Defense Working Capital Fund: Military Services Did Not Calculate
and Report Carryover Amounts Correctly (27-JUN-06, GAO-06-530).
According to the Department of Defense's (DOD) fiscal year 2006
budget estimates, working capital fund activity groups (depot
maintenance, ordnance, and research and development) will have
about $6.3 billion of funded work that will be carried over from
fiscal year 2006 into fiscal year 2007. The congressional defense
committees recognize that these activity groups need some
carryover to ensure smooth work flow from one fiscal year to the
next. However, the committees have previously raised concern that
the amount of carryover may be more than is needed. GAO was asked
to determine (1) if the military services' carryover calculations
were in compliance with DOD's new carryover policy and (2) if
customers were submitting orders to working capital fund
activities late in the fiscal year and, if so, the effect this
practice has had on carryover.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-530
ACCNO: A56004
TITLE: Defense Working Capital Fund: Military Services Did Not
Calculate and Report Carryover Amounts Correctly
DATE: 06/27/2006
SUBJECT: Budget outlays
Budget surplus
Funds management
Industrial funds
Military budgets
Military policies
Policy evaluation
Defense Working Capital Fund
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GAO-06-530
* Report to the Chairman, Subcommittee on Defense, Committee on
Appropriations, House of Representatives
* June 2006
* DEFENSE WORKING CAPITAL FUND
* Military Services Did Not Calculate and Report Carryover Amounts
Correctly
* Contents
* Results in Brief
* Background
* What Is Carryover and Why Is It Important?
* DOD Revised Its Carryover Policy
* The Military Services Did Not Follow DOD Policy in Calculating
Carryover
* Military Services Used Different Outlay Rate Tables to
Calculate the Allowable Amount of Carryover
* Air Force Did Not Calculate Actual Carryover and Allowable
Carryover Correctly
* Army's Reported Actual Carryover Was Understated in Fiscal
Years 2002 and 2003 because Prior Year Orders Were Not
Included
* Navy Generally Followed DOD's Carryover Policy but Better
Disclosure Is Needed for Reporting on Research and
Development Activity Group's Carryover
* Carryover Increased Due to Military Services Placing Orders Late
in the Fiscal Year
* Reasons Customer Orders Are Placed Late in the Fiscal Year
* Impact of Late Orders on Carryover
* Conclusions
* Recommendations for Executive Action
* Agency Comments and Our Evaluation
* Scope and Methodology
* Air Force
* Navy
* Army
* Comments from the Department Of Defense
* GAO Contacts and Staff Acknowledgments
Report to the Chairman, Subcommittee on Defense, Committee on
Appropriations, House of Representatives
June 2006
DEFENSE WORKING CAPITAL FUND
Military Services Did Not Calculate and Report Carryover Amounts Correctly
Contents
Tables
Figure
June 27, 2006Letter
The Honorable C. W. Bill Young Chairman, Subcommittee on Defense Committee
on Appropriations House of Representatives
Dear Mr. Chairman:
According to the Department of Defense's (DOD) fiscal year 2006 budget
estimates, working capital fund activity groups (depot maintenance,
ordnance, and research and development) will have about $6.3 billion of
funded work that will be carried over from fiscal year 2006 into fiscal
year 2007.1 The congressional defense committees recognize that these
activity groups need some carryover to ensure a smooth flow of work during
the transition from one fiscal year to the next. However, past
congressional defense committee reports raised concerns that the level of
carryover may be more than is needed. Excessive amounts of carryover
financed with customer appropriations are subject to reductions by DOD and
the congressional defense committees during the budget review process. To
the extent that carryover is too high, Congress may redirect the funds
gained from such reductions to other priority initiatives. For example,
Congress reduced the Army's fiscal year 2003 Operation and Maintenance
appropriation by $48 million due to excessive carryover.
In May 2001, we reported2 that DOD did not have a sound analytical basis
for its 3-month carryover standard which it established in 1996. Based on
our recommendation, in December 2002 DOD revised its carryover policy to
eliminate the 3-month across-the-board standard for allowable carryover.
Under the new policy, the allowable amount of carryover is to be
based on the outlay rate3 of the customers' appropriations financing the
work. This means that in determining allowable carryover, the first year
outlay rate is used for new orders received in the current year (first
year of the work order). However, during our review of Army depot
maintenance operations, we reported4 in June 2005 that the Army
encountered several problems implementing DOD's new policy on calculating
actual carryover as well as the allowable amount of carryover. In that
report, we also determined that activities exceeded the carryover ceiling
because they received and accepted orders late in the fiscal year.
As requested and agreed to with your office, the objectives of this
assignment were to determine (1) if the military services' carryover
calculations were in compliance with DOD's new carryover policy and (2) if
customers were submitting orders to working capital fund activities late
in the fiscal year and, if so, the effect that this practice has had on
carryover. Our review was performed from July 2005 through March 2006 in
accordance with U.S. generally accepted government auditing standards. The
carryover information in this report is budget data obtained from official
Army, Navy, and Air Force budget documents. To assess the reliability of
the data, we (1) reviewed and analyzed the factors used in calculating
carryover and (2) interviewed officials knowledgeable about the data. We
determined that the data were sufficiently reliable for the purposes in
this report. Further details on our scope and methodology can be found in
appendix I. We requested comments on a draft of this report from the
Secretary of Defense or his designee. Written comments from the Under
Secretary of Defense (Comptroller) are reprinted in appendix II.
Results in Brief
The military services have not consistently implemented DOD's revised
policy in calculating carryover. Instead, the military services have used
different methodologies for calculating the reported actual amount of
carryover and the allowable amount of carryover since DOD changed its
carryover policy in December 2002. Specifically, (1) the military services
did not consistently calculate the allowable amount of carryover that was
reported in their fiscal year 2004, 2005, and 2006 budgets because they
used different tables (both provided by DOD) that contained different
outlay rates for the same appropriation; (2) the Air Force did not follow
DOD's regulation on calculating carryover for its depot maintenance
activity group, which affected the amount of allowable carryover and
actual carryover by tens of millions of dollars as well as whether the
actual amount of carryover exceeded the allowable amount as reported in
the fiscal year 2004, 2005, and 2006 budgets; and (3) the Army depot
maintenance and ordnance activity groups' actual carryover was understated
in fiscal years 2002 and 2003 because carryover associated with prior year
orders was not included in the carryover calculation as required. Further,
while the Navy generally followed DOD's policy for calculating carryover,
the Navy consolidated the reporting of carryover information for research
and development activities beginning with the fiscal year 2004 budget that
included actual carryover information for fiscal year 2002. As a result,
the Navy budgets no longer provide information to show if any of the five
research and development subactivity groups individually exceeded the
carryover ceiling as the Navy budgets did prior to the change in the
carryover policy in December 2002. For example, Navy budget documents to
Congress show that the Navy research and development activity group did
not exceed the carryover ceiling for fiscal years 2003, 2004, and 2005.
However, our analysis of Navy reports showed that the Naval Air Warfare
Center-one of the subactivity groups-exceeded the carryover ceiling for
these 3 fiscal years by $19 million, $57 million, and $52 million,
respectively. The primary factor for these inconsistencies is that DOD's
December 2002 guidance was verbal and DOD did not issue detailed written
procedures for calculating carryover and the allowable amount of carryover
until June 2004. As a result, year-end carryover data provided to decision
makers who review and use the data for budgeting-Office of the Under
Secretary of Defense (Comptroller) and congressional decision makers-are
erroneous and not comparable across the three military services. For
example, the Air Force reported to Congress that the actual fiscal year
2002 carryover for depot maintenance was $87 million less than the
carryover ceiling. However, if the Air Force had followed DOD's policy,
our calculations show that its carryover would have actually exceeded the
ceiling by $216 million.
Carryover is greatly affected by orders accepted by working capital fund
activities late in the fiscal year that generally cannot be completed by
fiscal year end, and in some cases cannot even be started prior to the end
of the fiscal year. As a result, almost all orders accepted late in the
fiscal year increase the amount of carryover. We analyzed 68 orders
accepted in September 2003 and September 2004 by certain activity groups
for the three military services.5 Our analysis identified four key factors
contributing to orders generally being issued by customers late in the
fiscal year and being accepted by the working capital fund activities
during the last month of the fiscal year. These reasons included (1) funds
provided to the customer late in the fiscal year to finance existing
requirements, (2) new work requirements identified at year end, (3)
problems encountered in processing orders, and (4) work scheduled at year
end. Further, our analysis showed that 39 of the 68 orders-over half of
the orders reviewed-were not completed at the end of the next fiscal year,
generating a second year of carryover. For example, on September 29, 2004,
an Army working capital fund activity accepted an order for about $2
million for 17,848 illumination candles with parachutes.6 Due to the late
acceptance of this order, about $2 million was carried over into fiscal
year 2005. However, because another Army activity failed to supply enough
component parachutes to meet the production schedule, about $1.9 million
was carried over into fiscal year 2006. DOD Financial Management
Regulation 7000.14-R, Volume 11A, identifies a number of requirements
before a working capital fund activity accepts an order. For example, the
work is expected to (1) begin without delay (usually within 90 days) and
(2) be completed within the normal production period for the specific work
ordered. However, our review of 68 orders accepted by the working capital
fund activities at year end determined that work on some of these orders
did not begin within 90 days or was not completed within the normal
production period for the work being performed. As a result, these orders
may not have been the most effective use of DOD resources at that time and
may not have complied with all of the provisions cited in the above
regulation.
We are making eight recommendations to DOD to (1) improve the military
services' calculations of the allowable amount of carryover and actual
carryover, (2) improve the reporting of carryover information to Congress
and DOD decision makers, and (3) ensure that the military services follow
the DOD regulation concerning the acceptance of orders placed with working
capital fund activities. DOD concurred with all the recommendations and
identified corrective actions it is taking. It also commented that the
inaccuracies we identified in reported carryover did not materially
distort the evaluation of depot operations or projected workload levels.
While we do not know how DOD defines materiality, the reporting
inaccuracies we identified totaled hundreds of millions of dollars. DOD's
comments are reprinted in appendix II.
Background
A working capital fund relies on sales revenue rather than direct
appropriations to finance its continuing operations. A working capital
fund is intended to (1) generate sufficient resources to cover the full
costs of its operations and (2) operate on a break-even basis over
time-that is, neither make a gain nor incur a loss. Customers use
appropriated funds, primarily Operation and Maintenance appropriations, to
finance orders placed with the working capital fund. DOD estimates that in
fiscal year 2006, the Defense Working Capital Fund-which consists of the
Army, Navy, Air Force, Defense-wide, and Defense Commissary Agency working
capital funds-will have revenue of about $105 billion.
The Defense Working Capital Fund finances the operations of three
fundamentally different types of support organizations: (1) stock fund
activities, which provide spare parts and other items to military units
and other customers; (2) industrial activities, which provide depot
maintenance, research and development, ordnance, and other services to
their customers; and (3) other service activities, which provide various
services such as accounting (Defense Finance and Accounting Service) and
computer services (Defense Information Systems Agency). Because carryover
is primarily associated with industrial operations, this report discusses
the results of our review of Defense Working Capital Fund industrial
operations.
What Is Carryover and Why Is It Important?
Carryover is the dollar value of work that has been ordered and funded
(obligated) by customers but not completed by working capital fund
activities at the end of the fiscal year. Carryover consists of both the
unfinished portion of work started but not completed, as well as requested
work that has not yet commenced. Some carryover is necessary at fiscal
year end if working capital funds are to operate efficiently and
effectively. For example, if customers do not receive new appropriations
at the beginning of the fiscal year, carryover is necessary to ensure that
the working capital fund activities have enough work to ensure a smooth
transition between fiscal years. Too little carryover could result in some
personnel not having work to perform at the beginning of the fiscal year.
On the other hand, too much carryover could result in an activity group
receiving funds from customers in one fiscal year but not performing the
work until well into the next fiscal year or subsequent years. By
minimizing the amount of carryover, DOD can use its resources in the most
effective manner and minimize the "banking" of funds for work and programs
to be performed in subsequent years.
DOD Revised Its Carryover Policy
In 1996, DOD established a 3-month carryover standard for all working
capital fund activities except for the contract portion of the Air Force
depot maintenance activity group.8 that DOD did not 7 In May 2001, we
reportedhave a basis for its carryover standard and recommended that DOD
determine the appropriate carryover standard for the depot maintenance,
ordnance, and research and development activity groups. According to
Office of the Under Secretary of Defense (Comptroller) officials, DOD
provided verbal guidance concerning its new carryover policy for working
capital fund activities in December 2002. Subsequently, DOD included its
revised carryover policy in its DOD Financial Management Regulation
7000.14-R, Volume 2B, Chapter 9, dated June 2004, which eliminated the
3-month standard for allowable carryover. Under the new policy, the
allowable amount of carryover is to be based on the outlay rate9 of the
customers' appropriations financing the work. This meant that in
determining allowable carryover, the first year outlay rate would be used
for new orders received in the current year (first year of the work
order). According to the DOD regulation, this new metric allows for an
analytical-based approach that holds working capital fund activities to
the same standard as general fund execution and allows for more meaningful
budget execution analysis.
Further, based on our work on Army depot maintenance operations, we
recommended in our June 2005 report10 that DOD clarify its written
guidance for calculating the actual amount of carryover as well as the
allowable amount of carryover. On June 29, 2005, DOD issued clarifying
guidance on carryover.11 The guidance specified that (1) the actual amount
of carryover associated with current and prior year orders is required to
be the amount reported to Congress and within DOD, (2) the allowable
amount of carryover is to be calculated based on current year customer
orders received and the first year outlay rate for the appropriations
financing those orders for all activity groups except shipyards, and (3)
shipyards are authorized to use 2 years of customer orders in the
calculation of the allowable amount of carryover and to use the first and
second year outlay rates for the appropriations financing those orders.
The Military Services Did Not Follow DOD Policy in Calculating Carryover
The military services have not consistently implemented DOD's 2002 revised
policy in calculating carryover. Instead, the military services used
different methodologies for calculating the reported actual and the
allowable amount of carryover since DOD changed its carryover policy in
December 2002. Specifically, (1) the military services did not
consistently calculate the allowable amount of carryover that was reported
in their fiscal year 2004, 2005, and 2006 budgets because they used
different tables (both provided by DOD) that contained different outlay
rates for the same appropriation; (2) the Air Force did not follow DOD's
regulation on calculating carryover, which affected the amount of
allowable carryover and actual carryover by tens of millions of dollars
and whether the actual amount of carryover exceeded the allowable amount
as reported in the fiscal year 2004, 2005, and 2006 budgets; and (3) the
Army depot maintenance and ordnance activity groups' actual carryover was
understated in fiscal years 2002 and 2003 because carryover associated
with prior year orders was not included in the carryover calculation as
required. Further, while the Navy generally followed DOD's policy for
calculating carryover, the Navy consolidated the reporting of carryover
information for research and development activities. As a result, the Navy
budgets no longer provide information to show if any of the five research
and development subactivity groups individually exceed the carryover
ceiling. This information had been provided in the Navy budgets prior to
the change in the carryover policy in December 2002. The primary factor
for these inconsistencies is that DOD's December 2002 guidance was verbal
and DOD did not issue detailed written procedures for calculating
carryover and the allowable amount of carryover until June 2004.
Afterwards, DOD issued clarifying written guidance in June 2005, January
2006, and February 2006. As a result, year-end carryover data provided to
decision makers who review and use these data for budgeting-Office of the
Under Secretary of Defense (Comptroller) and congressional decision
makers-are erroneous and not comparable across the three military
services.
Military Services Used Different Outlay Rate Tables to Calculate the
Allowable Amount of Carryover
The military services used different outlay rate tables that provided
different outlay rates for the same appropriation when calculating the
allowable amount of carryover. The outlay rate tables came from two
sources-the Office of the Under Secretary of Defense (Comptroller),
Revolving Funds Directorate,12 and the Financial Summary Tables published
by Office of the Under Secretary of Defense (Comptroller), Directorate for
Program and Financial Control. Because the outlay rates in these documents
sometimes differ, this could affect whether an activity group exceeded the
carryover ceiling or not. Under the new carryover policy, the allowable
amount of carryover is to be based on the outlay rates of the customers'
appropriations financing the work. In implementing this policy, it is
important for the services to use the same outlay rate tables so that
their calculations on the allowable amount of carryover are consistent.
However, when DOD changed the carryover policy in December 2002, DOD did
not instruct the services, in writing, on which outlay rate tables should
be used to calculate the allowable amount of carryover. Table 1 shows
which outlay rate source each of the military services used.
Table 1: Schedule of the Source of Outlay Rates Used in Calculating the
Allowable Amount of Carryover by Service
Service Fiscal year 2004 Fiscal year 2005 Fiscal year 2006
budget budget budget
Army Office of the Under Office of the Under DOD Financial
Secretary of Defense Secretary of Defense Summary Tables
(Comptroller) table (Comptroller) table
Navy DOD Financial Summary DOD Financial Summary DOD Financial
Tables Tables Summary Tables
Air Force Office of the Under Office of the Under Office of the Under
Secretary of Defense Secretary of Defense Secretary of Defense
(Comptroller) table (Comptroller) table (Comptroller) table
Source: GAO analysis.
Table 2 shows the differences between the outlay rates for selected
appropriations in the tables provided by the Office of the Under Secretary
of Defense (Comptroller) and the DOD Financial Summary Tables that were
used to calculate the allowable amount of carryover, which is included in
the fiscal year 2005 budget. Some of the differences are large while
others are small. These outlay rates, along with the amount of
appropriations financing orders, are used to determine the allowable
carryover (ceiling). Because the dollar amount of appropriations financing
orders is sometimes in the hundreds of millions of dollars, even a small
rate difference could result in significantly more or less allowable
carryover. For example, the Navy estimated that the naval aviation depots
would receive $694 million for new Operation and Maintenance, Navy orders
in fiscal year 2005. Using the outlay rate provided in the DOD Financial
Summary Tables, the Navy would be allowed to carry over about $146
million. In contrast, using the outlay rate table provided by the Office
of the Under Secretary of Defense (Comptroller), the Navy would be allowed
to carry over $180 million-about a $34 million difference for just this
one appropriation financing orders received by the naval aviation depots.
Table 2: Schedule of Selected Appropriation Outlay Rates Used in
Calculating the Allowable Amount of Carryover for the Fiscal Year 2005
Budget (in percent)
Appropriation Outlay rates in the Office of Outlay rates in the
the Under Secretary of Defense DOD Financial
(Comptroller) table Summary Tables
Operation and 78 68.8
Maintenance, Army
Operation and 68 71.5
Maintenance, Army
Reserve
Research, Development, 53 51.5
Test, and Evaluation,
Army
Missile Procurement, 13 10.0
Army
Operation and 74 79.0
Maintenance, Navy
Operation and 67 70.2
Maintenance, Navy
Reserve
Other Procurement, Navy 39 36.5
Procurement, Marine 26 30.0
Corps
Research, Development, 59 56.0
Test, and Evaluation,
Navy
Operation and 70 72.5
Maintenance, Air Force
Operation and 70 80.8
Maintenance, Air Force
Reserve
Operation and 68 82.0
Maintenance, Air
National Guard
Research, Development, 57 61.58
Test, and Evaluation,
Air Force
Sources: Office of the Under Secretary of Defense (Comptroller) table and
the DOD Financial Summary Tables.
In addition to using different outlay rate tables, there appeared to be
uncertainties regarding which year's outlay rates to use. For the fiscal
year 2006 budget, the Army and Navy used the DOD Financial Summary Tables
to determine the appropriation outlay rates used in calculating the
allowable amount of carryover. These tables contain different
appropriation outlay rates for each fiscal year. Military service
officials stated that DOD had not provided any written guidance on whether
the services should use the fiscal year 2004 or 2005 outlay rates or both
when determining the allowable amount of carryover in preparing the fiscal
year 2006 budget. An excerpt of the outlay rates from the DOD Financial
Summary Tables dated February 2004 follows.
Table 3: Schedule of Selected Outlay Rates Used to Calculate Allowable
Carryover That Was Included in the Fiscal Year 2006 Budget (in percent)
Appropriation Fiscal year 2004 Fiscal year 2005
outlay rates outlay rates
Operation and Maintenance, Army 52.03 68.80
Operation and Maintenance, Navy 76.08 79.00
Operation and Maintenance, Air 66.59 73.50
Force
Source: DOD Financial Summary Tables, dated February 2004.
The Navy used the fiscal year 2005 outlay rates for calculating the
allowable amount of carryover for fiscal years 2004, 2005, 2006, and
2007-the fiscal years that are included in the fiscal year 2006 budget.
The Army used the same document but instead used the fiscal year 2004
outlay rates for calculating the allowable carryover for fiscal year 2004.
The Army used the fiscal year 2005 rates for calculating the allowable
carryover for fiscal years 2005, 2006, and 2007. While this might appear
to be a small matter because the rates are generally the same or almost
the same from one fiscal year to the next, using the different rates (2004
versus 2005) for calculating the allowable carryover for the Army
industrial operations activity group in fiscal year 2004 results in a
different outcome. Based on its calculations, the Army reported that its
actual carryover was $141 million below the ceiling for fiscal year 2004.
However, using the fiscal year 2005 rates (the rates that the Navy used)
would show the Army exceeded the ceiling by about $275 million-a swing of
$416 million. This difference is attributable to the outlay rate for the
Operation and Maintenance, Army appropriation being 52.03 percent for
fiscal year 2004 but 68.8 percent for fiscal year 2005. According to Army
officials, the outlay rate varied significantly for these 2 fiscal years
because of the supplemental appropriations received during fiscal year
2004.
Based on our work involving the Army depot maintenance activity group, we
recommended in our June 2005 report13 that DOD clarify its written
guidance for calculating the actual amount of carryover as well as the
allowable amount of carryover. DOD concurred with our recommendations and
on June 29, 2005, DOD issued clarifying guidance on carryover. Among other
things, the guidance specified that (1) the allowable amount of carryover
is to be calculated based on current year customer orders received and the
first year outlay rates for the appropriations financing those orders for
all activity groups except shipyards and (2) the outlay rates are to be
based on historic outlay rates in the DOD Financial Summary Tables. DOD's
guidance clarifies which source document should be used to identify the
outlay rates. However, it does not address the question of which fiscal
year or years that are contained in the DOD Financial Summary Tables are
to be used.
During our current review, we informed Office of the Under Secretary of
Defense (Comptroller) officials that the services did not always comply
with DOD's policy on calculating the allowable amount of carryover.
Specifically, the services (1) did not always use the correct outlay rate
tables in determining the amount of allowable carryover and (2) used
different outlay rates contained in the DOD Financial Summary Tables for
calculating the allowable amount of carryover for specific fiscal years.
In responding to our discussions, DOD took two actions. First, DOD
included carryover guidance in its January 17, 2006, memorandum on the
fiscal year 2007 budget justification book material for Congress. This
guidance specifies that the services are to use the fiscal year 2006 DOD
Financial Summary Tables to calculate carryover. The guidance further
specifies that the services must use the rates in the DOD Financial
Summary Tables unless a waiver is approved in writing by the Office of the
Under Secretary of Defense (Comptroller), Director for Revolving Funds.
Second, in February 2006, the Office of the Under Secretary of Defense
(Comptroller) provided additional guidance to the services for the fiscal
year 2007 budget specifying that the (1) fiscal year 2005 outlay rates in
the DOD Financial Summary Tables will be used for calculating the
allowable amount of carryover for fiscal year 2005 and (2) fiscal year
2006 outlay rates in the DOD Financial Summary Tables will be used for
calculating the allowable amount of carryover for fiscal years 2006 and
2007.
Air Force Did Not Calculate Actual Carryover and Allowable Carryover
Correctly
In reviewing the Air Force carryover figures shown in the fiscal year
2004, 2005, and 2006 budgets to Congress, we found a number of problems
with how the Air Force calculated the reported actual as well as the
allowable amount of carryover for the depot maintenance activity group.
These problems significantly affected the determination of allowable
carryover and whether the Air Force depot maintenance activity group
exceeded that ceiling. With one exception, the Air Force took action and
corrected the problems when preparing the fiscal year 2007 budget. These
problems are discussed below.
o The Air Force used the fiscal year 2001 outlay rates provided by the
Office of the Under Secretary of Defense (Comptroller) to determine the
allowable amount of carryover in the fiscal year 2004 budget. This was the
appropriate outlay rate table to use for that budget. However, even though
the Office of the Under Secretary of Defense (Comptroller) provided
updated outlay rates for the next fiscal year, the Air Force did not use
the updated outlay rates when calculating its allowable carryover in the
fiscal year 2005 budget. Instead, the Air Force continued to use the
fiscal year 2001 outlay rates. Moreover, the Air Force continued to use
the fiscal year 2001 outlay rates to calculate the allowable carryover in
the fiscal year 2006 budget instead of using the updated outlay rates
published by DOD.
o The Air Force used all orders received (both prior year and current year
orders) in calculating the allowable amount of carryover in the fiscal
year 2004, 2005, and 2006 budgets. For example, in calculating the
allowable carryover for fiscal year 2004, the Air Force included about
$1.8 billion of prior year orders in the calculation. DOD carryover policy
states that only current year orders should be used in determining the
allowable carryover. The Air Force method of including all orders allowed
too much carryover.
o The Air Force excluded orders received from the U.S. Transportation
Command when calculating the amount of actual carryover in the fiscal year
2004, 2005, and 2006 budgets. DOD Financial Management Regulation
7000.14-R, Volume 2B, Chapter 9, permits excluding some orders financed
with non-DOD funds, such as orders received from foreign countries, but
does not permit excluding U.S. Transportation Command orders. For example,
because the Air Force excluded about $214 million of U.S. Transportation
Command orders when calculating its actual carryover for fiscal year 2004,
its carryover was understated.
o The Air Force's fiscal year 2006 budget to Congress expressed carryover
in equivalent months of work (this is the old method of reporting
carryover) rather than in terms of the allowable and actual carryover
dollar amounts as required by DOD Financial Management Regulation
7000.14-R, Volume 2B, Chapter 9.
The problems cited above had a significant impact on the amount of
allowable carryover and actual carryover and whether the actual carryover
exceeded the allowable amount, as shown in table 4.
Table 4: Air Force's Reported Actual Carryover and GAO's Calculation of
the Amount of Actual Carryover with Respect to the Ceiling
Fiscal year and Air Air Force reported GAO calculated Difference
Force activity group actual carryover actual carryovera
Fiscal year 2002 depot $87 million under $216 million over $303 million
maintenance ceiling ceiling
Fiscal year 2003 depot $396 million under $428 million under ($32 million)
maintenance ceiling ceiling
Fiscal year 2004 depot $722 million under $598 million under $124 million
maintenance ceiling ceiling
Source: GAO analysis based on Air Force carryover data.
aWe calculated the allowable amount of carryover and actual amount of
carryover in accordance with DOD guidance in its regulation to determine
the amount of actual carryover in relationship to the ceiling.
In discussing the carryover calculations with Air Force officials, they
agreed that they were not calculating either the allowable amount of
carryover or the actual amount of carryover correctly in the fiscal year
2004, 2005, and 2006 budgets. They informed us that in preparing the
carryover information contained in the fiscal year 2004 budget, DOD budget
analysts who review the budget information, including the carryover
information, did not raise questions with the Air Force carryover
calculations. Accordingly, they continued to use the same methodology for
calculating the allowable carryover and actual carryover that was included
in the fiscal year 2005 and 2006 budgets to Congress. Based on our
discussions with them, these officials informed us that the Air Force
would be developing the carryover figures that will be used in the fiscal
year 2007 budget in accordance with DOD policy.
In reviewing the Air Force fiscal year 2005 carryover calculations
included in the fiscal year 2007 budget, we determined that the Air Force
was complying with DOD's carryover policy with one exception. For orders
financed with the Air Force working capital fund supply account, the Air
Force used a 61 percent outlay rate to calculate its allowable carryover
instead of the 73.5 percent outlay rate for the Air Force operation and
maintenance appropriation contained in the DOD Financial Summary Tables
and required by the Office of the Under Secretary of Defense
(Comptroller), Revolving Fund Directorate. Using the 61 percent figure,
the Air Force reported that its actual carryover for fiscal year 2005 was
about $193 million under the carryover ceiling. However, if the Air Force
used the 73.5 percent outlay rate, our analysis show that the fiscal year
2005 actual carryover would have exceeded the carryover ceiling by about
$148 million. In discussing the outlay rate difference with the Air Force,
officials stated that they used the 61 percent figure because the rate was
more consistent with the actual outlay rate of the Air Force working
capital fund supply account. However, the Air Force could not provide us
with documentation supporting how they arrived at the 61 percent figure.
On February 7, 2006, the Air Force requested from the Office of the Under
Secretary of Defense (Comptroller) that it be allowed to use the 61
percent figure in developing the carryover ceilings contained in the
fiscal year 2007 budget. The Office of the Under Secretary of Defense
(Comptroller) approved the Air Force's request on March 6, 2006.
Army's Reported Actual Carryover Was Understated in Fiscal Years 2002 and
2003 because Prior Year Orders Were Not Included
In June 2005, we reported14 that the Army understated the reported actual
carryover for the depot maintenance activity group for fiscal years 2002
and 2003 because it interpreted DOD's 2002 carryover guidance as requiring
only the inclusion of customer orders received in the current year when
calculating actual carryover. During this review, we found this same
problem affected the reported actual carryover for the ordnance activity
group. Thus, the Army did not include customer orders received in prior
years and the carryover related to those orders. The Army corrected this
problem and included all carryover when it prepared its fiscal year 2006
budget. Table 5 provides information on the actual amount of carryover
reported to Congress for fiscal years 2002 and 2003 and the amount of
carryover not included.
Table 5: Dollar Amount of Reported Actual Carryover that Exceeded the
Ceiling and the Amount of Carryover Not Included (dollars in millions)
Fiscal year and Army Reported carryover Carryover not Total carryover
activity group that exceeded ceiling included exceeding ceiling
Fiscal year 2002 $36. 1 $94.4 $130.5
depot maintenance
Fiscal year 2003 127.1 195.1 322.2
depot maintenance
Fiscal year 2002 3.9 98.0 101.9
ordnance
Fiscal year 2003 96.6 138.9 235.5
ordnance
Source: GAO analysis of Army carryover data.
Army officials at headquarters acknowledged that the reported actual
carryover did not include carryover related to prior year orders. Although
DOD changed its carryover policy in December 2002, it did not issue
detailed written procedures for calculating actual carryover until June
2004. Army headquarters officials stated that prior to the issuance of the
written guidance in June 2004, the new carryover calculation was based on
verbal instructions that the Army received from the Office of the Under
Secretary of Defense (Comptroller). The Army said they interpreted the new
guidance to include only actual carryover on orders received in the
current year and instructed the Army Materiel Command to calculate
carryover accordingly. When DOD issued the revised DOD regulation in June
2004, Army officials said they realized that they were not calculating
reported actual carryover correctly and changed their methodology in
developing the fiscal year 2006 budget so that the actual carryover
calculation would include prior year orders and be in accordance with
DOD's written guidance.
Navy Generally Followed DOD's Carryover Policy but Better Disclosure Is
Needed for Reporting on Research and Development Activity Group's
Carryover
In analyzing the Navy's actual carryover figures for the naval shipyards,
aviation depots, and research and development activity groups shown in the
fiscal year 2004, 2005, 2006, and 2007 budgets to Congress, we found that
the Navy generally followed DOD's policy on calculating the actual amount
of carryover as well as the allowable amount of carryover. Our analysis of
the Navy budgets submitted to Congress shows that the naval aviation
depots have consistently exceeded the carryover ceilings as shown in table
6. According to Navy budget documents and officials, the reasons why the
actual reported carryover exceeded the ceiling for the aviation depots
were (1) the lack of material to repair the components being fixed; (2)
the increased deterioration of components, leading to longer repair
cycles; and (3) the large dollar amount of orders financed with
supplemental appropriations for fiscal year 2003.
Table 6: Navy's Reported Actual Carryover in Relationship to the Ceiling
by Activity Group
Activity group Fiscal year 2002 Fiscal year Fiscal year Fiscal year
2003 2004 2005
Aviation depots $113 million $205 million $5 million $0.2 million
over ceiling over ceiling
over ceiling over ceiling
Shipyards $76 million $195 million $210 million $226 million
under ceiling over ceiling under ceiling under ceiling
Research and $442 million $435 million $439 million $310 million
development under ceiling under ceiling under ceiling under ceiling
Source: Navy Working Capital Fund budgets.
Note: We highlighted the years when the activity group exceeded the
carryover ceiling.
While the budgets show that the Navy research and development activity
group did not exceed the ceiling for any of the 4 years, the budgets no
longer provide information that shows if any of the five subactivity
groups individually exceeded the carryover ceiling, as the Navy budgets
did prior to the change in the carryover policy in December 2002. Prior to
the Office of the Under Secretary of Defense (Comptroller) changing its
carryover policy in December 2002, the Navy Working Capital Fund budget
provided carryover information, such as the dollar amount of carryover and
the number of months of carryover for each of the subactivity groups. An
analysis of the budget documents would show if any of the subactivity
groups exceeded the 3-month carryover standard. After DOD changed the
carryover policy in December 2002, the Navy changed the level of reporting
carryover information to be at the aggregate level and no longer provided
carryover information at the subactivity group level. Our analysis of Navy
reports showed that the Naval Air Warfare Center exceeded the ceiling for
fiscal years 2003, 2004, and 2005, and the Naval Surface Warfare Center
exceeded the ceiling for fiscal year 2002, as shown in table 7.
Table 7: Navy's Reported Actual Carryover in Relationship to the Ceiling
for the Research and Development Subactivity Groups
Subactivity group Fiscal year Fiscal year Fiscal year Fiscal year
2002 2003 2004 2005
Naval Air Warfare $201 million $19 million $57 million $52 million
Center under ceiling
over ceiling over ceiling over ceiling
Naval Surface $95 million $211 million $247 million $166 million
Warfare Center under ceiling under under ceiling
over ceiling ceiling
Naval Undersea $78 million $87 million $80 million $58 million
Warfare Center under ceiling under ceiling under under ceiling
ceiling
Space and Naval $148 million $76 million $81 million $51 million
Warfare Center under ceiling under ceiling under under ceiling
ceiling
Naval Research $79 million $81 million $88 million $86 million
Laboratory under ceiling under ceiling under under ceiling
ceiling
Total $411 million $436 million $439 million $309 million
under ceilinga under under under
ceilingb ceiling ceilingb
Source: Navy reports on the research and development subactivity groups.
Note: We highlighted the years when the subactivity group exceeded the
carryover ceiling.
aThere is a $31 million difference between the amount shown here and the
amount shown in table 6 for the research and development activity group.
The Navy's report to Congress and its internal report on the subactivity
groups contained different amounts.
b Due to rounding, there is a $1 million difference between the amount
shown here and the amount shown on table 6 for the research and
development activity group.
According to the Navy, there are two reasons why carryover should be
reported at the activity group level and not at the subactivity group
level. First, the Office of the Under Secretary of Defense (Comptroller)
required the research and development activities to use a higher outlay
rate for orders financed with procurement appropriations than the official
published procurement outlay rates. Using a higher procurement outlay rate
for calculating the carryover ceiling lowers the amount of allowable
carryover. Because of this higher rate, a Navy official stated that the
carryover should be reported at the aggregate level since subactivity
groups reporting under the ceiling will offset those subactivity groups
reporting over the ceiling. Second, the new methodology did not allow the
exclusion of intrafund orders from the carryover calculation. These are
orders placed by one research and development activity with another
research and development activity. Since intrafund orders were no longer
allowed to be excluded from the carryover calculation, this resulted in
the double counting of actual carryover associated with these intrafund
orders. Because the above two reasons reduce the carryover ceiling and
increase the actual amount of carryover, the Navy reports the carryover
information at the activity group level.
However, we believe that the carryover associated with the research and
development activity group should be reported at the subactivity group
level for several reasons. First, according to the fiscal year 2007
budget, the research and development activity group is the largest Navy
activity group-it received about $10 billion of new orders and carried
over about $3.5 billion for fiscal year 2005. By comparison, for fiscal
year 2005, the Navy shipyards received about $1.8 billion of new orders
and carried over about $636 million, and the aviation depots also received
about $1.8 billion and carried over about $470 million. Further, the
dollar amount of new orders received by three research and development
subactivity groups (Naval Surface Warfare Center--$3.4 billion, Naval Air
Warfare Center--$2.7 billion, and Space and Naval Warfare Systems
Centers--$2.2 billion) exceeded the amount of new orders received by the
shipyards and aviation depots for fiscal year 2005. Because of the dollar
magnitude of research and development subactivity groups, we believe
carryover reporting at the subactivity group level is needed for Congress
and DOD to maintain oversight.
Second, concerning the Navy's comment on using a higher outlay rate for
calculating the carryover ceiling, we agree with the Office of the Under
Secretary of Defense (Comptroller) that the Navy should use a higher rate.
We also believe that the Navy should report carryover information at the
subactivity group level from a disclosure standpoint. Otherwise,
subactivity groups reporting under the ceiling will offset those
subactivity groups reporting over the ceiling and this information would
not be available in the budgets to Congress. In the December 2002
management initiative decision, the Office of the Under Secretary of
Defense (Comptroller) stated that research and development activities
could achieve better results than the established outlay rates for orders
financed with procurement appropriations because of the type of work
performed by these activities. DOD further stated that 45 percent of the
fiscal year 2002 carryover was linked to contractual efforts and 55
percent supported in-house requirements. DOD concluded that carryover
linked to contractual obligations would disburse at the procurement
appropriations rate. However, the amount supporting the in-house
requirements would disburse at a higher rate because such requirements
tend to be funded on an annualized basis. The Office of the Under
Secretary of Defense (Comptroller) requested that the Navy examine the
nature and scope of the procurement-funded work and report its
recommendations by February 15, 2003, to the Comptroller. At the time DOD
issued the management initiative decision in December 2002, the Navy
reported carryover information to Congress at the subactivity group level.
The Navy determined, based on work performed by one Warfare Center, that
the outlay rate for Navy procurement appropriations should be 40 percent,
which is higher than the actual outlay rate for these appropriations.
However, the December 2002 management initiative decision did not discuss
the Navy changing its level of reporting carryover information from the
subactivity group level to the aggregate level.
Third, concerning the Navy's comments on intrafund orders, the Navy is
correct in that the amount of actual carryover will be double counted.
However, the effect of this is negated since the amount of allowable
carryover is also double counted since both of these activities will
include the intrafund order as a new order and include the new order in
their calculations for determining the allowable amount of carryover.
Furthermore, in May 2001 we reported15 that the Navy was not following
DOD's guidance on calculating carryover on intrafund orders. Specifically,
Navy working capital fund activities reduced carryover for orders received
from other working capital fund activities. However, Navy working capital
fund activities categorized orders they sent to other working capital fund
activities as contractual obligations and used these obligations to reduce
reported year-end carryover. As a result, not only did the Navy eliminate
the double counting of such orders, it eliminated all these orders from
its calculations, thus understating the equivalent number of months of
carryover work.
Carryover Increased Due to Military Services Placing Orders Late in the
Fiscal Year
Carryover is greatly affected by orders accepted late in the fiscal year
that generally cannot be completed, and in some cases cannot even be
started, prior to the end of the fiscal year. As a result, almost all
orders accepted late in the fiscal year increase the amount of carryover.
We analyzed 68 orders accepted in September 2003 and September 2004 by
certain activity groups for the three military services. Our analysis
identified four key factors contributing to orders generally being issued
by customers late in the fiscal year and being accepted by the working
capital fund activities during the last month of the fiscal year. These
reasons included (1) funds provided to customers late in the fiscal year
to finance existing requirements, (2) new work requirements identified at
year end, (3) problems encountered in processing orders, and (4) work
scheduled at year end. Further, our analysis showed that 39 of the 68
orders-over half of the orders reviewed-were not complete at the end of
the next fiscal year, generating a second year of carryover. In addition
to increasing carryover amounts, orders accepted by working capital fund
activities late in the fiscal year, in which these activities do not
perform the work until well into the next fiscal year or even subsequent
years, may not (1) be the most effective use of DOD resources at that time
and (2) have complied with all of the order acceptance provisions cited in
the DOD Financial Management Regulation. As noted in our scope and
methodology (app. I), the scope of our work for this review did not
include determining whether there was a bona fide need for the work being
ordered by customers.
Reasons Customer Orders Are Placed Late in the Fiscal Year
As shown in figure 1, our review of 68 fiscal year-end orders for 2003 and
2004 identified four key factors contributing to orders generally being
issued by customers late in the fiscal year and being accepted by the
working capital fund activities during the last month of the fiscal year.
Figure 1: Factors Contributing to Year-end Orders for 2003 and 2004
As depicted in figure 1, the factor contributing most frequently to orders
being accepted by working capital fund activities late in the fiscal
year-29 of the 68 orders (43 percent) we reviewed-is the late receipt of
funds from customers to finance existing requirements. DOD customers
stated that it is common for the military services to provide funds to
them late in the fiscal year after the military services review their
programs to identify funds that will not be obligated by year end. When
these funds are identified, the military services realign the funds to
programs that can use them. These funds are then used to finance orders
placed with working capital fund activities at year end. Further, in
fiscal years 2003 and 2004, the military services received supplemental
appropriations from Congress to fund ongoing military operations. Some of
these funds were distributed to DOD customers late in the fiscal year to
finance repairs on DOD assets. The following examples illustrate
situations when funds were provided to customers late in the fiscal year.
o On September 4, 2003, the Ogden Air Logistics Center accepted an order
from the Air Force Ground Theater Air Control System program office
totaling about $4.8 million financed with operation and maintenance funds
that would have expired on September 30, 2003. This order provided for
Ground Theater Air Control System hardware and software upgrades.
According to program office officials, the Air Combat Command
traditionally funds about 60 to 70 percent of its total software
development requirements annually. However in August 2003, the Command
provided the program office with funding to cover 100 percent of its
fiscal year 2003 software requirements. Thus, the program office applied
the funds to its next highest priority workload and issued the $4.8
million order.
o On September 27 and 29, 2003, the Space and Naval Warfare Systems Center
in San Diego accepted two orders from the U.S. Pacific Fleet totaling
approximately $4.15 million financed with operation and maintenance funds
that would have expired on September 30, 2003. These two orders were to
provide the technical and engineering support for the relocation of a
Sea-Based Battle Laboratory from the USS Coronado to a new ashore
headquarters activity. The Pacific Fleet identified this requirement in
early fiscal year 2003; however, funds were not made available until the
end of the fiscal year, when additional funds were identified from other
programs.
o On September 26, 2003, the Red River Army Depot accepted an order from
the Army Tank-automotive and Armaments Command totaling $17.9 million
financed with operation and maintenance funds that would have expired on
September 30, 2003. The order was for the repair and upgrade of 41 Bradley
Fighting Vehicles needed to support the war effort in Iraq and
Afghanistan. These vehicles were to be prepositioned in the theater of
operation. According to a Tank-automotive and Armaments Command official,
the order was issued late in fiscal year 2003 because the Army Materiel
Command did not provide them with funding until September 2003. An Army
Materiel Command official noted that the effort was funded by a
supplemental appropriation used to support war operations.
The second most significant factor that contributed to the year-end orders
we reviewed-17 of the 68 orders (25 percent)-was the identification of new
requirements at year end. Some examples of DOD customers identifying
requirements at year end include (1) a Navy aviation depot in performing
scheduled maintenance identified damage to aircraft beyond what was
originally included in its statement of work, (2) an Army depot identified
inspection requirements at year end to keep ammunition storage inspections
current and to satisfy requisitions to support the soldiers in the field,
(3) Navy aircraft repair requirements were moved from fiscal year 2004 to
fiscal year 2003 to meet an earlier deployment schedule, (4) the Army
identified new requirements at year end for repair of Army assets
necessary to support ongoing military operations, and (5) the Navy
identified the need for additional capabilities for several aircraft and
also needed to perform emergency repairs on one of its aircraft carriers.
Two examples of some of the reasons for new requirements being identified
at year end follow.
o On September 27 and 30, 2004, the Space and Naval Warfare Systems Center
in Charleston accepted an order and an amendment from the Commander, Naval
Air Force, U.S. Atlantic Fleet, totaling $425,000 financed with operation
and maintenance funds that would have expired on September 30, 2004. A
fleet official stated that it had received a casualty report from the USS
Harry S. Truman on September 24, 2004, indicating repairs needed to be
made to the ship's announcing system. An activity official stated that the
order was accepted regardless of carryover concerns due to the urgency
associated with a casualty report. Additionally, a fleet official noted
that the time to complete the needed repairs was limited due to the ship's
impending deployment.
o On September 8, 2004, the Army Rock Island Arsenal accepted an order
from the Tank-automotive and Armaments Command totaling about $1.4 million
financed with operation and maintenance funds that would have expired on
September 30, 2004. The order was for the reconditioning of chemical
biological protective shelters. The shelters mount on high- mobility,
multipurpose wheeled vehicles and provide an environmentally controlled
work area that filters out nuclear, biological, and chemical agents.
According to a logistics manager, in the fourth quarter of fiscal year
2004 the Tank-automotive and Armaments Command identified 11 shelters that
needed reconditioning and issued an order to the Army Rock Island Arsenal
for the work.
Further, we found 12 of the 68 orders (18 percent) were accepted by
working capital fund activities in the last month of the fiscal year due
to problems encountered with processing the orders. These problems
included (1) delays in processing forms through different activities and
multiple nonintegrated systems, (2) data input errors that were not
corrected until September, and (3) difficulties encountered in processing
documents and related funding from non-DOD customers to working capital
fund activities. Two examples follow.
o In July 2003, the Air National Guard Headquarters prepared documentation
that directed the Pennsylvania Air National Guard to send its ground
mobile navigation radar to the Tobyhanna Army Depot to repair damage
sustained by the radar system from multiple lightening strikes and power
surges and to overhaul the system. The order was not accepted by the depot
until September 26, 2003, about 3 months later. The delay in acceptance of
the order was due to (1) the normal time required to process forms through
six different activities using nonintegrated systems, (2) paperwork
processing delays due to missing information, (3) confusion on how to
process the workload in a new Army system implemented in July 2003, and
(4) errors made in entering data into the Army system.
o Due to delays in correcting input errors on an order, the Warner Robins
Air Logistics Center did not accept a $2.8 million order from the F-15
program office, financed with operation and maintenance funds, until
September 17, 2004. The order was for the maintenance of an Air National
Guard F-15 aircraft. When an order was generated by the F-15 program
office on June 10, 2004, the office entered the program control and serial
numbers into the project order system incorrectly. On September 17, 2004,
the Center established a new order with the corrected information.
Finally, we found 10 of the 68 orders (15 percent) were accepted by
working capital fund activities in the last month of the fiscal year when
DOD assets were scheduled for maintenance. According to Air Force and Navy
officials, planning for the repair of major assets such as aircraft,
ships, and engines begins several years prior to the date on which repairs
will actually be performed. The assets are scheduled for maintenance based
on routine cycles, such as numbers of years since the last depot
maintenance was performed. The services include funding requirements for
these repairs in their annual budget submissions. Generally, in the
quarter the assets are scheduled for maintenance, the major commands
distribute the repair funds to their customers and the customers, in turn,
issue orders to fund the repair. Two examples follow.
o On September 16, 2003, the Oklahoma City Air Logistics Center accepted
an order from the Air National Guard totaling about $7.2 million financed
with operation and maintenance funds set to expire on September 30, 2003.
The order was for the scheduled maintenance of the 39th Air National Guard
KC-135E aircraft in fiscal year 2003. During fiscal year 2001, the Air
National Guard determined that 39 KC-135E aircraft required maintenance in
fiscal year 2003 in accordance with their 5-year maintenance schedule. In
fiscal year 2001, the Air National Guard began planning and budgeting for
the maintenance of these aircraft. The 39th aircraft arrived at the air
logistics center in mid-September 2003 as planned. The Air National Guard
issued the order in September 2003 once it determined that the work on
this aircraft would be performed at the air logistics center instead of
contracting out the workload.
o On September 29, 2003, the Naval Air Warfare Center-Aircraft Division
accepted an order from the U.S. Atlantic Fleet in the amount of
approximately $2.4 million financed with operation and maintenance funds
set to expire the next day. The order required repairs and/or replacement
of deteriorated and worn components to support flight deck operations on
the USS Harry S. Truman. This work was scheduled for overhaul in fiscal
year 2003. A fleet official stated that they did not perform an inspection
of the ship to determine specific repair requirements until late in the
fiscal year.
Impact of Late Orders on Carryover
Our further review of the 68 fiscal year-end orders for 2003 and 2004
disclosed that 39 of these orders-over half-were not completed within the
next fiscal year, which resulted in carryover of 2 or more years. As we
reported in June 2005,16 two reasons generally caused work to carryover
into a second fiscal year. First, the depots received orders late in the
fiscal year and were unable to complete the effort by year end, as
discussed in the previous section; and second, some depots were unable to
obtain the materials/parts needed in a timely manner to complete the work.
In addition to these reasons, we found that some working capital fund
activities were unable to complete work within 1 year because of delays
caused by backlogged or other higher priority work and broken or unsafe
repair equipment. These factors have resulted in orders being carried over
for more than 1 fiscal year and increased the carryover balances for
subsequent years. As a result, these orders may not have been the most
effective use of DOD resources at that time and may not have complied with
all of the order acceptance provisions cited in the DOD Financial
Management Regulation.
The DOD Financial Management Regulation 7000.14-R, Volume 11A, Chapters 2
and 3, prescribes regulations governing the use of orders placed with
working capital fund activities. When a working capital fund activity
accepts an order, the customer's funds financing the order are obligated.
The DOD regulation identifies a number of requirements before a working
capital fund activity accepts an order. For example, work to be performed
under the order shall be expected to begin within a reasonable time after
the order is accepted by the performing DOD activity. As a minimum
requirement, it should be documented that when an order is accepted, the
work is expected to (1) begin without delay (usually within 90 days) and
(2) be completed within the normal production period for the specific work
ordered. Further, the regulation states that no project order shall be
issued if commencement of work is contingent upon the occurrence of a
future event. Our review of 68 orders accepted by the working capital fund
activities at year end determined that work on some of these orders did
not begin within 90 days or was not completed within the normal production
period for the work being performed. The following examples illustrate
orders that were accepted by working capital fund activities at year end
and (1) may not be the most effective use of DOD resources at that time
and (2) may not have complied with all of the provisions contained in this
regulation.
o On September 25, 2003, the Crane Army Ammunition Activity accepted an
order totaling $1,885,000 that was financed with operation and maintenance
funds for X-ray work to determine the safety and usability of 200,000
rounds of 40-millimeter high-explosive ammunition. However, due to
problems with the X-ray inspection machine, the activity had to suspend
work on the ammunition until the inspection machine was qualified as safe
to use. According to the program engineer, work was delayed because
imaging panels in the inspection machine were burning up and had to be
replaced. Compounding this problem was a delay in the approval process for
the safe operation of the machine. As a result, very little work was
completed on this order over 3 fiscal years. Specifically, $1,885,000
carried over into fiscal year 2004 and $1,881,105 carried over into fiscal
year 2005 and again into fiscal year 2006.
o On September 14, 2004, the Ogden Air Logistics Center accepted an order
totaling $3.4 million that was financed with operation and maintenance
funds to build an F-16 radar test station on behalf of the Air National
Guard. According to a center official, even though the depot did not have
the material to build the station, it accepted the order late in the
fiscal year. Thus, the entire $3.4 million order carried over into fiscal
year 2005. The center official noted that during fiscal year 2005, the
activity group ordered the material and began work assembling the station,
but as of the end of fiscal year 2005 all the material had not yet been
received from contractors. Therefore, $277,898 carried over into fiscal
year 2006.
o On September 29, 2003, the Sierra Army Depot accepted an order totaling
$11,680,175 that was financed with operation and maintenance funds for the
receipt, inspection, storage, and re-containerizing of 203 containers of
gas and oil pipeline equipment returned from Iraq and Afghanistan. Because
this order was received so late in the fiscal year, the entire amount of
the order-$11,680,175-was carried over into fiscal year 2004. According to
the mission director, this order was delayed because (1) some containers
were not returned from the war zones in a timely manner so the depot could
refurbish them and (2) the depot received other, higher priority
workloads, such as armored plating on wheeled vehicles. As a result, over
half of the dollar amount of the order-$6,847,529-carried over into fiscal
year 2005 and $2,643,093 carried over into fiscal year 2006.
o On September 16, 2003, the Space and Naval Warfare Systems Center in
Charleston accepted an order for $232,200 that was financed with operation
and maintenance funds. The U.S. Naval Forces Central Command identified
and funded this emergent requirement in August 2003 in support of the
Combat Terrorism Initiative during the Iraq war. More specifically, this
order was for technical and installation services for a new communications
link between Bahrain and Dubai. An activity official stated that minimal
engineering services were initiated prior to the end of fiscal year 2003,
so almost the entire dollar amount of the order-$230,000-carried over into
fiscal year 2004. This official also stated the center encountered delays
when the government of Dubai would not allow the leased line into the
country from Bahrain. This resulted in $207,000 being carried over into
fiscal year 2005, and $12,000 being carried over into fiscal year 2006.
o On September 11, 2003, the Oklahoma City Air Logistics Center accepted
an order totaling about $1.8 million that was financed with operation and
maintenance funds for the analytical condition inspection17 of a F110-129
engine. According to an Oklahoma City Air Logistics Center official, the
center brought the engine in for repair in September 2003 to ensure that
the funds were obligated by fiscal year end. Otherwise, the funds would
expire and be unavailable for new workload. However, the center did not
begin work on the engine until March 2004 due to a backlog of engines
waiting for repair. Since the engine was accepted for repair in the last
month of the fiscal year, almost the entire $1.8 million was carried over
into fiscal year 2004. Further, because of production delays and a failed
serviceability test, the center carried funds into fiscal year 2005 and
again into fiscal year 2006-more than 2 years after the order was
accepted.
Conclusions
The military services have provided erroneous carryover information to
Congress and DOD decision makers because the services have not
consistently applied DOD's revised policy on carryover. Reliable and
consistent carryover information is essential for Congress and DOD
decision makers to perform their oversight, including reviewing DOD's
budget to determine if an activity group has too much or not enough
carryover. To provide greater assurance that the military services provide
reliable and consistent carryover information, the military services must
be held accountable for the accuracy of reported carryover information and
ensure the timely identification of unneeded customer funds. While DOD's
guidance on calculating carryover was not adequate when it revised its
carryover policy in 2002, DOD began improving the guidance in 2004.
However, DOD has not updated the Financial Management Regulation so that
it includes comprehensive carryover guidance to the military services, and
the services have not always complied with the carryover guidance in the
past. Until this is done, Congress and DOD decision makers will be forced
to make key budget decisions, such as whether to enhance or reduce
customer budgets, based on unreliable information. In addition, DOD
working capital fund activities' acceptance of year-end orders (1)
increases the amount of carryover and (2) in some cases, contributes to
DOD working capital fund activities' actual carryover amounts exceeding
their allowable amounts by tens of millions of dollars. Excessive amounts
of year-end carryover tie up customer funds that could be put to better
near-term use and are subject to reductions by DOD and the congressional
defense committees during the budget review process.
Recommendations for Executive Action
In order to improve the business operations of the Department of Defense
Working Capital Fund, we are making the following eight recommendations to
the Secretary of Defense.
We recommend that the Secretary of Defense direct the Under Secretary of
Defense (Comptroller) to take the following actions:
o Issue written instructions in its DOD Financial Management Regulation
7000.14-R specifying the outlay rates to be used by DOD working capital
fund activities for calculating the allowable amount of carryover and
continue to issue carryover guidance to the military services in its
annual guidance on preparing budget justification book material for
Congress.
o Review the carryover information provided in the military services'
annual budget submissions to help ensure the services are calculating
their allowable and actual carryover amounts in accordance with DOD
policy.
o Reiterate the requirements in the DOD Financial Management Regulation
7000.14-R to help ensure that working capital fund activities are in
compliance with the regulations governing acceptance of orders,
particularly at fiscal year end.
We recommend that the Secretary of Defense direct the Secretary of the Air
Force to take the following actions:
o Use the current outlay rate tables that are included in the DOD
Financial Summary Tables when calculating the allowable carryover amounts
for the Air Force depot maintenance activity group, consistent with DOD
policy.
o Use only current year orders for calculating the allowable carryover
amounts for the Air Force depot maintenance activity group, as required by
DOD carryover policy.
o Include all orders when calculating the amount of actual carryover for
the Air Force depot maintenance activity group, except those orders that
are specifically excluded in DOD Financial Management Regulation 7000.14-R
or are excluded by the Under Secretary of Defense (Comptroller) in
writing.
o Include the allowable and actual dollar amounts of carryover for the Air
Force depot maintenance activity group in the Air Force's annual budget to
Congress, as required by DOD Financial Management Regulation 7000.14-R.
We recommend that the Secretary of Defense direct the Secretary of the
Navy to include the allowable and actual amounts of carryover for each of
the five Navy research and development subactivity groups in the Navy's
annual budget to Congress.
Agency Comments and Our Evaluation
DOD provided written comments on a draft of this report. DOD concurred
with all eight of our recommendations. Regarding its plans for
implementing the eight recommendations, DOD stated that it is in the
process of updating its financial management regulations and issuing
budget guidance for the fiscal year 2008/2009 President's Budget, which
will address calculating the allowable amount of carryover. Further, DOD
stated that it made a more rigorous review of the services' carryover
information in the fiscal year 2007 President's Budget submission and that
it will continue reviewing the services' budgets to ensure that the
services are calculating allowable and actual amounts of carryover in
accordance with DOD policy. DOD also stated that it will direct the Navy
to report carryover information for each of the five Navy research and
development subactivity groups in the Navy's annual budget to Congress.
Finally, as preparation for the close out of fiscal year 2006, DOD will
reiterate the guidance in its Financial Management Regulation governing
the working capital fund acceptance of orders which obligates customers'
funds, particularly at year end.
DOD also commented that the inaccuracies we identified in reported
carryover did not materially distort the evaluation of depot operations or
projected workload levels. While we do not know how DOD defines
materiality, we believe that the reporting inaccuracies affect the
evaluation of depot operations from a workload standpoint because the
inaccuracies understated the carryover balances for some activity groups
by hundreds of millions of dollars. For example, as stated in our report,
the Air Force reported that its fiscal year 2002 depot maintenance
carryover was $87 million under the ceiling but our calculation shows that
the carryover exceeded the ceiling by $216 million, a difference of $303
million. In another case, the Army reported that its fiscal year 2003
depot maintenance carryover was $127 million over the ceiling but our
calculations show that it was over the ceiling by $322 million, a
difference of $195 million. As a result of these understatements, the
amount of work carried over from one year to next was not reliable and
could have affected DOD's and the congressional defense committees' review
and evaluation of carryover during their annual budget review.
We are sending copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Armed Services; the Subcommittee on
Readiness and Management Support, Senate Committee on Armed Services; the
Subcommittee on Defense, Senate Committee on Appropriations; the House
Committee on Armed Services; the Subcommittee on Readiness, House
Committee on Armed Services; and the Ranking Minority Member, Subcommittee
on Defense, House Committee on Appropriations. We are also sending copies
to the Secretary of Defense, Secretaries of the Army, Navy, and Air Force,
and other interested parties. Copies will be made available to others upon
request. Should you or your staff have any questions concerning this
report, please contact McCoy Williams, Director, at (202) 512-9095 or
[email protected] , or William M. Solis, Director, at (202) 512-8365 or
[email protected] . Contact points for our Offices of Congressional Relations
and Public Affairs may be found on the last page of this report. Key
contributors to this report are listed in appendix III.
Sincerely yours,
McCoy Williams Director, Financial Management and Assurance
William M. Solis Director, Defense Capabilities and Management
Appendix I Scope and Methodology
To determine if the military services' carryover calculations were in
compliance with the Department of Defense's (DOD) new carryover policy, we
obtained and analyzed the services' calculations for the (1) reported
year-end actual carryover balances for fiscal years 2002 through 2005 and
(2) allowable amount of carryover for fiscal years 2002 through 2005. We
recomputed the services' calculations following DOD's regulation on
carryover and compared our carryover calculations with the services'
carryover calculations. We met with officials from the Army, Navy, and Air
Force to discuss (1) the methodology the services used to calculate
carryover and (2) any differences between our calculations and their
calculations. We also met with officials from the Office of the Under
Secretary of Defense (Comptroller) to discuss DOD's new carryover policy,
including the proper calculation for actual carryover and the allowable
amount of carryover. To assess the reliability of the carryover data, we
(1) reviewed and analyzed the factors used in calculating carryover and
(2) interviewed officials knowledgeable about the data. We determined that
the data were sufficiently reliable for the purposes in this report.
To determine if customers were submitting orders to working capital fund
activities late in the fiscal year and, if so, the effect that this
practice has had on carryover, we obtained data on orders accepted by
working capital fund activities in September 2003 and September 2004.
Initially, we obtained information on the top 20 orders from a dollar
standpoint that selected working capital fund activities accepted from
customers in September 2003 and September 2004. We analyzed the
information on the orders, which included the appropriation financing the
order, the date the order was accepted by the working capital fund
activity, and a description of the work to be performed. We then selected
and analyzed 68 orders with large dollar amounts that working capital fund
activities accepted in September. We also interviewed (1) working capital
fund officials to determine the current status of performing the work on
the orders and (2) customers to determine the reasons why they sent the
orders to the working capital fund activities late in the fiscal year. In
performing our work on these orders, we did not review these orders to
determine if there was a bona fide need for the work being ordered by
customers.
We performed our work at the headquarters offices of the Under Secretary
of Defense (Comptroller), the Assistant Secretary of the Army (Financial
Management and Comptroller), the Assistant Secretary of the Navy
(Financial Management and Comptroller), and the Assistant Secretary of the
Air Force (Financial Management and Comptroller), Washington, D.C. In
performing our work on reviewing the services' carryover calculations, we
obtained carryover information on the following Defense Working Capital
Fund activity groups: (1) Army depot maintenance, (2) Army ordnance, (3)
Army industrial operations, (4) Air Force depot maintenance, (5) Naval
aviation depots, (6) Naval shipyards, and (7) Naval research and
development. The Naval research and development activity group consists of
the following five subgroups: Naval Air Warfare Center, Naval Surface
Warfare Center, Naval Undersea Warfare Center, Naval Research Laboratory,
and the Space and Naval Warfare Systems Command Center.
In performing our work on reviewing individual orders, we obtained
information from the following working capital fund activities and their
customers that submitted the orders.
Air Force
o Ogden Air Logistics Center, Hill Air Force Base, Utah
o Oklahoma City Air Logistics Center, Tinker Air Force Base, Oklahoma
o Warner Robins Air Logistics Center, Robins Air Force Base, Georgia
Navy
o Naval Air Systems Command, Patuxent River, Maryland
o Naval Air Warfare Center, Aircraft Division, Patuxent River, Maryland
o Naval Air Warfare Center, Weapons Division, China Lake, California
o Naval Aviation Depot, San Diego, California
o Space and Naval Warfare Systems Command, San Diego, California
o Space and Naval Warfare Systems Center, San Diego, California
o Space and Naval Warfare Systems Center, Charleston, South Carolina
Army
o Blue Grass Army Depot, Richmond, Kentucky
o Crane Army Ammunition Activity, Crane, Indiana
o Rock Island Arsenal, Rock Island, Illinois
o Sierra Army Depot, Herlong, California
o Red River Army Depot, Texarkana, Texas
o Tobyhanna Army Depot, Tobyhanna, Pennsylvania
The carryover information in this report is budget data obtained from
official Army, Navy, and Air Force budget documents. We conducted our work
from July 2005 through March 2006 in accordance with U.S. generally
accepted government auditing standards. We requested comments on a draft
of this report from the Secretary of Defense or his designee. The Under
Secretary of Defense (Comptroller) provided written comments, and these
comments are presented in the Agency Comments and Our Evaluation section
of this report and are reprinted in appendix II.
Appendix II Comments from the Department Of Defense
Appendix III GAO Contacts and Staff Acknowledgments
McCoy Williams, (202) 512-9095 William M. Solis, (202) 512-8365
Staff who made key contributions to this report were Richard Cambosos,
Francine DelVecchio, Keith McDaniel, Clara Mejstrik, Greg Pugnetti, Chris
Rice, and Hal Santarelli.
(195066)
www.gao.gov/cgi-bin/getrpt? GAO-06-530 .
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact McCoy Williams at (202) 512-9095 or
[email protected].
Highlights of GAO-06-530 , a report to the Chairman, Subcommittee on
Defense, Committee on Appropriations, House of Representatives
June 2006
DEFENSE WORKING CAPITAL FUND
Military Services Did Not Calculate and Report Carryover Amounts Correctly
According to the Department of Defense's (DOD) fiscal year 2006 budget
estimates, working capital fund activity groups (depot maintenance,
ordnance, and research and development) will have about $6.3 billion of
funded work that will be carried over from fiscal year 2006 into fiscal
year 2007. The congressional defense committees recognize that these
activity groups need some carryover to ensure smooth work flow from one
fiscal year to the next. However, the committees have previously raised
concern that the amount of carryover may be more than is needed. GAO was
asked to determine (1) if the military services' carryover calculations
were in compliance with DOD's new carryover policy and (2) if customers
were submitting orders to working capital fund activities late in the
fiscal year and, if so, the effect this practice has had on carryover.
What GAO Recommends
GAO makes recommendations to DOD to (1) improve the military services'
calculations of the allowable amount of carryover and actual carryover,
(2) improve the reporting of carryover information to Congress and DOD
decision makers, and (3) ensure that the military services follow the DOD
regulation concerning the acceptance of orders placed with working capital
fund activities. DOD concurred with all the recommendations.
The military services have not consistently implemented DOD's revised
policy in calculating carryover. Instead, the military services used
different methodologies for calculating the reported actual amount of
carryover and the allowable amount of carryover since DOD changed its
carryover policy in December 2002.
o The military services did not consistently calculate the
allowable amount of carryover that was reported in their fiscal
year 2004, 2005, and 2006 budgets because they used different
outlay rates for the same appropriation.
o The Air Force did not follow DOD's regulation on calculating
carryover for its depot maintenance activity group, which affected
the amount of allowable carryover and actual carryover by tens of
millions of dollars and whether the actual carryover exceeded the
allowable amount as reported in the fiscal year 2004, 2005, and
2006 budgets.
o The Army depot maintenance and ordnance activity groups' actual
carryover was understated in fiscal years 2002 and 2003 because
carryover associated with prior year orders was not included.
o While the Navy generally followed DOD's policy for calculating
carryover, the Navy consolidated the reporting of carryover
information for research and development activities. The Navy
budgets no longer provide information to show if any of the five
research and development subactivity groups individually exceeded
the carryover ceiling as the Navy budgets did prior to the change
in the carryover policy.
As a result, carryover data provided to decision makers who review and use
the data for budgeting are erroneous and not comparable across the three
military services. For example, the Air Force reported to Congress that
the actual fiscal year 2002 carryover for depot maintenance was $87
million less than the ceiling. If the Air Force followed DOD's policy,
GAO's calculations show its carryover would have exceeded the ceiling by
$216 million.
Carryover is greatly affected by orders accepted by working capital fund
activities late in the fiscal year that generally cannot be completed by
fiscal year end, and in some cases cannot even be started prior to the end
of the fiscal year. GAO's analysis of 68 fiscal year-end orders identified
four key factors contributing to orders generally being issued by
customers late in the fiscal year and being accepted by the working
capital fund activities during the last month of the fiscal year. These
reasons included (1) funds provided to the customer late in the fiscal
year to finance existing requirements,
(2) new work requirements identified at year end, (3) problems encountered
in processing orders, and (4) work scheduled at year end. GAO's analysis
showed that over half of the orders reviewed were not completed at the end
of the next fiscal year, generating a second year of carryover on the same
order. As a result, some orders may not have been the most effective use
of DOD resources at that time and may not have complied with all of the
order acceptance provisions cited in the DOD Financial Management
Regulation.
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