[Final Audit Report on the Office of Management and Budget Circular A-76 Study of Aircraft Services for the Pacific Northwest Region, Bureau of Reclamation]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 96-1-822

Title: Final Audit Report on the Office of Management and Budget Circular
       A-76 Study of Aircraft Services for the Pacific Northwest
       Region, Bureau of Reclamation

Date: June 10, 1996

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United States Department of the Interior
OFFICE OF THE INSPECTOR GENERAL
Washington, D.C. 20240

MEMORANDUM

TO:                 The Secretary

FROM:               Wilma A. Lewis
                    Inspector General

SUBJECT SUMMARY:  Final Audit Report for Your Information - "Office of
Management and Budget Circular A-76 Study of Aircraft
Services for the Pacific Northwest Region, Bureau of
Reclamation" (No. 96-I-822)

Attached for your information is a copy of the subject final audit report.

The objective of our review was to determine whether the Bureau of Reclamation's cost
comparison supporting its decision to provide in-house aircraft services in the Pacific
Northwest Region was prepared in accordance with the provisions of Circular A-76,
"Performance of Commercial Activities." The Bureau had leased an aircraft since 1990 for
about $2.4 million in lease obligations. In January 1995, the Bureau completed the study,
which concluded that providing the services  in-house with a Government-owned aircraft was
more cost beneficial than providing in-house services with a leased aircraft or using private
sector contract services. As a result, the Bureau purchased the aircraft by applying $2
million of the prior lease obligations and providing a cash payment of $1.1 million.

We concluded that the Bureau had generally prepared the cost comparison in accordance
with the provisions of the Circular. In addition, we determined that the study provided
justification for the Bureau's decision to provide aircraft services in-house with a
Government-owned aircraft. Our report contained no recommendations.

If you have any questions concerning this matter, please contact me or Ms. Judy Harrison,
Assistant Inspector General for Audits, at (202) 208-5745.

Attachment

 
W-IN-BOR-O05-96   

United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Headquarters Audits
1550 Wilson Boulevard
Suite 401
Arlington, Virginia 22209

AUDIT REPORT

Memorandum

To:   Commissioner - Bureau of Reclamation

From:  Judy Harrison
Assistant Inspector General for Audits

Subject: Final Audit Report on the Office of Management and Budget
Circular A-76 Study of Aircraft Services for the Pacific Northwest Region,
Bureau of Reclamation (No. 96-1-822)

INTRODUCTION

This report presents the results of our review of the Bureau of Reclamation's
January 1995 cost comparison of alternatives in its Office of Management and
Budget Circular A-76 study on providing in-house aircraft services for its Pacific
Northwest Region. The objective of the review was to determine whether the cost
comparison was prepared in accordance with the provisions of Circular A-76,
"Performance of Commercial Activities," and whether the cost comparison supported
the Bureau's decision to continue to provide the aircraft services in-house.

BACKGROUND

The Bureau's mission is to manage, protect, and develop water-related resources in
an environmentally and economically sound manner in the interests of the American
public. To accomplish its mission, the Bureau manages a variety of programs, such
as water resource development, operation and maintenance of projects, and
construction of water and hydroelectric facilities.  Within the Bureau's Pacific
Northwest Region, these programs are carried out by personnel in the Regional
Office in Boise, Idaho, and at 19 other offices primarily in the States of Idaho,
Washington, and Oregon. A key element in the efficient management of these
programs is the Bureau's capability to transport the staff within the Region to its
facilities and remote areas in a timely manner. Because 13 of the 20 offices in the
Region are not served by commercial air transportation, the Bureau must obtain air

 
travel to these facilities and remote areas through either in-house aircraft services
or through the private sector.

The Bureau is required by Circular A-76 to compare the in-house versus private
sector costs of providing aircraft services to determine which alternative is more cost
beneficial to the Government.  In January 1995, the Bureau completed a
Circular A-76 study that concluded that providing the services in-house with a
Government-owned aircraft was more cost beneficial than providing in-house services
with a leased aircraft or using private sector contract services. Accordingly, in
September 1995, the Bureau requested that the Department of the Interior's Office
of Aircraft Servicesl purchase the King Air B200 aircraft that Aircraft Services had
leased for the Bureau since 1990. Under the lease agreement, the Bureau had paid
about $2.4 million in lease obligations, of which about $2.0 million was applied
toward the $3.1 million purchase price of the aircraft. As such, Aircraft Services
purchased the aircraft for the option price of about $1.1 million.

SCOPE OF AUDIT

We conducted our audit at the Bureau's Pacific Northwest Regional Office and at
Aircraft Services headquarters office in Boise. To accomplish our objective, we
analyzed the Bureau's documentation and support for the cost-comparison
alternatives presented in its Circular A-76 study to justify in-house aircraft services,
We also interviewed officials involved in preparing the study.

The audit was made in accordance with the "Government Auditing Standards," issued
by the Comptroller General of the United States. Accordingly, we included such
tests of records and other auditing procedures that were considered necessary under
the circumstances to accomplish the audit objective. Because the scope of the review
was limited to evaluating the cost comparison of the alternatives in the Bureau's
Circular A-76 study, we did not assess the Regional Office's system of internal
controls over costs and revenues. As part of the audit, we reviewed the Department
of the Interior's Annual Statement and Report, required by the Federal Managers'
Financial Integrity Act, for fiscal years 1994 and 1995. The Department did not
report any control weaknesses that related to the objective and scope of our audit,

PRIOR AUDIT COVERAGE

During the past 5 years, neither the Office of Inspector General nor the General
Accounting Office has issued any reports related to the Bureau's acquisition of
aircraft services. However, the Office of Inspector General has issued two audit
reports on the performance of Circular A-76 studies related to the acquisition of
aircraft services within the Department as follows:

lWithin the Department of the Interior, the Office of Aircraft Services has responsibility for
acquiring
all aircraft and related services for the bureaus.

2

 
  - The March 1994 report "Lease/Purchase of Aircraft for the Oregon State
Office, Bureau of Land Management'' (No. 94-I-476) addressed the acquisition of
aircraft services by the Bureau of Land Management. The report concluded that the
Bureau's lease/purchase of the aircraft was based on an inaccurate Circular A-76 cost
comparison of acquisition alternatives and recommended that a new study be
performed before the aircraft was purchased. The Bureau decided not to provide
aviation services in-house.

  - The January 1995 report "Use and Acquisition of Aircraft by the Department
of the Interior" (No. 95-I-317) discussed Circular A-76 guidelines.  The report
concluded that the bureaus either did not perform analyses or performed inadequate
analyses to determine whether aircraft and aircraft services should be purchased.
The reasons cited by the bureaus for these deficiencies were that they believed that
the aircraft were mission oriented and that the Circular A-76 guidelines were
"ambiguous."  The report recommended that studies under Circular A-76 be
performed before the aircraft was acquired. The Assistant Secretary for Policy,
Management and Budget concurred with the recommendation, noting that "the draft
Circular A-76 procedure now in use is not definitive enough" and that the
Department would work with the Office of Management and Budget "on acceptable
formulas and procedures for use in aviation A-76 studies."

We have addressed the area of ambiguity noted during this review under separate
correspondence for consideration by the Assistant Secretary for Policy, Management
and Budget.

RESULTS OF AUDIT

The Bureau of Reclamation's cost comparison of alternatives was generally prepared
in accordance with provisions of Office of Management and Budget Circular A-76,
as modified. In addition, we determined that, subsequent to audit adjustments, the
study justified the Bureau's decision to provide aircraft services in-house with a
Government-owned aircraft.

In its Circular A-76 study, the Bureau considered three alternatives: continue
providing in-house aircraft services with a Government-owned aircraft; provide
in-house aircraft services with a leased aircraft; or contract for aircraft services from
the private sector. The Bureau conducted the study using the Aircraft and Aviation
Cost Comparison Form, as illustrated in the June 1990 draft of Office of
Management and Budget Circular A-76. The Bureau's cost comparison, however,
contained some misstatements that understated the costs of all the alternatives.

Based on our analysis of these alternatives, we determined that the total cost of the
first alternative was understated by $94,035; the second alternative was understated
by $107,740, which was the least cost effective to the Government and the third
alternative was understated by $19,400. The largest adjustments to the Bureau's
estimates of the in-house alternatives were attributable to understatements in

3



 
depreciation and administrative overhead costs. The largest adjustment to the
private sector alternative was the conversion differential costs.  The audit
adjustments are detailed in the Appendix.

While the correction of these misstatements would not affect the Bureau's conclusion
that aircraft services could be provided in-house with a Government-owned aircraft
at a lower cost, the 5-year estimated savings over aircraft services contracted from
the private sector were reduced from $729,014 to $654,379 as follows:

         Bureau          Adjusted
        Estimated   Audit    Estimated
Description      costs   Adjustments   costs

Total In-House Costs     $3,555,838    $94,035   $3,649,873
Total Private Sector Costs   4,284,852    19,400    4,304,252
In-House Costs Less Than
Private Sector Costs

The legislation, as amended, creating the Office of Inspector General requires
semiannual reporting to the Congress on all audit reports issued, actions taken to
implement audit recommendations, and identification of each significant
recommendation on which corrective action has not been taken.

Since this report does not contain any recommendations, a response to this report
is not required. However, if you have any questions or comments concerning the
report, please call Mr. Charles Lyons, Acting Regional Audit Manager, Western
Region, at (916) 979-2700.

cc:  Assistant Secretary for Water and Science
  Assistant Secretary for Policy, Management and Budget
  Director, Office of Aircraft Services

4



 
                            APPENDIX
                            Page 1 of 3

BUREAU OF RECLAMATION'S STUDY OF AVIATION SERVICES

COSTS FOR A 5-YEAR PERIOD

Description

Alternative 1- In-House Aircraft Services With
Government-Owned Aircraft:
Total Direct Operating Costs
Annual Fixed Operating Costs
Crew Costs
Maintenance Costs
Depreciation
Self-insurance
  Operations Overhead
Administrative Overhead
  Cost of Capital
  Conversion Differential
Total Costs

Alternative 2- In-House Aircraft Services With
Leased Aircraft
Total Direct Operating Costs
Fixed Operating Annual Costs
Crew Costs
Maintenance Costs
Aircraft Lease
Self-insurance
  Operations Overhead
Administrative Overhead
Total Costs

Alternative 3- Private Sector:
Contract Costs
Cost Construction to Meet Performance
Work Statement Requirements
Additional Pilot and Crew Charges
Travel and Per Diem
Airport Fees
Other Costs (Overtime)
Contract Administration Costs
One-Time Conversion Costs
Federal Income Tax
Conversion Differential
Total Costs

Bureau
Estimated
costs



$1,603,800

608,280
157,500
193,800
293,700
130,000
18,630
536,090
14,038
$3,555,838



$1,821,300

608,280
157,500
1,094,400
190,200
130,000
18,630
$4,O2O,31O


$3,397,350


240,625
10,370
16,315
24,165
93,625
502,402
   0

$4,284,852


5

Audit
Adjustments







($157,500)
193,760
22,800

138,940
(89,927)

$94,035







($157,500)

126,300

138,940
$107,740









($67,945)
  87,345
$19,400

Adjusted
Estimated   Explanatory
costs     Notes

$1,603,800

608,280
   0    (1)
387,560    (2)
316,500    (3)
130,000
157,570    (4)
446,163    (5)
   0    (6)
$3,649,873

$1,821,300

608,280
   0    (1)
1,094,400
316,500    (3)
130,000
157,570    (4)
$4,128,050

$3,397,350

240,625
10,370
16,315
24,165
93,625
502,402
(67,945)   (7)
87,345    (6)
$4,304.252

 
APPENDIX
Page 2 of 3

EXPLANATORY NOTES:

(1) Maintenance Costs. The Government's maintenance costs should be decreased
by $157,500 for both in-house alternatives. Based on our review, this amount was
duplicative because it was included in the Office of Aircraft Services administrative
overhead (see Note 4).

(2) Depreciation. The amount for depreciation under the first alternative should
be increased by $193,760. The Bureau reduced the aircraft acquisition cost by an
estimate of the aircraft's residual value and divided the resulting amount by the
aircraft's estimated 20-year useful life. The Bureau's method of calculating the
$193,800 in depreciation was in accordance with Office of Management and Budget
Circular A-76 except that it allocated a portion to a replacement reserve. This
reserve allocation is consistent with Aircraft Services method of computing
depreciation. Specifically, Aircraft Services, for internal purposes, allocates half of
the amount to depreciation and half to a replacement reserve. However, the full
amount calculated for depreciation following the Bureau's method should have been
used in the cost comparison.

(3) Self-Insurance. The Government's costs for an in-house operation with an
owned aircraft should be increased by $22,800, and the costs with a leased aircraft
should be increased by $126,300. The Bureau used Aircraft Services method for
calculating self-insurance, which estimated this cost at 3 percent of the estimated
annual market value of the aircraft. However, the Bureau could not provide support
for its estimates of the market values used. Based on the prescribed market value
authority of trend estimates (the Fall 1995 "Aircraft Bluebook Price Digest"), we
determined that the aircraft's market value was $2,410,000 in 1994, the first year of
the study, and that the value would decline by $150,000 for each of the remaining
4 years. Using these figures and the 3 percent rate, we calculated total self-insurance
costs of $316,500.

(4) Administrative Overhead. The Government's administrative overhead costs
under both in-house alternatives should be increased by $138,940 to include an
estimate of Aircraft Services administrative overhead. The Bureau calculated its
5-year amount ($18,630) based on 5 percent of the annual salary for one employee
at the Federal general schedule rate at grade 13, step 5, including 29.66 percent for
employee fringe benefits, as prescribed by Circular A-76. We determined from
historical costs that Aircraft Services had incurred a larger amount of overhead
allocable to the aircraft. Based on Aircraft Services actual charges, we estimated
that the average cost of overhead per flight hour was $31.94, which also included a
monthly maintenance fee of $2,625 (see Note 1). Based on 870 hours per year for
5 years, we estimated Aircraft Services overhead costs at $138,940.

6



 
APPENDIX
Page 3 of 3

(5) Cost of Capital. The Government's cost of capital for the first alternative could
be decreased by $89,927. According to Circular A-76, the acquisition cost of the
aircraft, less its accumulated depreciation, is the basis for computing the cost of
capital at a 10 percent rate. However, Circular A-76 does not clarify the appropriate
acquisition cost for aircraft under a lease agreement. The Bureau estimated that the
cost of capital would be based on the lease/purchase option price of the aircraft in
May 1995, of $1,183,177, less the trade-in allowance for another Bureau aircraft.
The Bureau included 10 percent of this amount in the annual fixed operating costs.
We estimated that the cost of capital was $446,163, or a decrease of $89,927, by
using the actual option price in September 1995, $1,075,789, and adjusting this
amount for annual depreciation.

(6) Conversion Differential. The conversion differential should be decreased by
$14,038 for the in-house, Government-owned aircraft (Alternative 1) and increased
by $87,345 for aircraft services contracted from the private sector (Alternative 3).
The Bureau calculated the $14,038 based on 10 percent of the estimated personnel
salaries and expenses of $140,038 for a l-year period. According to Circular A-76,
the conversion differential should have been computed over the 5-year study period
and added to the private sector costs instead of the in-house alternative. In addition,
the Bureau had underestimated the conversion differential basis by omitting both the
aircraft crew and Aircraft Services administrative personnel salaries, expenses, and
per diem costs. We determined that 10 percent of these costs and expenses for a
5-year period were $87,345, which resulted in a corresponding increase in private
sector costs.

(7) Federal Income Tax. The estimated Federal income tax should be increased by
$67,945. The Bureau estimated Federal income tax based on 1 percent of the
contract cost, as stipulated in Circular A-76, Transmittal No. 7, dated August 8, 1988;
however, the Bureau did not include the tax estimate in the estimate, which should
reduce the total cost of contract performance.

 
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