[Survey Report on the Recovery of Costs of the Working Capital Fund, Office of Aircraft Services, Office of the Secretary]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 97-I-550

Title: Survey Report on the Recovery of Costs of the Working Capital
       Fund, Office of Aircraft Services, Office of the Secretary

Date: March 12, 1997

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W-IN-OAS-001-95A

United States Department of the Interior

OFFICE OF INSPECTOR GENERAL
   Washington, D.C. 20240
SURVEY REPORT

Memorandum

To:       Director, Office of Aircraft Services

From:          Robert J. Williams
          Acting Assistant Inspector General for Audits

Subject:  Survey Report on the Recovery of Costs of the Working Capital Fund, Office
of Aircraft Services, Office of the Secretary (No. 97-I-550)

INTRODUCTION

This report presents the results of our survey of the recovery of costs of the working
capital fund by the Office of Aircraft Services, Office of the Secretary. The objective of
our survey was to determine whether rates charged by Aircraft Services were adequate to
recover the expenses of providing aviation services to Department of the Interior agencies.

BACKGROUND

The Office of Aircraft Services was created on July 1, 1973, to provide for centralized
aviation management within the Department of the Interior. As part of its aviation
management, Aircraft Services provides services to user agencies as follows: maintains
the Department's 105 aircraft, contracts aviation services for Departmental agencies,
makes aircraft available to users through basic ordering agreements, provides pilot
training, and develops and implements Departmentwide aviation safety and aircraft
accident prevention programs.

Aircraft Services operates through a working capital fund within the Office of the
Secretary and is reimbursed for its operations by the agencies that use the aircraft managed
by the Service. In accordance with the General Appropriations Act of 195 1 (43 U. S .C.
1467) which established the working capital fund, Aircraft Services recovers its costs for
aviation management through rates charged to the user agencies. These rates are based,
in part, on the historical costs of providing aviation services, including fuel, oil, and
maintenance that are directly associated with owning and operating Departmental aircraft,
plus an estimate for replacing aircraft. The portions of the funds received for replacing
aircraft are recorded in the working capital fund as reserves. Aircraft Services also applies
a surcharge to an agency's use of contracted and rented aircraft, as well as for
Departmental aircraft. The surcharge includes overhead expenses and expenses directly

 
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associated with a specific service provided, such as contracting. For fiscal year 1995,
Aircraft Services revenues and expenses totaled about $62.4 million each.

SCOPE OF SURVEY

Our survey included a review of the rates charged by Aircraft Services during the period
of October 31, 1990, through September 30, 1995 (5 fiscal years), and was performed at
Aircraft Services office in Boise, Idaho. To accomplish our objective, we reviewed laws,
regulations, and financial documents related to aviation expenses; discussed the rate-setting
process with appropriate officials; and performed analyses of costs included in the rates
charged to user agencies.

Our review was conducted 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 to
accomplish the survey objective. As part of our review, we evaluated the system of
internal controls to the extent that we considered necessary. However, since the survey
was limited to the adequacy of aircraft rates, we focused our assessment of the system of
internal controls on those controls that would affect the full recovery of costs. We also
reviewed the Department's Annual Statement and Report, required by the Federal
Managers' Financial Integrity Act of 1982, for fiscal years 1991 through 1995 and
determined that none of the reported weaknesses were directly related to the objective and
scope of our review.

PRIOR AUDIT COVERAGE

During the past 5 years, neither the Office of Inspector General nor the General
Accounting Office has issued any reports on Aircraft Services recovery of costs of
providing aviation services.

RESULTS OF SURVEY

We found that the Office of Aircraft Services has generally been recovering its direct
operating expenses, overhead expenses, and the estimated amounts for replacing and
overhauling aircraft based on the rates it developed. However, we noted that in developing
the rates, Aircraft Services did not adjust the rates for its annual operating gains and
losses, which resulted in Aircraft Services underrecovering or overrecovering its costs.
In addition, we noted that Aircraft Services had not studied the adequacy of the reserves
for replacing aircraft to ensure that sufficient funds will be available when needed.

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Operating Gains and Losses

Aircraft Services did not include its annual operating gains or losses in developing its
rates. The application of the rates, including surcharges, to the rental or use of aircraft
should result in Aircraft Services recovering all of its operating expenses, as required by
the enabling legislation (43 U.S.C. 1467). However, since the rates are based primarily
on historical and estimated costs, the amounts collected will probably result in an
overrecovery (gain) or an underrecovery (loss) of operating costs. Our review of Aircraft
Services records for fiscal years 1991 through 1995 showed that it incurred the following
annual operating losses and gains:

Fiscal Year    Gain (Loss)
1991     ($1,524,000)
1992      $163,000
1993       $17,000
1994      $979,000
1995       $6,000

Our review of the rate development for fiscal years 1992 through 1996 indicated that
losses and gains had not been included in any of the rates for those years. Aircraft
Services should include the prior year's operating gain or loss in the computation and
development of Departmental aircraft rates to more accurately reflect its results of
operation.

Aircraft Replacement Reserves

In the Departmental aircraft rates, Aircraft Services includes a cost estimate to fund future
aircraft replacements. As of September 30, 1995, Aircraft Services had accumulated
replacement reserves of $1.5 million, but it had not developed a long-term capital budget
to support the adequacy of the cost estimate or the reserves to fund future replacements.

costs estimates to include in its rates. Since depreciation is based on the acquisition cost
of the existing aircraft, the depreciation expense most likely will not cover the cost
required to fund the replacement of the aircraft in the future. As a result, Aircraft
Services management does not have assurance that sufficient funds will be available to
replace the aircraft. Therefore, we believe that Aircraft Services should develop a long-
term capital replacement budget to establish an estimate when aircraft will be replaced and
what the estimated replacement costs will be. Without such a budget, Aircraft Services
cannot accurately estimate the amount of the reserves that needs to be included in the
aircraft rates. With an adequate reserve, Aircraft Services can replace aircraft, as needed,

and is measured by a set formula that reflects these elements over a given period of useful life, for
example,
cost minus estimated salvage divided by the estimated useful life equals depreciation expense.

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without having to rely, as in the past, on Departmental agencies obtaining appropriations
for aircraft replacements.

During our survey, Aircraft Services implemented procedures to ensure that prior year
gains or losses were included in the computation and development of aircraft rates and
developed a long-term capital replacement budget that would be used to estimate the
funding requirements needed to build an adequate reserve to purchase future replacement
aircraft. Therefore, we are not making any recommendations.

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.

We appreciate the assistance of Aircraft Services personnel in the conduct of our survey.

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ILLEGAL OR WASTEFUL ACTIVITIES
   SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:

Calling:

Within the Continental United States

U.S. Department of the Interior
Office of Inspector General
1849 C Street, N.W.
Mail Stop 5341
Washington, D.C. 20240

Our 24-hour
Telephone HOTLINE
l-800-424-5081 or
(202) 208-5300

TDD for hearing impaired
(202) 208-2420 or
l-800-354-0996

Outside the Continental United States

Caribbean Region

U.S. Department of the Interior
Office of Inspector General
Eastern Division - Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

(703) 235-9221

North Pacific Region

U.S. Department of the Interior
Office of Inspector General          (700) 550-7428 or
                    COMM 9-011-671-472-7279

North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910