Forest Service: Better Procedures and Oversight Needed to Address
Indirect Expenditures (Letter Report, 08/28/1998, GAO/RCED-98-258).

A May 1998 report (GAO/RCED-98-164R) found that overhead costs at the
Forest Service--called "indirect" costs by the Forest Service--had risen
over time. The costs grew from 16 to 27 percent of total expenditures
between 1993 and 1997 for the five funds GAO reviewed--the Brush
Disposal Fund, the Salvage Sale Fund, the Reforestation Trust Fund, the
Cooperative Work/Other Fund, and the Cooperative Work/Knutson-Vandenberg
Fund. This report discusses (1) the reasons indirect costs rose, (2)
steps taken by the Forest Service and others to control these costs, and
(3) other measures that may help the Forest Service to control these
costs in the future.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-98-258
     TITLE:  Forest Service: Better Procedures and Oversight Needed to
	     Address Indirect Expenditures
      DATE:  08/28/1998
   SUBJECT:  Accounting standards
	     Forest management
	     Financial records
	     Financial management systems
	     Accounting errors
	     Accounting procedures
	     Funds management
	     Overhead costs
	     Federal agency accounting systems
	     Cost control
IDENTIFIER:  Knutson-Vandenberg Trust Fund
	     Reforestation Trust Fund
	     Salvage Sale Fund
	     Brush Disposal Fund
	     Cooperative Work Trust Fund

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GAO/RCED-98-258

Cover
================================================================ COVER

Report to Congressional Requesters

August 1998

FOREST SERVICE - BETTER PROCEDURES
AND OVERSIGHT NEEDED TO ADDRESS
INDIRECT EXPENDITURES

GAO/RCED-98-258

Indirect Costs at the Forest Service

(141208)

Abbreviations
=============================================================== ABBREV

  ADP - automated data processing
  GAO - General Accounting Office
  K-V - Knutson-Vandenberg
  SFFAS - Statement of Federal Financial Accounting Standard

Letter
=============================================================== LETTER

B-280732

August 28, 1998

Congressional Requesters

In response to your interest in overhead costs at the Forest Service,
we examined the issue in a May 1998 report and found that such
costs--called "indirect" by the Forest Service--had risen over
time.\1 According to the Forest Service's data, these costs grew from
16 percent to 27 percent of total expenditures between fiscal years
1993 and 1997 for the five funds we reviewed--the Brush Disposal
Fund, the Salvage Sale Fund, the Reforestation Trust Fund, the
Cooperative Work--Other Fund, and the Cooperative
Work--Knutson-Vandenberg (K-V) Fund.\2 In response to this increase,
you next requested that we identify (1) the reasons why indirect
costs rose; (2) actions taken by the Forest Service and others to
control these costs; and (3) other actions that may help the Forest
Service control these costs in the future.

We based this portion of our review on work at the Forest Service's
Washington Office and in four of its nine regions--the Southwestern,
Rocky Mountain, Pacific Southwest, and Pacific Northwest regions.
These regions were selected because together they represented a mix
of high and low indirect costs and small and large timber sale
programs.  Additional information on the offices reviewed is provided
in appendix II.

--------------------
\1 Forest Service:  Indirect Expenditures Charged to Five Funds
(GAO/RCED-98-164R, May 6, 1998).

\2 See app.  I for a description of each of these funds.

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Inconsistencies in the Forest Service's accounting system make it
difficult to ascertain specifically why indirect costs rose for these
five funds during fiscal years 1993-97.  According to the Forest
Service, indirect costs rose for four main reasons:  the
implementation of a congressionally established program to increase
the amount of salvage timber offered for sale, additional costs
associated with downsizing, the allocation of costs incurred in
previous years but not charged against the funds at the time, and
computer modernization.  However, during this same time period, the
Forest Service was changing its policies about how to account for
indirect costs, and individual regions and forests were implementing
these policies in markedly different ways.  As a result, the
accounting system produced information that was not consistent from
year to year or location to location.  Neither we nor the Forest
Service is able to say how much indirect costs increased as a result
of the factors the Forest Service cites and how much they changed
because of these accounting inconsistencies.

To control costs, the Forest Service took a number of actions, most
of which were aimed at reducing costs generally and not targeted
specifically at indirect costs.  In particular, the agency reduced
its permanent staff by 14 percent, and individual regions used a
variety of other measures, including closing some district offices;
consolidating others; and centralizing certain administrative
functions, such as contracting and procurement.  For their part,
congressional appropriation committees reduced the budget line item
for some indirect costs.  One way the Forest Service responded to the
reductions was to reclassify some indirect costs to other accounts.

An essential step for controlling indirect costs is establishing
clear definitions for them and applying the definitions consistently
over time and across locations.  If implemented properly, a new
accounting standard released by the Financial Accounting Standards
Advisory Board, which recommends accounting principles for the
federal government, will go a long way towards providing consistent
and reliable data on the Forest Service's indirect costs.  Just as
important is ensuring that all of the agency's offices consistently
implement guidance on these costs.  Once the problems with the Forest
Service's accounting system are solved and the agency's indirect
costs are clearly known, there is the opportunity for informed
decisions to be made on how to control them.

   BACKGROUND
------------------------------------------------------------ Letter :2

In fiscal year 1996, the Forest Service reported that, for the first
time, the expenses associated with preparing and administering timber
sales exceeded the receipts generated by the sale of the timber.
This loss heightened the interest in the financial status and
spending practices of the Forest Service.  After we reported that
indirect expenditures had nearly doubled in 5 years,\3 legislation
was introduced in the House of Representatives (H.R.  4149) to
improve the fiscal accountability of the Forest Service through an
improved financial accounting system.  This legislation would first
limit, and then eliminate, all indirect costs that could be charged
to the funds.  In addition, H.R.  4193, the appropriations bill for
the Department of the Interior and related agencies for fiscal year
1999, contains provisions that would limit indirect costs to 25
percent of total costs for the Salvage Sale Fund and eliminate them
entirely for the K-V Fund.

The Forest Service separates indirect costs into three main
categories:  line management, common services, and program support
(see fig.  1).  Within each of these categories, its accounting
system further divides such costs into two subcategories,
differentiated on the basis of whether the cost can readily be
identified with a specific project or function.  For example,
personnel support provided to the timber program can be readily
identified with a single program, while a management position
providing leadership for many programs (e.g., a forest supervisor)
cannot.  Costs that can be readily identified with a project or
program are called "benefiting function" costs; costs that cannot be
so identified are called "general administration" costs.

   Figure 1:  Overview of Forest
   Service's Accounting for
   Indirect Support Costs

   (See figure in printed
   edition.)

The Forest Service derives its funding from two main
sources--congressional appropriations and trust and permanent funds
such as the five we reviewed.\4

Both sources of funding are used to pay for relevant indirect costs,
but the funding mechanisms operate somewhat differently for each
source.

  -- When indirect costs are charged to appropriations, benefiting
     function costs are charged to the appropriations made
     specifically for a program, while general administration costs
     are charged to a separate budget line item that covers general
     administration costs for all programs.

  -- When indirect costs are charged to a trust or permanent fund,
     both the general administration and benefiting function costs
     are paid for by the fund.  Since 1995, Forest Service's guidance
     has called for offices to separate the accounting of these costs
     into the two subcategories of general administration and
     benefiting function, although doing so is not mandatory.

--------------------
\3 See app.  III for a summary chart of indirect expenditures for
each fund for fiscal years 1993-97.

\4 In general, funding from trust and permanent funds covers certain
activities for which the funds were specifically established, such as
reforestation or trail building.

   FACTORS INCREASING INDIRECT
   COSTS
------------------------------------------------------------ Letter :3

The Forest Service identified four main factors that have contributed
to the increase in indirect expenditures.  However, year-to-year and
office-to-office differences in the accounting system hamper any
effort to determine the effect of any of these factors.  Neither we
nor Forest Service officials can isolate the effect of these factors
from the effects of inconsistencies in the way the accounting system
was implemented.

      FACTORS IDENTIFIED BY THE
      FOREST SERVICE
---------------------------------------------------------- Letter :3.1

According to the Forest Service, the four factors contributing most
to indirect cost increases during the 5-year review period were the
implementation of the emergency salvage timber sale program, employee
buyouts, the late assignment of costs, and a new computer system.

      EMERGENCY SALVAGE TIMBER
      SALE PROGRAM
---------------------------------------------------------- Letter :3.2

In July 1995, the Congress established the emergency salvage timber
sale program, commonly called the salvage rider.  It was intended to
increase the amount of salvage timber offered and sold by instituting
an expedited sale process.  As a result, regions with a large need
for salvage sales (among the regions we reviewed, the Pacific
Southwest and Pacific Northwest regions) experienced a sharp increase
in both direct and indirect expenditures to the Salvage Sale Fund.
The rider ended on December 31, 1996, but indirect expenditures
continued to increase in two of the four regions we reviewed through
fiscal year 1997.  A regional official attributed this continued
increase to the time lag between when the direct "on-the-ground" work
ended and when the work necessary to administer and close the
contracts and finish other administrative tasks was completed.

         EMPLOYEE BUYOUTS
-------------------------------------------------------- Letter :3.2.1

The Federal Workforce Restructuring Act of 1994 (Pub.L.  103-226)
authorized executive agencies, including the Forest Service, to
conduct a buyout of employees who met certain criteria and wanted to
leave the agency.  A buyout incentive payment of up to $25,000 per
employee was to be paid from appropriations or funds available to pay
the employee.  The act also required agencies to pay the Office of
Personnel Management:  (1) for fiscal years 1994 and 1995, 9 percent
of the basic pay for each employee that left and (2) for fiscal years
1995 through 1998, $80 for each remaining permanent employee (termed
a "head tax").  Consequently, Forest Service regions with large
staffs in positions classified as indirect have experienced increases
in indirect expenditures.  For example, for the 5 years we reviewed,
the Pacific Northwest Region had more employees--some of them in
indirect positions--than any other region and accounted for almost
half of the $2.5 million charged to the funds since fiscal year 1994
for the head tax in the offices we reviewed.

Similarly, indirect expenditures for the Salvage Sale Fund at the
Washington Office increased almost $1.1 million between fiscal year
1994 and 1995.  Of this amount, the Forest Service's accounting
records show that $211,423 was the result of the head tax.  For
fiscal year 1995, Forest Service officials stated that the National
Finance Center\5 requested that the agency account centrally for the
head tax because the Center's computer system could not appropriately
account for it.  As a result, the Washington Office funded the entire
$2.6 million assessed to the agency in that year, which included the
$211,423 indirect cost charged to the Salvage Sale Fund.

--------------------
\5 The National Finance Center provides financial and administrative
management services.

         LATE ASSIGNMENT OF COSTS
-------------------------------------------------------- Letter :3.2.2

The Pacific Southwest Region experienced an increase in indirect
expenditures charged to the K-V, Brush Disposal and Salvage Sale
funds in fiscal year 1997.  According to regional office officials,
this increase occurred because the Washington Office billed the
region for about $5 million in charges for rent, telephones, and
unemployment and disability payments that the region had incurred in
fiscal years 1992, 1993, and 1994.  The region had not expected to be
billed for these costs at such a late date, so it had dismissed the
associated obligations for those years.  Other offices were also
affected by this late assignment of costs.

         NEW COMPUTER SYSTEM
-------------------------------------------------------- Letter :3.2.3

The regions and most funds experienced a rise in expenditures in
fiscal years 1995, 1996, and 1997 due to a modernization of the
Forest Service's computer system.  Agency officials stated that the
software license fee contract associated with this modernization is
funded centrally through the Washington Office.  For the funds
reviewed, this license fee increased the Washington Office's indirect
expenditures by $762,000 in fiscal year 1996 and $885,000 in fiscal
year 1997.  Regions are assessed for their share of the hardware and
related technical support costs.  Between fiscal years 1993 and 1997,
charges for computer related indirect expenditures to the Salvage
Sale Fund in the Pacific Northwest Region, for example, increased
from $22,000 to $556,000.

      ACCOUNTING SYSTEM'S
      INCONSISTENCIES
---------------------------------------------------------- Letter :3.3

Although Forest Service officials could broadly quantify the rise in
indirect expenditures associated with the four major factors just
discussed, they could not separate what increases were specifically
attributable to these factors from those caused by inconsistencies in
the way indirect costs are recorded.  During the 5-year review
period, definitions of indirect costs changed, and offices often
decided how, when, and whether to implement guidance issued by the
Washington Office.  Changing definitions and inconsistent
implementation of accounting system guidance created data that were
not comparable from year to year or office to office.

         CHANGING DEFINITIONS AND
         POLICIES
-------------------------------------------------------- Letter :3.3.1

In order to determine why costs increased, it is necessary to have
data that are comparable from year to year.  However, over our 5-year
review period, the instructions explaining how to account for
indirect costs changed several times.  For example, agency officials
stated that prior to fiscal year 1994, there was no central and
specific policy on how rent, utilities, and communications costs were
to be charged.  While the majority of the cost for rent charged to
the funds was classified as a direct cost, some offices classified
rent as an indirect cost, and still others classified it as both.
The Forest Service recognized that a better system was needed to
track indirect costs.  Towards this end, the Forest Service
established the common services category for rent, utilities, and
communications costs in that fiscal year.

However, the impact of this new account cannot be clearly measured.
For example, in fiscal year 1993, rent charged to the Salvage Sale
Fund in the Southwestern Region included $12,000 classified as direct
and $1,000 classified as indirect.  In fiscal year 1994, the Salvage
Sale Fund had no rent classified as direct and $23,000 classified as
indirect.  Although rent costs charged to this fund nearly doubled,
it is unclear how much of this change was attributable to an actual
increase in rent and how much was attributable to the use of the new
common services account.

Other changes were brought about by policy decisions.  For example,
in fiscal year 1993, indirect expenditures as a percentage of total
expenditures were less than 1 percent for the Reforestation Trust
Fund.  After determining that not all regions were assessing this
fund for general administration costs, the Washington Office directed
that the fund be assessed starting in fiscal year 1994.  After the
Washington Office's request, national indirect expenditures for this
fund jumped to 13 percent of its total expenditures in fiscal year
1994.  However, a Washington Office official stated that the Office
inadvertently excluded this fund from its own general administration
assessments until fiscal year 1996.  Again, we cannot determine the
extent to which the increase reflects a cost increase or simply the
assessment of the fund for general administration costs.

         INCONSISTENT APPLICATION
         OF POLICIES BY FOREST
         SERVICE OFFICES
-------------------------------------------------------- Letter :3.3.2

Even when provided with direction from the Washington Office,
individual offices will often determine how, when, and whether to
implement various aspects of the current accounting system for
recording indirect expenditures.  This independence adversely
impacted the Forest Service's ability to provide us with the specific
amounts associated with the reasons given for cost increases.  For
example, although instructed to start assessing the Reforestation
Trust Fund for general administration costs starting in fiscal year
1994, the Rocky Mountain and Southwestern regions did not start doing
so until fiscal year 1995.  Such choices produce inconsistencies that
affect the comparability of data and the ability to isolate specific
reasons for expenditure increases.  To similar effect, individual
offices make many of the decisions regarding how to assess and
allocate indirect costs to the funds and whether to classify certain
costs as direct or indirect, as these examples show:

  -- The Pacific Southwestern Region lets its forests decide how to
     allocate unemployment costs, according to an official there.
     Some forests consider these costs direct, and others consider
     them indirect.  As a result, the expenditures reported by the
     region contain amounts that are classified differently from
     forest to forest.

  -- In the Rocky Mountain Region, almost no indirect expenditures
     are charged to the Cooperative Work--Other Fund because,
     according to a regional official, some managers are reluctant to
     burden the fund's contributors--such as commercial users of
     forest roads--with indirect costs.  The regional supplement to
     the Forest Service Manual supports this decision by saying that
     "Contributors do not need to be assessed for overhead charges if
     the contributors are unwilling to accept them."

  -- Since fiscal year 1995, the Rocky Mountain Region has classified
     rent charged to the Brush Disposal Fund entirely as an indirect
     cost, whereas the Southwestern Region has classified rent
     charged to the same fund both as a direct and an indirect cost.

  -- In the Pacific Southwest Region, an official stated that
     expenses for timber resource clerks in some forests are
     classified as a direct cost to the funds but in other forests
     are classified as an indirect cost.

  -- At the Washington Office, officials told us that the majority of
     the increase in the indirect expenditures to the Salvage Sale
     Fund in fiscal years 1996 and 1997 occurred to charge the
     correct amount and to compensate for what were determined to be
     underassessments for general administration during fiscal years
     1993-95.

      IMPACT OF ALL FACTORS CANNOT
      BE QUANTIFIED
---------------------------------------------------------- Letter :3.4

Although the Forest Service can trace some of the increases in
indirect costs to the four major factors discussed above, changing
definitions and inconsistent implementation of policies hamper the
agency's efforts to explain all the increases.  For example, in the
Pacific Southwest Region, four indirect expenditure categories in the
Salvage Sale Fund increased $2.5 million from fiscal year 1995 to
1996.  Financial records show that indirect automated data processing
(ADP) expenditures rose $221,000; rent by $103,000; salaries by
$251,000; and materials, supplies, and other services by $1.9
million.  While the increase in ADP expenditures might be explained
by the additional expenditures associated with the modernization of
the computer system, regional officials cannot specifically isolate
the amount that rent or salaries rose because of factors such as the
salvage sale rider from increases that may have resulted from policy
changes.

The explanation of why the region had such a sharp increase in
materials, supplies, and other services illustrates another reason
why indirect cost increases are so difficult to isolate.  Agency
officials explained that this increase occurred because it was the
Salvage Sale Fund's turn to pay for the "pooled" general
administration assessment for the Forest Service's contract with the
National Finance Center.  Forest Service regions often "pool" the
assessment to simplify budgeting procedures.  For example, instead of
assessing each fund individually for its share of costs from the
National Finance Center, each fund places its allotted share for
general administration into a pool, with the entire cost then being
shown as charged against one fund instead of five.  In this case, it
was the Salvage Sale Fund's year to bear the pooled amount for the
National Finance Center.  While pooling may simplify budgeting
procedures, it has hindered efforts to isolate and explain individual
cost increases.

   ACTIONS TAKEN TO CONTROL COSTS
------------------------------------------------------------ Letter :4

Overall, the Forest Service reduced its permanent staff by 14 percent
during the 5-year period of our review, and individual offices
implemented additional measures designed to reduce costs.  Most of
these efforts have been aimed at reducing costs generally and have
not been targeted specifically at indirect expenditures.  The
congressional appropriations committees also reduced the budget line
item for general administration during the period, but one way the
Forest Service responded to the decrease was by reclassifying some
general administration activities as benefiting function activities.

      ACTIONS INITIATED BY THE
      FOREST SERVICE
---------------------------------------------------------- Letter :4.1

The regions actively participated in the Forest Service's national
downsizing effort.  In the four regions we reviewed, the downsizing
resulted in staff reductions ranging from 8 to 23 percent.  However,
during the 5-year period, indirect salary expenditures charged to the
five funds dropped appreciably only in the Rocky Mountain Region.
They decreased slightly in the Pacific Southwest and Pacific
Northwest regions and rose slightly in the Southwestern Region.  The
Washington Office also saw an increase.  Because of the combined
effect of the other factors already discussed, we cannot isolate the
extent of the impact that downsizing had on indirect expenditures
charged to these funds.

Regions and forests also pursued other measures designed to reduce
both direct and indirect costs.  These included closing offices,
consolidating offices, and centralizing administrative functions.

         OFFICE CLOSURES
-------------------------------------------------------- Letter :4.1.1

During our 5-year review period, a total of five district offices
were closed in the four regions we visited.  Estimates of cumulative
savings from these five closures totaled about $1.6 million, but the
savings were not identified as direct or indirect costs.  Regional
officials stated that closing offices is a very effective way to
reduce costs, but they consider it a time-consuming and complicated
process.  A Washington Office official noted that for fiscal years
1996 and 1997, provisions in the appropriations law prohibited the
agency from closing offices without specific congressional
approval.\6 He also stated that even before being submitted to the
Congress for approval, the proposed closures must first be approved
by the Washington Office.  The whole approval process can take 2
years or more to complete.

--------------------
\6 The prohibition against closing offices was not included in the
1998 appropriations law, and an official in one of the four regions
we reviewed said that the region is following through with a
previously studied closure.

         OFFICE CONSOLIDATIONS AND
         CENTRALIZATION OF
         FUNCTIONS
-------------------------------------------------------- Letter :4.1.2

Compared with office closures, office consolidations and the
centralization of certain administrative functions were more commonly
used in an effort to reduce total costs.  While the Washington Office
must approve office consolidations, the process is less complicated
than the one for closures.  In fiscal year 1998, the Washington
Office has approved 15 ranger district consolidations involving 31
district offices in the regions we reviewed.  During our 5-year
review period, examples of specific consolidations and efforts to
centralize administrative functions included these:

  -- For the Black Hills National Forest, we were told that three
     district ranger positions were eliminated when six districts
     were consolidated.  The remaining three district rangers oversee
     the six offices.

  -- According to a regional official, in fiscal year 1996 the
     Southwestern Region received approval to consolidate two
     districts in one forest.  Both offices would remain open, and
     they would share a district ranger.

  -- According to a Rocky Mountain Regional official, in fiscal year
     1996 the region organized its forests into three administrative
     zones.  By combining 16 units into three zones and thereby
     centralizing such administrative processing functions as
     contracting and procurement, the region was able to reduce
     administrative costs.

  -- According to a regional official, in fiscal year 1994 the
     Pacific Southwest Region instituted its "Excellence in
     Administrative Organization" project in an effort to control
     indirect costs.  The region was divided into five provinces, and
     certain types of administrative operations, such as accounting,
     budgeting, and contracting, were centralized.

  -- In the Southwestern Region, as a result of consolidation, we
     were told that three forests share a contracting officer and
     personnel staff.  Also, the region no longer has its own
     aircraft safety officer; it now shares one with the Rocky
     Mountain Region.

      ACTIONS TAKEN BY THE
      CONGRESS
---------------------------------------------------------- Letter :4.2

The Senate and House appropriations committees, in their committee
and conference reports, recommended a specified amount each year for
the general administration budget line item within the National
Forest System appropriation.  This budget line item applies only for
general administration activities associated with appropriations and
cannot be used to fund general administration activities applicable
to the trust and permanent funds.

Between fiscal year 1993 and fiscal year 1997, the committees reduced
the recommended amount for general administration costs by about 14
percent.  However, this reduction did not result in a corresponding
decrease in indirect costs.\7 One way that the Forest Service has
been able to comply with the reduction was by reclassifying costs
previously considered general administration costs to other indirect
cost categories.  In doing so, the agency also implemented
recommendations made by the National Forest System General
Administration Task Force in a 1992 report that was provided to the
appropriations committees, and the Forest Service described the
reclassifications in the explanatory notes of its budget.
Reclassifications included these:

  -- In fiscal year 1993, for each forest supervisor's office, the
     expenses for the forest supervisor, deputies, and their
     secretarial support were classified as general administration
     costs.  By 1995, only the costs for the forest supervisor and
     one secretary could be charged as general administration.  The
     other positions were reclassified and are now charged to other
     indirect cost categories.

  -- In fiscal year 1993, up to five district ranger positions were
     included in general administration.  In fiscal year 1997, all
     such district support could not be included in general
     administration and was reclassified.

The general administration budget line item cannot be used to fund
general administration activities in the permanent and trust funds;
therefore, the Forest Service has developed a method of assessing the
funds for such charges.  The method used results in a percentage
reflecting the portion of the budget that general administration
represents.  If the general administration budget line item is 12
percent of the total budget to which it applies, then the Forest
Service limits the general administration costs that may be assessed
to the funds to 12 percent of each fund's annual program level.
Amounts that can be charged for other indirect cost categories are
limited by budget constraints.  We were told by agency officials
that, in practice, many forests have chosen not to separately
identify general administration costs from other indirect costs
charged to the funds.  Agency officials stated that forest officials
found the distinction confusing and unnecessary because all the costs
charged to a fund are paid for by that fund.

--------------------
\7 We discussed how this action did not result in reduced indirect
costs in Forest Service:  Effect of H.R.  4149 on Indirect
Expenditures Charged to Four Funds (GAO/T-RCED-98-251, July 28,
1998).

   ACTIONS ESSENTIAL IN
   CONTROLLING INDIRECT COSTS
------------------------------------------------------------ Letter :5

In an effort to reduce overall costs, the Forest Service has closed
and consolidated offices, downsized, and centralized certain
administrative functions.  However, these measures were not enough to
keep indirect expenditures from almost doubling in 5 years.  Because
individual offices will often decide how to account for indirect
costs, the accounting system will not yield the data necessary to
measure the savings in indirect costs resulting from these actions.
This condition is made worse by definitional and other shifts that
allow costs simply to be reclassified.  Only after consistent and
reliable indirect cost data are produced can trends and comparisons
be studied and informed decisions made.  An essential first step for
the Forest Service in controlling indirect costs is to know clearly
what these costs are from year to year and office to office.

A starting point for this effort involves establishing clear
definitions for indirect costs and applying them consistently over
time.  In this regard, the Forest Service can be helped by a recent
addition to the federal financial accounting standards.  In July
1995, the Financial Accounting Standards Advisory Board, the group
that recommends accounting principles for the federal government,
released Statement of Federal Financial Accounting Standard (SFFAS)
No.  4, Managerial Cost Accounting Concepts and Standards for the
Federal Government.  Effective for federal agencies starting with
fiscal year 1998, this standard is "aimed at providing reliable and
timely information on the full cost of federal programs, their
activities, and outputs."

Although the Forest Service was required to use the principles set
forth in SFFAS No.  4 on October 1, 1997, we were told by a
Washington Office official that the agency currently has a team
discussing the possibility of applying the principles to its existing
accounting system.  Properly implementing this standard will go a
long way towards providing cost data upon which informed decisions
about reducing costs can be based.  Of necessity, this endeavor will
mean some changes in the way the Forest Service classifies costs as
direct or indirect, as the following examples show.

Unemployment and Disability Costs.  About 59 percent of the total
unemployment and disability costs charged to the five funds we
reviewed were indirect, totaling more than $16 million over the 5
years.  If an employee normally charges his or her time directly,
then we believe that SFFAS No.  4 requires that associated
unemployment or disability costs should also be charged directly.
Because 76 percent of all salary costs charged to the funds during
the past 5 years were classified as direct, proper implementation of
SFFAS No.  4 should result in a substantial lowering of the
unemployment and disability costs classified as indirect.

ADP Costs.  In the regions we reviewed, 71 percent of the ADP costs
charged to the five funds were classified as indirect--a total of
almost $10 million in 5 years.  Again, under SFFAS No.  4, we believe
such costs would be classified as direct to the degree that the
employees associated with the ADP costs normally charge their time
that way.  As with the assignment of unemployment and disability
costs, we would expect ADP costs to mirror those of salaries and to
be classified as direct whenever people to whom they are assigned
charge their time directly.  Classifying these types of costs as
indirect overstates indirect costs overall and understates direct
costs.

Just as important as clarifying how costs should be classified,
however, is ensuring that Forest Service offices apply these
classifications consistently.  If individual offices continue to vary
in their decisions about how, when, and whether to implement
accounting policies and definitions, the data produced will continue
to have limited validity, and the Forest Service will have little
reliable information upon which to judge whether indirect costs are
truly rising or falling, let alone why.  Because centralization
represents such a change in the Forest Service's approach of giving
great latitude to local offices, oversight by Forest Service
headquarters and regional officials will be crucial to this effort.

   CONCLUSIONS
------------------------------------------------------------ Letter :6

Over the 5-year period we reviewed, the Forest Service took many
actions to reduce costs, but indirect expenditures charged to the
five funds reviewed increased nonetheless.  Thus far, congressional
attempts to affect indirect costs (through appropriations committees'
reducing the budget line item recommended for general administration)
also appear to provide little assurance that such costs will actually
be reduced.  Instead, such costs have often been redefined into other
indirect cost categories.  However, incorporating the principles set
forth in the Statement of Federal Financial Accounting Standard No.
4 would go a long way towards producing cost data that are consistent
and reliable.  But even the best guidance will not produce consistent
and reliable data if it is not uniformly implemented by all offices.
Solving these accounting system problems is an essential first step
in controlling indirect expenditures.  Once these problems are solved
and indirect costs from year to year and office to office are clearly
known, there is the opportunity for informed decisions about indirect
costs and how to reduce them.  At that point, approaches could
include requiring the Forest Service to reduce indirect costs by a
set amount and to report on what it has done or plans to do to
achieve that reduction.

   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

To ensure that consistent and reliable cost data are available upon
which to base management decisions and monitor trends, we recommend
that the Secretary of Agriculture direct the Chief of the Forest
Service to take the following actions:

  -- Incorporate the Statement of Federal Financial Accounting
     Standards No.  4 into the Forest Service's cost accounting
     system.

  -- Ensure that all offices consistently implement guidance with
     respect to accounting for indirect costs and hold the offices
     accountable by following up to make sure that the standards are
     being consistently used.

   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We provided a draft of this report to the Forest Service for review
and comment.  The Forest Service's letter commenting on the report
(see app.  IV) states that the agency concurs with our
recommendations and that it is committed to developing definitions of
indirect costs to be applied on a national basis.

---------------------------------------------------------- Letter :8.1

As we arranged with your offices, unless you publicly announce its
contents earlier, we plan no further distributions of this report
until 30 days from the date of this letter.  At that time, we will
send copies to the Secretary of Agriculture, the Chief of the Forest
Service, and other interested parties.  We will also make copies
available to others upon request.

Major contributors to this report are listed in appendix V.  If you
or your staff have any questions or wish to discuss this material
further, please call me at (206) 287-4810.

James K.  Meissner
Associate Director, Energy,
 Resources, and Science Issues

List of Requesters

The Honorable Slade Gorton
Chairman, Subcommittee on Interior
 and Related Agencies
Committee on Appropriations
United States Senate

The Honorable Larry E.  Craig
Chairman, Subcommittee on Forests
 and Public Land Management
Committee on Energy and Natural Resources
United States Senate

The Honorable Robert F.  Smith
Chairman, Committee on Agriculture
House of Representatives

DESCRIPTIONS OF THE FIVE FUNDS
EXAMINED
=========================================================== Appendix I

   BRUSH DISPOSAL FUND
--------------------------------------------------------- Appendix I:1

A permanent appropriation that uses deposits from timber purchasers
to dispose of brush and other debris resulting from timber
harvesting.  It was authorized by the Act of August 11, 1916, ch.
313, 39 Stat.  446, as amended.  (16 U.S.C.  490)

   COOPERATIVE WORK--OTHER FUND
--------------------------------------------------------- Appendix I:2

A trust fund that uses deposits from "cooperators"--commercial users
of the forest road system--for the construction, reconstruction, and
maintenance of roads, trails, and other improvements.  It was
authorized beginning with the Act of June 30, 1914, ch.  131, 38
Stat.  415, as amended.  (16 U.S.C.  498)

   COOPERATIVE
   WORK--KNUTSON-VANDENBERG FUND
--------------------------------------------------------- Appendix I:3

A trust fund that uses deposits made by timber purchasers to reforest
timber sale areas.  In addition to planting, these deposits may also
be used for eliminating unwanted vegetation on lands cut over by the
purchasers and for protecting and improving the future productivity
of the renewable resources on forest land in the sale areas,
including sale area improvement operations, maintenance,
construction, reforestation, and wildlife habitat management.  The
fund was authorized by the Act of June 9, 1930, ch.  416, 46 Stat.
527, as amended.  (16 U.S.C.  576-576b)

   REFORESTATION TRUST FUND
--------------------------------------------------------- Appendix I:4

A trust fund that uses tariffs on imports of solid wood products to
prevent a backlog in reforestation and timber stand improvement work.
It was authorized by sec.  303 of the Recreational Boating Safety and
Facilities Improvement Act of 1980, Pub.L.  96-451, 94 Stat.  1983,
as amended.  (16 U.S.C.  1606a)

   SALVAGE SALE FUND
--------------------------------------------------------- Appendix I:5

A permanent appropriation that uses receipts generated by the sale of
salvage timber to prepare and administer future salvage sales.  It
was authorized by section 14(h) of the National Forest Management Act
of 1976, Pub.L.  94-588, 90 Stat.  2949.  (16 U.S.C.  472a (h))

OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix II

Given the heightened interest in the financial status and spending
habits of the Forest Service, you asked us to provide data on
indirect expenditures charged to five Forest Service funds.  We
agreed to provide this information in two phases.  In phase one, we
provided information on the amount of indirect expenditures charged
to these five funds between fiscal years 1993 and 1997.  This second
phase has the three objectives of identifying (1) the reasons why
indirect costs rose, (2) actions taken by the Forest Service and
others to control these expenditures, and (3) other actions that may
help the Forest Service control such expenditures in the future.

As agreed, we concentrated our detailed review on four regions and
the Washington Office.  Because the five funds are mainly
timber-related, we chose the Pacific Southwest and Pacific Northwest
regions because they have large timber programs.  We chose the Rocky
Mountain Region because it had lower indirect expenditures than any
other region.  We selected the Southwestern Region because it is
similar in size to the Rocky Mountain Region yet had much higher
indirect costs.  We selected the Washington Office because its
indirect costs fluctuated widely and increased significantly in some
funds.  Table II.1 provides each region's location and the geographic
area it covers.

                               Table II.1

                 Location and Area Administered by the
                            Regions Reviewed

Region                          Location            Area administered
------------------------------  ------------------  ------------------
Rocky Mountain                  Lakewood,Colorado   Colorado, Kansas,
                                                    Nebraska, South
                                                    Dakota, Eastern
                                                    Wyoming

Southwestern                    Albuquerque, New    Arizona, New
                                Mexico              Mexico

Pacific Southwest               San Francisco,      California,
                                California          Hawaii, Guam,
                                                    Trust Territories
                                                    of the Pacific
                                                    Islands

Pacific Northwest               Portland, Oregon    Oregon, Washington
----------------------------------------------------------------------
To obtain information on why indirect costs increased and what had
been done to control them, we interviewed knowledgeable officials at
each location visited.  In addition, we reviewed pertinent files,
financial records, studies, reports and manuals and asked follow-up
questions as dictated by the document reviews.

After gathering information on what had caused costs to rise and
fluctuate, we reviewed various financial standards, laws,
legislation, studies, and manuals to determine how the costs might be
controlled in the future.  We also interviewed Forest Service
officials to obtain their suggestions.

Because of an ongoing lawsuit involving indirect expenditures charged
to the Cooperative Work--Knutson-Vandenberg Fund, you agreed that we
should not include this fund in our analysis of why indirect
expenditures increased.

We conducted our review from May through August 1998 in accordance
with generally accepted government auditing standards.

GENERAL SUMMARY OF EXPENDITURES,
ALL OFFICES COMBINED
========================================================= Appendix III

Fund                         1993          1994          1995          1996          1997
-------------------  ------------  ------------  ------------  ------------  ------------
Brush Disposal Fund
-----------------------------------------------------------------------------------------
Total expenditures    $39,155,531   $32,682,801   $28,516,095   $24,779,148   $21,792,477
Indirect                7,276,062     8,296,252     9,269,824     7,628,872     7,451,007
 expenditures
Percent of indirect        18.58%        25.38%        32.51%        30.79%        34.19%
 to total
 expenditures

Cooperative Work--Other Fund
-----------------------------------------------------------------------------------------
Total expenditures    $25,366,234   $34,089,814   $36,828,275   $38,449,576   $37,959,632
Indirect                3,248,775     3,424,970     4,471,326     3,659,738     3,409,289
 expenditures
Percent of indirect        12.81%        10.05%        12.14%         9.52%         8.98%
 to total
 expenditures

Cooperative Work--K-V Fund
-----------------------------------------------------------------------------------------
Total expenditures   $172,845,447  $195,157,437  $182,381,980  $167,816,598  $166,324,646
Indirect               33,259,078    44,491,025    47,129,820    44,804,956    51,169,263
 expenditures
Percent of indirect        19.24%        22.80%        25.84%        26.70%        30.76%
 to total
 expenditures

Reforestation Trust Fund
-----------------------------------------------------------------------------------------
Total expenditures    $31,868,201   $32,188,968   $26,971,033    30,590,737   $30,977,214
Indirect                  260,642     4,230,938     6,271,400     6,974,873     6,635,364
 expenditures
Percent of indirect         0.82%        13.14%        23.25%        22.80%        21.42%
 to total
 expenditures

Salvage Sale Fund
-----------------------------------------------------------------------------------------
Total expenditures   $144,277,887  $152,326,586  $157,419,033  $203,718,423  $180,135,263
Indirect               21,921,728    31,598,254    37,830,702    50,989,586    50,079,180
 expenditures
Percent of indirect        15.19%        20.74%        24.03%        25.03%        27.80%
 to total
 expenditures
-----------------------------------------------------------------------------------------
Note:  In addition to the regions and the Washington Office, other
offices such as the Forest Experiment Stations also charge the five
funds for indirect expenditures.  Because these amounts are
relatively minor, we chose not to include them in the compilation of
expenditures.

(See figure in printed edition.)Appendix IV
COMMENTS FROM THE FOREST SERVICE
========================================================= Appendix III

MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

ENERGY, RESOURCES, AND SCIENCE
ISSUES

Jonathan T.  Bachman
Jill L.  Berman
Victor S.  Rezendes
Stanley G.  Stenersen
William J.  Temmler

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION

Carla J.  Lewis
Louis J.  Schuster
McCoy Williams

OFFICE OF THE GENERAL COUNSEL

Doreen S.  Feldman
Alysa Stiefel
*** End of document ***