Army Working Capital Fund:

Actions Needed to Improve Budgeting for Carryover at Army Ordnance

GAO-09-415: Published: Jun 10, 2009. Publicly Released: Jun 10, 2009.

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From fiscal years 2004 through 2008, new orders received by the eight Army ordnance activities increased from $788 million to $1.5 billion. To the extent that the ordnance activities do not complete work at year end, the ordered and funded work is carried over into the next fiscal year. While past congressional defense committees recognized the need for carryover, the committees have on occasion raised concerns that carryover may be more than needed. GAO was asked to determine (1) whether the reported actual total carryover increased or decreased from fiscal years 2004 through 2008 and, if the carryover increased, the actions the Army is taking to reduce it; (2) the primary reasons for carryover at the eight ordnance activities; and (3) whether carryover amounts exceeded ceilings for fiscal years 2006, 2007, and 2008, and whether the methodology used to calculate the ceiling for the ordnance activities was reasonable. GAO analyzed reported carryover and related data at the eight activities.

From fiscal years 2004 through 2008, the Army ordnance activities' carryover increased from $517 million to $1.2 billion--about 10 months of work. The carryover increased because new orders outpaced work performed. The carryover more than doubled even though the ordnance activities increased the number of employees by 20 percent and the direct labor hours of work performed by 30 percent from fiscal years 2004 through 2008. GAO analysis of reports and discussions with Army officials identified three primary reasons for carryover: (1) the Army ordnance budget underestimated the amount of new orders by $479 million, $696 million, and $688 million in fiscal years 2006, 2007, and 2008, respectively; (2) the activities accepted all orders received during the fiscal year regardless of the effect on carryover; and (3) the lead time to obtain some material or parts could be a year or longer because of the time needed to award contracts and for the vendors to produce the material or parts. As a result, the activities often did not work on items until the second year and, for items with longer lead times, the third year. The ordnance activities reported that they exceeded the carryover ceiling by $98 million in fiscal year 2006 and $180 million in fiscal year 2007. In fiscal year 2008, the activities reported they were under the ceiling by $145 million due to a DOD change in the methodology used to calculate the ceiling. Otherwise, the activities would have exceeded the ceiling by $79 million. The methodology change allowed the ordnance activities to use the second-year outlay rates for calculating the carryover ceiling for procurement-funded orders, which more accurately considers the source of funds used for the carried over work and reflects the lead time needed to obtain material.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and, on May 18, 2009, directed the Army to establish procedures that outline the methods the Army is taking to more accurately estimate future orders. Further, DOD directed the Army to consider prior year experience when estimating future workload. In June 2009, the Army established procedures for more accurately forecasting budgeted new orders using a seven year trend analysis comparing historical new orders to new orders reported in the current budget submission. The Army noted that the trend analysis tool would be very useful going forward to identify any large deviations from recent years. By implementing this tool, the Army should have more accurate budget estimates that allow it to put in place the necessary resources (materiel and personnel) to perform work to better address carryover and expected orders.

    Recommendation: To improve the management of budgeting for carryover and update the DOD Financial Management Regulation that contains guidance on carryover, the Secretary of Defense should direct the Secretary of the Army to establish procedures requiring Army headquarters and Army Materiel Command to develop more accurate estimates of new order data by comparing budgeted orders to actual orders and consider these trends in developing the following year's budget estimates for new orders.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and directed the Army to report separately the allowable and actual amount of carryover for the Army ordnance activities. The Army complied with the guidance and has separately reported the amounts 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: To improve the management of budgeting for carryover and update the DOD Financial Management Regulation that contains guidance on carryover, the Secretary of Defense should direct the Secretary of the Army to report the allowable and actual amounts of carryover for the Army ordnance activities as a separate item in the Army Working Capital Fund annual budget to Congress.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: The Undersecretary of Defense (Comptroller) concurred with the recommendation and included the new requirement in the November 2009 update to the DOD Financial Management Regulation.

    Recommendation: To improve the management of budgeting for carryover and update the DOD Financial Management Regulation that contains guidance on carryover, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to update methodology in the DOD Financial Management Regulation for calculating the allowable amount of carryover for ordnance activities in order to formally establish this new requirement, which was contained in the December 31, 2008, memorandum.

    Agency Affected: Department of Defense

 

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