Army Working Capital Fund:

Army Industrial Operations Could Improve Budgeting and Management of Carryover

GAO-16-543: Published: Jun 23, 2016. Publicly Released: Jun 23, 2016.

Additional Materials:

Contact:

Asif A. Khan
(202) 512-9869
khana@gao.gov

 

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What GAO Found

GAO's analysis of Army Industrial Operations (Industrial Operations) reports showed that Industrial Operations actual adjusted carryover exceeded its allowable carryover amount from fiscal years 2013 through 2015 by $195 million, $1.1 billion, and $854 million, respectively. This occurred because Industrial Operations performed less work (i.e., earned less revenue) than orders accepted due to staff reductions of more than 5,000 over the 2-year period for fiscal years 2013 and 2014 caused by budgetary uncertainty and the across-the-board spending reductions referred to as sequestration. GAO also determined that the Army did not correctly calculate the allowable carryover amounts for fiscal years 2013 and 2014 as specified by the Department of Defense (DOD) Financial Management Regulation because the Army did not use the most recent data available to perform the calculations. Based on GAO's calculations, Industrial Operations exceeded the allowable amounts by $44 million less in fiscal year 2013 and $27 million more in fiscal year 2014 than reported.

Industrial Operations' actual adjusted carryover also significantly exceeded budgeted adjusted carryover from fiscal years 2013 through 2015. While its budgeted adjusted carryover would have been under the allowable amount by $174 million and $1.2 billion for fiscal years 2013 and 2014, respectively, and over the allowable amount by $186 million for fiscal year 2015, the actual adjusted carryover amount exceeded the allowable amounts all 3 fiscal years because Industrial Operations (1) accepted more new orders than budgeted and (2) performed less work (earned less revenue) than budgeted.

Actual and Budgeted Army Industrial Operations' New Orders and Revenue for Fiscal Years 2013 through 2015


Dollars in millions

 

New orders

Revenue

Fiscal year

Actual

Budget

Difference

Actual

Budget

Difference

2013

5,375

5,092

283

5,061

6,268

(1,207)

2014

4,772

4,401

371

4,543

6,024

(1,481)

2015

4,474

3,984

490

4,529

4,661

(132)

Source: GAO analysis of Army Industrial Operations' budgets. | GAO-16-543

To address budget concerns, the Army has implemented actions intended to improve budget information. However, Industrial Operations has not been able to provide reliable budget information on carryover to decision makers from fiscal years 2013 through 2015.

GAO identified four key drivers for large Industrial Operations carryover balances: (1) work was scheduled to carry over at the end of the fiscal year as part of the normal course of business, (2) work on crash-damaged aircraft was difficult to predict and required nonstandard repairs that necessitated long lead time parts to perform the work, (3) work did not have a well-defined scope of work for repairing the assets, and (4) parts were not available to perform work. The Army is taking actions to reduce carryover. One of those actions is to develop a regulation that consolidates and updates guidance for Industrial Operations. However, this regulation has not yet been completed, issued, and implemented.

Why GAO Did This Study

Industrial Operations' activities support combat readiness by providing depot maintenance and ordnance services to keep Army units operating worldwide. To the extent that these activities do not complete work ordered and funded by fiscal year-end, the work and related funding will be carried over into the next fiscal year. DOD established a formula based on new orders from customers for determining the allowable carryover as defined by DOD's Financial Management Regulation. GAO was asked to review issues related to carryover.

GAO's objectives were to determine (1) the extent to which Industrial Operations' actual carryover differed from allowable amounts and reasons for differences; (2) the extent to which Industrial Operations' budgeted carryover differed from actual carryover, reasons for differences, and actions Army is taking to improve related budgeting; and (3) the key drivers for orders with large carryover balances and the extent to which the Army is taking actions to reduce carryover. GAO reviewed carryover guidance, analyzed carryover and related data, and interviewed Army officials.

What GAO Recommends

GAO recommends that DOD improve the budgeting and management for carryover by establishing procedures for correctly calculating the allowable carryover, improving budget estimates on carryover, and addressing in its draft regulation scope of work and parts issues that affect carryover. DOD concurred with GAO's recommendations and cited related actions planned or under way.

For more information, contact Asif A. Khan at (202) 512-9869 or khana@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and revised the DOD FMR in May 2016 to require DOD Working Capital Fund activities to use the most recent DOD Financial Summary Tables when calculating allowable carryover amounts in annual budget submissions to Congress. Accurate carryover data will help DOD decision makers and Congress make more informed decisions.

    Recommendation: To improve budgeting and management of carryover, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to clarify existing guidance in the DOD Financial Management Regulation to require DOD Working Capital Fund activities to use the most recent DOD Financial Summary Table when calculating allowable carryover amounts in annual budget submissions to Congress.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Army developed internal control procedures for calculating the allowable carryover in annual budget submissions. The Office of the Assistant Secretary of the Army (Financial Management and Comptroller) published the updated procedures on April 15, 2016 as a annex to the Army Working Capital Fund Resource Formulation Guidance. The documented procedures adhere to the guidance within the Department of Defense Financial Management Regulation for calculating the allowable carryover amount. Accurate carryover data will help DOD decision makers and Congress make more informed decisions.

    Recommendation: To improve budgeting and management of carryover, the Secretary of Defense should direct the Secretary of the Army to develop, document, and implement internal controls for developing and monitoring the process of calculating the allowable amount of carryover in annual budget submissions to Congress.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: The Army concurred with our recommendation and stated that the Army will continue to stress the importance of improving communications among all Industrial Operations stakeholders during the depot maintenance requirements and budget estimate development process. For example, the Army held a briefing with its components to discuss carryover corporate governance in January 2017. The objectives of the meeting included (1) developing accurate and executable budget requirements to minimize unplanned orders that increase carryover above allowable ceiling, (2) aligning depot execution to budget estimates, and (3) meeting or exceeding revenue goals. More reliable budget estimates should help Army decision makers and the Congress make more informed decisions.

    Recommendation: To improve budgeting and management of carryover, the Secretary of Defense should direct the Secretary of the Army to improve its budget estimates on orders by directing Industrial Operations to continue to work with its customers on identifying differences in budgeted and actual orders and consider these differences and their potential consequences when developing budget estimates.

    Agency Affected: Department of Defense

  4. Status: Open

    Comments: DOD stated that the Army will enforce policy and business rules that require Organic Industrial Base facilities to communicate with their customers early to verify the scope of work and ensure that the Army has the required capability, capacity, equipment, and parts needed to meet delivery schedules and avoid excessive carryover. DOD also stated that it will update its policy and publish its draft regulation during fiscal year 2017.

    Recommendation: To improve budgeting and management of carryover, the Secretary of Defense should direct the Secretary of the Army to direct the Army Materiel Command to incorporate in its regulation provisions for a repair process that includes upfront communication and coordination among AMC and non-AMC stakeholders that will result in the development of a well-defined scope of work and parts needed by the Industrial Operations activities to perform the repair work that will help reduce carryover.

    Agency Affected: Department of Defense

 

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