Defense Working Capital Fund
Military Services Did Not Calculate and Report Carryover Amounts Correctly Gao ID: GAO-06-530 June 27, 2006According to the Department of Defense's (DOD) fiscal year 2006 budget estimates, working capital fund activity groups (depot maintenance, ordnance, and research and development) will have about $6.3 billion of funded work that will be carried over from fiscal year 2006 into fiscal year 2007. The congressional defense committees recognize that these activity groups need some carryover to ensure smooth work flow from one fiscal year to the next. However, the committees have previously raised concern that the amount of carryover may be more than is needed. GAO was asked to determine (1) if the military services' carryover calculations were in compliance with DOD's new carryover policy and (2) if customers were submitting orders to working capital fund activities late in the fiscal year and, if so, the effect this practice has had on carryover.
The military services have not consistently implemented DOD's revised policy in calculating carryover. Instead, the military services used different methodologies for calculating the reported actual amount of carryover and the allowable amount of carryover since DOD changed its carryover policy in December 2002. The military services did not consistently calculate the allowable amount of carryover that was reported in their fiscal year 2004, 2005, and 2006 budgets because they used different outlay rates for the same appropriation. The Air Force did not follow DOD's regulation on calculating carryover for its depot maintenance activity group, which affected the amount of allowable carryover and actual carryover by tens of millions of dollars and whether the actual carryover exceeded the allowable amount as reported in the fiscal year 2004, 2005, and 2006 budgets. The Army depot maintenance and ordnance activity groups' actual carryover was understated in fiscal years 2002 and 2003 because carryover associated with prior year orders was not included. While the Navy generally followed DOD's policy for calculating carryover, the Navy consolidated the reporting of carryover information for research and development activities. The Navy budgets no longer provide information to show if any of the five research and development subactivity groups individually exceeded the carryover ceiling as the Navy budgets did prior to the change in the carryover policy. As a result, carryover data provided to decision makers who review and use the data for budgeting are erroneous and not comparable across the three military services. For example, the Air Force reported to Congress that the actual fiscal year 2002 carryover for depot maintenance was $87 million less than the ceiling. If the Air Force followed DOD's policy, GAO's calculations show its carryover would have exceeded the ceiling by $216 million. Carryover is greatly affected by orders accepted by working capital fund activities late in the fiscal year that generally cannot be completed by fiscal year end, and in some cases cannot even be started prior to the end of the fiscal year. GAO's analysis of 68 fiscal year-end orders identified four key factors contributing to orders generally being issued by customers late in the fiscal year and being accepted by the working capital fund activities during the last month of the fiscal year. These reasons included (1) funds provided to the customer late in the fiscal year to finance existing requirements, (2) new work requirements identified at year end, (3) problems encountered in processing orders, and (4) work scheduled at year end. GAO's analysis showed that over half of the orders reviewed were not completed at the end of the next fiscal year, generating a second year of carryover on the same order. As a result, some orders may not have been the most effective use of DOD resources at that time and may not have complied with all of the order acceptance provisions cited in the DOD Financial Management Regulation.
RecommendationsOur 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.
Director: Team: Phone:GAO-06-530, Defense Working Capital Fund: Military Services Did Not Calculate and Report Carryover Amounts Correctly
This is the accessible text file for GAO report number GAO-06-530
entitled 'Defense Working Capital Fund: Military Services Did Not
Calculate and Report Carryover Amounts Correctly' which was released on
June 27, 2006.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Chairman, Subcommittee on Defense, Committee on
Appropriations, House of Representatives:
June 2006:
Defense Working Capital Fund:
Military Services Did Not Calculate and Report Carryover Amounts
Correctly:
GAO-06-530:
GAO Highlights:
Highlights of GAO-06-530, a report to the Chairman, Subcommittee on
Defense, Committee on Appropriations, House of Representatives.
Why GAO Did This Study:
According to the Department of Defense‘s (DOD) fiscal year 2006 budget
estimates, working capital fund activity groups (depot maintenance,
ordnance, and research and development) will have about $6.3 billion of
funded work that will be carried over from fiscal year 2006 into fiscal
year 2007. The congressional defense committees recognize that these
activity groups need some carryover to ensure smooth work flow from one
fiscal year to the next. However, the committees have previously raised
concern that the amount of carryover may be more than is needed. GAO
was asked to determine (1) if the military services‘ carryover
calculations were in compliance with DOD‘s new carryover policy and (2)
if customers were submitting orders to working capital fund activities
late in the fiscal year and, if so, the effect this practice has had on
carryover.
What GAO Found:
The military services have not consistently implemented DOD‘s revised
policy in calculating carryover. Instead, the military services used
different methodologies for calculating the reported actual amount of
carryover and the allowable amount of carryover since DOD changed its
carryover policy in December 2002. • The military services did not
consistently calculate the allowable amount of carryover that was
reported in their fiscal year 2004, 2005, and 2006 budgets because they
used different outlay rates for the same appropriation. • The Air Force
did not follow DOD‘s regulation on calculating carryover for its depot
maintenance activity group, which affected the amount of allowable
carryover and actual carryover by tens of millions of dollars and
whether the actual carryover exceeded the allowable amount as reported
in the fiscal year 2004, 2005, and 2006 budgets. • The Army depot
maintenance and ordnance activity groups‘ actual carryover was
understated in fiscal years 2002 and 2003 because carryover associated
with prior year orders was not included. • While the Navy generally
followed DOD‘s policy for calculating carryover, the Navy consolidated
the reporting of carryover information for research and development
activities. The Navy budgets no longer provide information to show if
any of the five research and development subactivity groups
individually exceeded the carryover ceiling as the Navy budgets did
prior to the change in the carryover policy.
As a result, carryover data provided to decision makers who review and
use the data for budgeting are erroneous and not comparable across the
three military services. For example, the Air Force reported to
Congress that the actual fiscal year 2002 carryover for depot
maintenance was $87 million less than the ceiling. If the Air Force
followed DOD‘s policy, GAO‘s calculations show its carryover would have
exceeded the ceiling by $216 million.
Carryover is greatly affected by orders accepted by working capital
fund activities late in the fiscal year that generally cannot be
completed by fiscal year end, and in some cases cannot even be started
prior to the end of the fiscal year. GAO‘s analysis of 68 fiscal year-
end orders identified four key factors contributing to orders generally
being issued by customers late in the fiscal year and being accepted by
the working capital fund activities during the last month of the fiscal
year. These reasons included (1) funds provided to the customer late in
the fiscal year to finance existing requirements, (2) new work
requirements identified at year end, (3) problems encountered in
processing orders, and (4) work scheduled at year end. GAO‘s analysis
showed that over half of the orders reviewed were not completed at the
end of the next fiscal year, generating a second year of carryover on
the same order. As a result, some orders may not have been the most
effective use of DOD resources at that time and may not have complied
with all of the order acceptance provisions cited in the DOD Financial
Management Regulation.
What GAO Recommends:
GAO makes recommendations to DOD to (1) improve the military services‘
calculations of the allowable amount of carryover and actual carryover,
(2) improve the reporting of carryover information to Congress and DOD
decision makers, and (3) ensure that the military services follow the
DOD regulation concerning the acceptance of orders placed with working
capital fund activities. DOD concurred with all the recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-530].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact McCoy Williams at (202)
512-9095 or Williamsm1@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
The Military Services Did Not Follow DOD Policy in Calculating
Carryover:
Carryover Increased Due to Military Services Placing Orders Late in the
Fiscal Year:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department Of Defense:
Appendix III: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Schedule of the Source of Outlay Rates Used in Calculating the
Allowable Amount of Carryover by Service:
Table 2: Schedule of Selected Appropriation Outlay Rates Used in
Calculating the Allowable Amount of Carryover for the Fiscal Year 2005
Budget (in percent):
Table 3: Schedule of Selected Outlay Rates Used to Calculate Allowable
Carryover That Was Included in the Fiscal Year 2006 Budget (in
percent):
Table 4: Air Force's Reported Actual Carryover and GAO's Calculation of
the Amount of Actual Carryover with Respect to the Ceiling:
Table 5: Dollar Amount of Reported Actual Carryover that Exceeded the
Ceiling and the Amount of Carryover Not Included (dollars in millions):
Table 6: Navy's Reported Actual Carryover in Relationship to the
Ceiling by Activity Group:
Table 7: Navy's Reported Actual Carryover in Relationship to the
Ceiling for the Research and Development Subactivity Groups:
Figure:
Figure 1: Factors Contributing to Year-end Orders for 2003 and 2004:
Letter:
June 27, 2006:
The Honorable C. W. Bill Young:
Chairman, Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
Dear Mr. Chairman:
According to the Department of Defense's (DOD) fiscal year 2006 budget
estimates, working capital fund activity groups (depot maintenance,
ordnance, and research and development) will have about $6.3 billion of
funded work that will be carried over from fiscal year 2006 into fiscal
year 2007.[Footnote 1] The congressional defense committees recognize
that these activity groups need some carryover to ensure a smooth flow
of work during the transition from one fiscal year to the next.
However, past congressional defense committee reports raised concerns
that the level of carryover may be more than is needed. Excessive
amounts of carryover financed with customer appropriations are subject
to reductions by DOD and the congressional defense committees during
the budget review process. To the extent that carryover is too high,
Congress may redirect the funds gained from such reductions to other
priority initiatives. For example, Congress reduced the Army's fiscal
year 2003 Operation and Maintenance appropriation by $48 million due to
excessive carryover.
In May 2001, we reported[Footnote 2] that DOD did not have a sound
analytical basis for its 3-month carryover standard which it
established in 1996. Based on our recommendation, in December 2002 DOD
revised its carryover policy to eliminate the 3-month across-the-board
standard for allowable carryover. Under the new policy, the allowable
amount of carryover is to be based on the outlay rate[Footnote 3] of
the customers' appropriations financing the work. This means that in
determining allowable carryover, the first year outlay rate is used for
new orders received in the current year (first year of the work order).
However, during our review of Army depot maintenance operations, we
reported[Footnote 4] in June 2005 that the Army encountered several
problems implementing DOD's new policy on calculating actual carryover
as well as the allowable amount of carryover. In that report, we also
determined that activities exceeded the carryover ceiling because they
received and accepted orders late in the fiscal year.
As requested and agreed to with your office, the objectives of this
assignment were to determine (1) if the military services' carryover
calculations were in compliance with DOD's new carryover policy and (2)
if customers were submitting orders to working capital fund activities
late in the fiscal year and, if so, the effect that this practice has
had on carryover. Our review was performed from July 2005 through March
2006 in accordance with U.S. generally accepted government auditing
standards. The carryover information in this report is budget data
obtained from official Army, Navy, and Air Force budget documents. To
assess the reliability of the data, we (1) reviewed and analyzed the
factors used in calculating carryover and (2) interviewed officials
knowledgeable about the data. We determined that the data were
sufficiently reliable for the purposes in this report. Further details
on our scope and methodology can be found in appendix I. We requested
comments on a draft of this report from the Secretary of Defense or his
designee. Written comments from the Under Secretary of Defense
(Comptroller) are reprinted in appendix II.
Results in Brief:
The military services have not consistently implemented DOD's revised
policy in calculating carryover. Instead, the military services have
used different methodologies for calculating the reported actual amount
of carryover and the allowable amount of carryover since DOD changed
its carryover policy in December 2002. Specifically, (1) the military
services did not consistently calculate the allowable amount of
carryover that was reported in their fiscal year 2004, 2005, and 2006
budgets because they used different tables (both provided by DOD) that
contained different outlay rates for the same appropriation;
(2) the Air Force did not follow DOD's regulation on calculating
carryover for its depot maintenance activity group, which affected the
amount of allowable carryover and actual carryover by tens of millions
of dollars as well as whether the actual amount of carryover exceeded
the allowable amount as reported in the fiscal year 2004, 2005, and
2006 budgets; and (3) the Army depot maintenance and ordnance activity
groups' actual carryover was understated in fiscal years 2002 and 2003
because carryover associated with prior year orders was not included in
the carryover calculation as required. Further, while the Navy
generally followed DOD's policy for calculating carryover, the Navy
consolidated the reporting of carryover information for research and
development activities beginning with the fiscal year 2004 budget that
included actual carryover information for fiscal year 2002. As a
result, the Navy budgets no longer provide information to show if any
of the five research and development subactivity groups individually
exceeded the carryover ceiling as the Navy budgets did prior to the
change in the carryover policy in December 2002. For example, Navy
budget documents to Congress show that the Navy research and
development activity group did not exceed the carryover ceiling for
fiscal years 2003, 2004, and 2005. However, our analysis of Navy
reports showed that the Naval Air Warfare Center--one of the
subactivity groups--exceeded the carryover ceiling for these 3 fiscal
years by $19 million, $57 million, and $52 million, respectively. The
primary factor for these inconsistencies is that DOD's December 2002
guidance was verbal and DOD did not issue detailed written procedures
for calculating carryover and the allowable amount of carryover until
June 2004. As a result, year-end carryover data provided to decision
makers who review and use the data for budgeting--Office of the Under
Secretary of Defense (Comptroller) and congressional decision makers--
are erroneous and not comparable across the three military services.
For example, the Air Force reported to Congress that the actual fiscal
year 2002 carryover for depot maintenance was $87 million less than the
carryover ceiling. However, if the Air Force had followed DOD's policy,
our calculations show that its carryover would have actually exceeded
the ceiling by $216 million.
Carryover is greatly affected by orders accepted by working capital
fund activities late in the fiscal year that generally cannot be
completed by fiscal year end, and in some cases cannot even be started
prior to the end of the fiscal year. As a result, almost all orders
accepted late in the fiscal year increase the amount of carryover. We
analyzed 68 orders accepted in September 2003 and September 2004 by
certain activity groups for the three military services.[Footnote 5]
Our analysis identified four key factors contributing to orders
generally being issued by customers late in the fiscal year and being
accepted by the working capital fund activities during the last month
of the fiscal year. These reasons included (1) funds provided to the
customer late in the fiscal year to finance existing requirements, (2)
new work requirements identified at year end, (3) problems encountered
in processing orders, and (4) work scheduled at year end. Further, our
analysis showed that 39 of the 68 orders--over half of the orders
reviewed--were not completed at the end of the next fiscal year,
generating a second year of carryover. For example, on September 29,
2004, an Army working capital fund activity accepted an order for about
$2 million for 17,848 illumination candles with parachutes.[Footnote 6]
Due to the late acceptance of this order, about $2 million was carried
over into fiscal year 2005. However, because another Army activity
failed to supply enough component parachutes to meet the production
schedule, about $1.9 million was carried over into fiscal year 2006.
DOD Financial Management Regulation 7000.14-R, Volume 11A, identifies a
number of requirements before a working capital fund activity accepts
an order. For example, the work is expected to (1) begin without delay
(usually within 90 days) and (2) be completed within the normal
production period for the specific work ordered. However, our review of
68 orders accepted by the working capital fund activities at year end
determined that work on some of these orders did not begin within 90
days or was not completed within the normal production period for the
work being performed. As a result, these orders may not have been the
most effective use of DOD resources at that time and may not have
complied with all of the provisions cited in the above regulation.
We are making eight recommendations to DOD to (1) improve the military
services' calculations of the allowable amount of carryover and actual
carryover, (2) improve the reporting of carryover information to
Congress and DOD decision makers, and (3) ensure that the military
services follow the DOD regulation concerning the acceptance of orders
placed with working capital fund activities. DOD concurred with all the
recommendations and identified corrective actions it is taking. It also
commented that the inaccuracies we identified in reported carryover did
not materially distort the evaluation of depot operations or projected
workload levels. While we do not know how DOD defines materiality, the
reporting inaccuracies we identified totaled hundreds of millions of
dollars. DOD's comments are reprinted in appendix II.
Background:
A working capital fund relies on sales revenue rather than direct
appropriations to finance its continuing operations. A working capital
fund is intended to (1) generate sufficient resources to cover the full
costs of its operations and (2) operate on a break-even basis over
time--that is, neither make a gain nor incur a loss. Customers use
appropriated funds, primarily Operation and Maintenance appropriations,
to finance orders placed with the working capital fund. DOD estimates
that in fiscal year 2006, the Defense Working Capital Fund--which
consists of the Army, Navy, Air Force, Defense-wide, and Defense
Commissary Agency working capital funds--will have revenue of about
$105 billion.
The Defense Working Capital Fund finances the operations of three
fundamentally different types of support organizations: (1) stock fund
activities, which provide spare parts and other items to military units
and other customers;
(2) industrial activities, which provide depot maintenance, research
and development, ordnance, and other services to their customers;
and (3) other service activities, which provide various services such
as accounting (Defense Finance and Accounting Service) and computer
services (Defense Information Systems Agency). Because carryover is
primarily associated with industrial operations, this report discusses
the results of our review of Defense Working Capital Fund industrial
operations.
What Is Carryover and Why Is It Important?
Carryover is the dollar value of work that has been ordered and funded
(obligated) by customers but not completed by working capital fund
activities at the end of the fiscal year. Carryover consists of both
the unfinished portion of work started but not completed, as well as
requested work that has not yet commenced. Some carryover is necessary
at fiscal year end if working capital funds are to operate efficiently
and effectively. For example, if customers do not receive new
appropriations at the beginning of the fiscal year, carryover is
necessary to ensure that the working capital fund activities have
enough work to ensure a smooth transition between fiscal years. Too
little carryover could result in some personnel not having work to
perform at the beginning of the fiscal year. On the other hand, too
much carryover could result in an activity group receiving funds from
customers in one fiscal year but not performing the work until well
into the next fiscal year or subsequent years. By minimizing the amount
of carryover, DOD can use its resources in the most effective manner
and minimize the "banking" of funds for work and programs to be
performed in subsequent years.
DOD Revised Its Carryover Policy:
In 1996, DOD established a 3-month carryover standard for all working
capital fund activities except for the contract portion of the Air
Force depot maintenance activity group.[Footnote 7] In May 2001, we
reported[Footnote 8] that DOD did not have a basis for its carryover
standard and recommended that DOD determine the appropriate carryover
standard for the depot maintenance, ordnance, and research and
development activity groups. According to Office of the Under Secretary
of Defense (Comptroller) officials, DOD provided verbal guidance
concerning its new carryover policy for working capital fund activities
in December 2002. Subsequently, DOD included its revised carryover
policy in its DOD Financial Management Regulation 7000.14-R, Volume 2B,
Chapter 9, dated June 2004, which eliminated the 3-month standard for
allowable carryover. Under the new policy, the allowable amount of
carryover is to be based on the outlay rate[Footnote 9] of the
customers' appropriations financing the work. This meant that in
determining allowable carryover, the first year outlay rate would be
used for new orders received in the current year (first year of the
work order). According to the DOD regulation, this new metric allows
for an analytical-based approach that holds working capital fund
activities to the same standard as general fund execution and allows
for more meaningful budget execution analysis.
Further, based on our work on Army depot maintenance operations, we
recommended in our June 2005 report[Footnote 10] that DOD clarify its
written guidance for calculating the actual amount of carryover as well
as the allowable amount of carryover. On June 29, 2005, DOD issued
clarifying guidance on carryover.[Footnote 11] The guidance specified
that (1) the actual amount of carryover associated with current and
prior year orders is required to be the amount reported to Congress and
within DOD, (2) the allowable amount of carryover is to be calculated
based on current year customer orders received and the first year
outlay rate for the appropriations financing those orders for all
activity groups except shipyards, and (3) shipyards are authorized to
use 2 years of customer orders in the calculation of the allowable
amount of carryover and to use the first and second year outlay rates
for the appropriations financing those orders.
The Military Services Did Not Follow DOD Policy in Calculating
Carryover:
The military services have not consistently implemented DOD's 2002
revised policy in calculating carryover. Instead, the military services
used different methodologies for calculating the reported actual and
the allowable amount of carryover since DOD changed its carryover
policy in December 2002. Specifically, (1) the military services did
not consistently calculate the allowable amount of carryover that was
reported in their fiscal year 2004, 2005, and 2006 budgets because they
used different tables (both provided by DOD) that contained different
outlay rates for the same appropriation; (2) the Air Force did not
follow DOD's regulation on calculating carryover, which affected the
amount of allowable carryover and actual carryover by tens of millions
of dollars and whether the actual amount of carryover exceeded the
allowable amount as reported in the fiscal year 2004, 2005, and 2006
budgets; and (3) the Army depot maintenance and ordnance activity
groups' actual carryover was understated in fiscal years 2002 and 2003
because carryover associated with prior year orders was not included in
the carryover calculation as required. Further, while the Navy
generally followed DOD's policy for calculating carryover, the Navy
consolidated the reporting of carryover information for research and
development activities. As a result, the Navy budgets no longer provide
information to show if any of the five research and development
subactivity groups individually exceed the carryover ceiling. This
information had been provided in the Navy budgets prior to the change
in the carryover policy in December 2002. The primary factor for these
inconsistencies is that DOD's December 2002 guidance was verbal and DOD
did not issue detailed written procedures for calculating carryover and
the allowable amount of carryover until June 2004. Afterwards, DOD
issued clarifying written guidance in June 2005, January 2006, and
February 2006. As a result, year-end carryover data provided to
decision makers who review and use these data for budgeting--Office of
the Under Secretary of Defense (Comptroller) and congressional decision
makers--are erroneous and not comparable across the three military
services.
Military Services Used Different Outlay Rate Tables to Calculate the
Allowable Amount of Carryover:
The military services used different outlay rate tables that provided
different outlay rates for the same appropriation when calculating the
allowable amount of carryover. The outlay rate tables came from two
sources--the Office of the Under Secretary of Defense (Comptroller),
Revolving Funds Directorate,[Footnote 12] and the Financial Summary
Tables published by Office of the Under Secretary of Defense
(Comptroller), Directorate for Program and Financial Control. Because
the outlay rates in these documents sometimes differ, this could affect
whether an activity group exceeded the carryover ceiling or not. Under
the new carryover policy, the allowable amount of carryover is to be
based on the outlay rates of the customers' appropriations financing
the work. In implementing this policy, it is important for the services
to use the same outlay rate tables so that their calculations on the
allowable amount of carryover are consistent. However, when DOD changed
the carryover policy in December 2002, DOD did not instruct the
services, in writing, on which outlay rate tables should be used to
calculate the allowable amount of carryover. Table 1 shows which outlay
rate source each of the military services used.
Table 1: Schedule of the Source of Outlay Rates Used in Calculating the
Allowable Amount of Carryover by Service:
Service: Army;
Fiscal year 2004 budget: Office of the Under Secretary of Defense
(Comptroller) table;
Fiscal year 2005 budget: Office of the Under Secretary of Defense
(Comptroller) table;
Fiscal year 2006 budget: DOD Financial Summary Tables.
Service: Navy;
Fiscal year 2004 budget: DOD Financial Summary Tables;
Fiscal year 2005 budget: DOD Financial Summary Tables;
Fiscal year 2006 budget: DOD Financial Summary Tables.
Service: Air Force;
Fiscal year 2004 budget: Office of the Under Secretary of Defense
(Comptroller) table;
Fiscal year 2005 budget: Office of the Under Secretary of Defense
(Comptroller) table;
Fiscal year 2006 budget: Office of the Under Secretary of Defense
(Comptroller) table.
Source: GAO analysis.
[End of table]
Table 2 shows the differences between the outlay rates for selected
appropriations in the tables provided by the Office of the Under
Secretary of Defense (Comptroller) and the DOD Financial Summary Tables
that were used to calculate the allowable amount of carryover, which is
included in the fiscal year 2005 budget. Some of the differences are
large while others are small. These outlay rates, along with the amount
of appropriations financing orders, are used to determine the allowable
carryover (ceiling). Because the dollar amount of appropriations
financing orders is sometimes in the hundreds of millions of dollars,
even a small rate difference could result in significantly more or less
allowable carryover. For example, the Navy estimated that the naval
aviation depots would receive $694 million for new Operation and
Maintenance, Navy orders in fiscal year 2005. Using the outlay rate
provided in the DOD Financial Summary Tables, the Navy would be allowed
to carry over about $146 million. In contrast, using the outlay rate
table provided by the Office of the Under Secretary of Defense
(Comptroller), the Navy would be allowed to carry over $180 million--
about a $34 million difference for just this one appropriation
financing orders received by the naval aviation depots.
Table 2: Schedule of Selected Appropriation Outlay Rates Used in
Calculating the Allowable Amount of Carryover for the Fiscal Year 2005
Budget (in percent):
Appropriation: Operation and Maintenance, Army;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 78;
Outlay rates in the DOD Financial Summary Tables: 68.8.
Appropriation: Operation and Maintenance, Army Reserve;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 68;
Outlay rates in the DOD Financial Summary Tables: 71.5.
Appropriation: Research, Development, Test, and Evaluation, Army;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 53;
Outlay rates in the DOD Financial Summary Tables: 51.5.
Appropriation: Missile Procurement, Army;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 13;
Outlay rates in the DOD Financial Summary Tables: 10.0.
Appropriation: Operation and Maintenance, Navy;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 74;
Outlay rates in the DOD Financial Summary Tables: 79.0.
Appropriation: Operation and Maintenance, Navy Reserve;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 67;
Outlay rates in the DOD Financial Summary Tables: 70.2.
Appropriation: Other Procurement, Navy;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 39;
Outlay rates in the DOD Financial Summary Tables: 36.5.
Appropriation: Procurement, Marine Corps;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 26;
Outlay rates in the DOD Financial Summary Tables: 30.0.
Appropriation: Research, Development, Test, and Evaluation, Navy;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 59;
Outlay rates in the DOD Financial Summary Tables: 56.0.
Appropriation: Operation and Maintenance, Air Force;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 70;
Outlay rates in the DOD Financial Summary Tables: 72.5.
Appropriation: Operation and Maintenance, Air Force Reserve;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 70;
Outlay rates in the DOD Financial Summary Tables: 80.8.
Appropriation: Operation and Maintenance, Air National Guard;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 68;
Outlay rates in the DOD Financial Summary Tables: 82.0.
Appropriation: Research, Development, Test, and Evaluation, Air Force;
Outlay rates in the Office of the Under Secretary of Defense
(Comptroller) table: 57;
Outlay rates in the DOD Financial Summary Tables: 61.58.
Sources: Office of the Under Secretary of Defense (Comptroller) table
and the DOD Financial Summary Tables.
[End of table]
In addition to using different outlay rate tables, there appeared to be
uncertainties regarding which year's outlay rates to use. For the
fiscal year 2006 budget, the Army and Navy used the DOD Financial
Summary Tables to determine the appropriation outlay rates used in
calculating the allowable amount of carryover. These tables contain
different appropriation outlay rates for each fiscal year. Military
service officials stated that DOD had not provided any written guidance
on whether the services should use the fiscal year 2004 or 2005 outlay
rates or both when determining the allowable amount of carryover in
preparing the fiscal year 2006 budget. An excerpt of the outlay rates
from the DOD Financial Summary Tables dated February 2004 follows.
Table 3: Schedule of Selected Outlay Rates Used to Calculate Allowable
Carryover That Was Included in the Fiscal Year 2006 Budget (in
percent):
Appropriation: Operation and Maintenance, Army;
Fiscal year 2004 outlay rates: 52.03;
Fiscal year 2005 outlay rates: 68.80.
Appropriation: Operation and Maintenance, Navy;
Fiscal year 2004 outlay rates: 76.08;
Fiscal year 2005 outlay rates: 79.00.
Appropriation: Operation and Maintenance, Air Force;
Fiscal year 2004 outlay rates: 66.59;
Fiscal year 2005 outlay rates: 73.50.
Source: DOD Financial Summary Tables, dated February 2004.
[End of table]
The Navy used the fiscal year 2005 outlay rates for calculating the
allowable amount of carryover for fiscal years 2004, 2005, 2006, and
2007--the fiscal years that are included in the fiscal year 2006
budget. The Army used the same document but instead used the fiscal
year 2004 outlay rates for calculating the allowable carryover for
fiscal year 2004. The Army used the fiscal year 2005 rates for
calculating the allowable carryover for fiscal years 2005, 2006, and
2007. While this might appear to be a small matter because the rates
are generally the same or almost the same from one fiscal year to the
next, using the different rates (2004 versus 2005) for calculating the
allowable carryover for the Army industrial operations activity group
in fiscal year 2004 results in a different outcome. Based on its
calculations, the Army reported that its actual carryover was $141
million below the ceiling for fiscal year 2004. However, using the
fiscal year 2005 rates (the rates that the Navy used) would show the
Army exceeded the ceiling by about $275 million--a swing of $416
million. This difference is attributable to the outlay rate for the
Operation and Maintenance, Army appropriation being 52.03 percent for
fiscal year 2004 but 68.8 percent for fiscal year 2005. According to
Army officials, the outlay rate varied significantly for these 2 fiscal
years because of the supplemental appropriations received during fiscal
year 2004.
Based on our work involving the Army depot maintenance activity group,
we recommended in our June 2005 report[Footnote 13] that DOD clarify
its written guidance for calculating the actual amount of carryover as
well as the allowable amount of carryover. DOD concurred with our
recommendations and on June 29, 2005, DOD issued clarifying guidance on
carryover. Among other things, the guidance specified that (1) the
allowable amount of carryover is to be calculated based on current year
customer orders received and the first year outlay rates for the
appropriations financing those orders for all activity groups except
shipyards and (2) the outlay rates are to be based on historic outlay
rates in the DOD Financial Summary Tables. DOD's guidance clarifies
which source document should be used to identify the outlay rates.
However, it does not address the question of which fiscal year or years
that are contained in the DOD Financial Summary Tables are to be used.
During our current review, we informed Office of the Under Secretary of
Defense (Comptroller) officials that the services did not always comply
with DOD's policy on calculating the allowable amount of carryover.
Specifically, the services (1) did not always use the correct outlay
rate tables in determining the amount of allowable carryover and (2)
used different outlay rates contained in the DOD Financial Summary
Tables for calculating the allowable amount of carryover for specific
fiscal years. In responding to our discussions, DOD took two actions.
First, DOD included carryover guidance in its January 17, 2006,
memorandum on the fiscal year 2007 budget justification book material
for Congress. This guidance specifies that the services are to use the
fiscal year 2006 DOD Financial Summary Tables to calculate carryover.
The guidance further specifies that the services must use the rates in
the DOD Financial Summary Tables unless a waiver is approved in writing
by the Office of the Under Secretary of Defense (Comptroller), Director
for Revolving Funds. Second, in February 2006, the Office of the Under
Secretary of Defense (Comptroller) provided additional guidance to the
services for the fiscal year 2007 budget specifying that the (1) fiscal
year 2005 outlay rates in the DOD Financial Summary Tables will be used
for calculating the allowable amount of carryover for fiscal year 2005
and (2) fiscal year 2006 outlay rates in the DOD Financial Summary
Tables will be used for calculating the allowable amount of carryover
for fiscal years 2006 and 2007.
Air Force Did Not Calculate Actual Carryover and Allowable Carryover
Correctly:
In reviewing the Air Force carryover figures shown in the fiscal year
2004, 2005, and 2006 budgets to Congress, we found a number of problems
with how the Air Force calculated the reported actual as well as the
allowable amount of carryover for the depot maintenance activity group.
These problems significantly affected the determination of allowable
carryover and whether the Air Force depot maintenance activity group
exceeded that ceiling. With one exception, the Air Force took action
and corrected the problems when preparing the fiscal year 2007 budget.
These problems are discussed below.
* The Air Force used the fiscal year 2001 outlay rates provided by the
Office of the Under Secretary of Defense (Comptroller) to determine the
allowable amount of carryover in the fiscal year 2004 budget. This was
the appropriate outlay rate table to use for that budget. However, even
though the Office of the Under Secretary of Defense (Comptroller)
provided updated outlay rates for the next fiscal year, the Air Force
did not use the updated outlay rates when calculating its allowable
carryover in the fiscal year 2005 budget. Instead, the Air Force
continued to use the fiscal year 2001 outlay rates. Moreover, the Air
Force continued to use the fiscal year 2001 outlay rates to calculate
the allowable carryover in the fiscal year 2006 budget instead of using
the updated outlay rates published by DOD.
* The Air Force used all orders received (both prior year and current
year orders) in calculating the allowable amount of carryover in the
fiscal year 2004, 2005, and 2006 budgets. For example, in calculating
the allowable carryover for fiscal year 2004, the Air Force included
about $1.8 billion of prior year orders in the calculation. DOD
carryover policy states that only current year orders should be used in
determining the allowable carryover. The Air Force method of including
all orders allowed too much carryover.
* The Air Force excluded orders received from the U.S. Transportation
Command when calculating the amount of actual carryover in the fiscal
year 2004, 2005, and 2006 budgets. DOD Financial Management Regulation
7000.14-R, Volume 2B, Chapter 9, permits excluding some orders financed
with non-DOD funds, such as orders received from foreign countries, but
does not permit excluding U.S. Transportation Command orders. For
example, because the Air Force excluded about $214 million of U.S.
Transportation Command orders when calculating its actual carryover for
fiscal year 2004, its carryover was understated.
* The Air Force's fiscal year 2006 budget to Congress expressed
carryover in equivalent months of work (this is the old method of
reporting carryover) rather than in terms of the allowable and actual
carryover dollar amounts as required by DOD Financial Management
Regulation 7000.14-R, Volume 2B, Chapter 9.
The problems cited above had a significant impact on the amount of
allowable carryover and actual carryover and whether the actual
carryover exceeded the allowable amount, as shown in table 4.
Table 4: Air Force's Reported Actual Carryover and GAO's Calculation of
the Amount of Actual Carryover with Respect to the Ceiling:
Fiscal year and Air Force activity group: Fiscal year 2002 depot
maintenance;
Air Force reported actual carryover: $87 million under ceiling;
GAO calculated actual carryover[A]: $216 million over ceiling;
Difference: $303 million.
Fiscal year and Air Force activity group: Fiscal year 2003 depot
maintenance;
Air Force reported actual carryover: $396 million under ceiling;
GAO calculated actual carryover[A]: $428 million under ceiling;
Difference: ($32 million).
Fiscal year and Air Force activity group: Fiscal year 2004 depot
maintenance;
Air Force reported actual carryover: $722 million under ceiling;
GAO calculated actual carryover[A]: $598 million under ceiling;
Difference: $124 million.
Source: GAO analysis based on Air Force carryover data.
[A] We calculated the allowable amount of carryover and actual amount
of carryover in accordance with DOD guidance in its regulation to
determine the amount of actual carryover in relationship to the
ceiling.
[End of table]
In discussing the carryover calculations with Air Force officials, they
agreed that they were not calculating either the allowable amount of
carryover or the actual amount of carryover correctly in the fiscal
year 2004, 2005, and 2006 budgets. They informed us that in preparing
the carryover information contained in the fiscal year 2004 budget, DOD
budget analysts who review the budget information, including the
carryover information, did not raise questions with the Air Force
carryover calculations. Accordingly, they continued to use the same
methodology for calculating the allowable carryover and actual
carryover that was included in the fiscal year 2005 and 2006 budgets to
Congress. Based on our discussions with them, these officials informed
us that the Air Force would be developing the carryover figures that
will be used in the fiscal year 2007 budget in accordance with DOD
policy.
In reviewing the Air Force fiscal year 2005 carryover calculations
included in the fiscal year 2007 budget, we determined that the Air
Force was complying with DOD's carryover policy with one exception. For
orders financed with the Air Force working capital fund supply account,
the Air Force used a 61 percent outlay rate to calculate its allowable
carryover instead of the 73.5 percent outlay rate for the Air Force
operation and maintenance appropriation contained in the DOD Financial
Summary Tables and required by the Office of the Under Secretary of
Defense (Comptroller), Revolving Fund Directorate. Using the 61 percent
figure, the Air Force reported that its actual carryover for fiscal
year 2005 was about $193 million under the carryover ceiling. However,
if the Air Force used the 73.5 percent outlay rate, our analysis show
that the fiscal year 2005 actual carryover would have exceeded the
carryover ceiling by about $148 million. In discussing the outlay rate
difference with the Air Force, officials stated that they used the 61
percent figure because the rate was more consistent with the actual
outlay rate of the Air Force working capital fund supply account.
However, the Air Force could not provide us with documentation
supporting how they arrived at the 61 percent figure. On February 7,
2006, the Air Force requested from the Office of the Under Secretary of
Defense (Comptroller) that it be allowed to use the 61 percent figure
in developing the carryover ceilings contained in the fiscal year 2007
budget. The Office of the Under Secretary of Defense (Comptroller)
approved the Air Force's request on March 6, 2006.
Army's Reported Actual Carryover Was Understated in Fiscal Years 2002
and 2003 because Prior Year Orders Were Not Included:
In June 2005, we reported[Footnote 14] that the Army understated the
reported actual carryover for the depot maintenance activity group for
fiscal years 2002 and 2003 because it interpreted DOD's 2002 carryover
guidance as requiring only the inclusion of customer orders received in
the current year when calculating actual carryover. During this review,
we found this same problem affected the reported actual carryover for
the ordnance activity group. Thus, the Army did not include customer
orders received in prior years and the carryover related to those
orders. The Army corrected this problem and included all carryover when
it prepared its fiscal year 2006 budget. Table 5 provides information
on the actual amount of carryover reported to Congress for fiscal years
2002 and 2003 and the amount of carryover not included.
Table 5: Dollar Amount of Reported Actual Carryover that Exceeded the
Ceiling and the Amount of Carryover Not Included (dollars in millions):
Fiscal year and Army activity group: Fiscal year 2002 depot
maintenance;
Reported carryover that exceeded ceiling: $36. 1;
Carryover not included: $94.4;
Total carryover exceeding ceiling: $130.5.
Fiscal year and Army activity group: Fiscal year 2003 depot
maintenance;
Reported carryover that exceeded ceiling: 127.1;
Carryover not included: 195.1;
Total carryover exceeding ceiling: 322.2.
Fiscal year and Army activity group: Fiscal year 2002 ordnance;
Reported carryover that exceeded ceiling: 3.9;
Carryover not included: 98.0;
Total carryover exceeding ceiling: 101.9.
Fiscal year and Army activity group: Fiscal year 2003 ordnance;
Reported carryover that exceeded ceiling: 96.6;
Carryover not included: 138.9;
Total carryover exceeding ceiling: 235.5.
Source: GAO analysis of Army carryover data.
[End of table]
Army officials at headquarters acknowledged that the reported actual
carryover did not include carryover related to prior year orders.
Although DOD changed its carryover policy in December 2002, it did not
issue detailed written procedures for calculating actual carryover
until June 2004. Army headquarters officials stated that prior to the
issuance of the written guidance in June 2004, the new carryover
calculation was based on verbal instructions that the Army received
from the Office of the Under Secretary of Defense (Comptroller). The
Army said they interpreted the new guidance to include only actual
carryover on orders received in the current year and instructed the
Army Materiel Command to calculate carryover accordingly. When DOD
issued the revised DOD regulation in June 2004, Army officials said
they realized that they were not calculating reported actual carryover
correctly and changed their methodology in developing the fiscal year
2006 budget so that the actual carryover calculation would include
prior year orders and be in accordance with DOD's written guidance.
Navy Generally Followed DOD's Carryover Policy but Better Disclosure Is
Needed for Reporting on Research and Development Activity Group's
Carryover:
In analyzing the Navy's actual carryover figures for the naval
shipyards, aviation depots, and research and development activity
groups shown in the fiscal year 2004, 2005, 2006, and 2007 budgets to
Congress, we found that the Navy generally followed DOD's policy on
calculating the actual amount of carryover as well as the allowable
amount of carryover. Our analysis of the Navy budgets submitted to
Congress shows that the naval aviation depots have consistently
exceeded the carryover ceilings as shown in table 6. According to Navy
budget documents and officials, the reasons why the actual reported
carryover exceeded the ceiling for the aviation depots were (1) the
lack of material to repair the components being fixed; (2) the
increased deterioration of components, leading to longer repair cycles;
and (3) the large dollar amount of orders financed with supplemental
appropriations for fiscal year 2003.
Table 6: Navy's Reported Actual Carryover in Relationship to the
Ceiling by Activity Group:
Activity group: Aviation depots;
Fiscal year 2002: $113 million over ceiling;
Fiscal year 2003: $205 million over ceiling;
Fiscal year 2004: $5 million;
over ceiling;
Fiscal year 2005: $0.2 million;
over ceiling.
Activity group: Shipyards;
Fiscal year 2002: $76 million under ceiling;
Fiscal year 2003: $195 million over ceiling;
Fiscal year 2004: $210 million under ceiling;
Fiscal year 2005: $226 million under ceiling.
Activity group: Research and development;
Fiscal year 2002: $442 million under ceiling;
Fiscal year 2003: $435 million under ceiling;
Fiscal year 2004: $439 million under ceiling;
Fiscal year 2005: $310 million under ceiling.
Source: Navy Working Capital Fund budgets.
Note: We highlighted the years when the activity group exceeded the
carryover ceiling.
[End of table]
While the budgets show that the Navy research and development activity
group did not exceed the ceiling for any of the 4 years, the budgets no
longer provide information that shows if any of the five subactivity
groups individually exceeded the carryover ceiling, as the Navy budgets
did prior to the change in the carryover policy in December 2002. Prior
to the Office of the Under Secretary of Defense (Comptroller) changing
its carryover policy in December 2002, the Navy Working Capital Fund
budget provided carryover information, such as the dollar amount of
carryover and the number of months of carryover for each of the
subactivity groups. An analysis of the budget documents would show if
any of the subactivity groups exceeded the 3-month carryover standard.
After DOD changed the carryover policy in December 2002, the Navy
changed the level of reporting carryover information to be at the
aggregate level and no longer provided carryover information at the
subactivity group level. Our analysis of Navy reports showed that the
Naval Air Warfare Center exceeded the ceiling for fiscal years 2003,
2004, and 2005, and the Naval Surface Warfare Center exceeded the
ceiling for fiscal year 2002, as shown in table 7.
Table 7: Navy's Reported Actual Carryover in Relationship to the
Ceiling for the Research and Development Subactivity Groups:
Subactivity group: Naval Air Warfare Center;
Fiscal year 2002: $201 million under ceiling;
Fiscal year 2003: $19 million;
over ceiling;
Fiscal year 2004: $57 million;
over ceiling;
Fiscal year 2005: $52 million;
over ceiling.
Subactivity group: Naval Surface Warfare Center;
Fiscal year 2002: $95 million;
over ceiling;
Fiscal year 2003: $211 million under ceiling;
Fiscal year 2004: $247 million under ceiling;
Fiscal year 2005: $166 million under ceiling.
Subactivity group: Naval Undersea Warfare Center;
Fiscal year 2002: $78 million under ceiling;
Fiscal year 2003: $87 million under ceiling;
Fiscal year 2004: $80 million under ceiling;
Fiscal year 2005: $58 million under ceiling.
Subactivity group: Space and Naval Warfare Center;
Fiscal year 2002: $148 million under ceiling;
Fiscal year 2003: $76 million under ceiling;
Fiscal year 2004: $81 million under ceiling;
Fiscal year 2005: $51 million under ceiling.
Subactivity group: Naval Research Laboratory;
Fiscal year 2002: $79 million under ceiling;
Fiscal year 2003: $81 million under ceiling;
Fiscal year 2004: $88 million under ceiling;
Fiscal year 2005: $86 million under ceiling.
Subactivity group: Total;
Fiscal year 2002: $411 million under ceiling[A];
Fiscal year 2003: $436 million under ceiling[B];
Fiscal year 2004: $439 million under ceiling;
Fiscal year 2005: $309 million under ceiling[B].
Source: Navy reports on the research and development subactivity
groups.
Note: We highlighted the years when the subactivity group exceeded the
carryover ceiling.
[A] There is a $31 million difference between the amount shown here and
the amount shown in table 6 for the research and development activity
group. The Navy's report to Congress and its internal report on the
subactivity groups contained different amounts.
[B] Due to rounding, there is a $1 million difference between the
amount shown here and the amount shown on table 6 for the research and
development activity group.
[End of table]
According to the Navy, there are two reasons why carryover should be
reported at the activity group level and not at the subactivity group
level. First, the Office of the Under Secretary of Defense
(Comptroller) required the research and development activities to use a
higher outlay rate for orders financed with procurement appropriations
than the official published procurement outlay rates. Using a higher
procurement outlay rate for calculating the carryover ceiling lowers
the amount of allowable carryover. Because of this higher rate, a Navy
official stated that the carryover should be reported at the aggregate
level since subactivity groups reporting under the ceiling will offset
those subactivity groups reporting over the ceiling. Second, the new
methodology did not allow the exclusion of intrafund orders from the
carryover calculation. These are orders placed by one research and
development activity with another research and development activity.
Since intrafund orders were no longer allowed to be excluded from the
carryover calculation, this resulted in the double counting of actual
carryover associated with these intrafund orders. Because the above two
reasons reduce the carryover ceiling and increase the actual amount of
carryover, the Navy reports the carryover information at the activity
group level.
However, we believe that the carryover associated with the research and
development activity group should be reported at the subactivity group
level for several reasons. First, according to the fiscal year 2007
budget, the research and development activity group is the largest Navy
activity group--it received about $10 billion of new orders and carried
over about $3.5 billion for fiscal year 2005. By comparison, for fiscal
year 2005, the Navy shipyards received about $1.8 billion of new orders
and carried over about $636 million, and the aviation depots also
received about $1.8 billion and carried over about $470 million.
Further, the dollar amount of new orders received by three research and
development subactivity groups (Naval Surface Warfare Center--$3.4
billion, Naval Air Warfare Center--$2.7 billion, and Space and Naval
Warfare Systems Centers--$2.2 billion) exceeded the amount of new
orders received by the shipyards and aviation depots for fiscal year
2005. Because of the dollar magnitude of research and development
subactivity groups, we believe carryover reporting at the subactivity
group level is needed for Congress and DOD to maintain oversight.
Second, concerning the Navy's comment on using a higher outlay rate for
calculating the carryover ceiling, we agree with the Office of the
Under Secretary of Defense (Comptroller) that the Navy should use a
higher rate. We also believe that the Navy should report carryover
information at the subactivity group level from a disclosure
standpoint. Otherwise, subactivity groups reporting under the ceiling
will offset those subactivity groups reporting over the ceiling and
this information would not be available in the budgets to Congress. In
the December 2002 management initiative decision, the Office of the
Under Secretary of Defense (Comptroller) stated that research and
development activities could achieve better results than the
established outlay rates for orders financed with procurement
appropriations because of the type of work performed by these
activities. DOD further stated that 45 percent of the fiscal year 2002
carryover was linked to contractual efforts and 55 percent supported in-
house requirements. DOD concluded that carryover linked to contractual
obligations would disburse at the procurement appropriations rate.
However, the amount supporting the in-house requirements would disburse
at a higher rate because such requirements tend to be funded on an
annualized basis. The Office of the Under Secretary of Defense
(Comptroller) requested that the Navy examine the nature and scope of
the procurement-funded work and report its recommendations by February
15, 2003, to the Comptroller. At the time DOD issued the management
initiative decision in December 2002, the Navy reported carryover
information to Congress at the subactivity group level. The Navy
determined, based on work performed by one Warfare Center, that the
outlay rate for Navy procurement appropriations should be 40 percent,
which is higher than the actual outlay rate for these appropriations.
However, the December 2002 management initiative decision did not
discuss the Navy changing its level of reporting carryover information
from the subactivity group level to the aggregate level.
Third, concerning the Navy's comments on intrafund orders, the Navy is
correct in that the amount of actual carryover will be double counted.
However, the effect of this is negated since the amount of allowable
carryover is also double counted since both of these activities will
include the intrafund order as a new order and include the new order in
their calculations for determining the allowable amount of carryover.
Furthermore, in May 2001 we reported[Footnote 15] that the Navy was not
following DOD's guidance on calculating carryover on intrafund orders.
Specifically, Navy working capital fund activities reduced carryover
for orders received from other working capital fund activities.
However, Navy working capital fund activities categorized orders they
sent to other working capital fund activities as contractual
obligations and used these obligations to reduce reported year-end
carryover. As a result, not only did the Navy eliminate the double
counting of such orders, it eliminated all these orders from its
calculations, thus understating the equivalent number of months of
carryover work.
Carryover Increased Due to Military Services Placing Orders Late in the
Fiscal Year:
Carryover is greatly affected by orders accepted late in the fiscal
year that generally cannot be completed, and in some cases cannot even
be started, prior to the end of the fiscal year. As a result, almost
all orders accepted late in the fiscal year increase the amount of
carryover. We analyzed 68 orders accepted in September 2003 and
September 2004 by certain activity groups for the three military
services. Our analysis identified four key factors contributing to
orders generally being issued by customers late in the fiscal year and
being accepted by the working capital fund activities during the last
month of the fiscal year. These reasons included (1) funds provided to
customers late in the fiscal year to finance existing requirements, (2)
new work requirements identified at year end, (3) problems encountered
in processing orders, and (4) work scheduled at year end. Further, our
analysis showed that 39 of the 68 orders--over half of the orders
reviewed--were not complete at the end of the next fiscal year,
generating a second year of carryover. In addition to increasing
carryover amounts, orders accepted by working capital fund activities
late in the fiscal year, in which these activities do not perform the
work until well into the next fiscal year or even subsequent years, may
not (1) be the most effective use of DOD resources at that time and (2)
have complied with all of the order acceptance provisions cited in the
DOD Financial Management Regulation. As noted in our scope and
methodology (app. I), the scope of our work for this review did not
include determining whether there was a bona fide need for the work
being ordered by customers.
Reasons Customer Orders Are Placed Late in the Fiscal Year:
As shown in figure 1, our review of 68 fiscal year-end orders for 2003
and 2004 identified four key factors contributing to orders generally
being issued by customers late in the fiscal year and being accepted by
the working capital fund activities during the last month of the fiscal
year.
Figure 1: Factors Contributing to Year-end Orders for 2003 and 2004:
[See PDF for image]
[End of figure]
As depicted in figure 1, the factor contributing most frequently to
orders being accepted by working capital fund activities late in the
fiscal year--29 of the 68 orders (43 percent) we reviewed--is the late
receipt of funds from customers to finance existing requirements. DOD
customers stated that it is common for the military services to provide
funds to them late in the fiscal year after the military services
review their programs to identify funds that will not be obligated by
year end. When these funds are identified, the military services
realign the funds to programs that can use them. These funds are then
used to finance orders placed with working capital fund activities at
year end. Further, in fiscal years 2003 and 2004, the military services
received supplemental appropriations from Congress to fund ongoing
military operations. Some of these funds were distributed to DOD
customers late in the fiscal year to finance repairs on DOD assets. The
following examples illustrate situations when funds were provided to
customers late in the fiscal year.
* On September 4, 2003, the Ogden Air Logistics Center accepted an
order from the Air Force Ground Theater Air Control System program
office totaling about $4.8 million financed with operation and
maintenance funds that would have expired on September 30, 2003. This
order provided for Ground Theater Air Control System hardware and
software upgrades. According to program office officials, the Air
Combat Command traditionally funds about 60 to 70 percent of its total
software development requirements annually. However in August 2003, the
Command provided the program office with funding to cover 100 percent
of its fiscal year 2003 software requirements. Thus, the program office
applied the funds to its next highest priority workload and issued the
$4.8 million order.
* On September 27 and 29, 2003, the Space and Naval Warfare Systems
Center in San Diego accepted two orders from the U.S. Pacific Fleet
totaling approximately $4.15 million financed with operation and
maintenance funds that would have expired on September 30, 2003. These
two orders were to provide the technical and engineering support for
the relocation of a Sea-Based Battle Laboratory from the USS Coronado
to a new ashore headquarters activity. The Pacific Fleet identified
this requirement in early fiscal year 2003;
however, funds were not made available until the end of the fiscal
year, when additional funds were identified from other programs.
* On September 26, 2003, the Red River Army Depot accepted an order
from the Army Tank-automotive and Armaments Command totaling $17.9
million financed with operation and maintenance funds that would have
expired on September 30, 2003. The order was for the repair and upgrade
of 41 Bradley Fighting Vehicles needed to support the war effort in
Iraq and Afghanistan. These vehicles were to be prepositioned in the
theater of operation. According to a Tank-automotive and Armaments
Command official, the order was issued late in fiscal year 2003 because
the Army Materiel Command did not provide them with funding until
September 2003. An Army Materiel Command official noted that the effort
was funded by a supplemental appropriation used to support war
operations.
The second most significant factor that contributed to the year-end
orders we reviewed--17 of the 68 orders (25 percent)--was the
identification of new requirements at year end. Some examples of DOD
customers identifying requirements at year end include (1) a Navy
aviation depot in performing scheduled maintenance identified damage to
aircraft beyond what was originally included in its statement of work,
(2) an Army depot identified inspection requirements at year end to
keep ammunition storage inspections current and to satisfy requisitions
to support the soldiers in the field, (3) Navy aircraft repair
requirements were moved from fiscal year 2004 to fiscal year 2003 to
meet an earlier deployment schedule, (4) the Army identified new
requirements at year end for repair of Army assets necessary to support
ongoing military operations, and (5) the Navy identified the need for
additional capabilities for several aircraft and also needed to perform
emergency repairs on one of its aircraft carriers. Two examples of some
of the reasons for new requirements being identified at year end
follow.
* On September 27 and 30, 2004, the Space and Naval Warfare Systems
Center in Charleston accepted an order and an amendment from the
Commander, Naval Air Force, U.S. Atlantic Fleet, totaling $425,000
financed with operation and maintenance funds that would have expired
on September 30, 2004. A fleet official stated that it had received a
casualty report from the USS Harry S. Truman on September 24, 2004,
indicating repairs needed to be made to the ship's announcing system.
An activity official stated that the order was accepted regardless of
carryover concerns due to the urgency associated with a casualty
report. Additionally, a fleet official noted that the time to complete
the needed repairs was limited due to the ship's impending deployment.
* On September 8, 2004, the Army Rock Island Arsenal accepted an order
from the Tank-automotive and Armaments Command totaling about $1.4
million financed with operation and maintenance funds that would have
expired on September 30, 2004. The order was for the reconditioning of
chemical biological protective shelters. The shelters mount on high-
mobility, multipurpose wheeled vehicles and provide an environmentally
controlled work area that filters out nuclear, biological, and chemical
agents. According to a logistics manager, in the fourth quarter of
fiscal year 2004 the Tank-automotive and Armaments Command identified
11 shelters that needed reconditioning and issued an order to the Army
Rock Island Arsenal for the work.
Further, we found 12 of the 68 orders (18 percent) were accepted by
working capital fund activities in the last month of the fiscal year
due to problems encountered with processing the orders. These problems
included (1) delays in processing forms through different activities
and multiple nonintegrated systems, (2) data input errors that were not
corrected until September, and (3) difficulties encountered in
processing documents and related funding from non-DOD customers to
working capital fund activities. Two examples follow.
* In July 2003, the Air National Guard Headquarters prepared
documentation that directed the Pennsylvania Air National Guard to send
its ground mobile navigation radar to the Tobyhanna Army Depot to
repair damage sustained by the radar system from multiple lightening
strikes and power surges and to overhaul the system. The order was not
accepted by the depot until September 26, 2003, about 3 months later.
The delay in acceptance of the order was due to (1) the normal time
required to process forms through six different activities using
nonintegrated systems, (2) paperwork processing delays due to missing
information, (3) confusion on how to process the workload in a new Army
system implemented in July 2003, and (4) errors made in entering data
into the Army system.
* Due to delays in correcting input errors on an order, the Warner
Robins Air Logistics Center did not accept a $2.8 million order from
the F-15 program office, financed with operation and maintenance funds,
until September 17, 2004. The order was for the maintenance of an Air
National Guard F-15 aircraft. When an order was generated by the F-15
program office on June 10, 2004, the office entered the program control
and serial numbers into the project order system incorrectly. On
September 17, 2004, the Center established a new order with the
corrected information.
Finally, we found 10 of the 68 orders (15 percent) were accepted by
working capital fund activities in the last month of the fiscal year
when DOD assets were scheduled for maintenance. According to Air Force
and Navy officials, planning for the repair of major assets such as
aircraft, ships, and engines begins several years prior to the date on
which repairs will actually be performed. The assets are scheduled for
maintenance based on routine cycles, such as numbers of years since the
last depot maintenance was performed. The services include funding
requirements for these repairs in their annual budget submissions.
Generally, in the quarter the assets are scheduled for maintenance, the
major commands distribute the repair funds to their customers and the
customers, in turn, issue orders to fund the repair. Two examples
follow.
* On September 16, 2003, the Oklahoma City Air Logistics Center
accepted an order from the Air National Guard totaling about $7.2
million financed with operation and maintenance funds set to expire on
September 30, 2003. The order was for the scheduled maintenance of the
39th Air National Guard KC-135E aircraft in fiscal year 2003. During
fiscal year 2001, the Air National Guard determined that 39 KC-135E
aircraft required maintenance in fiscal year 2003 in accordance with
their 5-year maintenance schedule. In fiscal year 2001, the Air
National Guard began planning and budgeting for the maintenance of
these aircraft. The 39TH aircraft arrived at the air logistics center
in mid-September 2003 as planned. The Air National Guard issued the
order in September 2003 once it determined that the work on this
aircraft would be performed at the air logistics center instead of
contracting out the workload.
* On September 29, 2003, the Naval Air Warfare Center-Aircraft Division
accepted an order from the U.S. Atlantic Fleet in the amount of
approximately $2.4 million financed with operation and maintenance
funds set to expire the next day. The order required repairs and/or
replacement of deteriorated and worn components to support flight deck
operations on the USS Harry S. Truman. This work was scheduled for
overhaul in fiscal year 2003. A fleet official stated that they did not
perform an inspection of the ship to determine specific repair
requirements until late in the fiscal year.
Impact of Late Orders on Carryover:
Our further review of the 68 fiscal year-end orders for 2003 and 2004
disclosed that 39 of these orders--over half--were not completed within
the next fiscal year, which resulted in carryover of 2 or more years.
As we reported in June 2005,[Footnote 16] two reasons generally caused
work to carryover into a second fiscal year. First, the depots received
orders late in the fiscal year and were unable to complete the effort
by year end, as discussed in the previous section;
and second, some depots were unable to obtain the materials/parts
needed in a timely manner to complete the work. In addition to these
reasons, we found that some working capital fund activities were unable
to complete work within 1 year because of delays caused by backlogged
or other higher priority work and broken or unsafe repair equipment.
These factors have resulted in orders being carried over for more than
1 fiscal year and increased the carryover balances for subsequent
years. As a result, these orders may not have been the most effective
use of DOD resources at that time and may not have complied with all of
the order acceptance provisions cited in the DOD Financial Management
Regulation.
The DOD Financial Management Regulation 7000.14-R, Volume 11A, Chapters
2 and 3, prescribes regulations governing the use of orders placed with
working capital fund activities. When a working capital fund activity
accepts an order, the customer's funds financing the order are
obligated. The DOD regulation identifies a number of requirements
before a working capital fund activity accepts an order. For example,
work to be performed under the order shall be expected to begin within
a reasonable time after the order is accepted by the performing DOD
activity. As a minimum requirement, it should be documented that when
an order is accepted, the work is expected to (1) begin without delay
(usually within 90 days) and (2) be completed within the normal
production period for the specific work ordered. Further, the
regulation states that no project order shall be issued if commencement
of work is contingent upon the occurrence of a future event. Our review
of 68 orders accepted by the working capital fund activities at year
end determined that work on some of these orders did not begin within
90 days or was not completed within the normal production period for
the work being performed. The following examples illustrate orders that
were accepted by working capital fund activities at year end and (1)
may not be the most effective use of DOD resources at that time and (2)
may not have complied with all of the provisions contained in this
regulation.
* On September 25, 2003, the Crane Army Ammunition Activity accepted an
order totaling $1,885,000 that was financed with operation and
maintenance funds for X-ray work to determine the safety and usability
of 200,000 rounds of 40-millimeter high-explosive ammunition. However,
due to problems with the X-ray inspection machine, the activity had to
suspend work on the ammunition until the inspection machine was
qualified as safe to use. According to the program engineer, work was
delayed because imaging panels in the inspection machine were burning
up and had to be replaced. Compounding this problem was a delay in the
approval process for the safe operation of the machine. As a result,
very little work was completed on this order over 3 fiscal years.
Specifically, $1,885,000 carried over into fiscal year 2004 and
$1,881,105 carried over into fiscal year 2005 and again into fiscal
year 2006.
* On September 14, 2004, the Ogden Air Logistics Center accepted an
order totaling $3.4 million that was financed with operation and
maintenance funds to build an F-16 radar test station on behalf of the
Air National Guard. According to a center official, even though the
depot did not have the material to build the station, it accepted the
order late in the fiscal year. Thus, the entire $3.4 million order
carried over into fiscal year 2005. The center official noted that
during fiscal year 2005, the activity group ordered the material and
began work assembling the station, but as of the end of fiscal year
2005 all the material had not yet been received from contractors.
Therefore, $277,898 carried over into fiscal year 2006.
* On September 29, 2003, the Sierra Army Depot accepted an order
totaling $11,680,175 that was financed with operation and maintenance
funds for the receipt, inspection, storage, and re-containerizing of
203 containers of gas and oil pipeline equipment returned from Iraq and
Afghanistan. Because this order was received so late in the fiscal
year, the entire amount of the order--$11,680,175--was carried over
into fiscal year 2004. According to the mission director, this order
was delayed because (1) some containers were not returned from the war
zones in a timely manner so the depot could refurbish them and (2) the
depot received other, higher priority workloads, such as armored
plating on wheeled vehicles. As a result, over half of the dollar
amount of the order--$6,847,529--carried over into fiscal year 2005 and
$2,643,093 carried over into fiscal year 2006.
* On September 16, 2003, the Space and Naval Warfare Systems Center in
Charleston accepted an order for $232,200 that was financed with
operation and maintenance funds. The U.S. Naval Forces Central Command
identified and funded this emergent requirement in August 2003 in
support of the Combat Terrorism Initiative during the Iraq war. More
specifically, this order was for technical and installation services
for a new communications link between Bahrain and Dubai. An activity
official stated that minimal engineering services were initiated prior
to the end of fiscal year 2003, so almost the entire dollar amount of
the order--$230,000--carried over into fiscal year 2004. This official
also stated the center encountered delays when the government of Dubai
would not allow the leased line into the country from Bahrain. This
resulted in $207,000 being carried over into fiscal year 2005, and
$12,000 being carried over into fiscal year 2006.
* On September 11, 2003, the Oklahoma City Air Logistics Center
accepted an order totaling about $1.8 million that was financed with
operation and maintenance funds for the analytical condition
inspection[Footnote 17] of a F110-129 engine. According to an Oklahoma
City Air Logistics Center official, the center brought the engine in
for repair in September 2003 to ensure that the funds were obligated by
fiscal year end. Otherwise, the funds would expire and be unavailable
for new workload. However, the center did not begin work on the engine
until March 2004 due to a backlog of engines waiting for repair. Since
the engine was accepted for repair in the last month of the fiscal
year, almost the entire $1.8 million was carried over into fiscal year
2004. Further, because of production delays and a failed serviceability
test, the center carried funds into fiscal year 2005 and again into
fiscal year 2006--more than 2 years after the order was accepted.
Conclusions:
The military services have provided erroneous carryover information to
Congress and DOD decision makers because the services have not
consistently applied DOD's revised policy on carryover. Reliable and
consistent carryover information is essential for Congress and DOD
decision makers to perform their oversight, including reviewing DOD's
budget to determine if an activity group has too much or not enough
carryover. To provide greater assurance that the military services
provide reliable and consistent carryover information, the military
services must be held accountable for the accuracy of reported
carryover information and ensure the timely identification of unneeded
customer funds. While DOD's guidance on calculating carryover was not
adequate when it revised its carryover policy in 2002, DOD began
improving the guidance in 2004. However, DOD has not updated the
Financial Management Regulation so that it includes comprehensive
carryover guidance to the military services, and the services have not
always complied with the carryover guidance in the past. Until this is
done, Congress and DOD decision makers will be forced to make key
budget decisions, such as whether to enhance or reduce customer
budgets, based on unreliable information. In addition, DOD working
capital fund activities' acceptance of year-end orders (1) increases
the amount of carryover and (2) in some cases, contributes to DOD
working capital fund activities' actual carryover amounts exceeding
their allowable amounts by tens of millions of dollars. Excessive
amounts of year-end carryover tie up customer funds that could be put
to better near-term use and are subject to reductions by DOD and the
congressional defense committees during the budget review process.
Recommendations for Executive Action:
In order to improve the business operations of the Department of
Defense Working Capital Fund, we are making the following eight
recommendations to the Secretary of Defense.
We recommend that the Secretary of Defense direct the Under Secretary
of Defense (Comptroller) to take the following actions:
* Issue written instructions in its DOD Financial Management Regulation
7000.14-R specifying the outlay rates to be used by DOD working capital
fund activities for calculating the allowable amount of carryover and
continue to issue carryover guidance to the military services in its
annual guidance on preparing budget justification book material for
Congress.
* Review the carryover information provided in the military services'
annual budget submissions to help ensure the services are calculating
their allowable and actual carryover amounts in accordance with DOD
policy.
* Reiterate the requirements in the DOD Financial Management Regulation
7000.14-R to help ensure that working capital fund activities are in
compliance with the regulations governing acceptance of orders,
particularly at fiscal year end.
We recommend that the Secretary of Defense direct the Secretary of the
Air Force to take the following actions:
* Use the current outlay rate tables that are included in the DOD
Financial Summary Tables when calculating the allowable carryover
amounts for the Air Force depot maintenance activity group, consistent
with DOD policy.
* Use only current year orders for calculating the allowable carryover
amounts for the Air Force depot maintenance activity group, as required
by DOD carryover policy.
* Include all orders when calculating the amount of actual carryover
for the Air Force depot maintenance activity group, except those orders
that are specifically excluded in DOD Financial Management Regulation
7000.14-R or are excluded by the Under Secretary of Defense
(Comptroller) in writing.
* Include the allowable and actual dollar amounts of carryover for the
Air Force depot maintenance activity group in the Air Force's annual
budget to Congress, as required by DOD Financial Management Regulation
7000.14-R.
We recommend that the Secretary of Defense direct the Secretary of the
Navy to include the allowable and actual amounts of carryover for each
of the five Navy research and development subactivity groups in the
Navy's annual budget to Congress.
Agency Comments and Our Evaluation:
DOD provided written comments on a draft of this report. DOD concurred
with all eight of our recommendations. Regarding its plans for
implementing the eight recommendations, DOD stated that it is in the
process of updating its financial management regulations and issuing
budget guidance for the fiscal year 2008/2009 President's Budget, which
will address calculating the allowable amount of carryover. Further,
DOD stated that it made a more rigorous review of the services'
carryover information in the fiscal year 2007 President's Budget
submission and that it will continue reviewing the services' budgets to
ensure that the services are calculating allowable and actual amounts
of carryover in accordance with DOD policy. DOD also stated that it
will direct the Navy to report carryover information for each of the
five Navy research and development subactivity groups in the Navy's
annual budget to Congress. Finally, as preparation for the close out of
fiscal year 2006, DOD will reiterate the guidance in its Financial
Management Regulation governing the working capital fund acceptance of
orders which obligates customers' funds, particularly at year end.
DOD also commented that the inaccuracies we identified in reported
carryover did not materially distort the evaluation of depot operations
or projected workload levels. While we do not know how DOD defines
materiality, we believe that the reporting inaccuracies affect the
evaluation of depot operations from a workload standpoint because the
inaccuracies understated the carryover balances for some activity
groups by hundreds of millions of dollars. For example, as stated in
our report, the Air Force reported that its fiscal year 2002 depot
maintenance carryover was $87 million under the ceiling but our
calculation shows that the carryover exceeded the ceiling by $216
million, a difference of $303 million. In another case, the Army
reported that its fiscal year 2003 depot maintenance carryover was $127
million over the ceiling but our calculations show that it was over the
ceiling by $322 million, a difference of $195 million. As a result of
these understatements, the amount of work carried over from one year to
next was not reliable and could have affected DOD's and the
congressional defense committees' review and evaluation of carryover
during their annual budget review.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Armed Services;
the Subcommittee on Readiness and Management Support, Senate Committee
on Armed Services; the Subcommittee on Defense, Senate Committee on
Appropriations; the House Committee on Armed Services; the Subcommittee
on Readiness, House Committee on Armed Services; and the Ranking
Minority Member, Subcommittee on Defense, House Committee on
Appropriations. We are also sending copies to the Secretary of Defense,
Secretaries of the Army, Navy, and Air Force, and other interested
parties. Copies will be made available to others upon request. Should
you or your staff have any questions concerning this report, please
contact McCoy Williams, Director, at (202) 512-9095 or
williamsm1@gao.gov, or William M. Solis, Director, at (202) 512-8365 or
solisw@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Key contributors to this report are listed in appendix III.
Sincerely yours,
Signed by:
McCoy Williams:
Director, Financial Management and Assurance:
Signed by:
William M. Solis:
Director, Defense Capabilities and Management:
[End of section]
Appendix I:
Scope and Methodology:
To determine if the military services' carryover calculations were in
compliance with the Department of Defense's (DOD) new carryover policy,
we obtained and analyzed the services' calculations for the (1)
reported year-end actual carryover balances for fiscal years 2002
through 2005 and (2) allowable amount of carryover for fiscal years
2002 through 2005. We recomputed the services' calculations following
DOD's regulation on carryover and compared our carryover calculations
with the services' carryover calculations. We met with officials from
the Army, Navy, and Air Force to discuss (1) the methodology the
services used to calculate carryover and (2) any differences between
our calculations and their calculations. We also met with officials
from the Office of the Under Secretary of Defense (Comptroller) to
discuss DOD's new carryover policy, including the proper calculation
for actual carryover and the allowable amount of carryover. To assess
the reliability of the carryover data, we (1) reviewed and analyzed the
factors used in calculating carryover and (2) interviewed officials
knowledgeable about the data. We determined that the data were
sufficiently reliable for the purposes in this report.
To determine if customers were submitting orders to working capital
fund activities late in the fiscal year and, if so, the effect that
this practice has had on carryover, we obtained data on orders accepted
by working capital fund activities in September 2003 and September
2004. Initially, we obtained information on the top 20 orders from a
dollar standpoint that selected working capital fund activities
accepted from customers in September 2003 and September 2004. We
analyzed the information on the orders, which included the
appropriation financing the order, the date the order was accepted by
the working capital fund activity, and a description of the work to be
performed. We then selected and analyzed 68 orders with large dollar
amounts that working capital fund activities accepted in September. We
also interviewed (1) working capital fund officials to determine the
current status of performing the work on the orders and (2) customers
to determine the reasons why they sent the orders to the working
capital fund activities late in the fiscal year. In performing our work
on these orders, we did not review these orders to determine if there
was a bona fide need for the work being ordered by customers.
We performed our work at the headquarters offices of the Under
Secretary of Defense (Comptroller), the Assistant Secretary of the Army
(Financial Management and Comptroller), the Assistant Secretary of the
Navy (Financial Management and Comptroller), and the Assistant
Secretary of the Air Force (Financial Management and Comptroller),
Washington, D.C. In performing our work on reviewing the services'
carryover calculations, we obtained carryover information on the
following Defense Working Capital Fund activity groups: (1) Army depot
maintenance, (2) Army ordnance, (3) Army industrial operations, (4) Air
Force depot maintenance, (5) Naval aviation depots, (6) Naval
shipyards, and (7) Naval research and development. The Naval research
and development activity group consists of the following five
subgroups: Naval Air Warfare Center, Naval Surface Warfare Center,
Naval Undersea Warfare Center, Naval Research Laboratory, and the Space
and Naval Warfare Systems Command Center.
In performing our work on reviewing individual orders, we obtained
information from the following working capital fund activities and
their customers that submitted the orders.
Air Force:
* Ogden Air Logistics Center, Hill Air Force Base, Utah:
* Oklahoma City Air Logistics Center, Tinker Air Force Base, Oklahoma:
* Warner Robins Air Logistics Center, Robins Air Force Base, Georgia:
Navy:
* Naval Air Systems Command, Patuxent River, Maryland:
* Naval Air Warfare Center, Aircraft Division, Patuxent River,
Maryland:
* Naval Air Warfare Center, Weapons Division, China Lake, California:
* Naval Aviation Depot, San Diego, California:
* Space and Naval Warfare Systems Command, San Diego, California:
* Space and Naval Warfare Systems Center, San Diego, California:
* Space and Naval Warfare Systems Center, Charleston, South Carolina:
Army:
* Blue Grass Army Depot, Richmond, Kentucky:
* Crane Army Ammunition Activity, Crane, Indiana:
* Rock Island Arsenal, Rock Island, Illinois:
* Sierra Army Depot, Herlong, California:
* Red River Army Depot, Texarkana, Texas:
* Tobyhanna Army Depot, Tobyhanna, Pennsylvania:
The carryover information in this report is budget data obtained from
official Army, Navy, and Air Force budget documents. We conducted our
work from July 2005 through March 2006 in accordance with U.S.
generally accepted government auditing standards. We requested comments
on a draft of this report from the Secretary of Defense or his
designee. The Under Secretary of Defense (Comptroller) provided written
comments, and these comments are presented in the Agency Comments and
Our Evaluation section of this report and are reprinted in appendix II.
[End of section]
Appendix II: Comments from the Department Of Defense:
Under Secretary Of Defense:
1100 Defense Pentagon Washington, DC 20301-1 100:
Comptroller:
May 30 2006:
Mr. McCoy Williams, Director, Financial Management and Assurance:
Mr. William M. Solis, Director, Defense Capabilities and Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Williams and Mr. Solis:
This is the Department of Defense response to the Government
Accountability Office (GAO) draft report, "DEFENSE WORKING CAPITAL
FUND: Military Services Did Not Calculate and Report Carryover Amounts
Correctly," dated April 20, 2006, (GAO Code 195066/GAO-06-530). We have
received and reviewed the draft report. Specific comments on the draft
report are attached.
The Department remains committed to providing accurate budget data. The
Department believes that the reporting inaccuracies included in this
draft report did not materially distort the evaluation of depot
operations or projected workload levels. The Department will provide
increased visibility of Navy Research and Development activity group
carryover.
Sincerely,
Signed by:
Tina W. Jonas:
Attachment:
As stated:
Gao Draft Report - Dated April 20,2006 GAO Code 195066/GAO-06-530:
"Defense Working Capital Fund: Military Services Did Not Calculate And
Report Carryover Amounts Correctly"
Department Of Defense Comments To The Recommendations:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to issue written
instructions in its DOD Financial Management Regulation 7000.14-R
specifying the outlay rates to be used by DOD working capital fund
activities for calculating the allowable amount of carryover and
continue to issue carryover guidance to the military services in its
annual guidance on preparing budget justification book material for
Congress. (p. 39/GAO Draft Report):
DOD RESPONSE: Concur. The Department issued budget guidance for the FY
2007 President's Budget submission that specified the outlay rates to
use for calculating the allowable amount of carryover. Additionally,
the Department is in the process of updating the DOD Financial
Management Regulations (FMR) and issuing budget guidance for the:
FY 2008/FY 2009 President's Budget. Both documents will include the
recommended improvements.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to review the
carryover information provided in the military services' annual budget
submissions to help ensure the services are calculating their allowable
and actual carryover amounts in accordance with DOD policy. (p. 39/GAO
Draft Report).
DOD RESPONSE: Concur. A more rigorous review of the Services' carryover
reporting was performed for the preparation of the FY 2007 President's
Budget submission. For future budget submissions, the Under Secretary
of Defense (Comptroller) will ensure that the Services' budget
submission complies with the approved carryover policy.
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to reiterate the
requirements in the DOD Financial Management Regulation 7000.14-R to
help ensure that working capital fund activities are in compliance with
the regulations governing acceptance of orders, particularly at fiscal
year end. (p. 39/GAO Draft Report):
DOD RESPONSE: Concur. As preparation for the close out of FY 2006, the
Department will reiterate the requirements in the DOD FMR to help
ensure that working capital fund activities comply with the regulations
governing acceptance of orders, particularly at fiscal year end.
RECOMMENDATION 4: The GAO recommended that the Secretary of Defense
direct the Secretary of the Air Force to use the current outlay rate
tables that are included in the DOD Financial Summary Tables when
calculating the allowable carryover amounts for the Air Force Depot
Maintenance Activity Group, consistent with DOD policy. (p. 39/GAO
Draft Report):
DOD RESPONSE: Concur. The Under Secretary of Defense (Comptroller) has
already directed the Air Force to use approved outlay rates when
calculating the allowable carryover amounts. For the FY 2008/FY 2009
budget submission, the Department will ensure that the Services'
correctly follow outlay rate guidance.
RECOMMENDATION 5: The GAO recommended that the Secretary of Defense
direct the Secretary of the Air Force to use only current year orders
for calculating the allowable carryover amounts for the Air Force Depot
Maintenance Activity Group, as required by DOD carryover policy. (p.
39/GAO Draft Report):
DOD RESPONSE: Concur. During the FY 2007 budget review, the Under
Secretary of Defense (Comptroller) restated the requirements for
calculating and reporting carryover. These restated requirements will
be included in the next update of the DOD FMR. The Department will
ensure that the Services' budget submissions comply with the revised
carryover policy.
RECOMMENDATION 6: The GAO recommended that the Secretary of Defense
direct the Secretary of the Air Force to include all orders when
calculating the amount of actual carryover for the Air Force depot
maintenance activity group, except those orders that are specifically
excluded in DOD Financial Management Regulation 7000.14-R or are
excluded by the Under Secretary of Defense (Comptroller) in writing.
(p. 39/GAO Draft Report):
DOD RESPONSE: Concur. During the FY 2007 budget review, the Under
Secretary of Defense (Comptroller) restated the requirements for
calculating and reporting carryover. These restated requirements will
be included in the next update of the DOD FMR. The Department will
ensure that the Services' budget submissions comply with the revised
carryover policy.
RECOMMENDATION 7: The GAO recommended that the Secretary of Defense
direct the Secretary of the Air Force to include the allowable and
actual dollar amounts of carryover for the Air Force depot maintenance
activity group in the Air Force's annual budget to Congress, as
required by DOD Financial Management Regulation 7000.14-R. (p. 40/GAO
Draft Report):
DOD RESPONSE: Concur. During the FY 2007 budget review, the Under
Secretary of Defense (Comptroller) restated the requirements for
calculating and reporting carryover. These restated requirements will
be included in the next update of the DOD FMR. The Department will
ensure that the Services' budget submissions comply with the revised
carryover policy.
RECOMMENDATION 8: The GAO recommended that the Secretary of Defense
direct the Secretary of the Navy to include the allowable and actual
amounts of carryover for each of the five Navy research and development
sub-activity groups in the Navy's annual budget to Congress. (p. 40/GAO
Draft Report):
DOD RESPONSE: Concur. For the FY 2008 President's Budget the Department
will direct the Navy to include the allowable and actual amounts of
carryover for each of the five Navy Research and Development sub-
activity groups in the Navy's annual budget submission to Congress.
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
McCoy Williams, (202) 512-9095:
William M. Solis, (202) 512-8365:
Acknowledgments:
Staff who made key contributions to this report were Richard Cambosos,
Francine DelVecchio, Keith McDaniel, Clara Mejstrik, Greg Pugnetti,
Chris Rice, and Hal Santarelli.
(195066):
FOOTNOTES
[1] The carryover amount includes work for which obligations have been
made by requesting organizations but that has not yet started and the
cost to complete work that has been started.
[2] GAO, Defense Working Capital Fund: Improvements Needed for Managing
the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 30,
2001).
[3] The amount of allowable carryover using the outlay rate follows.
For example, customers order $100 of work, which is financed with a
specific appropriation. If the outlay rate for this appropriation at
the appropriation level is 60 percent, then this would result in the
working capital fund activity group being allowed to carry over $40
($100 - $60 [$100 x 60 percent] = $40).
[4] GAO, Army Depot Maintenance: Ineffective Oversight of Depot
Maintenance Operations and System Implementation Efforts, GAO-05-441
(Washington, D.C.: June 30, 2005).
[5] As noted in our scope and methodology (app. I), the scope of our
work for this review did not include determining whether there was a
bona fide need for the work being ordered by the customers.
[6] Illumination candles are devices used by the military to provide
light in the battlefield to see the enemy. The illumination candles are
fired from a mortar and are held up in the sky with parachutes.
[7] The Air Force is the only military service that included its
contract depot maintenance operation in its working capital fund. To
reflect this difference, DOD established a 4.5-month carryover standard
to account for the additional administrative functions associated with
awarding contracts. The Air Force is currently taking its contract
depot maintenance operation out of the working capital fund and plans
to complete this action by the end of fiscal year 2006.
[8] GAO, Defense Working Capital Fund: Improvements Needed for Managing
the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 30,
2001).
[9] The amount of allowable carryover using the outlay rate follows.
For example, customers order $100 of work, which is financed with a
specific appropriation. If the outlay rate for this appropriation at
the appropriation level is 60 percent, then this would result in the
working capital fund activity group being allowed to carry over $40
($100 - $60 [$100 x 60 percent] = $40).
[10] GAO, Army Depot Maintenance: Ineffective Oversight of Depot
Maintenance Operations and System Implementation Efforts, GAO-05-441
(Washington, D.C.: June 30, 2005).
[11] Office of the Under Secretary of Defense (Comptroller), Director
of Revolving Funds, memorandum on clarifying guidance on carryover,
June 29, 2005.
[12] Unless otherwise noted in this report, the tables provided by the
Office of the Under Secretary of Defense (Comptroller), Revolving
Funds, will be referred to as the Office of the Under Secretary of
Defense (Comptroller) tables.
[13] GAO, Army Depot Maintenance: Ineffective Oversight of Depot
Maintenance Operations and System Implementation Efforts, GAO-05-441
(Washington, D.C.: June 30, 2005).
[14] GAO, Army Depot Maintenance: Ineffective Oversight of Depot
Maintenance Operations and System Implementation Efforts, GAO-05-441
(Washington, D.C.: June 30, 2005).
[15] GAO, Defense Working Capital Fund: Improvements Needed for
Managing the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May
30, 2001).
[16] GAO, Army Depot Maintenance: Ineffective Oversight of Depot
Maintenance Operations and System Implementation Efforts, GAO-05-441
(Washington, D.C.: June 30, 2005).
[17] An analytical condition inspection is a systematic disassembly and
inspection of a representative sample of end items to find hidden
defects, deteriorating conditions, corrosion fatigue, overstress, or
other deficiencies in an aircraft structure or systems. These
inspections are normally over and above those inspections in normal
program depot maintenance.
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.GAO.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.GAO.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.GAO.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
