Foreign Assistance
USAID's Operating Expense Account Does Not Fully Reflect the Cost of Delivering Foreign Assistance Gao ID: GAO-03-1152R September 30, 2003Humanitarian and economic development assistance has long been an important component of U.S. global security strategy. Since 1962, the U.S. Agency for International Development (USAID) has managed more than $273 billion in such assistance. In fiscal year 2003, USAID estimates that it will obligate about $13 billion for assistance programs in almost 160 countries. In recent years, demands on USAID's budget and workforce have increased as the agency strives to meet emerging requirements, such as reconstruction efforts in Afghanistan and Iraq and increased funding for health programs. However, USAID officials have expressed concern that funds provided for its administrative or operating expenses have not kept pace with the agency's requirements. Since 1976, Congress has included a separate appropriation to consolidate USAID's operating expenses into a single budget item. Congress intended that USAID pay for the administrative costs of delivering foreign assistance (its "cost of doing business") from an operating expense account separate from its humanitarian and development assistance program funds. These operating expenses are costs incurred primarily for the benefit of the United States rather than the foreign assistance recipient. In accordance with congressional guidance, USAID reports all expenses related to the U.S. direct-hire staff as operating expenses and, based on its guidance on what constitutes the cost of doing business, other operating expenses--from rent to office utilities and supplies. In fiscal year 2003, USAID estimates that it will obligate $668 million for its operating expenses. We examined (1) trends in USAID's operating expenses since 1995 and (2) whether the charges to USAID's operating expenses account reflect the agency's actual cost of doing business.
According to date USAID reported, over fiscal years 1995 to 2003, USAID's total obligated operating expenses have ranged from a low $595.7 million in 1998 to a high of $654.8 million in 1995, and USAID estimates total obligations in 20003 will be about $668 million (in constant 2003 dollars). The largest administrative category in USAID's operating expense account is salaries and related support for U.S. direct-hire staff. Obligations for these expenses account for 43 percent ($277.7 million) of USAID's estimated operating expenses for fiscal year 2003. However, funds obligated for direct-hire personnel declined during fiscal years 1995 through 2001--from $302 million to $249.2 million--primarily due to declining levels of direct-hire staff during this period. But, in fiscal years 2002 and 2003, U.S. direct-hire personnel costs have increased over 11 percent. USAID expects these costs to continue rising as it continues its recent hiring efforts. Three other administrative categories--other staff costs, information technology, and rent--account for about 33 percent ($216 million) of USAID's estimated operating expenses for fiscal year 2003. Although these expenses varied from year to year, the net change in total from fiscal year 1995 was a decline of less than 1 percent. Between fiscal years 1995 to 2002, operating expense obligations as a percentage of program obligations remained fairly level--averaging about 8.5 percent. However, in fiscal year 2003, the operating expenses to program ration dropped to 5 percent due to large amounts of supplemental funding. USAID's operating expense account does not fully reflect the agency's cost of doing business primarily because the agency pays for some administrative activities done by contractors and other nondirect-hire staff with program funds.
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Director: Team: Phone:GAO-03-1152R, Foreign Assistance: USAID's Operating Expense Account Does Not Fully Reflect the Cost of Delivering Foreign Assistance
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September 30, 2003:
The Honorable Christopher Shays,
Chairman
The Honorable Dennis J.Kucinich,
Ranking Minority Member
Subcommittee on National Security, Emerging Threats, and International
Relations
Committee on Government Reform
House of Representatives:
Subject: Foreign Assistance: USAID's Operating Expense Account Does Not
Fully Reflect the Cost of Delivering Foreign Assistance:
Humanitarian and economic development assistance has long been an
important component of U.S. global security strategy. Since 1962, the
U.S. Agency for International Development (USAID) has managed more than
$273 billion in such assistance. In fiscal year 2003, USAID estimates
that it will obligate about $13 billion for assistance programs in
almost 160 countries. In recent years, demands on USAID's budget and
workforce have increased as the agency strives to meet emerging
requirements, such as reconstruction efforts in Afghanistan and Iraq
and increased funding for health programs. However, USAID officials
have expressed concern that funds provided for its administrative or
operating expenses have not kept pace with the agency's requirements.
Since 1976, Congress has included a separate appropriation to
consolidate USAID's operating expenses into a single budget item.
Congress intended that USAID pay for the administrative costs of
delivering foreign assistance (its "cost of doing business") from an
operating expense account separate from its humanitarian and
development assistance program funds.[Footnote 1] These operating
expenses are costs incurred primarily for the benefit of the United
States rather than the foreign assistance recipient. In accordance with
congressional guidance,[Footnote 2] USAID reports all expenses related
to U.S. direct-hire staff as operating expenses[Footnote 3] and, based
on its guidance on what constitutes the cost of doing business, other
operating expenses--from rent to office utilities and supplies. In
fiscal year 2003, USAID estimates that it will obligate $668 million
for its operating expenses. At your request, we examined (1) trends in
USAID's operating expenses since 1995 and (2) whether charges to
USAID's operating expense account reflect the agency's actual cost of
doing business.
To accomplish our objectives, we interviewed cognizant officials in
USAID's regional bureaus and its bureaus for management and policy and
program coordination. In connection with other work, we also conducted
fieldwork at seven overseas missions. We reviewed budget and workforce
data generated by USAID missions and headquarters offices from fiscal
years 1995 to 2003. We present our analysis in obligations because this
information was readily available in USAID's annual congressional
budget justifications. We converted the obligations data into constant
year 2003 dollars to adjust for inflation and better reflect the
agency's purchasing power over the period.
Results in Brief:
According to data USAID reported, over fiscal years 1995 to 2003,
USAID's total obligated operating expenses have ranged from a low of
$595.7 million in 1998 to a high of $654.8 million in 1995, and USAID
estimates total obligations in 2003 will be about $668 million (in
constant 2003 dollars).
* The largest administrative category in USAID's operating expense
account is salaries and related support for U.S. direct-hire staff.
Obligations for these expenses account for 43 percent ($277.7 million)
of USAID's estimated operating expenses for fiscal year 2003. However,
funds obligated for direct-hire personnel declined during fiscal years
1995 through 2001--from $302.5 million to $249.2 million--primarily due
to declining levels of direct-hire staff during this period. But, in
fiscal years 2002 and 2003, U.S. direct-hire personnel costs have
increased over 11 percent. USAID expects these costs to continue rising
as it continues its recent hiring efforts.
* Three other administrative categories--other staff costs, information
technology, and rent--account for about 33 percent ($216.5 million) of
USAID's estimated operating expenses for fiscal year 2003. Although
these expenses varied from year to year, the net change in total from
fiscal year 1995 was a decline of less than 1 percent.
* Between fiscal years 1995 and 2002, operating expense obligations as
a percentage of program obligations remained fairly level--averaging
about 8.5 percent. However, in fiscal year 2003, the operating expenses
to program funds ratio dropped to 5 percent due to large amounts of
supplemental funding.[Footnote 4]
USAID's operating expense account does not fully reflect the agency's
cost of doing business primarily because the agency pays for some
administrative activities done by contractors and other nondirect-hire
staff with program funds. As we noted in our recent report,[Footnote 5]
USAID's overseas missions have increasingly relied on personal services
contractors--foreign national personal services contractors make up
about 60 percent of its workforce--to manage USAID's development
activities due to declining numbers of U.S. direct-hire staff.
Nondirect-hire staff may be paid with either program or operating
expense funds. Many of these staff perform administrative duties that
directly benefit the United States, and it is often difficult to
distinguish between the administrative duties they perform and those
done by U.S. direct-hire personnel. In four missions we visited, some
foreign national personal services contractors were financial and
procurement analysts, secretaries, and drivers. Although these analysts
and support staff performed primarily administrative tasks for USAID's
benefit, some were assigned to specific technical teams, and their
salaries and support costs were paid from program funds because USAID
considered their services directly allocable to these activities and
did not report them as operating expenses. According to USAID
officials, based on data recently collected from its missions, USAID
estimates that about $350 million in program funds will be used to pay
for nondirect-hire staff performing both administrative and technical
support functions in fiscal year 2003. As a result, the operating
expense account and other funds authorized for operating expenses do
not fully reflect the cost of delivering foreign assistance.
To help provide increased visibility over USAID's operating expenses
and a more realistic accounting of the agency's cost of doing business,
we recommend that the USAID Administrator identify all administrative
costs that primarily benefit the United States--whether paid for with
operating expense funds or program funds--and report this information
to the Congress in its annual budget requests for operating expense
account appropriations.
In commenting on a draft of this report, USAID fully agreed with our
recommendation. USAID also stated that it is well aware of the issues
raised and is taking corrective actions to fundamentally restructure
financing for the administration of foreign assistance to reflect the
full cost of assistance delivery and match resources with changing
circumstances.
Background:
Until the mid-1970s, about two-thirds of USAID's operating expenses
were funded from appropriations to program accounts, and the rest were
funded from a separate administrative expenses account.[Footnote 6] In
1975, the House Appropriations Committee noted that when USAID was
first established, a large percentage of direct-hire employees
implemented assistance projects as technical specialists, and their
salaries and support were paid from program funds because they were
considered to be working primarily for the benefit of the recipient
country.[Footnote 7] USAID staff working for the benefit of both the
recipient country and the U.S. government were also paid from program
funds, while the remaining staff--whose activities were primarily in
the interest of the United States--were paid from the administrative
expense account. The Committee noted that this distinction became
blurred as USAID delegated more program implementation responsibilities
to third parties and its direct-hire staff took on more of a monitoring
role. The Committee concluded that operating expense activities paid
from program funds did not really differ from those paid from the
administrative expenses account and suggested the creation of a
separate account that would reflect all operating expenses.
In 1976, Congress began providing a line-item appropriation for
operating expenses separate from USAID's humanitarian and economic
development assistance programs.[Footnote 8] The accompanying Senate
report noted that USAID's cost of doing business would be better
managed if these funds were separately appropriated.[Footnote 9]
Congress authorized USAID's separate operating expense account the
following year.[Footnote 10]
USAID's criteria for determining the expenses to be paid from operating
expense funds are based on guidance it has received from Congress as
well as its assessment of who benefits from a particular activity. A
1977 congressional report stated that "operating costs include not only
the traditional 'administrative expenses,' but also the substantial
cost of support and management of programs and projects (such as
technical planning and management of specific projects, contracting,
procurement of commodities, engineering services, and handling of
trainees from abroad)."[Footnote 11] Congressional reports in the late
1970s directed USAID to fund the costs of all full-time staff in
permanent positions from the operating expense account.[Footnote 12]
We also note that since 1976 Congress has approved funding sources
other than USAID's operating expense account appropriation to pay
USAID's operating expenses. For example, in fiscal year 2003, USAID's
estimated appropriations for operating expenses are about 86 percent
($572.2 million) of the agency's total estimated obligations, and other
sources comprise the remaining 14 percent ($95.8 million). Other
congressional sources of operating expense funds have included specific
uses of program funds and specific amounts in supplemental
appropriations for humanitarian and reconstruction assistance--$21
million for fiscal year 2003.
In addition, local currency trust funds generated by the sale of U.S.
commodities, which totaled more than $27 million at 18 overseas
missions in fiscal year 2003, can be used for their operating expenses.
However, the Office of Management and Budget offsets the use of trust
funds from USAID's estimated operating expense account requirements. In
addition, USAID regulations allow missions to charge a portion of
leased office space, utilities, and maintenance costs to program
accounts based on the number of program-funded personnel employed at
the mission.
Enclosure I provides more detail on USAID's sources of funding for
operating expenses in fiscal year 2003.
Trends in USAID's Operating Expenses:
Over fiscal years 1995 to 2002, USAID's total obligated operating
expenses in constant 2003 dollars have ranged from a low of
$595.7 million in 1998 to a high of $654.8 million in 1995, and USAID
estimates total obligations in 2003 will be about $668
million.[Footnote 13] However, as table 1 shows, the various
administrative categories have varied considerably over this period
with the net changes resulting in a modest total decline of about 1.2
percent between fiscal years 1995 and 2003.
* The largest administrative category in USAID's operating expense
account is salaries and related support for U.S. direct-hire staff--
accounting for 43 percent of USAID's estimated operating expenses in
fiscal year 2003. However, funds obligated for direct-hire personnel
declined during fiscal years 1995 through 2001, primarily due to
declining levels of direct-hire staff during this period. But, in
fiscal years 2002 and 2003, U.S. direct-hire personnel costs have
increased over 11 percent. USAID expects these costs to rise as it
continues its recent hiring efforts.
* Three other administrative categories--other staff costs, information
technology, and rent--accounted for about 33 percent of USAID's
estimated operating expenses for fiscal year 2003. Since fiscal year
1995, rent has increased more than 10 percent while other staff costs
and information technology declined 6 percent and 3.4 percent,
respectively. Although these expenses varied from year to year, the net
change in total from fiscal year 1995 was a decline of less than 1
percent.
* Twelve other administrative categories account for the remaining
operating expenses--about 24 percent in fiscal year 2003. Several
categories varied widely over this period. Most notably land and
structures ranged from a high of about $21 million in fiscal year 2000
to a low of $241,000 in 1996. Beginning in fiscal year 2004, most
funding for new buildings will be provided from a newly established
Capital Investment Fund.
Table 1: Table 1: Operating Expense Obligations by Administrative
Category, Fiscal Years 1995-2003 (Constant 2003 dollars in thousands):
Administrative category: U.S. direct-hire personnel costs[B]; Fiscal
years: 1995: $302.5; Fiscal years: 1996: $292.3; Fiscal years: 1997:
$268.2; Fiscal years: 1998: $255.1; Fiscal years: 1999: $255.2; Fiscal
years: 2000: $254.3; Fiscal years: 2001: $249.2; Fiscal years: 2002:
$264.5; Fiscal years: 2003[A]: $277.7; Fiscal years: Percentage:
change: 1995-2003: -8.2.
Administrative category: Other staff costs[C]; Fiscal years: 1995:
90.4; Fiscal years: 1996: 87.3; Fiscal years: 1997: 79.6; Fiscal years:
1998: 77.2; Fiscal years: 1999: 77.3; Fiscal years: 2000: 67.8; Fiscal
years: 2001: 74.4; Fiscal years: 2002: 78.5; Fiscal years: 2003[A]:
85.0; Fiscal years: Percentage: change: 1995-2003: -6.0.
Administrative category: Information technology[D]; Fiscal years:
1995: 68.2; Fiscal years: 1996: 56.0; Fiscal years: 1997: 47.7; Fiscal
years: 1998: 60.0; Fiscal years: 1999: 61.7; Fiscal years: 2000: 64.1;
Fiscal years: 2001: 83.8; Fiscal years: 2002: 78.6; Fiscal years:
2003[A]: 65.9; Fiscal years: Percentage: change: 1995-2003: -3.4.
Administrative category: Rent[E]; Fiscal years: 1995: 59.4; Fiscal
years: 1996: 55.2; Fiscal years: 1997: 54.7; Fiscal years: 1998: 56.8;
Fiscal years: 1999: 59.3; Fiscal years: 2000: 57.3; Fiscal years: 2001:
61.6; Fiscal years: 2002: 62.8; Fiscal years: 2003[A]: 65.7; Fiscal
years: Percentage: change: 1995-2003: 10.5.
Administrative category: Goods and services from government
accounts[F]; Fiscal years: 1995: 24.7; Fiscal years: 1996: 24.3; Fiscal
years: 1997: 38.0; Fiscal years: 1998: 28.5; Fiscal years: 1999: 29.0;
Fiscal years: 2000: 31.7; Fiscal years: 2001: 29.4; Fiscal years: 2002:
33.5; Fiscal years: 2003[A]: 38.2; Fiscal years: Percentage: change:
1995-2003: 54.6.
Administrative category: Other USAID-contracted; services[G]; Fiscal
years: 1995: 19.5; Fiscal years: 1996: 14.6; Fiscal years: 1997: 19.4;
Fiscal years: 1998: 32.5; Fiscal years: 1999: 38.5; Fiscal years: 2000:
20.0; Fiscal years: 2001: 21.5; Fiscal years: 2002: 21.1; Fiscal years:
2003[A]: 22.3; Fiscal years: Percentage: change: 1995-2003: 14.2.
Administrative category: Operation and; maintenance; Fiscal years:
1995: 14.2; Fiscal years: 1996: 14.3; Fiscal years: 1997: 11.4; Fiscal
years: 1998: 11.8; Fiscal years: 1999: 10.8; Fiscal years: 2000: 8.6;
Fiscal years: 2001: 11.1; Fiscal years: 2002: 14.0; Fiscal years:
2003[A]: 15.7; Fiscal years: Percentage: change: 1995-2003: 10.8.
Administrative category: Communications and utilities; Fiscal years:
1995: 20.8; Fiscal years: 1996: 19.1; Fiscal years: 1997: 17.3; Fiscal
years: 1998: 18.9; Fiscal years: 1999: 14.1; Fiscal years: 2000: 12.9;
Fiscal years: 2001: 13.0; Fiscal years: 2002: 12.1; Fiscal years:
2003[A]: 13.8; Fiscal years: Percentage: change: 1995-2003: -33.5.
Administrative category: Land and structures; Fiscal years: 1995: 0.7;
Fiscal years: 1996: 0.2; Fiscal years: 1997: 9.8; Fiscal years: 1998:
1.9; Fiscal years: 1999: 12.2; Fiscal years: 2000: 21.0; Fiscal years:
2001: 3.5; Fiscal years: 2002: 4.3; Fiscal years: 2003[A]: 13.3; Fiscal
years: Percentage: change: 1995-2003: 1,715.1.
Administrative category: Security; Fiscal years: 1995: 6.8; Fiscal
years: 1996: 7.6; Fiscal years: 1997: 6.8; Fiscal years: 1998: 6.8;
Fiscal years: 1999: 7.7; Fiscal years: 2000: 8.2; Fiscal years: 2001:
10.4; Fiscal years: 2002: 9.8; Fiscal years: 2003[A]: 11.6; Fiscal
years: Percentage: change: 1995-2003: 71.7.
Administrative category: Equipment; Fiscal years: 1995: 11.8; Fiscal
years: 1996: 19.5; Fiscal years: 1997: 30.0; Fiscal years: 1998: 14.4;
Fiscal years: 1999: 19.4; Fiscal years: 2000: 18.3; Fiscal years: 2001:
25.3; Fiscal years: 2002: 18.3; Fiscal years: 2003[A]: 10.1; Fiscal
years: Percentage: change: 1995-2003: -14.3.
Administrative category: Transportation of goods; Fiscal years: 1995:
15.9; Fiscal years: 1996: 13.0; Fiscal years: 1997: 10.5; Fiscal years:
1998: 11.7; Fiscal years: 1999: 10.8; Fiscal years: 2000: 10.5; Fiscal
years: 2001: 9.9; Fiscal years: 2002: 9.2; Fiscal years: 2003[A]: 9.9;
Fiscal years: Percentage: change: 1995-2003: -37.8.
Administrative category: Supplies and materials; Fiscal years: 1995:
11.8; Fiscal years: 1996: 8.9; Fiscal years: 1997: 9.6; Fiscal years:
1998: 10.5; Fiscal years: 1999: 10.7; Fiscal years: 2000: 11.1; Fiscal
years: 2001: 10.9; Fiscal years: 2002: 10.3; Fiscal years: 2003[A]:
8.8; Fiscal years: Percentage: change: 1995-2003: -25.6.
Administrative category: Training; Fiscal years: 1995: 5.7; Fiscal
years: 1996: 5.9; Fiscal years: 1997: 5.9; Fiscal years: 1998: 8.9;
Fiscal years: 1999: 5.5; Fiscal years: 2000: 7.2; Fiscal years: 2001:
10.2; Fiscal years: 2002: 7.0; Fiscal years: 2003[A]: 8.4; Fiscal
years: Percentage: change: 1995-2003: 47.7.
Administrative category: Claims and indemnities; Fiscal years: 1995:
0.6; Fiscal years: 1996: 1.0; Fiscal years: 1997: 0.7; Fiscal years:
1998: 1.1; Fiscal years: 1999: 2.3; Fiscal years: 2000: 0.4; Fiscal
years: 2001: 4.1; Fiscal years: 2002: 0.6; Fiscal years: 2003[A]: 0.6;
Fiscal years: Percentage: change: 1995-2003: -6.4.
Administrative category: Grants, subsidies,; and contributors; Fiscal
years: 1995: 1.7; Fiscal years: 1996: 1.7; Fiscal years: 1997: 2.4;
Fiscal years: 1998: 0; Fiscal years: 1999: 0.2; Fiscal years: 2000:
0.4; Fiscal years: 2001: 1.5; Fiscal years: 2002: 1.2; Fiscal years:
2003[A]: 0; Fiscal years: Percentage: change: 1995-2003: -100.0.
Administrative category: Total[H]; Fiscal years: 1995: $654.8; Fiscal
years: 1996: $621.0; Fiscal years: 1997: $612.2; Fiscal years: 1998:
$595.7; Fiscal years: 1999: $614.5; Fiscal years: 2000: $593.9; Fiscal
years: 2001: $619.9; Fiscal years: 2002: $625.8; Fiscal years: 2003[A]:
$647.0; Fiscal years: Percentage: change: 1995-2003: -1.2.
Source: GAO analysis of USAID data.
Note: USAID data are taken from its congressional budget justification
documents.
[A] We did not include $21 million provided to USAID in supplemental
funding for operating expenses in fiscal year 2003 because USAID has
not allocated it among the administrative categories.
[B] Includes compensation, benefits, training, and travel expenses,
such as home leave, post-assignment travel, and travel expenses
incurred for training.
[C] USAID funds many of its overseas non-U.S. direct-hire personnel
using operating expenses because their tasks are administrative in
nature, such as providing support to the executive office.
[D] Includes costs for computer equipment, systems design and analysis,
maintenance, and support.
[E] Includes domestic and overseas rental payments.
[F] Includes USAID's portion of administrative costs shared by U.S.
agencies with an overseas presence and paid primarily to the Department
of State.
[G] Includes operation and maintenance of facilities and goods,
security costs, equipment, and transportation of household goods.
[H] Totals may not add due to rounding.
[End of table]
As shown in figures 1 and 2, between fiscal years 1995 and 2002,
USAID's program obligations decreased at a faster rate than operating
expense obligations, with fluctuations during this period. In constant
2003 dollars, USAID's program obligations decreased by more than 10
percent--from almost $7.8 billion in fiscal year 1995 to about $6.9
billion in fiscal year 2002. In fiscal year 2003, USAID's estimated
program obligations increased almost 88 percent to $13 billion because
of $4.2 billion in supplemental funds for, among other things, relief
and reconstruction activities in Iraq and the global initiative to
fight human immunodeficiency virus/acquired immune deficiency
syndrome. However, USAID's estimated operating expense account
obligations for fiscal year 2003 did not increase at a similar rate.
Including $21 million in operating expense funds provided by
supplemental legislation, estimated operating expenses increased less
than 7 percent.
Figure 1: Program Obligations, Fiscal Years 1995 to 2003:
[See PDF for image]
Notes: USAID data are taken from its congressional budget justification
documents and the Emergency Wartime Supplemental Appropriations Act of
2003 (P.L. 108-11). Fiscal years 1995 to 2002 are actual obligations
adjusted to constant fiscal year 2003 dollars. Fiscal year 2003 data
are estimated amounts. Fiscal year 2003 operating expenses include
$21 million provided by supplemental legislation. Program data for
fiscal years 2000 to 2003 include disaster recovery, emergency
response, and supplemental funds. Program funding obligations sources
include development assistance; child survival and health; development
fund for Africa; international disaster assistance; transition
initiatives; economic support funds; support for Eastern European
democracy; Freedom Support Act; Public Law 480; Iraq relief and
reconstruction fund; and credit program funds.
[End of figure]
Figure 2: Operating Expense Obligations, Fiscal Years 1995 to 2003:
[See PDF for image]
Note: See figure 1 notes.
[End of figure]
As shown in figure 3, from fiscal years 1995 to 2002, USAID's operating
expense obligations fluctuated as a percentage of program obligations
but averaged about 8.5 percent. In fiscal year 2003, estimated
operating expense obligations dropped to about 5 percent of estimated
program obligations, including the supplemental funding.
Figure 3: USAID's Operating Expense Obligations as a Percentage of
Program Obligations, Fiscal Years 1995 to 2003:
[See PDF for image]
Note: See figure 1 notes.
[End of figure]
USAID's Operating Expense Account Does Not Include All Administrative
Costs:
USAID's operating expense account does not fully reflect the agency's
cost of doing business primarily because the agency pays for some
administrative activities done by contractors and other nondirect-hire
staff with program funds. As we reported in August 2003, as the number
of U.S. direct hire foreign service officers has declined over the
years, USAID missions have often hired personal services contractors--
usually foreign nationals--to manage development activities and provide
technical project support.[Footnote 14] Approximately 60 percent of
USAID's staff are foreign national personal service contractors. Many
of these nondirect-hire personnel are engaged in activities that
directly support USAID programs and are paid with program funds.
Many nondirect-hires perform administrative duties that directly
benefit the United States, and it is often difficult to distinguish
between the administrative duties they perform and those done by U.S.
direct-hire personnel. These staff can be paid with program or
operating expense account funds. In four missions we visited--the
Dominican Republic, Mali, Peru, and Senegal--some foreign national
personal services contractors were financial and procurement analysts,
secretaries, and drivers. Although these analysts and support staff
performed primarily administrative tasks for USAID's benefit, some were
assigned to specific technical teams and their salaries and support
costs were paid from program funds because USAID considered their
services directly allocable to these activities and did not report them
as operating expenses. According to USAID officials, based on data
recently collected from its missions, USAID estimates that about $350
million in program funds will be used to pay for personal services
contractors performing administrative functions overseas in fiscal year
2003.[Footnote 15]
Institutional contract staff also provide administrative and technical
services in support of USAID programs. In 2002, for example, USAID
estimated that 758 institutional contractor staff were involved in the
administration of foreign assistance at an estimated cost of $95
million. Of this total staff, 450 positions were funded from operating
expense appropriations ($56 million), and 308 positions were funded
from program funds ($39 million).[Footnote 16] USAID is continuing its
review of institutional contractors to decide how to characterize their
work.
A 2002 USAID team examining USAID's operating expense account found
that most of the agency's evaluations and analyses have been paid with
program funds, based on the rationale that these activities are
intended to enable the agency to better serve its "ultimate
beneficiaries." But this may not be what Congress intended.
* The team's report stated that "although strategy development, project
design, evaluation and other activities relate to the agency's cost of
doing business, in the longer run they are essential building blocks of
agency operations and are necessary for program oversight. Ultimately,
the impact of improved strategies, design, and projects has an impact
on the agency's beneficiaries. In that sense, there clearly is a
rationale for providing program funding for these activities.[Footnote
17]":
* In contrast, a USAID attorney assisting the team noted that a 1980
Senate Appropriations Committee report stated that only such planning
and evaluation activities that are project specific should be paid with
program funds, but that activities with a primary objective of serving
the agency, including analyses for development assistance policy
planning, were part of the cost of doing business.
Cognizant USAID officials contend that congressional intent has shifted
and that from 1980 to the present, Congress has increasingly encouraged
the agency to use program funds to support certain administrative
costs. However, these officials also stated that the increased reliance
on program funded staff for some administrative activities further
demonstrates the need to restructure how operating expenses are
accounted for to better reflect USAID's cost of doing business.
Conclusion:
Since 1976, Congress has provided a separate appropriation for USAID's
operating expenses and, over the years, has approved additional funding
sources for operating expenses to separate administrative costs from
USAID's humanitarian and development assistance programs. However, as
U.S. direct-hire staff levels have declined, overseas missions have
hired personal services and institutional contractors and other
nondirect-hire staff to manage development activities and perform
various administrative duties, but pay for some of these services with
program funds. But USAID has not fully identified or reported the
extent of these costs. Therefore, separating USAID's cost of doing
business from its humanitarian and development programs is not always
done. As a result, the operating expense account and other funds USAID
has available for operating expenses do not fully reflect the cost of
delivering foreign assistance.
Recommendation for Executive Action:
To help provide increased visibility over USAID's operating expenses,
better reflect what USAID spends on program administration, and provide
a more realistic accounting of the agency's cost of doing business, we
recommend that the USAID Administrator identify all administrative
costs that primarily benefit the United States--whether paid for with
operating expense funds or program funds--and report this information
to the Congress in its annual budget requests for operating expense
account appropriations. Such an accounting should form the basis of
USAID's annual budget request for operating expense funds.
Agency Comments:
USAID provided written comments on a draft of this report (see enc.
II). It fully agreed with the recommendation. USAID acknowledged that
the current structure of the operating expense account does not serve
workforce planning needs or foreign policy objectives because (1)
staffing decisions are often made according to funding source rather
than workforce requirements and (2) as a result, the heavy reliance on
short-term contractors has limited USAID's capacity to respond to
foreign assistance needs.
USAID also stated that it is well aware of the issues raised in the
report and is taking corrective action. USAID noted that, within the
past 18 months, it has completed assessments of operating expenses and
overseas staffing, a survey of program-funded personnel, and an
approach for full costing of assistance at a unit level. It has also
initiated a long-term assessment of human resources. As a result of
these efforts, USAID is reviewing ways to fundamentally restructure
financing for the administration of foreign assistance to reflect the
full cost of assistance delivery and match resources with changing
circumstances.
In addition, USAID officials provided clarification of certain
technical matters that we have incorporated into this report, as
appropriate.
Scope and Methodology:
To examine trends in USAID's spending for operating expenses and
program activities since 1995, we analyzed obligations data reported by
USAID in its annual budget justification documents. We converted
obligations for operating expenses and program activities into constant
fiscal year 2003 dollars to adjust for inflation and better reflect the
agency's purchasing power during this period. We also met with
cognizant budget officials at USAID to better understand the reported
operating expense and program funding data. We did not verify the
accuracy of USAID's reported data.
To determine whether USAID's operating expenses reflect its cost of
doing business, we reviewed USAID reports and annual budget
justifications and met with knowledgeable officials in USAID's Bureau
for Policy and Program Coordination, the U.S. Department of State, and
the U.S. Office of Management and Budget. In conjunction with other
work,[Footnote 18] we conducted fieldwork at seven overseas missions--
the Dominican Republic, Ecuador, Egypt, Mali, Peru, Senegal, and the
West Africa Regional Program in Mali.[Footnote 19] We reviewed mission
staffing reports to determine whether staff were funded from the
operating expense account or program funds and discussed the duties of
personnel with cognizant mission officials.
Our review was conducted from May through September 2003 in accordance
with generally accepted government auditing standards.
:
We are sending copies of this report to appropriate congressional
committees, the Administrator of USAID, the Secretary of State, and the
Director of the Office of Management and Budget. We will also make
copies available to others upon request. In addition, this report will
be available at no charge on our Web site at [Hyperlink, http://
www.gao.gov.] h [Hyperlink, http://www.gao.gov] ttp://www.gao.gov.
If you or your staff have any questions concerning this report, please
contact me at (202) 512-4268 or Al Huntington, Assistant Director, at
(202) 512-4140. Other key contributors to this report were Kimberley
Ebner, Emily Gupta, and Audrey Solis.
Jess T. Ford,
Director
International Affairs and Trade:
Signed by Jess T. Ford:
[End of section]
[End of section]
Enclosure I: Description of Sources of Funding for USAID's Operating
Expenses Fiscal Year 2003:
Since 1976, Congress has approved funding sources other than the U.S.
Agency for International Development's (USAID) operating expense
account appropriation to pay for operating expenses. Although USAID
reports these other funds as operating expenses, they are not part of
its single budget item appropriation. As shown in table 2, for example,
in fiscal year 2003, other sources comprised 14.2 percent
($95.8 million) of what USAID is estimating as operating expense
obligations.
Table 2: USAID's Estimated Obligations for Operating Expenses in Fiscal
Year 2003 by Sources of Funding (Dollars in millions):
Funding source: Annual appropriation; Amount: $572,200; Percent: 85.6.
Funding source: Unobligated balance; Amount: 34,231; Percent: 5.1.
Funding source: Local currency trust funds; Amount: 27,557; Percent:
4.1.
Funding source: Supplemental funding; Amount: 21,000; Percent: 3.1.
Funding source: Authorized program funds; Amount: 7,417; Percent: 1.1.
Funding source: Reimbursements; Amount: 5,600; Percent: 0.8.
Funding source: Total; Amount: $668,005; Percent: 99.8[A].
Source: USAID fiscal year 2004 congressional budget justification
documents and the Emergency Wartime Supplemental Appropriations Act of
2003 (P.L. 108-11), which provided supplemental operating expense
funding.
[A] Does not add to 100 percent due to rounding.
[End of table]
Annual appropriation: These are funds for which USAID receives new
budget authority every fiscal year and do not include supplemental
appropriations for operating expenses obtained during the course of the
fiscal year.
Unobligated balance: The unobligated balance is of any unobligated
funds that USAID has the authority to transfer to the following fiscal
year's operating expense account.
Local currency trust funds:[Footnote 20] U.S. commodity import programs
normally generate this type of funding. In fiscal year 2003, 18 USAID
missions have local currency trust funds. The Egypt mission's trust
fund is the largest (almost $73 million in January 2003), and the
mission uses it to pay for training, housing, and dependents'
education.
Supplemental funding: Supplemental legislation for an emergency
response or large-scale reconstruction generally specifies an amount
that USAID may use as operating expenses in administering such
activities.
Authorized program funds: Some specific program funding can be
transferred to the operating expense account. The amount varies
according to different rules governing the transfer of program funding
from each account. For example, USAID can transfer a limited amount of
program funds to the operating expense account to finance travel to
countries with USAID activities but no USAID field presence.
Additionally, USAID has the authority to transfer larger program
funding amounts from other accounts to the operating expense account,
not to exceed 10 percent of the originating program account.[Footnote
21] But this action requires presidential approval and is rarely
undertaken.
Reimbursements: These funds are primarily generated internally by
USAID. Examples include reimbursements to USAID from the its Office of
the Inspector General or the Development Credit Program--units that
receive separate operating expense appropriations--for services by
USAID, such as computer services and rent. Proceeds from the sale of
equipment overseas are also included in this category.
[End of section]
Enclosure II: Comments from the Agency for International Development:
USAID:
U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT:
SEP 2 9 2003:
Mr. Jess T. Ford Director International Affairs and Trade U.S. General
Accounting Office 441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Ford:
I am pleased to provide the formal response of the U.S. Agency for
International Development (USAID)to the draft GAO report entitled
"FOREIGN ASSISTANCE: USAID's Operating Expense Account Does Not Fully
Reflect the Cost of Delivering Foreign Assistance" (September 2003).
The GAO report indicates accurately a critical and timely issue for
USAID. It is clear that USAID must have a better approach to both
recognizing the full cost of assistance
delivery and better linking and matching available resources for
administration with the programs. While direct hire staff have declined
over time, program requirements and, internal budgetary requirements
for mandatory operating cost increases--i.e., emerging technology
needs, security, and ICASS costs--have grown, placing great pressure on
the Agency.
USAID is well aware of the issues within the Report and is taking
action. Within the past 18 months, USAID has completed an assessment of
operating expenses, completed a survey and costing of program funded
personnel, prepared an assessment of field presence and overseas
staffing, from which USAID staff will be redeployed, completed an
approach for full costing of assistance at a unit level and initiated a
long term assessment of Human Resources. Most importantly, in light of
the results of these efforts, USAID has initiated a review of a
fundamental restructuring of the financing of the administration of
foreign assistance to reflect the full cost of assistance delivery and
to match resources with changing circumstances. USAID sees this GAO
Report as a confirmation of the validity of the issues which
have been identified and as encouragement to reach consensus on a new
approach for the financing of the administration of foreign assistance.
With regard to the history of the OE account, we believe it is
important to emphasize that Congressional intent evolved over time with
changing circumstance. From 1980 on Congress has increasingly
encouraged the agency to use program funds (in lieu of increased OE) to
support salaries of certain types of personnel, payment of
administrative expenses like travel for certain programs, and costs of
managing unanticipated program increases (e.g. HIV/AIDS and
supplementals). The increasing reliance on program funded staff
underscores the need to restructure the cost of administration to
transparently reflect the total cost of doing business.
It is important to note too that USAID is monitoring the use of
program-funded staff. The Agency's HR staffing pattern report has
included such non direct staff since 1995 as does our Congressional
Budget Justification (CBJ). USAID completed a costing of program funded
staff last year. We have efforts in process to expand monitoring and
control of non-direct hire staff including a USAID notice which sets
out procedures and the Agency's Annual Report now includes efforts on
costing. We are increasing our efforts through methodology which
brings all cost together against the pertinent program cost,
including allocation of support functions.
We want to emphasize that non-direct hire staff is funded both through
OE and program accounts, depending on the functions of the position, in
accordance with USAID guidance. OE-funded PSC's have been used to fill
critical staffing gaps. USAID uses such short-term measures because it
does not have adequate numbers of staff (a "float" capacity) to cover
training time and gaps between assignments. In contrast, program funded
people are, by definition, related directly to programs and strategic
objectives rather than support function in accordance with USAID
guidance. All costs not specifically and directly related to identified
strategic objectives are funded from operating Expenses. USAID staffing
pattern reporting distinguishes between OE and program funded non-
direct hire staff.
In summary, the GAO report highlights a key issue for USAID-the
structure and sufficiency of resources for the administration of
foreign assistance. USAID agrees fully with the proposed recommendation
to modify our approach to administrative cost to provide a realistic
accounting of the:
Agency's cost of doing business. The report is particularly timely as
USAID is engaged in the development of a new approach to administrative
cost financing, which responds to this requirement. We do not believe
the current structure of the Operating Expense account serves foreign
policy objectives or workforce planning needs. Because Operating
Expenses have been supplemented by program resources, by both Congress
and USAID, workforce decisions are made according to funding source
rather than workforce need. As a result, a wide variety of personnel
systems has evolved with heavy reliance on short-term contract
assignments limiting the institutional capacity of the Agency to
respond to foreign assistance needs.
If you have any questions concerning this response please contact James
Painter, USAID Bureau for Policy and Program and Coordination at (202)
712-0280.
Thank your for the opportunity to respond to the draft report and for
the courtesies extended by your staff in the conduct of this review.
Sincerely,
Signed by:
John Marshall:
Assistant Administrator Bureau for Management:
(320191):
:
:
FOOTNOTES
[1] S. Rept. 94-704.
[2] H. Rept. 95-701 and S. Rept. 95-1194.
[3] USAID's Automated Directives System, Functional Series 600, chapter
601 (Funding Source Policy).
[4] Primarily, funding provided for relief and reconstruction
activities in Iraq and the global initiative to fight human
immunodeficiency virus/acquired immune deficiency syndrome.
[5] U.S. General Accounting Office, Foreign Assistance: Strategic
Workforce Planning Can Help USAID Address Current and Future
Challenges, GAO-03-946 (Washington, D.C.: Aug. 22, 2003).
[6] The administration's budget request for fiscal year 1975 identified
11 separate funding accounts from which administrative expenses would
be funded.
[7] H. Rept. 94-53.
[8] P.L. 94-330.
[9] S. Rept. 94-704.
[10] P.L. 95-88, Sec. 129, 22 U.S.C. 2427.
[11] H. Rept. 95-240.
[12] H. Rept. 95-701 and S. Rept. 95-1194.
[13] Including a $21 million supplemental for operating expenses that
USAID has not allocated to its administrative categories.
[14] GAO-03-946.
[15] One senior level USAID program planning officer told us that about
10 to 15 percent of program funds may be a more realistic estimate of
USAID's cost of doing business (compared with the 8.5 percent average
since 1995).
[16] According to USAID, these figures were developed as part of a
staff study of institutional contractors and were as of September 30,
2002.
[17] U.S. Agency for International Development/Bureau for Policy and
Program Coordination, USAID's Operating Expense Account: Current
Practices and Planned Reforms (Washington, D.C.: Oct. 7, 2002).
[18] GAO-03-946.
[19] We also examined documents and interviewed officials at USAID's
mission to Indonesia at its temporary location in Arlington, Virginia,
following its evacuation in October 2002.
[20] USAID cites a recurring provision in its appropriations bills as
legal authority to use local currency trust funds. For fiscal year
2003, see Public Law 107-115, section 529.
[21] Foreign Assistance Act of 1961, as amended, title 22, section
610a.
