Army Working Capital Fund:

Actions Needed to Reduce Carryover at Army Depots

GAO-08-714: Published: Jul 8, 2008. Publicly Released: Jul 8, 2008.

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The five Army depot maintenance activities support combat readiness by providing services to keep Army units operating worldwide. From fiscal years 2004 through 2007, the amount of new orders received to perform work increased 100 percent from $2.6 billion to $5.2 billion. The number of new orders is a factor in the amount of work the depots carry over from one fiscal year to the next. While past congressional defense committees recognize the need for carryover, the committees have raised concerns that carryover may be more than needed. GAO was asked to determine (1) the growth in reported total carryover from fiscal years 2004 through 2007 and the actions the Army is taking to reduce the carryover, (2) whether reported carryover amounts exceeded carryover ceilings for fiscal years 2006 and 2007 and adjustments made to reduce those amounts, and (3) the primary reasons for the increased carryover at the five Army depots. GAO analyzed reported carryover and related data at the five depots.

From fiscal years2004 through 2007, the Army depots' total carryover significantly increased from $1.1 billion to $2.7 billion--about 7.6 months of work. The amount of carryover increased because new orders received (about $9.5 billion) by the depots significantly outpaced the work performed (about $7.8 billion) in fiscal years 2006 and 2007. GAO analysis of the Army's plan to reduce carryover showed that the depots performed $293 million more work in the first 3 months of fiscal year 2008 than they performed during the same period a year earlier, but the depots missed their planned goal by $173 million. The Army depots reported that they were under the carryover ceiling by $67 million in fiscal year 2006 but over the ceiling by $96.8 million in fiscal year 2007. GAO identified two factors that affected reported carryover amounts. First, the Army Materiel Command directed the Tobyhanna Army Depot to deobligate $30 million at the end of fiscal year 2006 and reobligate the same amount at the beginning of the next fiscal year, which artificially lowered reported carryover and was not in accordance with existing DOD policy. Second, the Army excluded about $299.7 million in fiscal year 2007 orders from the carryover calculations. The exemptions for fourth quarter orders from other services and long lead time material did not provide the right incentives for DOD to resolve long-standing problems. GAO analysis of reports and discussions with Army officials identified four primary reasons for growth in carryover: (1) the Army depot maintenance budget underestimated the amount of new orders during fiscal years 2006 and 2007 by about $1.7 billion and $1.5 billion, respectively; (2) the depots accepted orders late in the fiscal year that generally could not be completed by the end of the fiscal year; (3) the depots experienced parts shortages; and (4) the depots did not receive assets that had been scheduled for repair.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In April 2009, the Army updated the Air Force Working Capital Fund Resource Formulation Guidance to encourage Army depots to consider prior year trends when estimating future workloads. Further, the Army in June 2009 established procedures for more accurately forecasting budgeted new orders using a seven year trend analysis comparing historical new orders to new orders found in the current budget submission. The Army noted that the trend analysis tool would be very useful going forward to identify any large deviations in recent years. Using the trend analysis tool, the Army revised upward the fiscal year 2010 new order forecast contained in the fiscal year 2011 Army Working Capital Fund budget submission by $604 million. The fiscal year 2010 budgeted new order amount was within 2 percent of the actual amount. By revising the Resource Formulation Guidance and implementing the trend analysis tool, the Army should have more accurate budget and workload estimates that allow them to put in place the necessary resources (manpower and material) to perform work to better address carryover and expected orders.

    Recommendation: The Secretary of Defense should direct the Secretary of the Army to establish procedures requiring Army headquarters and Army Materiel Command to compare budgeted orders to actual orders that the depots received from customers and consider these trends in developing the following year's budget estimates on new orders to be received from customers.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and the Assistant Secretary of the Army (Financial Management and Comptroller) issued a memorandum on November 19, 2008 to the U.S. Army Material Command reemphasizing the need to follow the DOD Financial Management Regulation when accepting new orders. The guidance provides the conditions that must be followed when accepting new orders. The Army follows-up periodically on compliance with the guidance during site visits. This meets the intent of our recommendation.

    Recommendation: The Secretary of Defense should direct the Secretary of the Army to develop a mechanism to monitor the Army depot maintenance activities' compliance with the requirements in DOD Financial Management Regulation 7000.14-R governing acceptance of orders, particularly when work is not expected to (1) begin without delay (usually within 90 days of acceptance) and (2) be completed within the normal production period for the specific work ordered.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: On November 19, 2008, the Assistant Secretary of the Army (Financial Management and Comptroller) issued a memorandum to the Army Material Command prohibiting the deobligation of customer funds at year end for the sole purpose of reducing carryover amounts. The Army now tracks adjustments to carryover for the depots and monitors the adjustments to prohibit this type of action. With the issuance of the Army memorandum directing its activities to comply with existing carryover policies and implementation of procedures for monitoring depot adjustments, the reliability of carryover data and their usefulness as a management tool should improve significantly.

    Recommendation: The Secretary of Defense should direct the Secretary of the Army to issue guidance, in accordance with existing DOD-wide guidance, that prohibits the Army Industrial Operations activity group from deobligating reimbursable customer orders at the end of the fiscal year and reobligating them in the next fiscal year for the sole purpose of reducing carryover balances that are ultimately reported to Congress.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and the Army separately identified the allowable and the actual amounts of carryover for the Army depot maintenance activities in the fiscal years 2010 and 2011 President's Budget Request Justification Books provided to Congress. With the additional information Congress should have better visibility over the Army Working Capital Fund's carryover.

    Recommendation: The Secretary of Defense should direct the Secretary of the Army to establish procedures for separately identifying the allowable and reported actual amounts of carryover for the Army depot maintenance activities in the Army's annual budget to Congress (as was done prior to fiscal year 2005).

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and established a program to monitor carryover information throughout the fiscal year. Specifically, the Army has established a Depot Maintenance Execution Council that meets quarterly to discuss planned versus actual carryover, new requirements impact on carryover (i.e., whether the requirements will increase or decrease carryover), and projected carryover completions by fiscal year. In 2008, the Council met in June, September, and November. With the establishment of the Council, the Army should have sufficient high-level visibility over carryover issues that will allow them to identify and implement ways to further reduce depot maintenance carryover if carryover goals are not being met.

    Recommendation: The Secretary of Defense should direct the Secretary of the Army to direct the Army headquarters budget office to compare the amounts contained in the Army's carryover reduction plan to reported actual execution data on a monthly basis to determine (1) if the depots met established targets and (2) if the overall plan's execution has the desired effect of reducing fiscal year 2008 year-end carryover, and work with the Army Materiel Command and the Army depots to identify ways to further reduce fiscal year 2008 carryover if monthly revenue goals are not met.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: DOD updated the DOD Financial Management Regulation in September 2008 to require requests for exemptions to the carryover policy to be submitted to the Under Secretary of Defense (Comptroller) Director of Revolving Funds separate from the budget documents. DOD then evaluates these requests to determine the impact the requests have on actual carryover balances reported to Congress and whether granting such exemptions reduce the visibility over and financial incentives to resolve long-standing problems. If DOD grants a waiver, the amount of the waiver and the reason for the waiver is listed in the budget justification book. To illustrate the implementation of the procedure, DOD provided GAO an example of a Navy exemption request that was submitted to DOD in September 2009 for approval. DOD denied a portion of the requested waiver amount because some of the work identified in the Navy's memo was considered no different that other depot workload and should not be inducted into the depots unless the work could be performed within the criteria identified in the Financial Management Regulations.

    Recommendation: In order to (1) improve the reliability and level of detail of carryover amounts reported to Congress and DOD decision makers and (2) reduce carryover associated with the Army depot maintenance working capital fund activities, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to establish procedures requiring evaluations of future exemption requests on carryover to consider the impact these requests have on the actual carryover balances reported to Congress and whether granting such exemptions substantially reduces the visibility over and financial incentive to resolve long-standing issues, such as spare parts problems.

    Agency Affected: Department of Defense

  7. Status: Closed - Implemented

    Comments: To address the intent of our recommendation, the Office of the Under Secretary of Defense (Comptroller)(OUSD(C)) issued a memorandum, dated August 6, 2008, that(1) reiterated its current policy prohibiting the manipulation of customer order balances to reduce the reported carryover levels; (2) directed its components to conduct internal reviews of accounting procedures currently in use, to include year-end adjustments, to ensure that manipulation of carryover levels is not occurring; and (3) OUSD(C) will evaluate future carryover violations and take appropriate action as warranted. With the issuance of the memorandum directing its components to comply with existing carryover policies and OUSD(C)'s commitment to address any future violations, reliability of carryover data and their usefulness as a management tool should improve significantly.

    Recommendation: In order to (1) improve the reliability and level of detail of carryover amounts reported to Congress and DOD decision makers and (2) reduce carryover associated with the Army depot maintenance working capital fund activities, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to establish a mechanism to monitor whether activities are not following the existing July 2003 policy that prohibits the deobligating and reobligating of funds at year-end for the sole purpose of reducing carryover balances and take appropriate actions, such as reducing future funding designated for these activities, if they do not follow the policy.

    Agency Affected: Department of Defense

  8. Status: Closed - Implemented

    Comments: The Army incorporated the critical maintenance repair parts reactive system into the Commander's Critical Item Requirement process, which is monitored on a daily, weekly, and monthly basis by the Army and the Office of the Undersecretary of Defense (OUSD)(Comptroller) to ensure parts shortages do not impact production. The critical maintenance repair parts reactive system provides quantifiable data on parts shortages or potential parts shortages that have or will cause the depots to resort to "work-around" methods to try to prevent work stoppage. Further, the Army began in 2009 including the amount of carryover attributed to parts shortages and the actions the activities are taking to reduce carryover in their quarterly budget execution reviews with OUSD (Comptroller). For example, the Army identified one program that experienced parts shortages resulting in carryover for small arms. The shortage, which has been resolved, was caused by defective/non-conforming parts provided by the supplier. The resulting carryover amount was $31 million in fiscal year 2007. With the implementation of these actions, the Army should have better information to determine the effectiveness of actions taken to resolve spare parts shortages and its impact on carryover.

    Recommendation: The Secretary of Defense should direct the Secretary of the Army to develop quantifiable measures to determine the effectiveness of actions taken by the Army and DLA to resolve spare parts shortages, such as analyzing the information on customer orders with insufficient spare parts in the critical maintenance repair parts reactive system at the end of fiscal year 2008 and comparing the results to those of prior fiscal years.

    Agency Affected: Department of Defense

 

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