Lease Refinancing:

A DOD-Wide Program Is Not Currently Feasible

AFMD-91-39: Published: Mar 14, 1991. Publicly Released: Apr 17, 1991.

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Pursuant to a congressional request, GAO evaluated the feasibility of implementing the Army's equipment lease refinancing program throughout the Department of Defense (DOD), focusing on: (1) the type of information needed for a lease refinancing program; and (2) whether such information was readily available to DOD and its components.

GAO found that: (1) between fiscal years 1985 and 1988, DOD equipment lease obligations declined from $868 million to $515 million; (2) at the completion of its lease refinancing program, the Army found that the leases it had previously thought to be viable candidates for pooling and refinancing were ineligible; (3) the Army's lease refinancing contractor found that most of the Army's leases did not include assignable purchase options and could not be refinanced; (4) the contractor also identified several problems with the reliability and availability of the Army's lease data; (5) it could be difficult to implement a lease financing program similar to the Army's across DOD, since the declining number and value of DOD leases reduced the likelihood of creating pools of eligible leases, and the DOD lease reporting system did not provide adequate financial management; (6) the DOD Corporate Information Management initiative, aimed at strengthening financial management by consolidating accounting and finance operations and systems, provided an opportunity to develop procedures that would support effective financial management of leases; and (7) DOD could use the Air Force's contract management systems as a starting point for designing its consolidated lease management system.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: DOD states that a steady decline in leases, as well as a low dollar value of leases eligible for refinancing, does not justify actions to amend the Federal Acquisition Regulation at this time.

    Recommendation: The Administrator of General Services should amend the Federal Acquisition Regulation to provide agencies with specific guidance and criteria for identifying leases that should include assignable purchase options and for documenting related decisions.

    Agency Affected: General Services Administration

  2. Status: Closed - Not Implemented

    Comments: DOD states that a steady decline in leases, as well as a low dollar value of leases eligible for refinancing, does not justify the cost for developing a system to track lease information. Additionally, no significant benefit appears to accrue to DOD as a result of interest costs accounting records being recorded.

    Recommendation: The Secretary of Defense should ensure that DOD components obtain, record, and maintain the: (1) lease assignable purchase option prices and dates; (2) lease-stated interest rate; (3) lease commencement date; (4) purchase price offered by the lessor when the lease was awarded; (5) lease term including option years; (6) number of lease payments; and (7) lease payment amount exclusive of maintenance and service costs.

    Agency Affected: Department of Defense

  3. Status: Closed - Not Implemented

    Comments: GAO agrees that the utility of recording such data in the DOD financial system does not outweigh the additional cost of collecting and accounting for imputed interest amounts separate from the capital portion of the lease payment. This is especially true in light of the decline in the number and dollar value of equipment leases.

    Recommendation: The Secretary of Defense should instruct DOD components to account for and record the lease acquisition cost component separately from the lease finance cost component on capital leases in accordance with title 2 of the GAO "Policy and Procedures Manual for Guidance of Federal Agencies".

    Agency Affected: Department of Defense

  4. Status: Closed - Not Implemented

    Comments: DOD claims that the recommendation is based on the finding that "If leasing by DOD and its components increases in the future, pooling and refinancing may become economically viable". Without a demonstrated need, it is not considered cost-effective to establish a mandatory system to collect and regularly report lease information.

    Recommendation: The Secretary of Defense should design DOD management information systems under the Corporate Information Management initiative to record and report the information needed to routinely monitor lease operations and costs as well as to implement a lease refinancing program. Procedures should be established for DOD and its components to monitor lease costs, particularly the finance cost component of total lease costs, to identify cost-effective refinancing opportunities.

    Agency Affected: Department of Defense

 

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