Budget Issues: Franchise Fund Pilot Review (22-AUG-03,
GAO-03-1069).
Congress is considering the reauthorization of the six franchise
fund pilots authorized by the Government Reform Act of 1994.
These self-supporting business-like entities were established to
provide common administrative services on a fully reimbursable
basis. The authorization for most of the pilots will expire at
the end of fiscal year 2003. In addition to the suggestion of
giving the pilots permanent authorization, there has been some
discussion in recent years of expanding the franchise fund
concept so that all departments and independent agencies can set
up a franchise fund. To provide the context to evaluate franchise
fund pilots and fully understand reauthorization issues, GAO
agreed to identify the many funds, called intragovernmental
revolving funds, that operate with purposes similar to that of
franchise funds and to analyze their legal authorities to
determine if franchise funds were somehow unique. In addition, we
examined the operations and managerial cost accounting processes
of the franchise fund pilots at the Departments of the Interior
and Commerce. We determined if they had taken into account the
criteria suggested by the Office of Management and Budget (OMB),
including: (1) adhering to OMB/Chief Financial Officers (CFO)
Council's 12 business operating principles, (2) accounting for
full cost, and (3) conducting audits of financial statements at
the fund level.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-1069
ACCNO: A08163
TITLE: Budget Issues: Franchise Fund Pilot Review
DATE: 08/22/2003
SUBJECT: Accounting standards
Authorization
Budget obligations
Cost accounting
Intragovernmental revolving funds
Permanent budget authority
DOI GovWorks
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GAO-03-1069
A
Report to the Committee on Government Reform, House of Representatives
August 2003 BUDGET ISSUES Franchise Fund Pilot Review
GAO- 03- 1069
Contents Letter 1
Results in Brief 2 Background 2 Intragovernmental Revolving Funds and
Their Legal Authorities 4 Operations of the Franchise Fund Pilots at
Interior and Commerce 5
Reauthorization Issues 5 Appendixes
Appendix I: Franchise Fund Pilot Review 8
Appendix II: 12 Business Operating Principles 49
Appendix III: Authority to Retain Unobligated Balances* Franchise Pilots
and Comparable IR Funds 50
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separately.
Letter
August 22, 2003 The Honorable Tom Davis Chairman The Honorable Henry A.
Waxman Ranking Minority Member Committee on Government Reform House of
Representatives In your January 9, 2003, letter you asked us to evaluate
the franchise fund pilots authorized by the Government Management Reform
Act of 1994 as you consider their reauthorization. To fully understand
reauthorization issues, we agreed to (1) examine the universe of
intragovernmental revolving (IR) funds 1 (of which franchise funds are a
type) and their legal authorities and to determine how these authorities
differ, (2) study the
operations of selected franchise fund pilots, and (3) identify issues that
Congress might consider as it contemplates permanent reauthorization of
franchise funds. On July 11, 2003, we briefed committee staff on the
results of our work. As agreed with your office, this letter summarizes
and transmits the information provided in that briefing.
We used budget data to identify IR funds and reviewed the U. S. Code to
analyze their legal authorities. We selected the franchise fund pilots at
the Departments of the Interior and Commerce for case studies. We
determined that GovWorks is the primary component of the Interior
franchise fund (IFF) and that the Office of Computer Services (OCS) is the
sole component of the Commerce franchise fund (CFF), and our case- study
work focused on these two entities. We interviewed agency officials at the
department and franchise fund levels, examined a variety of documentation,
and did an in- depth review of the managerial cost accounting processes at
the franchise fund level. During this review, we
examined work done by other auditors and performed limited testing of data
reliability but did not conduct audit procedures designed to render an
opinion on the franchise funds* financial information. We obtained
comments from GovWorks and OCS on a draft of the report relevant to each
and incorporated those comments, which were technical in nature, 1 An IR
fund conducts continuing cycles of business- like activity within and
between government agencies. It charges for the sale of products or
services and uses the proceeds
to finance its spending, usually without requirement for annual
appropriations.
where appropriate. Our work was conducted in Washington, D. C., from
January through July 2003, in accordance with generally accepted
government auditing standards. (See pages 12 to 14.)
Results in Brief Although longer- term authorization for franchise fund
pilots would be helpful to the operation of the funds and their clients,
neither their legal
authority nor their operation makes franchise funds unique compared to
other IR funds. A primary attraction to the franchise fund label is the
explicit ability to retain 4 percent of total annual income, and Congress
could, and has, given this authority to other IR funds. Since most large
agencies already have at least one IR fund, allowing all departments and
independent agencies to set up franchise funds is unnecessary. Instead,
the explicit authority provisions granted to franchise fund pilots (and a
few other IR funds) could be considered case- by- case for individual IR
funds. In deciding whether to provide these authorities, Congress could
use the same criteria suggested for franchise fund pilots, including: (1)
examining operations against the 12 business operating principles
established by the Office of Management and Budget (OMB) and the Chief
Financial Officers (CFO) Council, (2) determining if managerial cost
accounting processes are in place to account for the full unit costs of
outputs produced, and (3) considering if annual or periodic independent
audits are being conducted at the fund level to ensure the reliability of
the fund*s financial information. Individual case- by- case authority
would also permit Congress to consider and evaluate the agency*s
commitment and the strength of the IR fund*s leadership, which are
additional factors that can influence the success of the fund. (See pages
47 and 48.)
Background Federal agencies are prohibited by law from transferring funds
from one agency to another, unless otherwise authorized by law. The
Economy Act
of 1932 authorizes a federal agency to provide goods or services to
another federal agency and generally provides authority for federal
agencies to enter into intragovernmental transactions when no other, more
specific, authority applies. However, the Economy Act restricts
flexibility by requiring the client agency to deobligate fiscal year funds
at the end of the period of availability to the extent that these funds
have not been obligated by the performing agency. In contrast, where an
interagency agreement is based on specific statutory authority other than
the Economy Act, an agency is not required to deobligate funds at the end
of the period of availability. The specific legal authorities creating IR
funds authorize these
funds to enter into intragovernmental transactions and provide more
flexibility by allowing the client agency*s fiscal year funds to remain
obligated, even after the end of the fiscal year, to pay the IR fund for
the provision of services which meet a legitimate or bona fide need
incurred during the period of availability of the customer agency*s
appropriation. 2, 3 The Government Management Reform Act of 1994
authorized OMB to
designate six franchise fund pilots. These pilots are a type of IR fund
that were established as self- supporting business- like entities
providing common administrative services on a fully reimbursable basis.
Between May 1996 and January 1997, OMB designated pilots at the
Departments of Commerce, Veterans Affairs (VA), Health and Human Services
(HHS), the Interior, and the Treasury, and at the Environmental Protection
Agency (EPA). As criteria for operation, OMB and the CFO Council defined
12
business operating principles for the franchise fund pilots. 4 OMB also
stressed the importance of accounting for full cost 5 and suggested that
agencies consider the usefulness of audited financial statements at the
fund level. The six pilots provide a variety of common services, such as
acquisition management, financial management services, and employee
assistance programs. They are similar to other business- like entities
such as the National Finance Center (NFC) at the Department of Agriculture
and the Federal Systems Integration and Management Center (FEDSIM) at the
General Services Administration (GSA).
The pilots were originally to expire at the end of fiscal year 1999, but
the date has been extended three times (the last two times on an annual
basis). As of August 2003, authorization for most of the pilots will
expire at the end of fiscal year 2003. The Treasury franchise fund is
authorized through the end of fiscal year 2004 and the EPA pilot has
permanent authorization. In
2 The use of a revolving fund does not change the period of availability
of the customer agency*s appropriation. It is improper for a customer
funded by fiscal year appropriations to place orders in excess of
legitimate needs, thereby using the revolving fund to extend the
life of the appropriation. 3 This is only one of the differences between
the Economy Act of 1932 and the legal authorities for IR funds, but it is
the one most important for our discussion. Other differences are mentioned
on page 15.
4 See appendix II for a list of the 12 business operating principles. 5
The Statement of Federal Financial Accounting Standards (SFFAS) No. 4 sets
forth basic cost accounting concepts and five main standards for
managerial cost accounting by the federal government.
addition to suggestions of permanent authorization for the pilots, there
has been some discussion in recent years of expanding the franchise fund
concept governmentwide, that is, allowing all departments and independent
agencies to set up franchise funds.
Intragovernmental We identified 58 IR funds with varying titles and
purposes. Most IR funds
Revolving Funds and function under the title or label *working capital
fund.* Examples of other
labels include revolving funds, supply funds, and franchise funds. Most
Their Legal Authorities
large agencies have at least one IR fund, and many have more than one. For
example, Interior has a franchise fund pilot and four working capital
funds. Intragovernmental revolving funds were created for a variety of
purposes, but most frequently, to provide the common support services
required by many federal agencies. Examples include photocopying, payroll
services, information technology services, and financial management
services. We determined that 34 of the 58 IR funds provide common
services, while the
remaining 24 have very specific purposes of providing goods or services to
satisfy needs unique to their agencies. (See pages 22 and 23.)
The 34 IR funds that provide common services operate under similar legal
authorities. These authorities generally specify the means of initial
capitalization and allow both internal entities and external agencies to
pay the IR funds for services provided, either by reimbursement or in
advance
(some are required to receive payments in advance). Intragovernmental
revolving funds are generally required to charge rates for their services
sufficient to recover all operational expenses, although over the long
term they are not intended to earn more than is required to break- even.
In fact, the legal authorities for IR funds commonly require the return of
surplus amounts to the Treasury at the end of the fiscal year. However,
some receipts may be carried over to the next fiscal year as unobligated
balances, including amounts reserved to cover the costs of annual leave
and depreciation. Some additional discretion to carry over unobligated
balances is provided to 22 of the 34 IR funds. For example, the head of
the agency is allowed to determine the level of funding required to meet
the needs of 16 of the IR funds and 6 IR funds are not specifically
required to return surpluses to the Treasury. This discretion does not
mean that IR funds are allowed to operate with continuing surpluses; over
the long term, they are still required to break- even. The remaining 12 of
the 34 funds* including 5 of the franchise fund pilots* have explicit
authority to retain additional unobligated balances. By statute, the 12
funds are authorized to charge for an operating reserve and/ or to retain
a reserve for acquisition of capital equipment and financial management
improvements. Five of the
franchise fund pilots have explicit authority for both a *reasonable
operating reserve* and *to retain up to 4 percent of total annual income
for acquisition of capital equipment and financial management
improvements.* 6 Appendix 3 shows the various authorities by fund. (See
pages 24 through 27.)
Operations of the During our case studies at the Interior and Commerce
franchise fund pilots,
Franchise Fund Pilots we found that both have (1) taken into account many
of the 12 business
operating principles, (2) designed their cost accounting processes to set
at Interior and
fees to recover the full cost of operations, and (3) progressed toward
Commerce
implementing the five main cost accounting standards. 7 The IFF*s major
business line, GovWorks, provides acquisition services and has seen
dramatic growth in revenue and workload since fiscal year 1997. GovWorks
projects continuing growth through fiscal year 2007. The IFF has been
subject to an audit of its financial statements at the franchise fund
level through fiscal year 2002. The CFF*s only business line, OCS,
provides information technology infrastructure support services and has
had a declining revenue and customer base. However, OCS expects its
revenues to remain stable through fiscal year 2005. The CFF was subject to
financial audits at the franchise fund level for fiscal years 1997 and
1998, and at the department level for fiscal years 2001 and 2002. No
audits were conducted for fiscal years 1999 or 2000. (See pages 28 through
35 for the IFF and pages
36 through 43 for the CFF.) Reauthorization Issues During the course of
our work, we identified several reauthorization issues.
Franchise fund managers cited the benefits of working under the franchise
fund label and perceived the ability to retain 4 percent of total annual
income as a benefit of a franchise fund. However, there is not a clear
understanding of the relationship between the *4 percent retention*
provision and the *operating reserve* provision. Clarification of the
6 The HHS franchise fund pilot operates under the statutory authority for
the HHS service and supply fund, which is not required to return excess to
the Treasury. There is no explicit authority specifying an operating
reserve or the retention of up to 4 percent of annual income, although HHS
franchise fund officials believe that they are allowed this authority
according to Chief Financial Officers Council, Federal Franchise Pilots:
Pilot Program Implementation Guide (Washington, D. C.: April 1996).
7 The standards are set forth in SFFAS No. 4.
relationship between these two provisions could avoid different
interpretations. (See pages 44 and 45.)
If franchise funds were to be reauthorized, longer term reauthorizations
(i. e., more than 1 or 2 years) would be beneficial and might provide less
uncertainty for current and potential clients than do annual
reauthorizations. Franchise fund managers mentioned other changes that
might be helpful. Although the ability to receive payment in advance is
sometimes advantageous, the requirement for advance payment reduces
the IR funds* flexibility to work with some clients. One franchise fund
manager said that additional human capital flexibilities, such as in
hiring practices, might be beneficial. (See page 45.)
If the pilots were not reauthorized, many of the services provided would
probably continue under other authorities. For example, both GovWorks and
OCS operated under different authorities prior to becoming part of their
respective franchise fund pilots. OCS officials told us that they would
probably continue to operate under the authority of the working capital
fund if the CFF pilot did not continue. GovWorks would seek authorization
as a working capital fund so that it would not have to operate under the
authority of the Economy Act. (See page 46.)
As agreed with your office, unless you announce the contents of this
report earlier, we plan no further distribution until 30 days from the
date of this letter. At that time, we will provide copies of this report
to other interested congressional committees and make copies available to
others upon request. In addition, the report will be available at no
charge on the GAO Web site at http:// www. gao. gov.
If you or your staff have any questions regarding the information in this
report, please contact me at (202) 512- 9142 or Christine Bonham,
Assistant
Director, at (202) 512- 9576. Key contributors to this review were
Jennifer A. Ashford, Michael S. LaForge, Bill Wright, Hannah R. Laufe,
Mark P. Connelly, and Elizabeth Lessman.
Susan J. Irving Director, Federal Budget Analysis Strategic Issues
Appendi Appendi xes x I
Franchise Fund Pilot Review Franchise Fund Pilot Review Briefing for
Chairman Davis and Ranking
Member Waxman Committee on Government Reform
U. S. House of Representatives July 11, 2003
Introduction The Government Management Reform Act ( GMRA) of 1994
authorized the Office of Management and Budget ( OMB) to designate six
franchise fund pilots: One of many types of intragovernmental revolving (
IR)
funds Self- supporting business- like entities providing common
administrative services on a fully reimbursable basis Compete for federal
customers, both internal and external OMB designated the following six
pilot agencies:
Interior ( May 17, 1996) Treasury ( May 17, 1996) Commerce ( May 20,1996)
Environmental Protection Agency ( EPA) ( May 30, 1996) Veterans Affairs (
VA) ( May 30, 1996) Health and Human Services ( HHS) ( January 24, 1997)
Introduction Original expiration extended three times Current expiration
at end of fiscal year 2003; Treasury
franchise fund will expire at end of fiscal year 2004 Little literature is
available regarding franchise fund pilots
operations Expanding the franchise fund concept on a
governmentwide basis has been discussed in recent years In consideration
of reauthorization, need to understand the
universe of similar types of IR funds and the operation of the pilots
Key Questions 1. What types of intragovernmental revolving funds exist,
under what authorities do they operate, and how do these authorities
differ?
2. How have selected franchise funds operated? 3. What issues might
Congress consider as it contemplates
permanent reauthorization of franchise funds?
Scope and Methodology To identify IR funds and their legal authorities,
we:
Used budget data from OMB s MAX budget database Reviewed U. S. Code and
fund information in the President s 2004 Budget For background on
franchise funds and their operations, we examined:
1997 and 1999 OMB/ Chief Financial Officers ( CFO) Council reports on
franchise funds Legal and budget documents, GAO reports, agency documents
Documentation from franchise fund websites and magazine articles For
detailed information on operations, we selected Interior and
Commerce franchise funds for case studies based on size and activity:
Interviewed agency officials at the department and franchise fund levels
Examined original franchise fund applications, Inspector General reports,
and other documentation on the history and operation of the funds Examined
each against specific OMB/ CFO Council operating principles
and determined whether franchise funds had taken into account these
principles
Scope and Methodology ( cont. ) We also examined in- depth the managerial
cost accounting processes
at: GovWorks, which makes up over 95 percent of all Interior
franchise fund revenues as of October 1, 2002 Office of Computer Services
( OCS) , currently the only business
line within the Commerce franchise fund By studying their cost accounting
processes, we were able to:
Gain an understanding of their financial operations Review underlying
methodologies for identifying, accumulating,
and assigning costs to cost objects Trace sources for cost- related
information in internal management
reports to supporting systems and documentation Investigate anomalies or
potential problems found in the design of
the costing processes and discuss these issues with agency officials
Scope and Methodology ( cont. ) Reviewed work by other auditors and
performed limited testing
of data reliability, but did not conduct audit procedures designed to give
an opinion on the franchise funds financial information Reauthorization
issues were identified during our document
reviews and interviews GovWorks and OCS have each reviewed the relevant
slides;
they provided technical comments which have been incorporated where
appropriate Conducted our work between January and July 2003 in
accordance with generally accepted government auditing standards
Background Intragovernmental Revolving Funds The Economy Act of 1932
provides broad authority:
Allows a federal agency to enter into an agreement to provide goods or
services to another federal agency, and generally is the authority
governing intragovernmental transactions when no other, more specific,
authority applies Requires that payment from the client agency be based on
the actual cost of
goods or service provided Restricts flexibility by requiring client agency
to deobligate fiscal year funds at
end of period of availability to the extent unobligated by the performing
entity In contrast, specific legal authorities creating IR funds at the
agency level: 1
Describe the fund s purpose and authorized uses Detail the receipts or
collections the agency may credit to the fund Provides more flexibility by
allowing client agency funds to remain obligated,
even after the end of the fiscal year, to pay the performing IR fund Other
authorities specific to the fund
1 There are other types of revolving funds that share common elements with
IR funds, but they are not relevant to our discussion. IR funds are
revolving funds whose receipts come primarily from other government
accounts.
Background Franchise Fund Pilots Franchise funds are a type of IR fund
First conceptualized in the 1993 National Performance Review to
establish fully self- supporting business- like entities within the
federal government to compete in the market to provide federal common
administrative support services GAO reported and testified on the
franchise concept in early 1994 2
and questioned whether governmentwide legislation was necessary since the
concept so closely resembled existing IR funds GMRA 1994 authorized OMB to
designate six franchise fund pilots OMB chose pilots through an
application process Legal authorities for pilots:
Five of the six pilots received authority in respective agency s
appropriations bill ( all but HHS) HHS pilot operates under authority of
the HHS service and supply fund EPA franchise pilot established as a
working capital fund and law was
amended so fund has no expiration date 2 See U. S. General Accounting
Office reports Improving Government : GAO s Views on H. R. 3400 Management
Initiatives,
GAO/ T- AIMD/ GGD- 94- 97 ( Washington, D. C. : Feb. 23, 1994) and Working
Capital Funds: Three Agency Perspectives,
GAO/ AIMD- 94- 121 ( Washington, D. C. : May 20, 1994) .
Background Franchise Fund Pilots ( cont. ) Pilots did not begin to operate
until fiscal year 1997 OMB and the CFO Council defined 12 operating
principles for
business- like operations in a 1996 guide for franchise fund pilots: 3 1.
Services 7. Adjustments to Business Dynamics 2. Organization 8. Surge
Capacity 3. Competition 9. Cessation of Activity
4. Self- sustaining/ Full Cost Recovery 10. Voluntary Exit 5. Performance
Measures 11. FTE Accountability* 6. Benchmarks 12. Initial Capitalization*
* We did not examine these principles in our case study of the Interior
and Commerce Franchise Funds In addition to emphasizing these 12
principles, OMB has stressed
the importance of accounting for full cost and suggested that agencies
consider the usefulness of audited financial statements at the fund level
Statement of Federal Financial Accounting Standards ( SFFAS) No.
4 sets forth basic cost accounting concepts and five main standards for
managerial cost accounting by the federal government
3 See appendix 2 for description of principles.
Background Franchise Fund Pilots ( cont. ) Franchise fund pilots provide
common administrative services such as:
Acquisition management Administrative management Information technology
services Financial management services Records management Employee
assistance programs Facilities management Clinical occupational health
Franchise fund pilots are often discussed in the literature with other
recognized business- like entities such as: Agriculture s National Finance
Center ( NFC) Central Intelligence Agency s ( CIA) central services
working capital
fund ( WCF) General Services Administration s ( GSA) Federal Systems
Integration
and Management Center ( FEDSIM) Cooperative administrative support units (
CASUs)
Results in Brief Identified 58 IR funds with varying labels and purposes:
Determined that 34 IR funds ( including 6 franchise fund pilots) are
authorized to provide common services required by many federal agencies;
24 IR funds have more specific purposes In addition to the 58 IR funds, we
identified cooperative
administrative support units, another type of government entity that
provides common services
34 intragovernmental revolving funds that provide common services operate
under similar legal authorities: For example, most authorize advances and
reimbursements, as well
as the carryover of unobligated balances to recover the costs of accrued
leave and depreciation Some, but not all, have authority explicitly
allowing 1) an operating
reserve and/ or 2) retention of up to 4 percent of total annual income for
capital equipment/ financial management improvements
Results in Brief ( cont. ) Interior and Commerce franchise fund pilots
have:
Taken into account many of the business operating principles Designed
their cost accounting processes to set fees to recover the full cost
of operations Made progress toward implementing the five main cost
accounting
standards set forth in SFFAS No. 4 Had financial statement audits
performed at different levels Interior franchise fund s ( IFF) major
business line, GovWorks:
Provides acquisition services Has seen dramatic growth in revenue and
workload since fiscal year 1997
and projected through fiscal year 2007 Commerce franchise fund s ( CFF)
business line, OCS:
Provides information technology ( IT) infrastructure support services Has
had a declining revenue and customer base, but OCS expects
revenues to remain stable through fiscal year 2005
Results in Brief ( cont. ) We identified several reauthorization issues:
Franchise fund managers cited benefits of working under the franchise fund
label Ability to retain 4 percent of total annual income is generally
perceived as a benefit of a franchise fund If reauthorized, longer- term
authorization for selected franchise
fund pilots would be beneficial If not reauthorized, many services being
provided under franchise
funds probably would continue under other authorities Franchise funds are
not unique from other IR funds in their legal
authority or operation Expanding franchise funds governmentwide is not
necessary since
funds are individually authorized and may receive expanded authorities
from Congress
58 intragovernmental revolving funds have varying labels and purposes IR
funds exist under a variety of labels, with working capital fund
being the most common: 28 working capital funds
3 supply funds 6 revolving funds 3 building funds 5 franchise funds 4 13
other funds Most large agencies have at least one IR fund, and many have
more
than one, for example: Department of Interior has a franchise fund pilot
and 4 working
capital funds Department of Commerce has a franchise fund pilot and 3
working
capital funds 4 As discussed, the EPA franchise fund is labeled a working
capital fund and the HHS pilot operates under its service and supply fund.
On the other hand, the Federal Aviation Administration ( FAA) has a fund
that it labels a franchise fund. It is not part of the franchise fund
pilot program although it operates under similar authority.
58 intragovernmental revolving funds have varying labels and purposes (
cont. )
IR funds were created for a variety of purposes, most frequently to
provide common services: 34 IR funds, including 6 franchise fund pilots,
are authorized to provide
common services required by many federal agencies 24 provide goods or
services that are not commonly required In addition to the IR funds, there
are entities called cooperative
administrative support units ( CASUs) : CASUs are entrepreneurial
organizations that provide the full range of
support services to federal agencies on a cost reimbursable basis Have
provided services since 1986 in those regions of the country with
intense federal government activity CASUs generally derive their authority
to enter into agreements with other
federal entities from the Economy Act Several CASUs have moved to operate
under the authority of a franchise
fund to make use of provisions more expansive than those of the Economy
Act
Funds that perform common services operate under similar legal authorities
The legal authorities for the 34 IR funds that provide common services
generally specify: The means of initial capitalization That funds may be
received from clients external to the
agency, i. e. , other government/ federal agencies or other sources That
both payment in advance and payment by
reimbursement are allowed; some funds require advance payment and do not
permit reimbursement That rates should be set to recover all operational
expenses;
authority most frequently stipulates the inclusion of annual leave and
depreciation as part of expenses to be recovered
Funds that perform common services operate under similar legal authorities
( cont. )
Receipts earned in a fiscal year, i. e. , offsetting collections, are a
result of the rates charged for services provided Most revolving funds are
intended to operate on a break- even
basis over the long term Statutes frequently include the requirement for
the periodic
payment of any surplus amounts to the general fund of the Treasury at the
end of the fiscal year However, not all unspent receipts are considered
surplus, some
are carried over as unobligated balances, including amounts reserved to
recover the costs of accrued leave and depreciation
Funds that perform common services operate under similar legal authorities
( cont. )
22 of 34 IR funds that provide common services have some additional
discretion in determining unobligated balances that may be retained ( see
appendix 3) : 16 allow the head of the agency to determine what level of
funding meets the needs of the fund 6 do not specifically stipulate the
return of surpluses to
Treasury While some funds have the discretion described above, GAO
has stated that operating with deficits or surpluses continuously for
periods of several years is not consistent with the funds statutory
objective of operating on a break-
- even basis over the long term 5
5 See U. S. General Accounting Office, OPM' s Revolving Fund Policy Should
Be Clarified and Management Controls Strengthened, GAO/ GGD- 84- 23 (
Washington, D. C. : Oct. 13, 1983) .
Funds that perform common services operate under similar legal authorities
( cont. ) Several funds were given explicit authority to accumulate
reserves ( see appendix 3) : 8 IR funds, including 5 of the franchise fund
pilots, have the
authority to charge for a reasonable operating reserve 8 IR funds,
including 5 of the franchise funds pilots, have
authority to retain up to 4 percent of total annual income for acquisition
of capital equipment and financial management improvements Labor, Justice,
and the National Archives and Records
Administration have other explicit language allowing reserves for
specified purposes
Interior Franchise Fund Organizational history: Began operating in October
1996 Two primary components, Minerals Management Service ( MMS) and
National Business Center ( NBC) MMS contained GovWorks, two CASUs, and U.
S. Films & Video; all
existed prior to the creation of the franchise fund NBC included a few of
its services under the franchise fund, most
stayed under the working capital fund In 2001, CASUs left IFF to go to the
Treasury franchise fund In October 2002, those NBC services under the
franchise fund were
moved to the working capital fund GovWorks accounted for over 95 percent
of all IFF revenues as of
October 1, 2002, and is currently the primary business line under the
franchise fund Through fiscal year 2002, IFF subject to an audit of its
financial
statements at the fund level
Interior Franchise Fund: Implementation of Business Principles
Principle 1: Services provide only common administrative support services
GovWorks:
Provides acquisition services OMB defines procurement as inherently
governmental in nature Some clients do not have a procurement office;
others choose to
use GovWorks rather than their own procurement office Supports project
from contract initiation to contract close- out and
helps client choose appropriate vendor to perform work Principle 2:
Organization clearly defined organizational structure GovWorks:
Separate organizational coding structure in general ledger accounting
system for transactions
Interior Franchise Fund: Implementation of Business Principles ( cont. )
Principle 3: Competition not sheltered or a monopoly GovWorks:
Accounts for and pays MMS for support services Pays the Department of the
Interior for an allocation of
departmental overhead In fiscal year 2002, received 95 percent of revenue
from customers
external to Interior and 5 percent of revenue from customers within
Interior Has competitors who also offer procurement services
Interior Franchise Fund: Implementation of Business Principles ( cont. )
Principle 4: Self- sustaining/ Full Cost Recovery fees established to
recover full cost
GovWorks: Management reports and financial statements indicate the
collection of revenues in excess of what would normally be considered full
costs, as permitted by law Design of the managerial costing processes
identifies full ( direct
and indirect) costs of operations Service fees are set at a fixed
percentage of contract amounts in
order to recover the full cost of operations, including support services
provided by MMS and overhead allocated by the Department of the Interior;
however, Has not regularly calculated the unit costs of outputs, i. e. ,
actual
unit cost per contract dollar awarded, which could be useful as a measure
of performance
Interior Franchise Fund: Implementation of Business Principles ( cont. )
Principle 5: Performance Measures should have comprehensive performance
measures to assess services
GovWorks: Prepares trend analysis on revenues and expenses in addition to
total number and dollar amount of awards and funding documents Hired KPMG
Consulting to conduct customer survey; June 2000
report assessed clients opinions on satisfaction with services, marketing
strategies, interest in potential future service offerings
Principle 6: Benchmarks cost and performance measures against competitors
GovWorks: Has cost and performance data that could be compared to
competitors, but GovWorks staff said that information is not available
from entities with similar functions
Interior Franchise Fund: Implementation of Business Principles ( cont. )
Principle 7: Adjustments to Business Dynamics ability to adjust capacity
and resources up and down GovWorks:
Experienced dramatic growth in revenue and workload since fiscal year 1997
and projected through fiscal year 2007 Actively marketing in print and
electronic media using the
GovWorks brand name in its franchise awareness program Has hired new staff
to meet increasing workloads and has
developed training Reviewing core business processes and documenting
procedures
to facilitate consistent delivery of services
Interior Franchise Fund: Implementation of Business Principles ( cont. )
Principle 8: Surge Capacity resources to provide for peak business
periods,
capital investments, and new starts GovWorks:
Legal requirement for advance payments allows cash flow for hiring of
additional employees as needed Flexibility limited by constraints on using
private contractors to
perform inherently governmental acquisition management Combined reserve
balance as of June 2003 is about $ 6.3 million Desired operating reserve
would total $ $ 16 million, and would include
funds intended to: Pay for ordinary/ necessary operating costs that may be
incurred Offset any future short- term operating losses Replace existing
capital equipment/ software Pay employees annual leave earned since
business line inception Cover costs of shutting- down business line ( if
ever necessary) Desired reserve for improvements would total $ $ 3
million, and would
include funds intended for improvements in the financial, procurement, and
business management systems
Interior Franchise Fund: Implementation of Business Principles ( cont. )
Principle 9: Cessation of Activity reasonable notice to customer before
eliminating service GovWorks:
No elimination of service has occurred; clients reportedly not affected by
movement of NBC services to working capital fund Franchise fund management
has the freedom to not enter into additional
contracts with clients Operating reserve includes funds intended to cover
1 year of costs to
perform shut- down if service is eliminated Believes that if the franchise
fund was not reauthorized, it could continue
successful operations if it were authorized as a working capital fund;
would not want to operate under the authority of the Economy Act Principle
10: Voluntary Exit customers should be able to exit GovWorks:
Procurement contracts are discrete, customers can leave at contract s end
Has many return clients but does not document whether all customers
return
Commerce Franchise Fund Organizational History Began operating in October
1996 Two primary business components, OCS and National Oceanic and
Atmospheric Administration s ( NOAA) Administrative Service Centers ( ASC)
Both existed prior to creation of the franchise fund NOAA s ASCs left
franchise fund in 1998 Department requested adding another business line
in 2001, but OMB
did not authorize it Currently, OCS is the only business line in the
franchise fund OCS was subject to financial audits at the fund level for
fiscal years
1997 and 1998, and at the department level for fiscal years 2001 and 2002
( no audits for fiscal years 1999 or 2000)
Commerce Franchise Fund: Implementation of Business Principles
Principle 1: Services provide only common administrative support services
OCS: Provides information technology infrastructure support services Uses
subcontractors to provide some services such as disaster data
recovery, computer maintenance, and technical support Principle 2:
Organization clearly defined organizational structure OCS:
Separate organizational coding structure in general ledger accounting
system for transactions Is the only business line in the franchise fund
and its internal
management reports clearly lay out its revenues and types of costs
Commerce Franchise Fund: Implementation of Business Principles ( cont. )
Principle 3: Competition not sheltered or a monopoly OCS:
Accounts for and pays for its own support costs Pays the Department of
Commerce for an allocation of
departmental overhead In fiscal year 2002, received 57 percent of revenue
from customers
external to Commerce and 43 percent of revenue from customers within
Commerce Has competitors who also offer information technology support
services
Commerce Franchise Fund: Implementation of Business Principles ( cont. )
Principle 4: Self- sustaining/ Full Cost Recovery fees established to
recover full cost
OCS: Management reports and financial statements indicate the
collection of total revenues in excess of what would normally be
considered full costs, as permitted by law Design of the managerial
costing processes identifies full costs
( direct and indirect costs) of operations Activity- based pricing model
is used to estimate future costs to be
recovered and fees for each output are set at a level that is expected to
recover full costs; however, Has not calculated the actual unit costs of
outputs to determine if
fees are sufficient to recover full costs for each type of output, which
could be useful as a measure of performance
Commerce Franchise Fund: Implementation of Business Principles ( cont. )
Principle 5: Performance Measures should have comprehensive performance
measures to assess services OCS:
Prepares trend analysis on number and types of customers and related
revenues Positive feedback from customers but has not used a formal
mechanism to evaluate its performance Principle 6: Benchmarks cost and
performance measures against
competitors OCS:
Has developed cost- based fees for units of output delivered to customers
that could be compared against those of competitors, but OCS staff stated
that competitors fees for similar units of output are difficult to obtain
Commerce Franchise Fund: Implementation of Business Principles ( cont. )
Principle 7: Adjustments to Business Dynamics ability to adjust capacity
and resources up and down OCS:
Has had recent declines in number of customers and revenues, but OCS
expects revenues to remain stable through fiscal year 2005 In fiscal year
2002, INS accounted for 77 percent of external
revenue and 44 percent of total revenue Not focused on actively marketing;
management relies on satisfied
customers and referrals to find new customers that can be served with
existing systems Has subcontractors available to meet short- term
requirements and
to avoid carrying excess capacity Computer processors sometimes operate
near capacity but
processors could be added to serve additional customers
Commerce Franchise Fund: Implementation of Business Principles ( cont. )
Principle 8: Surge Capacity resources to provide for peak business
periods, capital investments, and new starts OCS:
Received authority to retain up to 4 percent of total annual income for
capital/ improvements starting in fiscal year 1999 Reserve balance at end
of fiscal year 2002 is approximately
$ 500,000, or about 1 percent of total revenues earned since receiving
retained earnings authority Currently developing a capital plan
Commerce Franchise Fund: Implementation of Business Principles ( cont. )
Principle 9: Cessation of Activity reasonable notice to customer before
eliminating service OCS:
Has never eliminated a service unless requested by the client Service
agreements allow either party to terminate the agreement,
usually with 120 days advance notification Would probably return to the
Department of Commerce working
capital fund if it were not reauthorized as a franchise fund ( as such,
would not have the explicit authority to retain 4 percent of total annual
income for capital/ improvements) Principle 10: Voluntary Exit customers
should be able to exit OCS:
Has had several clients leave when client IT applications were no longer
supportable; the clients chose new applications and new IT support
providers
Reauthorization Issues Managers cited benefits of working under the
franchise fund label:
Believe it energized operations and provided opportunities for growth
CASUs have joined franchise funds to make use of provisions more
expansive than those of the Economy Act Ability to retain 4 percent of
total annual income generally perceived
as a benefit of a franchise fund, although our discussions with franchise
fund managers and others have raised several considerations: There is not
a clear understanding of the provision allowing the 4 percent
retention of total annual income, although many interpret it as a reserve
for capital/ improvements and therefore maintain a separate operating
reserve The need for capital reserves depends on the amount of capital
assets used
in providing services There is evidence that franchise fund pilots have
not been able to retain 4
percent of total annual income and indications that charging rates that
would allow a 4 percent reserve might make their prices uncompetitive
Reauthorization Issues ( cont. ) If reauthorized, longer- term
authorization for selected franchise fund
pilots would be beneficial: Annual reauthorizations create unease for
current and potential clients
concerned with stability Adding new business lines unlikely until future
operations are more
certain If reauthorized, additional changes might be helpful for agencies:
Clarification of relationship between reserve of 4 percent of total annual
income for capital/ / improvements and operating reserve could avoid
differing interpretations Ability to receive advances helpful, but
requirement for advance payment
reduces flexibility to work with some clients Additional human capital
flexibilities, such as in hiring practices, might be
helpful, according to one franchise fund manager
Reauthorization Issues ( cont. ) If not reauthorized, many services being
provided under franchise
funds probably would continue under other authorities: All the business
lines we examined were in existence before becoming
part of the franchise fund Several business lines have left the franchise
funds and continue to
provide services OCS would probably return to the existing working capital
fund GovWorks would want authorization to be a working capital fund
Proposed revisions to OMB s Circular A- 76 regulations would have
affected IR funds, but final version does not: A- 76 provides rules for
competition of commercial activities, including
many of the common services provided by IR funds November 2002 proposed
revisions would have required customer
agencies to compete their contracts ( i. e. , inter- service support
agreements) over $ 1 million Final version issued May 29, 2003, omitted
this provision
Concluding Observations Longer- term authorization for selected pilot
funds would be
helpful to the operation of the funds and their clients Nonetheless,
neither the legal authority nor the operation of
franchise funds makes them unique from other IR funds The attraction to
the franchise fund label seems to be the
explicit ability to retain 4 percent of total annual income- need legal
authority but not franchise label to do that For any IR fund, agencies may
request additional legal
authorities, and Congress may expand those authorities if it wishes to do
so ( and has done so in the past) A governmentwide authorization is not
necessary
Concluding Observations ( cont. ) In considering the provision of
franchise- type authorities to
individual IR funds, criteria include: 1. Operations should adhere to OMB
s 12 business principles 2. Managerial cost accounting process should be
in place that
can account for the full unit costs of outputs produced 3. Annual or
periodic independent audit should be considered
at the fund level to ensure the reliability of the fund s financial
information 4. Additional elements to consider:
Top level commitment at agency Strong leadership at the fund level Well-
developed business- like operating philosophy Commitment of staff to
customer service
Appendi x II
12 Business Operating Principles Operating Principle OMB Description 1)
Services The enterprise should only provide common administrative support
services. 2) Organization The organization would have a clearly defined
organizational structure including readily
identifiable delineation of responsibilities and functions and separately
identifiable units for the purpose of accumulating and reporting revenues
and costs. The funds of the organization must be separate and identifiable
and not commingled with another organization.
3) Competition The provision of services should be on a fully competitive
basis. The organization*s operation should not be *sheltered* or be a
monopoly.
4) Self- sustaining/ The operation should be self- sustaining. Fees will
be established to recover the *full costs,* as Full Cost Recovery defined
by standards issued in accordance with FASAB (the Federal Accounting
Standards Advisory Board).
5) Performance Measures The organization must have a comprehensive set of
performance measures to assess each service that is being offered.
6) Benchmarks Cost and performance benchmarks against other *competitors*
are maintained and evaluated. 7) Adjustments to Business
The ability to adjust capacity and resources up or down as business rises
or falls, or as other Dynamics conditions dictate, if necessary.
8) Surge Capacity Resources to provide for *surge* capacity and peak
business periods, capital investments, and new starts should be available.
9) Cessation of Activity The organization should specify that prior to
curtailing or eliminating a service, the provider will give notice within
a reasonable and mutually agreed time frame so the customer may obtain
services elsewhere. Notice will also be given within a reasonable and
mutually agreeable timeframe to the provider when the customer elects to
obtain services elsewhere. 10) Voluntary Exit Customers should be able to
*exit* and go elsewhere for services after appropriate notification to the
service provider and be permitted to choose other providers to obtain
needed service. 11) FTE Accountability a Full Time Equivalents (FTEs)
would be accounted for in a manner consistent with the Federal Workforce
Restructuring Act and OMB requirements, such as Circular A- 11. 12)
Initial Capitalization a Capitalization of franchises, administrative
service, or other cross- servicing operations should
include the appropriate FTE commensurate with the level of effort the
operation has committed to perform. Source: OMB and the CFO Council
a We did not examine these principles in our case study of the Interior
and Commerce franchise fund pilots.
Authority to Retain Unobligated Balances*
Appendi x III
Franchise Pilots and Comparable IR Funds Secretarial Explicit
Other discretion to
authority to Explicit authority
explicit retain retain
to retain up to 4% authority to
Department/ unobligated operating
of total annual retain agency Fund name/ bureau
balances a reserve
income balances
1 Commerce Franchise fund, Departmental X X Management 2 Interior
Franchise fund, Minerals X X
Management Service 3 Treasury Franchise fund, Departmental X X Offices 4
VA Franchise fund, Departmental
X X Administration 5 EPA Working capital fund (WCF) X X
6 Transportation Administrative services franchise X X fund, FAA 7
Commerce WCF, Census X
8 Homeland Security WCF, Departmental Management X 9 Justice WCF, General
Administration X X 10 CIA Central services WCF X 11 Labor WCF,
Departmental Management X 12 National Archives
Records center revolving fund X and Records Administration
13 Agriculture WCF, Executive Operations X 14 Commerce WCF, Departmental
Management X 15 Commerce WCF, National Institute of X
Standards and Technology 16 Defense* Military Buildings maintenance fund X
17 Energy WCF, Departmental Administration X 18 HHS b HHS service and
supply fund,
X Program Support Center 19 Housing and Urban WCF, Management and
X Development Administration 20 State WCF, Administration of Foreign
X Affairs 21 Interior WCF, Bureau of Reclamation X
22 Interior WCF, Departmental Management X 23 Interior WCF, United States
Geological X
Survey 24 Treasury WCF, Departmental Offices X
(Continued From Previous Page)
Secretarial Explicit
Other discretion to
authority to Explicit authority
explicit retain retain
to retain up to 4% authority to
Department/ unobligated operating
of total annual retain agency Fund name/ bureau
balances a reserve
income balances
25 Transportation Transportation Administrative X Service Center, Office
of the Secretary
26 VA Supply fund, Departmental X Administration 27 Equal Employment
Education, technical assistance X Opportunity
and training revolving fund Commission 28 GSA WCF, General Activities X 29
GSA Federal buildings fund, Real
X Property Activities 30 GSA General supply fund, Supply and
X Technology Activities 31 GSA Information technology fund
X (FEDSIM), Supply and Technology Activities
32 International WCF, Agency for International
X Assistance
Development Programs 33 Legislative Branch Fedlink program and Federal X
research program, Library of Congress
34 Office of Personnel Revolving fund X Management Total 22 8 8 3
Source: GAO analysis Note: Shading highlights franchise fund pilots. a
Most of these funds are required to deposit in miscelleneous receipts of
the Treasury amounts in
excess of the needs fo the fund; however, in some cases this requirement
is not specifically stipulated. b The HHS franchise fund pilot operates
under the statutory authority for the HHS Service and Supply
Fund, which is not required to return excess to the Treasury. There is no
explicit authority specifying an operating reserve or the retention of up
to 4 percent of total annual income, although HHS franchise fund officials
believe that they are allowed this authority according to Chief Financial
Officers Council, Federal Franchise Pilots: Pilot Program Implementation
Guide (Washington, D. C.: April 1996).
(450182)
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a
GAO United States General Accounting Office
The six franchise fund pilots are part of a group of 34 intragovernmental
revolving (IR) funds that were created to provide the common support
services required by many federal agencies. In general, the legal
authorities for these 34 funds are very similar. Twelve of the 34 funds*
including 5 of the franchise fund pilots* have explicit authority to
charge for an operating reserve and/ or to retain a reserve for
acquisition of capital equipment and financial management improvements.
The franchise fund pilots at the Departments of Interior and Commerce have
both (1) taken into account many of the 12 business operating principles,
(2) designed their cost accounting processes to set fees to recover the
full cost of operations, and (3) progressed toward implementing the main
cost accounting standards. The Interior Franchise Fund*s (IFF) major
business line, GovWorks, provides acquisition services and has seen
dramatic growth in revenue and workload since fiscal year 1997. GovWorks
expects continuing growth through fiscal year 2007. The IFF has been
subject to an audit of its financial statements at the franchise fund
level through fiscal year 2002. The Commerce Franchise Fund*s (CFF) only
business line, Office of Computer Services (OCS), provides information
technology infrastructure support services and has had a declining revenue
and customer base. However, OCS expects its revenues to remain stable
through fiscal year 2005. The CFF was subject to financial audits at the
franchise fund level for fiscal years 1997 and 1998, and at the department
level for fiscal years 2001 and 2002. No audits were conducted for fiscal
years 1999 or 2000.
Longer- term reauthorization (more than 1 or 2 years) would be helpful to
the operation of franchise fund pilots, but neither their legal authority
nor their operation makes franchise funds unique compared to other IR
funds. A primary attraction to the franchise fund label is the explicit
ability to retain reserves, and Congress could, and has, given this
authority to other IR funds. The explicit authority provisions granted to
franchise fund pilots (and a few other IR funds) could be considered case-
by- case for individual IR funds. In deciding whether to provide these
authorities to any individual fund, Congress could use the same criteria
suggested by OMB for franchise fund pilots, including: (1) examining
operations against OMB/ CFO*s 12 business operating principles, (2)
determining if managerial cost accounting processes are in place to
account for the full unit costs of outputs produced, and (3) considering
if annual or periodic independent audits are being conducted at the fund
level to ensure the reliability of the fund*s financial information.
Individual case- by- case authority would also permit Congress to consider
and evaluate the agency*s commitment and the strength of the IR fund*s
leadership, which are additional factors that can influence the success of
the fund. Congress is considering the reauthorization of the six franchise
fund pilots authorized by the Government Reform Act of 1994. These self-
supporting business- like
entities were established to provide common administrative services on a
fully reimbursable basis. The authorization for most of the pilots
will expire at the end of fiscal year 2003. In addition to the suggestion
of giving the pilots permanent authorization, there has been some
discussion in recent years of
expanding the franchise fund concept so that all departments and
independent agencies can set up a franchise fund. To provide the
context to evaluate franchise fund pilots and fully understand
reauthorization issues, GAO agreed to identify the many funds, called
intragovernmental revolving funds, that operate with purposes similar to
that of franchise funds and to analyze their legal authorities to
determine if franchise funds were somehow unique. In addition, we
examined the operations and managerial cost accounting processes of the
franchise fund pilots at the Departments of the Interior and Commerce. We
determined if they had taken into
account the criteria suggested by the Office of Management and Budget
(OMB), including: (1) adhering to OMB/ Chief Financial Officers (CFO)
Council*s 12 business operating principles, (2) accounting for full cost,
and (3)
conducting audits of financial statements at the fund level.
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 1069. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Susan J. Irving at (202) 512- 9142 or irvings@ gao.
gov. Highlights of GAO- 03- 1069, a report to the
Committee on Government Reform, House of Representatives August 2003
BUDGET ISSUES
Franchise Fund Pilot Review
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Appendix III Authority to Retain Unobligated Balances* Franchise Pilots
and Comparable IR Funds
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