Air Force budget and accounting reports. We did not validate the
information for accuracy.

Air Force officials informed us that developing accurate carryover budgets
and executing those budgets during the late 1990s was difficult because the
depot maintenance activity group underwent significant downsizing.
Specifically, the activity group (1) reduced maintenance personnel by more
than one- third as it closed three repair centers and (2) realigned 40 Air
Force Reports Showed

That the Depot Maintenance Activity Group Exceeded the Carryover Standard

Page 16 GAO- 01- 559 Defense Working Capital Fund

percent of its in- house workload. In developing budgets for those years,
the activity group?s productivity estimates were optimistic resulting in the
activity group accomplishing less work than budgeted, and, therefore, was
unable to stay within the carryover standard. In addition to the
productivity problem, the activity group could not always obtain the
material it needed in a timely manner. 13 As a result, it could not complete
work as scheduled and the amount of carryover increased.

In developing its fiscal year 2002 budget request, the Air Force determined
that the initial year- end carryover budget estimate for its contract depot
maintenance operations exceeded the 4.5- month carryover standard by $92.5
million. To help ensure that the actual carryover would not be over the 4.5-
month standard at the end of fiscal year 2002, Air Force officials reduced
the activity group?s customers? budget request by $92.5 million. Thus, in
theory, customers should order less work from the activity group in fiscal
year 2002, resulting in less carryover than initially budgeted.

Our analysis showed that customer order levels would have been about $2.9
billion less than the amount budgeted if a 30- day carryover policy had been
in effect during the fiscal year 2001 budget review process. Further, as
previously discussed, the amount of carryover needed to ensure a smooth flow
of work during the transition from one fiscal year to the next varies
significantly from one activity group to the next. Military service
officials and working capital fund managers stated that a 30- day carryover
policy would have a potentially adverse effect on the operations of most
working capital fund activities. However, because (1) DOD has not performed
the analysis necessary to validate its existing 3- month carryover standard
and (2) the actual impact would depend on a number of unknown factors- such
as the amount and type of work requested by customers and the timing of the
requests- it is difficult, if not impossible, to predict the operational
impact of reducing the carryover standard.

If DOD were to reduce its carryover standard to less than 3 months, a
corresponding reduction would occur in both the amount of carryover allowed
and the level of customer orders accepted. As noted in the

13 Our report entitled Air Force Supply: Management Actions Create Spare
Parts Shortages and Operational Problems (GAO/ NSIAD/ AIMD- 99- 77, April
29, 1999) discusses this problem. Financial Impact of a

Lower Carryover Standard

Page 17 GAO- 01- 559 Defense Working Capital Fund

previous paragraph, our analysis showed that customer order levels would
have been about $2.9 billion less than the amount actually budgeted if a
30day carryover policy had been in effect during the fiscal year 2001 budget
review process. If the standard had been reduced to 60 days or 75 days,
projected customer order levels would have been about $1.6 billion or $1.0
billion less, respectively, than the amount budgeted. The amount of
carryover exceeding 90 days was about $700 million.

Although they have no analytical data to support their views, working
capital fund managers at the headquarters level believe a 30- day carryover
policy would have the potential of significantly impairing their operations.
Working capital fund officials at the activities we visited indicated that a
30- day policy would (1) restrict their ability to accept orders during the
fourth quarter of the fiscal year as they act to ensure that actual
carryover levels do not exceed the 30- day standard, (2) complicate the
tasks of planning and scheduling work, and (3) create ?pockets of
inefficiency? where direct- labor employees are without work and must,
therefore, charge their time to overhead. They also indicated that these
problems, in turn, would adversely affect their ability to provide timely
support to their customers, increase the unit cost of the work that is
accomplished, and cause operating losses.

Our work showed that, because the amount of carryover needed to ensure a
smooth flow of work varies significantly from one activity group to the
next, the effect of a 30- day carryover standard on a group?s efficiency and
effectiveness would likewise vary significantly. For example, in its August
1996 decision paper, which addresses the carryover standard, DOD points out
that the Air Force?s contract depot maintenance operations could not operate
with a 30- day standard because the average administrative time associated
with awarding a contract is more than 30 days. Conversely, Navy records
indicate that the Naval Research Laboratory?s actual reported carryover
during fiscal years 1996 through 2000 averaged about 0.9 months, and
laboratory officials indicated that these low carryover levels have not had
an adverse impact on their operations.

Finally, our work indicates that the impact of a 30- day policy depends
largely on what action DOD ultimately takes to ensure consistent carryover
reporting. For example, at the end of fiscal year 2000, the Air Force depot
maintenance activity group reported actual year- end carryover levels of 4.8
months for contract operations and 2.8 months for its in- house operations.
However, if it had used the Navy?s carryover reporting policies and
procedures, the activity group would have reported an overall carryover
level of about 1.6 months. Conversely, although Navy

Page 18 GAO- 01- 559 Defense Working Capital Fund

activity groups frequently reported actual year- end carryover balances of
less than 2 months during fiscal years 1996 through 2000, their managers
indicated that even a 3- month standard would not be enough if they
implemented DOD?s carryover formula in the same manner as the Air Force.

Decisionmakers do not have the information they need to make informed
decisions on fiscal year- end carryover balances because (1) there is no
analytical basis for the 3- month carryover standard, (2) the services use
different methods to calculate the carryover balances, and (3) some activity
groups consistently underestimate their budgeted carryover when developing
their budgets. Until these weaknesses are resolved, concerns will continue
to be raised about whether an activity group has too much or not enough
carryover. These concerns will affect not only the working capital fund
activity groups? operations but also customer operations because they
finance the orders placed with the working capital fund activities.

We recommend that the Secretary of Defense

 direct the Under Secretary of Defense (Comptroller) to determine the
appropriate carryover standard for the depot maintenance, ordnance, and
research and development activity groups because these groups account for
about 90 percent of the dollar amount of carryover. The carryover standard
should be based on the type of work performed by the activity group and its
business practices, such as whether it performs the work inhouse or
contracts it out. As part of this effort, DOD needs to have a sound
analytical basis for determining the appropriate level of carryover.

 direct the Under Secretary of Defense (Comptroller) to clarify the
carryover policy to obtain consistency in calculating the amount of
carryover for use in determining whether the activity groups have exceeded
the carryover standard. Specifically, in calculating the number of months of
carryover, the policy needs to clarify (1) the type of obligations to be
included in the contractual obligation category, such as contracts with
private industry and outstanding material requisitions, and (2) that the
revenue used must be adjusted for certain purposes, such as revenue earned
for work performed by contractors. All internal and external reporting of
carryover should be done using the same methodology.

 direct the Under Secretary of Defense (Comptroller) to ensure that the
military services calculate carryover consistently during the budget review
process so that the carryover figures are comparable. Conclusions

Recommendations for Executive Action

Page 19 GAO- 01- 559 Defense Working Capital Fund

 direct the Under Secretary of Defense (Comptroller) and the Acting
Secretaries of the military services to enforce the current policy that
specifies that one activity should report carryover on interfund and
intrafund orders.

 direct the Acting Secretaries of the military services to use more
realistic carryover figures in developing their budgets by considering
historical actual carryover data.

In its comments on a draft of this report, DOD agreed with our five
recommendations and stated that it will take actions in the near future to
clarify the policies and formula to properly ascertain a uniform approach in
examining the backlog of funded work in its Financial Management
Regulations. In addition, DOD said it will revalidate the appropriate
carryover standards that should be applied to the depot maintenance,
ordnance, and research and development activity groups.

We are sending copies of this report to the Honorable Donald H. Rumsfeld,
Secretary of Defense, and the Acting Secretaries of the Army, Navy, and Air
Force. We will also make copies available to others upon request. Please
contact Greg Pugnetti at (703) 695- 6922 if you or your staff have any
questions concerning this report. GAO contact and staff acknowledgments to
this report are listed in appendix IV.

Gregory D. Kutz, Director, Financial Management and Assurance

David R. Warren, Director, Defense Capabilities and Management Agency
Comments

Page 20 GAO- 01- 559 Defense Working Capital Fund

List Of Congressional Committees The Honorable John W. Warner Chairman The
Honorable Carl Levin Ranking Member Committee on Armed Services United
States Senate

The Honorable James M. Inhofe Chairman The Honorable Daniel K. Akaka Ranking
Member Subcommittee on Readiness and Management Support Committee on Armed
Services United States Senate

The Honorable Ted Stevens Chairman The Honorable Daniel K. Inouye Ranking
Member Subcommittee on Defense Committee on Appropriations United States
Senate

The Honorable Bob Stump Chairman The Honorable Ike Skelton Ranking Minority
Member Committee on Armed Services House of Representatives

The Honorable Curt Weldon Chairman The Honorable Solomon P. Ortiz Ranking
Minority Member Subcommittee on Military Readiness Committee on Armed
Services House of Representatives

Page 21 GAO- 01- 559 Defense Working Capital Fund

The Honorable Jerry Lewis Chairman The Honorable John P. Murtha Ranking
Minority Member Subcommittee on Defense Committee on Appropriations House of
Representatives

Appendix I Scope and Methodolgy Page 22 GAO- 01- 559 Defense Working Capital
Fund

To determine the reasons and the basis for DOD?s 3- month carryover policy,
we met and discussed the policy with officials from the Office of the Under
Secretary of Defense (Comptroller), Army, Navy, and Air Force. We also
requested and reviewed documentation and/ or analysis that supported the
rationale for the 3- month carryover standard. In addition, we obtained and
analyzed DOD studies, including the 1996 carryover study and budget
documents that discussed DOD?s carryover policy and the need for a 3- month
period. We did not determine how much carryover individual activity groups
would need in order to ensure a smooth flow of work at the end of the fiscal
year.

To determine if the services were calculating carryover in a consistent
manner and, if not, the reasons for any differences, we obtained and
analyzed the services? calculations for the (1) fiscal year 1996 through
fiscal year 2000 reported year- end actual carryover balances and (2) fiscal
year 1996 through fiscal year 2001 budgeted year- end carryover balances. We
met with officials from the Army, Navy, and Air Force to discuss the
methodology they used to calculate carryover. We obtained (1) explanations
about why the services made adjustments in calculating the dollar amount of
carryover balances as well as the number of months of carryover and (2)
determined the impact of those adjustments on the carryover figures.

To determine if the military services? budgeted and reported actual
carryover amounts exceeded the 3- month standard at fiscal year- end, we
obtained and analyzed (1) budgeted year- end carryover data for fiscal year
1996 through fiscal year 2001 and (2) reported actual year- end carryover
data for fiscal year 1996 through fiscal year 2000. When the budgeted and/
or actual carryover data exceeded the 3- month standard, we met with
responsible budgeting and/ or accounting officials to ascertain why.

To determine whether applying the carryover authority to not more than a 30-
day quantity of work would be sufficient to ensure uninterrupted operations
at the working capital fund activities early in a fiscal year and what the
impact on these activities would be if the carryover policy were reduced
from 3 months to 30 days, we calculated what the potential financial impact
on customer orders would have been if a 30, 60, 75, or 90day carryover
standard had been in effect for fiscal year 2001. We also met with (1)
headquarters officials from the Office of the Under Secretary of Defense
(Comptroller), Army, Navy, and Air Force and (2) Army, Navy, and Air Force
officials at individual working capital fund activity groups and activities
to obtain their views on what the impact on their operation would be if the
carryover policy were reduced from 3 months to 30 days. Appendix I Scope and
Methodolgy

Appendix I Scope and Methodolgy Page 23 GAO- 01- 559 Defense Working Capital
Fund

However, because (1) DOD has not performed the analysis necessary to
validate its existing 3- month carryover standard and (2) the actual impact
would depend on a number of unknown factors, such as the amount and type of
work requested by customers and the timing of the requests, it is difficult,
if not impossible, to predict the operational impact of reducing the
carryover levels.

In performing our work, we obtained carryover information on the following
Defense Working Capital Fund activity groups: (1) Air Force depot
maintenance (in- house and contract), (2) Army depot maintenance, (3) Army
ordnance, (4) Naval aviation depots, (5) Naval shipyards, and (6) Naval
research and development. The Naval research and development activity group
consists of the following five subgroups: Naval Air Warfare Center, Naval
Surface Warfare Center, Naval Undersea Warfare Center, Naval Research
Laboratory, and the Space and Naval Warfare Systems Center.

We performed our review at the following locations.

 Office of the Under Secretary of Defense (Comptroller), Washington, D. C.

 Air Force Headquarters, Washington, D. C.

 Air Force Materiel Command, Wright- Patterson Air Force Base, Ohio

 Oklahoma City Air Logistics Center, Tinker Air Force Base, Oklahoma

 Ogden Air Logistics Center, Hill Air Force Base, Utah

 Warner Robins Air Logistics Center, Robins Air Force Base, Georgia

 Navy Headquarters, Crystal City, Virginia

 Naval Surface Warfare Center, Crystal City, Virginia

 Naval Surface Warfare Center, Carderock Division; Carderock, Maryland

 Naval Surface Warfare Center, Crane Division; Crane, Indiana

 Naval Surface Warfare Center, Dahlgren Division; Dahlgren, Virginia

 Naval Surface Warfare Center, Indian Head Division; Indian Head, Maryland

 Space and Naval Warfare Systems Command, San Diego, California

 Space and Naval Warfare Systems Center, San Diego, California

 Space and Naval Warfare Systems Center, Charleston, South Carolina

 Naval Research Laboratory, Washington, D. C.

 Naval Air Systems Command, Patuxent River, Maryland

 Naval Aviation Depot, Cherry Point; Cherry Point, North Carolina

 Naval Aviation Depot, North Island; San Diego, California Department of
Defense

Air Force Navy

Appendix I Scope and Methodolgy Page 24 GAO- 01- 559 Defense Working Capital
Fund

 Army Headquarters, Washington, D. C.

 Army Materiel Command, Alexandria, Virginia

 Army Communications- Electronics Command, Fort Monmouth, New Jersey

 Corpus Christi Army Depot, Corpus Christi, Texas

 Tobyhanna Army Depot, Tobyhanna, Pennsylvania The reported actual year-
end carryover information used in this report was produced from DOD?s
systems, which have long been reported to generate unreliable data. We did
not independently verify this information. The Defense Inspector General has
cited system deficiencies and internal control weaknesses as major obstacles
to the presentation of financial statements that would fairly present the
Defense Working Capital Fund financial position for fiscal years 1993
through 2000.

Our review was performed from September 2000 through April 2001 in
accordance with U. S. generally accepted government auditing standards.
However, we did not validate the accuracy of the accounting and budget
information, all of which was provided by the Army, Navy, and Air Force. We
requested comments on a draft on this report from the Secretary of Defense
or his designee. We have reprinted the comments in appendix III of this
report. Army

Appendix II The Military Services Have Inconsistently Implemented DOD?s
Carryover Guidance

Page 25 GAO- 01- 559 Defense Working Capital Fund

DOD?s carryover guidance does not address how certain items should be
treated and/ or calculated and, as a result, it is a contributing factor to
the military services? inconsistent implementation of DOD?s formula for
determining the number of months of carryover. This appendix discusses the
different methods the services used to determine compliance with DOD?s 3-
month carryover standard.

Prior to the fiscal year 2002 budget, the Air Force did not make any
adjustments to its figures when determining the number of months of
carryover and whether the Air Force had exceeded the 3- month standard. An
Air Force official said they did not implement the 1996 carryover guidance
sooner because the deductions would have had little or no impact on the
number of months of carryover. Beginning with the fiscal year 2002 budget,
the Air Force official informed us that they were making the adjustments so
that the Air Force would be in compliance with DOD?s 1996 carryover policy.

In making the adjustments for the fiscal year 2002 budget, the Air Force
reduced its year- end carryover figure by the amount associated with certain
types of orders, such as orders from foreign countries and nonDOD sources.
However, unlike the Navy and Army, as discussed below, the Air Force (1) did
not make adjustments for contractual obligations such as outstanding
requisitions for material and (2) reduced the revenue figure used in the
calculation by the amount of revenue related to those certain types of
orders excluded from the carryover figure. An Air Force official told us
that they adjusted the revenue figure so that the Air Force would be
consistent in making the adjustments. That is, they reduced both the
numerator (the carryover figure) and denominator (the revenue figure) part
of the equation.

The Navy has been making the allowable adjustments to its year- end
carryover figures since 1996. 1 The Navy has been reducing orders carried
over into the next fiscal year for (1) carryover associated with certain
types of orders, such as orders from foreign countries and non- DOD sources
and (2) any contractual obligations incurred against those orders, which
includes contracts with private industry, outstanding material

1 The Navy began making adjustments in 1996, which affected the fiscal year
1998 budgeted carryover figures and the fiscal year 1996 actual carryover
figures. Appendix II The Military Services Have

Inconsistently Implemented DOD?s Carryover Guidance

Air Force?s Method of Determining Compliance With DOD?s Carryover Standard

Navy?s Method of Determining Compliance With DOD?s Carryover Standard

Appendix II The Military Services Have Inconsistently Implemented DOD?s
Carryover Guidance

Page 26 GAO- 01- 559 Defense Working Capital Fund

requisitions with DOD supply activities, and orders placed with other
working capital fund activities.

However, unlike the Air Force, the Navy did not reduce or make any
adjustments to the revenue figure used in the calculation. Because it did
not adjust the revenue figure, the Navy?s method resulted in a lower monthly
carryover figure than did the method used by the Air Force. Navy officials
informed us that they used total revenue in their calculation because total
revenue represented the full operating capability of a given activity to
accomplish a full year?s level of workload. Further, the Navy?s reason for
not removing contract- related revenue from the denominator of the
calculation was that the numerator of the calculation included carryover
(funds) related to work for which contracts would eventually be awarded but
which had not yet been awarded at fiscal year- end.

The Army has also been making the allowable adjustments to its carryover
figures since 1996. 2 That is, the Army has been reducing orders carried
over into the next fiscal year for (1) carryover associated with certain
types of orders, such as orders from foreign countries and non- DOD sources
and (2) any contractual obligations incurred against those orders, which
include contracts with private industry, outstanding material requisitions
with DOD supply activities, and orders placed with other working capital
fund activities. Like the Navy, the Army also did not reduce or make any
adjustments to the revenue figure used in the calculation.

Army officials told us that they did not adjust the revenue figure because
(1) DOD?s guidance states that current year revenue should be used when
calculating months of carryover and (2) doing so reflects the rate of actual
workload execution for the entire year. However, in discussing this issue
with Army headquarters and depot officials, they stated that it did not make
much sense to adjust the carryover figure in the formula (numerator) for
contractual obligations and other orders and not make a corresponding
adjustment to the revenue figure in the formula (denominator) for the
related revenue.

2 The Army began making the adjustments in 1996, which affected the fiscal
year 1998 budgeted carryover figures and the fiscal year 1996 actual
carryover figures. Army?s Method of

Determining Compliance With DOD?s Carryover Standard

Appendix II The Military Services Have Inconsistently Implemented DOD?s
Carryover Guidance

Page 27 GAO- 01- 559 Defense Working Capital Fund

Further, Army working capital fund activities where we performed work did
not all calculate carryover the same way. For example, at least one Army
activity did not use contractual obligations when calculating the number of
months of carryover, even though the activity had such obligations. In
addition, another Army activity did not use contractual obligations when
computing the months of carryover until recently when it calculated its
actual carryover for fiscal year 2000.

Appendix III Comments From the Department of Defense Page 28 GAO- 01- 559
Defense Working Capital Fund

Appendix III Comments From the Department of Defense

Appendix III Comments From the Department of Defense Page 29 GAO- 01- 559
Defense Working Capital Fund

Appendix III Comments From the Department of Defense Page 30 GAO- 01- 559
Defense Working Capital Fund

Appendix IV GAO Contact and Staff Acknowledgments

Page 31 GAO- 01- 559 Defense Working Capital Fund

Greg Pugnetti, (703) 695- 6922 In addition, Karl Gustafson, William Hill,
Ron Tobias, and Eddie Uyekawa made key contributions to this report.
Appendix IV GAO Contact and Staff

Acknowledgments GAO Contact Acknowledgments

924056

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