B-159797, JAN. 22, 1968

B-159797, JAN. 22, 1968

DEFENSE DEPT. - ACCOUNTING SYSTEMS DECISION TO SECY OF DEFENSE CONCLUDING THAT PROPOSAL TO EXTEND THE USE OF INDUSTRIAL FUNDS TO FINANCE THE REPAIR, OVERHAUL, AND MAINTENANCE ACTIVITIES OF THE SEVERAL MILITARY DEPARTMENTS DOES NOT INVOLVE THE INSTALLATION OR UTILIZATION OF A NEW COST - BASED OR EXPENSE - BASED SYSTEM OF ACCOUNTING AS IS PROSCRIBED UNDER SECTION 640 (B) OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1968. HOWEVER, IT IS SUGGESTED THAT THE PROPOSED EXTENSION OF INDUSTRIAL FUNDS AT 21 INSTALLATIONS SHOULD BE DISCUSSED IN ADVANCE WITH THE APPROPRIATIONS COMMITTEES.

TO MR. SECRETARY:

IN VARIOUS DISCUSSIONS BETWEEN REPRESENTATIVES OF YOUR DEPARTMENT, THE BUREAU OF THE BUDGET AND THE GENERAL ACCOUNTING OFFICE, A QUESTION HAS ARISEN AS TO WHETHER THE IMPLEMENTATION OF ADDITIONAL INDUSTRIAL FUND ACCOUNTING SYSTEMS DURING THE CURRENT FISCAL YEAR CONSTITUTES "NEW -COST- BASED- OR -EXPENSE-BASED- SYSTEM OR SYSTEMS FOR ACCOUNTING" WITHIN THE MEANING OF THAT TERM AS USED IN SECTION 640 (B) OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1968, PUB.L. 90-96, 81 STAT. 249.

YOUR DEPARTMENT HAS PROPOSED THAT 21 INSTALLATIONS (SEE ATTACHED SCHEDULE) PRESENTLY BEING OPERATED ON THE BASIS OF DIRECT FUNDING OF THEIR OPERATING COSTS THROUGH THE OPERATION AND MAINTENANCE APPROPRIATION BE PLACED UNDER THE INDUSTRIAL FUND OF THE RESPECTIVE MILITARY DEPARTMENTS DURING THE CURRENT FISCAL YEAR OR IN FISCAL YEAR 1969. EACH OF THESE ACTIVITIES IS ENGAGED IN (I) OVERHAUL AND REPAIR OF AIRCRAFT, MISSILE ENGINES, AND COMPONENTS AND EQUIPMENT OF THESE ITEMS; OR (II) OVERHAUL AND REPAIR OF OTHER MATERIEL AND EQUIPMENT.

SECTION 640 (B) OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT,1968, PROVIDES AS FOLLOWS:

"DURING THE CURRENT FISCAL YEAR NONE OF THE FUNDS AVAILABLE TO THE DEPARTMENT OF DEFENSE MAY BE USED TO INSTALL OR UTILIZE ANY NEW -COST BASED- OR -EXPENSE-BASED- SYSTEM OR SYSTEMS FOR ACCOUNTING, INCLUDING ACCOUNTING RESULTS FOR THE PURPOSES PRESCRIBED BY SECTION 113 (A) (4) OF THE BUDGET AND ACCOUNTING PROCEDURES ACT OF 1950 (31 U.S.C. 66A (A) (4) (, UNTIL FORTY-FIVE DAYS AFTER THE COMPTROLLER GENERAL OF THE UNITED STATES (AFTER CONSULTATION WITH THE DIRECTOR OF THE BUREAU OF THE BUDGET) HAS REPORTED TO THE CONGRESS THAT IN HIS OPINION SUCH SYSTEM OR SYSTEMS ARE DESIGNED TO: (1) MEET THE REQUIREMENTS OF ALL APPLICABLE LAWS GOVERNING BUDGETING, ACCOUNTING, AND THE ADMINISTRATION OF PUBLIC FUNDS AND THE STANDARDS AND PROCEDURES ESTABLISHED PURSUANT THERETO; (2) PROVIDE FOR UNIFORM APPLICATION TO THE EXTENT PRACTICABLE THROUGHOUT THE DEPARTMENT OF DEFENSE; AND (3) PREVENT VIOLATIONS OF THE ANTI-DEFICIENCY STATUTE (R.S. 3679; 31 U.S.C. 5).'

ON THE BASIS OF INFORMATION AVAILABLE TO US AT THE PRESENT TIME, WE HAVE CONCLUDED THAT THE PROPOSAL CONSTITUTES AN EXTENSION OF THE EXISTING DEPARTMENT OF DEFENSE INDUSTRIAL FUND ACCOUNTING SYSTEM TO ADDITIONAL LOCATIONS, RATHER THAN AN INSTALLATION OR UTILIZATION OF "NEW" SYSTEMS. WE GAVE CONSIDERATION TO THE FOLLOWING PRIMARY FACTORS IN DERIVING OUR CONCLUSION:

1.THE PERIOD OF TIME OVER WHICH THE SYSTEM HAS BEEN REFLECTED IN DOD DIRECTIVES OR INSTRUCTIONS. THE EXTENT OF THE PREVIOUS TESTING OR USE IN OPERATIONS OF A SYSTEM IN THE DEPARTMENT OF DEFENSE. (THESE CONSIDERATIONS BEAR UPON THE DECISION AS TO WHETHER THE SYSTEM IS NEW CONCEPTUALLY.)

2. THE PRESENCE OF A COMPLETE SYSTEM OR SUBSTANTIAL ELEMENTS OF A COMPLETE SYSTEM IN ONE OR MORE OF THE DEPARTMENT OF DEFENSE COMPONENTS, BUT NOT IN ALL.

3. THE PROPOSED EXTENSION OF THE SYSTEM INTO A NEW TYPE OF MISSION OR ACTIVITY AREA WHERE THE SYSTEM HAS NOT BEEN EXTENDED HERETOFORE. THE EXTENSION OF THE SYSTEM INTO UNUSUAL AREAS (E.G., BASE OPERATIONS FOR INDUSTRIAL FUNDS) MAY HAVE A BEARING UPON THE ISSUE OF "NEW.'

4. THE SIGNIFICANCE OF THE IMPACT OF THE SYSTEM UPON:

A. THE APPROPRIATION STRUCTURE, INCLUDING BUDGET FORMAT.

B. THE SHIFTING OF FUNDS FROM ONE APPROPRIATION TO ANOTHER, FROM ONE BUDGET ACTIVITY TO ANOTHER.

CONCERNING ITEMS 1 THROUGH 3 OF THE ABOVE FACTORS, THE INDUSTRIAL FUND ACCOUNTING SYSTEM WAS ORIGINALLY PRESCRIBED ON JULY 13, 1950, MORE THAN 17 YEARS AGO, AND IS NOW PRESCRIBED UNDER DOD DIRECTIVE 7410.4, DATED MARCH 13, 1967. THESE SYSTEMS HAVE BEEN IN EFFECT AT OTHER ACTIVITIES WITHIN THE SAME MILITARY DEPARTMENT, OR ACTIVITIES OF OTHER MILITARY DEPARTMENTS WITHIN THE DEPARTMENT OF DEFENSE, PERFORMING SIMILAR REPAIR, OVERHAUL AND MAINTENANCE FUNCTIONS AS THOSE PERFORMED BY THE ACTIVITIES FOR WHICH INDUSTRIAL FUNDING IS NOW PROPOSED. IT IS NOT PROPOSED TO EXTEND INDUSTRIAL FUNDING TO ANY FUNCTIONS OTHER THAN SUCH REPAIR, OVERHAUL AND MAINTENANCE FUNCTIONS NOR TO MAKE ANY SIGNIFICANT CHANGE IN THE PRESENT SYSTEMS FOR ACCOUNTING.

WITH RESPECT TO ITEM 4 OF THE FACTORS CITED ABOVE, WE UNDERSTAND FROM OUR DISCUSSIONS WITH REPRESENTATIVES OF YOUR DEPARTMENT AND THE BUREAU OF THE BUDGET THAT THERE WILL BE NO SIGNIFICANT SHIFTS BETWEEN APPROPRIATIONS AS A RESULT OF THE EXTENSIONS OF INDUSTRIAL FUNDING. THERE PROBABLY WILL BE A LIMITED SHIFT BETWEEN TWO BUDGET ACTIVITIES WITHIN THE OPERATION AND MAINTENANCE APPROPRIATION, AND CERTAIN OTHER ADJUSTMENTS IDENTIFIED BELOW AS A NATURAL CONSEQUENCE OF THE EXTENSION OF INDUSTRIAL FUNDING.

A. THE SHIFT IN BUDGET ACTIVITIES IS EXPECTED TO OCCUR IN THE ARMY FROM DIRECT PROGRAM 3., CENTRAL SUPPLY ACTIVITIES (DEPARTMENT PROGRAM 2200) TO DIRECT PROGRAM 4., DEPOT MATERIEL MAINTENANCE AND SUPPORT ACTIVITIES (DEPARTMENT PROGRAM 2300). THIS WOULD BE DUE TO THE DISTRIBUTION OF A PORTION OF THE PRESENT ADMINISTRATIVE AND BASE SUPPORT COSTS, TO THE TENANT INDUSTRIAL FUND. THE INDUSTRIAL FUND WOULD INCLUDE THESE COSTS AS OVERHEAD IN CUSTOMER BILLINGS, AND THE CUSTOMER COULD BE EXPECTED TO RECORD THE TOTAL BILLING AS A MAINTENANCE CHARGE. WE UNDERSTAND THAT AN ARMY ESTIMATE PLACED THE ANNUAL AMOUNT OF THESE COSTS IN THE DEPARTMENT OF THE ARMY AT ABOUT $23 MILLION.

B. THERE PROBABLY WILL BE SOME SHIFT IN BUDGET SUB-ACTIVITIES IN THE AIR FORCE, FOR THE SAME REASON DESCRIBED IN A., ABOVE. THE SHIFT WILL BE WITHIN DIRECT PROGRAM 4., (DEPARTMENT PROGRAM 430) LOGISTICAL SUPPORT, FROM SUB-ACTIVITY SUPPLY TO SUB-ACTIVITY DEPOT MAINTENANCE. DETAIL BY SUB -ACTIVITIES IS PROVIDED TO THE COMMITTEE, BUT IS NOT SHOWN IN THE APPENDIX TO THE PRESIDENT'S BUDGET.

C. THE DEPOT MAINTENANCE PORTION OF THE REIMBURSABLE PROGRAMS IN THE ARMY, AIR FORCE AND MARINE CORPS WILL DECREASE MATERIALLY (OR PERHAPS BE VIRTUALLY ELIMINATED) SINCE REIMBURSEMENTS WILL BE TO AN INDUSTRIAL FUND, AND THE OBLIGATIONS WILL BE RECORDED ONLY BY THE USING MILITARY SERVICE.

D. IN THE SECTION OF THE BUDGET APPENDIX WHICH COVERS INDUSTRIAL FUNDS, TWO ADDITIONAL LINES WILL BE REQUIRED, UNDER THE AIR FORCE SECTION, TO SHOW FINANCIAL DATA FOR THE AIR FORCE MAINTENANCE ACTIVITIES INDUSTRIAL FUND, AND POSSIBLY TWO ADDITIONAL LINES WILL BE ADDED IN THE NAVY INDUSTRIAL FUND SECTION FOR THE MARINE CORPS INDUSTRIAL FUND.

IT IS RECOGNIZED THAT SIMILAR CHANGES PROBABLY OCCURRED WHEN OTHER ACTIVITIES WERE PLACED UNDER WORKING CAPITAL FUNDS IN THE PAST AND THAT A MORE ACCURATE COST PRESENTATION WILL RESULT, SINCE BENEFITING ACTIVITIES WILL BE REQUIRED TO BEAR A PROPORTIONAL SHARE OF RELATED ALLOCABLE COSTS.

WE DO NOT BELIEVE THAT SECTION 640 (B) OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1968, WAS DIRECTED TO MINOR CHANGES IN BUDGET ACTIVITIES SUCH AS THOSE INVOLVED HERE. IN FACT, WE HAVE BEEN INFORMED THAT THE PLANS OF THE DEPARTMENT OF THE NAVY TO INSTALL INDUSTRIAL FUNDS DURING THE CURRENT FISCAL YEAR AT THE ACTIVITIES SHOWN ON THE SCHEDULE ATTACHED WERE APPROVED BY THE HOUSE COMMITTEE ON APPROPRIATIONS AND IMPLEMENTED IN THE BUDGET; AND THAT THE DEPARTMENT OF THE AIR FORCE RECEIVED INFORMAL COMMITTEE APPROVAL TO USE INDUSTRIAL FUNDS TO FINANCE THE ALASKA COMMUNICATIONS SYSTEM, EFFECTIVE OCTOBER 1, 1967.

IN CONSEQUENCE OF ALL THE CIRCUMSTANCES DISCUSSED, WE BELIEVE THE PROPOSAL TO EXTEND THE USE OF INDUSTRIAL FUNDS TO FINANCE REPAIR, OVERHAUL AND MAINTENANCE ACTIVITIES DOES NOT INVOLVE THE INSTALLATION OR UTILIZATION OF NEW COST-BASED OR EXPENSE-BASED SYSTEMS FOR ACCOUNTING. FROM A STRICT LEGAL VIEWPOINT, SUCH USE OF INDUSTRIAL FUNDS WOULD BE AUTHORIZED BY SECTION 2208, TITLE 10, UNITED STATES CODE. HOWEVER, IN VIEW OF THE RESPONSIBILITY, AUTHORITY, AND INTEREST OF THE HOUSE AND SENATE COMMITTEES ON APPROPRIATIONS IN THIS MATTER, WE BELIEVE THAT THE PROPOSED EXTENSION OF INDUSTRIAL FUNDS AT THE 21 INSTALLATIONS SHOULD BE DISCUSSED IN ADVANCE WITH THOSE COMMITTEES. SUCH A DISCUSSION WOULD ALSO SERVE TO APPRISE THE COMMITTEE OF THE SOURCE OF ANY FUNDS REQUIRED TO ACTIVATE THE EXTENSIONS.

COPIES OF THIS LETTER ARE BEING SENT TO THE CHAIRMAN OF THE HOUSE AND SENATE COMMITTEES ON APPROPRIATIONS.