Foreign Assistance: USAID's Operating Expense Account Does Not	 
Fully Reflect the Cost of Delivering Foreign Assistance 	 
(30-SEP-03, GAO-03-1152R).					 
                                                                 
Humanitarian and economic development assistance has long been an
important component of U.S. global security strategy. Since 1962,
the U.S. Agency for International Development (USAID) has managed
more than $273 billion in such assistance. In fiscal year 2003,  
USAID estimates that it will obligate about $13 billion for	 
assistance programs in almost 160 countries. In recent years,	 
demands on USAID's budget and workforce have increased as the	 
agency strives to meet emerging requirements, such as		 
reconstruction efforts in Afghanistan and Iraq and increased	 
funding for health programs. However, USAID officials have	 
expressed concern that funds provided for its administrative or  
operating expenses have not kept pace with the agency's 	 
requirements. Since 1976, Congress has included a separate	 
appropriation to consolidate USAID's operating expenses into a	 
single budget item. Congress intended that USAID pay for the	 
administrative costs of delivering foreign assistance (its "cost 
of doing business") from an operating expense account separate	 
from its humanitarian and development assistance program funds.  
These operating expenses are costs incurred primarily for the	 
benefit of the United States rather than the foreign assistance  
recipient. In accordance with congressional guidance, USAID	 
reports all expenses related to the U.S. direct-hire staff as	 
operating expenses and, based on its guidance on what constitutes
the cost of doing business, other operating expenses--from rent  
to office utilities and supplies. In fiscal year 2003, USAID	 
estimates that it will obligate $668 million for its operating	 
expenses. We examined (1) trends in USAID's operating expenses	 
since 1995 and (2) whether the charges to USAID's operating	 
expenses account reflect the agency's actual cost of doing	 
business.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-1152R					        
    ACCNO:   A08628						        
  TITLE:     Foreign Assistance: USAID's Operating Expense Account    
Does Not Fully Reflect the Cost of Delivering Foreign Assistance 
     DATE:   09/30/2003 
  SUBJECT:   Budget activities					 
	     Federal funds					 
	     Foreign financial assistance			 
	     Funds management					 
	     Economic development				 
	     Appropriated funds 				 

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GAO-03-1152R

A

United States General Accounting Office Washington, D.C. 20548

September 30, 2003

The Honorable Christopher Shays, Chairman

The Honorable Dennis J. Kucinich, Ranking Minority Member

Subcommittee on National Security, Emerging Threats, and International
Relations Committee on Government Reform House of Representatives

Subject: Foreign Assistance: USAID's Operating Expense Account Does Not
Fully Reflect the Cost of Delivering Foreign Assistance

Humanitarian and economic development assistance has long been an
important component of U.S. global security strategy. Since 1962, the U.S.
Agency for International Development (USAID) has managed more than $273
billion in such assistance. In fiscal year 2003, USAID estimates that it
will obligate about $13 billion for assistance programs in almost 160
countries. In recent years, demands on USAID's budget and workforce have
increased as the agency strives to meet emerging requirements, such as
reconstruction efforts in Afghanistan and Iraq and increased funding for
health programs. However, USAID officials have expressed concern that
funds provided for its administrative or operating expenses have not kept
pace with the agency's requirements.

Since 1976, Congress has included a separate appropriation to consolidate
USAID's operating expenses into a single budget item. Congress intended
that USAID pay for the administrative costs of delivering foreign
assistance (its "cost of doing business") from an operating expense
account separate from its humanitarian and development assistance program
funds. 1 These operating expenses are costs incurred primarily for the
benefit of the United States rather than the foreign assistance recipient.
In accordance with congressional guidance,2 USAID reports all expenses
related to U.S. direct-hire staff as operating expenses3 and, based on its
guidance on what constitutes the cost of doing business, other operating
expenses-from rent to office utilities and supplies. In fiscal year 2003,
USAID estimates

1S. Rept. 94-704.

2H. Rept. 95-701 and S. Rept. 95-1194.

3USAID's Automated Directives System, Functional Series 600, chapter 601
(Funding Source Policy).

that it will obligate $668 million for its operating expenses. At your
request, we examined (1) trends in USAID's operating expenses since 1995
and (2) whether charges to USAID's operating expense account reflect the
agency's actual cost of doing business.

To accomplish our objectives, we interviewed cognizant officials in
USAID's regional bureaus and its bureaus for management and policy and
program coordination. In connection with other work, we also conducted
fieldwork at seven overseas missions. We reviewed budget and workforce
data generated by USAID missions and headquarters offices from fiscal
years 1995 to 2003. We present our analysis in obligations because this
information was readily available in USAID's annual congressional budget
justifications. We converted the obligations data into constant year 2003
dollars to adjust for inflation and better reflect the agency's purchasing
power over the period.

Results in Brief	According to data USAID reported, over fiscal years 1995
to 2003, USAID's total obligated operating expenses have ranged from a low
of $595.7 million in 1998 to a high of $654.8 million in 1995, and USAID
estimates total obligations in 2003 will be about $668 million (in
constant 2003 dollars).

o 	The largest administrative category in USAID's operating expense
account is salaries and related support for U.S. direct-hire staff.
Obligations for these expenses account for 43 percent ($277.7 million) of
USAID's estimated operating expenses for fiscal year 2003. However, funds
obligated for direct-hire personnel declined during fiscal years 1995
through 2001-from $302.5 million to $249.2 million-primarily due to
declining levels of direct-hire staff during this period. But, in fiscal
years 2002 and 2003, U.S. direct-hire personnel costs have increased over
11 percent. USAID expects these costs to continue rising as it continues
its recent hiring efforts.

o 	Three other administrative categories-other staff costs, information
technology, and rent-account for about 33 percent ($216.5 million) of
USAID's estimated operating expenses for fiscal year 2003. Although these
expenses varied from year to year, the net change in total from fiscal
year 1995 was a decline of less than 1 percent.

o 	Between fiscal years 1995 and 2002, operating expense obligations as a
percentage of program obligations remained fairly level-averaging about
8.5 percent. However, in fiscal year 2003, the operating expenses

to program funds ratio dropped to 5 percent due to large amounts of
supplemental funding.4

USAID's operating expense account does not fully reflect the agency's cost
of doing business primarily because the agency pays for some
administrative activities done by contractors and other nondirect-hire
staff with program funds. As we noted in our recent report,5 USAID's
overseas missions have increasingly relied on personal services
contractors- foreign national personal services contractors make up about
60 percent of its workforce-to manage USAID's development activities due
to declining numbers of U.S. direct-hire staff. Nondirect-hire staff may
be paid with either program or operating expense funds. Many of these
staff perform administrative duties that directly benefit the United
States, and it is often difficult to distinguish between the
administrative duties they perform and those done by U.S. direct-hire
personnel. In four missions we visited, some foreign national personal
services contractors were financial and procurement analysts, secretaries,
and drivers. Although these analysts and support staff performed primarily
administrative tasks for USAID's benefit, some were assigned to specific
technical teams, and their salaries and support costs were paid from
program funds because USAID considered their services directly allocable
to these activities and did not report them as operating expenses.
According to USAID officials, based on data recently collected from its
missions, USAID estimates that about $350 million in program funds will be
used to pay for nondirect-hire staff performing both administrative and
technical support functions in fiscal year 2003. As a result, the
operating expense account and other funds authorized for operating
expenses do not fully reflect the cost of delivering foreign assistance.

To help provide increased visibility over USAID's operating expenses and a
more realistic accounting of the agency's cost of doing business, we
recommend that the USAID Administrator identify all administrative costs
that primarily benefit the United States-whether paid for with operating
expense funds or program funds-and report this information to the

4Primarily, funding provided for relief and reconstruction activities in
Iraq and the global initiative to fight human immunodeficiency
virus/acquired immune deficiency syndrome.

5U.S. General Accounting Office, Foreign Assistance: Strategic Workforce
Planning Can Help USAID Address Current and Future Challenges, GAO-03-946
(Washington, D.C.: Aug. 22, 2003).

Congress in its annual budget requests for operating expense account
appropriations.

In commenting on a draft of this report, USAID fully agreed with our
recommendation. USAID also stated that it is well aware of the issues
raised and is taking corrective actions to fundamentally restructure
financing for the administration of foreign assistance to reflect the full
cost of assistance delivery and match resources with changing
circumstances.

Background	Until the mid-1970s, about two-thirds of USAID's operating
expenses were funded from appropriations to program accounts, and the rest
were funded from a separate administrative expenses account.6 In 1975, the
House Appropriations Committee noted that when USAID was first
established, a large percentage of direct-hire employees implemented
assistance projects as technical specialists, and their salaries and
support were paid from program funds because they were considered to be
working primarily for the benefit of the recipient country.7 USAID staff
working for the benefit of both the recipient country and the U.S.
government were also paid from program funds, while the remaining
staff-whose activities were primarily in the interest of the United
States-were paid from the administrative expense account. The Committee
noted that this distinction became blurred as USAID delegated more program
implementation responsibilities to third parties and its direct-hire staff
took on more of a monitoring role. The Committee concluded that operating
expense activities paid from program funds did not really differ from
those paid from the administrative expenses account and suggested the
creation of a separate account that would reflect all operating expenses.

In 1976, Congress began providing a line-item appropriation for operating
expenses separate from USAID's humanitarian and economic development
assistance programs.8 The accompanying Senate report noted that USAID's
cost of doing business would be better managed if these funds were

6The administration's budget request for fiscal year 1975 identified 11
separate funding accounts from which administrative expenses would be
funded.

7H. Rept. 94-53.

8P.L. 94-330.

separately appropriated.9 Congress authorized USAID's separate operating
expense account the following year.10

USAID's criteria for determining the expenses to be paid from operating
expense funds are based on guidance it has received from Congress as well
as its assessment of who benefits from a particular activity. A 1977
congressional report stated that "operating costs include not only the
traditional `administrative expenses,' but also the substantial cost of
support and management of programs and projects (such as technical
planning and management of specific projects, contracting, procurement of
commodities, engineering services, and handling of trainees from
abroad)."11 Congressional reports in the late 1970s directed USAID to fund
the costs of all full-time staff in permanent positions from the operating
expense account. 12

We also note that since 1976 Congress has approved funding sources other
than USAID's operating expense account appropriation to pay USAID's
operating expenses. For example, in fiscal year 2003, USAID's estimated
appropriations for operating expenses are about 86 percent ($572.2
million) of the agency's total estimated obligations, and other sources
comprise the remaining 14 percent ($95.8 million). Other congressional
sources of operating expense funds have included specific uses of program
funds and specific amounts in supplemental appropriations for humanitarian
and reconstruction assistance-$21 million for fiscal year 2003.

In addition, local currency trust funds generated by the sale of U.S.
commodities, which totaled more than $27 million at 18 overseas missions
in fiscal year 2003, can be used for their operating expenses. However,
the Office of Management and Budget offsets the use of trust funds from
USAID's estimated operating expense account requirements. In addition,
USAID regulations allow missions to charge a portion of leased office
space, utilities, and maintenance costs to program accounts based on the
number of program-funded personnel employed at the mission.

9S. Rept. 94-704.
10P.L. 95-88, Sec. 129, 22 U.S.C. 2427.
11H. Rept. 95-240.
12H. Rept. 95-701 and S. Rept. 95-1194.

Enclosure I provides more detail on USAID's sources of funding for
operating expenses in fiscal year 2003.

                      Trends in USAID's Operating Expenses

Over fiscal years 1995 to 2002, USAID's total obligated operating expenses
in constant 2003 dollars have ranged from a low of $595.7 million in 1998
to a high of $654.8 million in 1995, and USAID estimates total obligations
in 2003 will be about $668 million.13 However, as table 1 shows, the
various administrative categories have varied considerably over this
period with the net changes resulting in a modest total decline of about
1.2 percent between fiscal years 1995 and 2003.

o 	The largest administrative category in USAID's operating expense
account is salaries and related support for U.S. direct-hire staff-
accounting for 43 percent of USAID's estimated operating expenses in
fiscal year 2003. However, funds obligated for direct-hire personnel
declined during fiscal years 1995 through 2001, primarily due to declining
levels of direct-hire staff during this period. But, in fiscal years 2002
and 2003, U.S. direct-hire personnel costs have increased over 11 percent.
USAID expects these costs to rise as it continues its recent hiring
efforts.

o 	Three other administrative categories-other staff costs, information
technology, and rent-accounted for about 33 percent of USAID's estimated
operating expenses for fiscal year 2003. Since fiscal year 1995, rent has
increased more than 10 percent while other staff costs and information
technology declined 6 percent and 3.4 percent, respectively. Although
these expenses varied from year to year, the net change in total from
fiscal year 1995 was a decline of less than 1 percent.

o 	Twelve other administrative categories account for the remaining
operating expenses-about 24 percent in fiscal year 2003. Several
categories varied widely over this period. Most notably land and
structures ranged from a high of about $21 million in fiscal year 2000 to
a low of $241,000 in 1996. Beginning in fiscal year 2004, most funding for
new buildings will be provided from a newly established Capital Investment
Fund.

13Including a $21 million supplemental for operating expenses that USAID
has not allocated to its administrative categories.

Table 1: Table 1: Operating Expense Obligations by Administrative
Category, Fiscal Years 1995-2003 (Constant 2003 dollars in thousands)

                                  Fiscal years

                                                                                Percentage 
                                                                                    change 
 Administrative    1995   1996   1997   1998   1999   2000   2001   2002 2003a   1995-2003 
    category                                                                    
U.S. direct-hire                                                                
personnel                                                                    
     costsb      $302.5 $292.3 $268.2 $255.1 $255.2 $254.3 $249.2 $264.5 $277.7 
  Other staff      90.4   87.3   79.6   77.2   77.3   67.8   74.4   78.5  85.0  
     costsc                                                                     
  Information      68.2   56.0   47.7   60.0   61.7   64.1   83.8   78.6  65.9  
  technologyd                                                                   
     Rente         59.4   55.2   54.7   56.8   59.3   57.3   61.6   62.8  65.7  
Goods and                                                                    
 services from                                                                  
government      24.7   24.3   38.0   28.5   29.0   31.7   29.4   33.5  38.2  
accountsf                                                                    
     Other                                                                      
USAID-contracted                                                                
servicesg       19.5   14.6   19.4   32.5   38.5   20.0   21.5   21.1  22.3  
 Operation and                                                                  
  maintenance      14.2   14.3   11.4   11.8   10.8    8.6   11.1   14.0  15.7  
 Communications    20.8   19.1   17.3   18.9   14.1   12.9   13.0   12.1  13.8  
 and utilities                                                                  
    Land and        0.7    0.2    9.8    1.9   12.2   21.0    3.5    4.3  13.3     1,715.1 
structures                                                                   
    Security        6.8    7.6    6.8    6.8    7.7    8.2   10.4    9.8  11.6  
Equipment       11.8   19.5   30.0   14.4   19.4   18.3   25.3   18.3  10.1  
 Transportation    15.9   13.0   10.5   11.7   10.8   10.5    9.9    9.2    9.9 
    of goods                                                                    
  Supplies and     11.8    8.9    9.6   10.5   10.7   11.1   10.9   10.3    8.8 
materials                                                                    
    Training        5.7    5.9    5.9    8.9    5.5    7.2   10.2    7.0    8.4 
Claims and       0.6    1.0    0.7    1.1    2.3    0.4    4.1    0.6    0.6 
  indemnities                                                                   
    Grants,                                                                     
subsidies,                                                                   
and contributors    1.7    1.7    2.4      0    0.2    0.4    1.5    1.2      0     -100.0 

Totalh $654.8 $621.0 $612.2 $595.7 $614.5 $593.9 $619.9 $625.8 $647.0

Source: GAO analysis of USAID data.

Note: USAID data are taken from its congressional budget justification
documents.

aWe did not include $21 million provided to USAID in supplemental funding
for operating expenses in fiscal year 2003 because USAID has not allocated
it among the administrative categories.

bIncludes compensation, benefits, training, and travel expenses, such as
home leave, post-assignment travel, and travel expenses incurred for
training.

cUSAID funds many of its overseas non-U.S. direct-hire personnel using
operating expenses because their tasks are administrative in nature, such
as providing support to the executive office.

dIncludes costs for computer equipment, systems design and analysis,
maintenance, and support.

eIncludes domestic and overseas rental payments.

fIncludes USAID's portion of administrative costs shared by U.S. agencies
with an overseas presence and paid primarily to the Department of State.

gIncludes operation and maintenance of facilities and goods, security
costs, equipment, and transportation of household goods.

hTotals may not add due to rounding.

As shown in figures 1 and 2, between fiscal years 1995 and 2002, USAID's
program obligations decreased at a faster rate than operating expense
obligations, with fluctuations during this period. In constant 2003
dollars, USAID's program obligations decreased by more than 10
percent-from almost $7.8 billion in fiscal year 1995 to about $6.9 billion
in fiscal year 2002. In fiscal year 2003, USAID's estimated program
obligations increased almost 88 percent to $13 billion because of $4.2
billion in supplemental funds for, among other things, relief and
reconstruction activities in Iraq and the global initiative to fight human
immunodeficiency virus/acquired immune deficiency syndrome. However,
USAID's estimated operating expense account obligations for fiscal year
2003 did not increase at a similar rate. Including $21 million in
operating expense funds provided by supplemental legislation, estimated
operating expenses increased less than 7 percent.

Figure 1: Program Obligations, Fiscal Years 1995 to 2003

Notes: USAID data are taken from its congressional budget justification
documents and the Emergency Wartime Supplemental Appropriations Act of
2003 (P.L. 108-11). Fiscal years 1995 to 2002 are actual obligations
adjusted to constant fiscal year 2003 dollars. Fiscal year 2003 data are
estimated amounts. Fiscal year 2003 operating expenses include $21 million
provided by supplemental legislation. Program data for fiscal years 2000
to 2003 include disaster recovery, emergency response, and supplemental
funds. Program funding obligations sources include development assistance;
child survival and health; development fund for Africa; international
disaster assistance; transition initiatives; economic support funds;
support for Eastern European democracy; Freedom Support Act; Public Law
480; Iraq relief and reconstruction fund; and credit program funds.

Figure 2: Operating Expense Obligations, Fiscal Years 1995 to 2003

Note: See figure 1 notes.

As shown in figure 3, from fiscal years 1995 to 2002, USAID's operating
expense obligations fluctuated as a percentage of program obligations but
averaged about 8.5 percent. In fiscal year 2003, estimated operating
expense obligations dropped to about 5 percent of estimated program
obligations, including the supplemental funding.

Figure 3: USAID's Operating Expense Obligations as a Percentage of Program
Obligations, Fiscal Years 1995 to 2003

Note: See figure 1 notes.

  USAID's Operating Expense Account Does Not Include All Administrative Costs

USAID's operating expense account does not fully reflect the agency's cost
of doing business primarily because the agency pays for some
administrative activities done by contractors and other nondirect-hire
staff with program funds. As we reported in August 2003, as the number of
U.S. direct hire foreign service officers has declined over the years,
USAID missions have often hired personal services contractors-usually
foreign nationals-to manage development activities and provide technical
project support.14 Approximately 60 percent of USAID's staff are foreign
national personal service contractors. Many of these nondirect-hire
personnel are engaged in activities that directly support USAID programs
and are paid with program funds.

14GAO-03-946.

Many nondirect-hires perform administrative duties that directly benefit
the United States, and it is often difficult to distinguish between the
administrative duties they perform and those done by U.S. direct-hire
personnel. These staff can be paid with program or operating expense
account funds. In four missions we visited-the Dominican Republic, Mali,
Peru, and Senegal-some foreign national personal services contractors were
financial and procurement analysts, secretaries, and drivers. Although
these analysts and support staff performed primarily administrative tasks
for USAID's benefit, some were assigned to specific technical teams and
their salaries and support costs were paid from program funds because
USAID considered their services directly allocable to these activities and
did not report them as operating expenses. According to USAID officials,
based on data recently collected from its missions, USAID estimates that
about $350 million in program funds will be used to pay for personal
services contractors performing administrative functions overseas in
fiscal year 2003.15

Institutional contract staff also provide administrative and technical
services in support of USAID programs. In 2002, for example, USAID
estimated that 758 institutional contractor staff were involved in the
administration of foreign assistance at an estimated cost of $95 million.
Of this total staff, 450 positions were funded from operating expense
appropriations ($56 million), and 308 positions were funded from program
funds ($39 million).16 USAID is continuing its review of institutional
contractors to decide how to characterize their work.

A 2002 USAID team examining USAID's operating expense account found that
most of the agency's evaluations and analyses have been paid with program
funds, based on the rationale that these activities are intended to enable
the agency to better serve its "ultimate beneficiaries." But this may not
be what Congress intended.

15One senior level USAID program planning officer told us that about 10 to
15 percent of program funds may be a more realistic estimate of USAID's
cost of doing business (compared with the 8.5 percent average since 1995).

16According to USAID, these figures were developed as part of a staff
study of institutional contractors and were as of September 30, 2002.

o 	The team's report stated that "although strategy development, project
design, evaluation and other activities relate to the agency's cost of
doing business, in the longer run they are essential building blocks of
agency operations and are necessary for program oversight. Ultimately, the
impact of improved strategies, design, and projects has an impact on the
agency's beneficiaries. In that sense, there clearly is a rationale for
providing program funding for these activities.17"

o 	In contrast, a USAID attorney assisting the team noted that a 1980
Senate Appropriations Committee report stated that only such planning and
evaluation activities that are project specific should be paid with
program funds, but that activities with a primary objective of serving the
agency, including analyses for development assistance policy planning,
were part of the cost of doing business.

Cognizant USAID officials contend that congressional intent has shifted
and that from 1980 to the present, Congress has increasingly encouraged
the agency to use program funds to support certain administrative costs.
However, these officials also stated that the increased reliance on
program funded staff for some administrative activities further
demonstrates the need to restructure how operating expenses are accounted
for to better reflect USAID's cost of doing business.

Conclusion	Since 1976, Congress has provided a separate appropriation for
USAID's operating expenses and, over the years, has approved additional
funding sources for operating expenses to separate administrative costs
from USAID's humanitarian and development assistance programs. However, as
U.S. direct-hire staff levels have declined, overseas missions have hired
personal services and institutional contractors and other nondirect-hire
staff to manage development activities and perform various administrative
duties, but pay for some of these services with program funds. But USAID
has not fully identified or reported the extent of these costs. Therefore,
separating USAID's cost of doing business from its humanitarian and
development programs is not always done. As a result, the operating
expense account and other funds USAID has available for operating expenses
do not fully reflect the cost of delivering foreign assistance.

17U.S. Agency for International Development/Bureau for Policy and Program
Coordination,

USAID's Operating Expense Account: Current Practices and Planned Reforms

(Washington, D.C.: Oct. 7, 2002).

                      Recommendation for Executive Action

To help provide increased visibility over USAID's operating expenses,
better reflect what USAID spends on program administration, and provide a
more realistic accounting of the agency's cost of doing business, we
recommend that the USAID Administrator identify all administrative costs
that primarily benefit the United States-whether paid for with operating
expense funds or program funds-and report this information to the Congress
in its annual budget requests for operating expense account
appropriations. Such an accounting should form the basis of USAID's annual
budget request for operating expense funds.

Agency Comments	USAID provided written comments on a draft of this report
(see enc. II). It fully agreed with the recommendation. USAID acknowledged
that the current structure of the operating expense account does not serve
workforce planning needs or foreign policy objectives because (1) staffing
decisions are often made according to funding source rather than workforce
requirements and (2) as a result, the heavy reliance on short-term
contractors has limited USAID's capacity to respond to foreign assistance
needs.

USAID also stated that it is well aware of the issues raised in the report
and is taking corrective action. USAID noted that, within the past 18
months, it has completed assessments of operating expenses and overseas
staffing, a survey of program-funded personnel, and an approach for full
costing of assistance at a unit level. It has also initiated a long-term
assessment of human resources. As a result of these efforts, USAID is
reviewing ways to fundamentally restructure financing for the
administration of foreign assistance to reflect the full cost of
assistance delivery and match resources with changing circumstances.

In addition, USAID officials provided clarification of certain technical
matters that we have incorporated into this report, as appropriate.

Scope and 	To examine trends in USAID's spending for operating expenses
and program activities since 1995, we analyzed obligations data reported
by

Methodology	USAID in its annual budget justification documents. We
converted obligations for operating expenses and program activities into
constant fiscal year 2003 dollars to adjust for inflation and better
reflect the agency's purchasing power during this period. We also met with
cognizant budget officials at USAID to better understand the reported
operating expense and

program funding data. We did not verify the accuracy of USAID's reported
data.

To determine whether USAID's operating expenses reflect its cost of doing
business, we reviewed USAID reports and annual budget justifications and
met with knowledgeable officials in USAID's Bureau for Policy and Program
Coordination, the U.S. Department of State, and the U.S. Office of
Management and Budget. In conjunction with other work,18 we conducted
fieldwork at seven overseas missions-the Dominican Republic, Ecuador,
Egypt, Mali, Peru, Senegal, and the West Africa Regional Program in
Mali.19 We reviewed mission staffing reports to determine whether staff
were funded from the operating expense account or program funds and
discussed the duties of personnel with cognizant mission officials.

Our review was conducted from May through September 2003 in accordance
with generally accepted government auditing standards.

We are sending copies of this report to appropriate congressional
committees, the Administrator of USAID, the Secretary of State, and the
Director of the Office of Management and Budget. We will also make copies
available to others upon request. In addition, this report will be
available at no charge on our Web site at http://www.gao.gov.

18GAO-03-946.

19We also examined documents and interviewed officials at USAID's mission
to Indonesia at its temporary location in Arlington, Virginia, following
its evacuation in October 2002.

If you or your staff have any questions concerning this report, please
contact me at (202) 512-4268 or Al Huntington, Assistant Director, at
(202) 512-4140. Other key contributors to this report were Kimberley
Ebner, Emily Gupta, and Audrey Solis.

Jess T. Ford, Director International Affairs and Trade

 Enclosure I: Description of Sources of Funding for USAID's Operating Expenses
                                Fiscal Year 2003

Since 1976, Congress has approved funding sources other than the U.S.
Agency for International Development's (USAID) operating expense account
appropriation to pay for operating expenses. Although USAID reports these
other funds as operating expenses, they are not part of its single budget
item appropriation. As shown in table 2, for example, in fiscal year 2003,
other sources comprised 14.2 percent ($95.8 million) of what USAID is
estimating as operating expense obligations.

Table 2: USAID's Estimated Obligations for Operating Expenses in Fiscal
Year 2003 by Sources of Funding (Dollars in millions)

                             Funding source            Amount         Percent 
                       Annual appropriation          $572,200 
                        Unobligated balance            34,231 
                 Local currency trust funds            27,557 
                       Supplemental funding            21,000 
                   Authorized program funds             7,417 
                             Reimbursements             5,600 
                                      Total          $668,005           99.8a 

Source: USAID fiscal year 2004 congressional budget justification
documents and the Emergency Wartime Supplemental Appropriations Act of
2003 (P.L. 108-11), which provided supplemental operating expense funding.

aDoes not add to 100 percent due to rounding.

Annual appropriation: These are funds for which USAID receives new budget
authority every fiscal year and do not include supplemental appropriations
for operating expenses obtained during the course of the fiscal year.

Unobligated balance: The unobligated balance is of any unobligated funds
that USAID has the authority to transfer to the following fiscal year's
operating expense account.

Local currency trust funds:20 U.S. commodity import programs normally
generate this type of funding. In fiscal year 2003, 18 USAID missions have
local currency trust funds. The Egypt mission's trust fund is the largest

20USAID cites a recurring provision in its appropriations bills as legal
authority to use local currency trust funds. For fiscal year 2003, see
Public Law 107-115, section 529.

Enclosure I: Description of Sources of Funding for USAID's Operating
Expenses Fiscal Year 2003

(almost $73 million in January 2003), and the mission uses it to pay for
training, housing, and dependents' education.

Supplemental funding: Supplemental legislation for an emergency response
or large-scale reconstruction generally specifies an amount that USAID may
use as operating expenses in administering such activities.

Authorized program funds: Some specific program funding can be transferred
to the operating expense account. The amount varies according to different
rules governing the transfer of program funding from each account. For
example, USAID can transfer a limited amount of program funds to the
operating expense account to finance travel to countries with USAID
activities but no USAID field presence. Additionally, USAID has the
authority to transfer larger program funding amounts from other accounts
to the operating expense account, not to exceed 10 percent of the
originating program account.21 But this action requires presidential
approval and is rarely undertaken.

Reimbursements: These funds are primarily generated internally by USAID.
Examples include reimbursements to USAID from the its Office of the
Inspector General or the Development Credit Program-units that receive
separate operating expense appropriations-for services by USAID, such as
computer services and rent. Proceeds from the sale of equipment overseas
are also included in this category.

21Foreign Assistance Act of 1961, as amended, title 22, section 610a.

      Enclosure II: Comments from the Agency for International Development

Enclosure II: Comments from the Agency for International Development

Enclosure II: Comments from the Agency for International Development

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