Financial Management

Army Industrial Fund Did Not Recover Costs Gao ID: AIMD-94-16 November 26, 1993

The Army Industrial Fund, which is supposed to break even, posted losses from 1989 through 1991 for its maintenance and storage activities. Depot maintenance, the largest activity, sustained losses of nearly $98 million on revenues of about $4 billion during that period. In fiscal year 1992, the fund was incorporated into the Defense Business Operations Fund and its billing rates were adjusted to recover prior year losses. Fund maintenance operations, although profitable as of late, project a loss for fiscal year 1994. This report (1) determines the reasons for the fund's continuing operating losses, (2) assesses the impact that operating losses had on the fund's working capital and identifies steps taken to minimize that impact, and (3) evaluates the reasonableness of the Army's projected cost savings from the competition initiative.

GAO found that: (1) various factors such as reduced billing rates, lower revenues, low maintenance cost estimates, lack of accounting controls, and a decrease in demand for AIF maintenance work have contributed to continuing losses on AIF maintenance operations; (2) losses on AIF maintenance operations resulted in a cumulative net operating loss of $233.7 million in fiscal year (FY) 1991; (3) after AIF became part of the Defense Business Operations Fund (DBOF), it reported a profit of $62.6 million in FY 1992 and $53.4 million in FY 1993, but projected a loss of $116 million for FY 1994; (4) the AIF net loss is projected to increase to 1991 levels by the end of FY 1994; (5) Congress has appropriated funds to AIF and authorized the transfer of funds to AIF from other Army fund accounts to restore AIF working capital and cash balances and sustain AIF operations; (6) AIF has implemented billing rates that are higher than the Department of Defense (DOD) initially approved; and (7) the Army will not realize projected savings from the competition initiative, since lower bids will not reduce overall Army depot maintenance costs.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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