Defense Working Capital Funds

This testimony discusses the Defense Department's (DOD) working capital funds, formerly known as the Defense Business Operations Fund, which both collect and disburse more than $65 billion annually. GAO provides (1) a brief overview of fund operations and objectives, (2) a more detailed perspective of cash management operations, and (3) its concerns with the cash situation through fiscal year 1998.

GAO noted that: (1) in creating DBOF, DOD consolidated the nine existing industrial and stock funds operated by the military services and Defense components into a single financial structure; (2) the primary goal of the working capital funds is to focus the attention of all levels of management on the total costs of carrying out certain critical DOD business operations and the management of those costs in order to encourage support organizations, such as depot maintenance facilities, to provide quality goods and services at the lowest costs; (3) the working capital funds are supposed to generate sufficient revenues to recover expenses incurred in their operations and to operate on a break-even basis over time; (4) to date, the working capital funds have not yet accomplished their goal of operating on a break-even basis and DOD estimates that they will have an accumulated operating loss of $1.7 billion at the end of FY 1997; (5) GAO remains very supportive of the concept behind the working capital funds; (6) since 1993, the working capital funds have experienced cash shortage and have had to advance bill customers for work not yet performed in order to ensure that the funds' cash balances remain positive; (7) cash generated from the sale of goods and services is the primary means by which the working capital funds pay their bills; (8) DOD's policy requires the funds to maintain cash levels to cover 7 to 10 days of operational costs and 4 to 6 months of capital asset disbursements which is about $2.3 billion to $3.4 billion for the four funds; (9) since 1993, with the transfer of $5.5 billion from DBOF as required by the National Defense Authorization Act for Fiscal Year 1993, the funds have been advance billing customers because they have not been able to generate enough cash to pay their bills; (10) since 1995, the military services have made some progress in liquidating (working off) their outstanding advance billing balances; (11) the Army, Navy and Air Force would have had negative cash balances when they received the responsibility for cash in February 1995 had they not advance billed customers; (12) according to Army and Air Force officials, they plan to liquidate all their outstanding advance billing balances by the end of FY 1998; and (13) DOD's cash plans, dated January/February 1997, show that the working capital funds will disburse about $2.3 billion more that they collect during FY 1997.