Defense Business Operations Fund

The primary goal of the Defense Business Operations Fund is to focus management attention on the total cost of carrying out critical Defense Department (DOD) business operations and the management of those costs. A basic principle of the Fund is to set prices that recover the total costs of providing goods and services to its customers. This report (1) describes the process used to develop the Fund's fiscal year 1995 prices, (2) identifies major reasons Fund prices have increased, (3) identifies major reasons the Fund has continued to incur operating losses, and (4) provides information on the adequacy of the Fund's budget and financial reports. GAO limited its review to depot maintenance and supply operations, the Fund's largest business areas, which will account for $51 billion, or 66 percent, of the Fund's estimated revenues in fiscal year 1995.

GAO found that: (1) the Fund's primary goal is to oversee the management of funds needed to carry out critical DOD business operations and establish prices that recover the total costs of providing goods and services to its customers; (2) since the Fund's inception in 1992, its prices have increased significantly because of DOD efforts to charge customers for the Fund's total operating costs and policies that require the Fund to recover prior-year losses by increasing subsequent-year prices; (3) the Fund plans to recover about $1.7 billion in 1995 and has had three consecutive operating losses; (4) the DOD practice of increasing prices to cover prior-year losses is inappropriate because it distorts the annual net operating results and diminishes the incentive for the Fund to operate efficiently; (5) continued annual losses indicate there may be a systemic problem in the Fund's financial management; (6) Fund losses are a result of unrealized productivity increases, varying and carried over workloads, and ongoing depot closures; (7) although the Fund's net operating results are fundamental in developing prices, its financial reports on Fund operations are inaccurate and cannot be relied upon to develop Fund prices; and (8) two of the Fund's reported fiscal year 1993 net operating results reports differed by $5.9 billion.