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entitled 'Defense Working Capital Fund: Military Services Did Not 
Calculate and Report Carryover Amounts Correctly' which was released on 
June 27, 2006. 

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Report to the Chairman, Subcommittee on Defense, Committee on 
Appropriations, House of Representatives: 

June 2006: 

Defense Working Capital Fund: 

Military Services Did Not Calculate and Report Carryover Amounts 
Correctly: 

GAO-06-530: 

GAO Highlights: 

Highlights of GAO-06-530, a report to the Chairman, Subcommittee on 
Defense, Committee on Appropriations, House of Representatives. 

Why GAO Did This Study: 

According to the Department of Defense’s (DOD) fiscal year 2006 budget 
estimates, working capital fund activity groups (depot maintenance, 
ordnance, and research and development) will have about $6.3 billion of 
funded work that will be carried over from fiscal year 2006 into fiscal 
year 2007. The congressional defense committees recognize that these 
activity groups need some carryover to ensure smooth work flow from one 
fiscal year to the next. However, the committees have previously raised 
concern that the amount of carryover may be more than is needed. GAO 
was asked to determine (1) if the military services’ carryover 
calculations were in compliance with DOD’s new carryover policy and (2) 
if customers were submitting orders to working capital fund activities 
late in the fiscal year and, if so, the effect this practice has had on 
carryover. 

What GAO Found: 

The military services have not consistently implemented DOD’s revised 
policy in calculating carryover. Instead, the military services used 
different methodologies for calculating the reported actual amount of 
carryover and the allowable amount of carryover since DOD changed its 
carryover policy in December 2002. • The military services did not 
consistently calculate the allowable amount of carryover that was 
reported in their fiscal year 2004, 2005, and 2006 budgets because they 
used different outlay rates for the same appropriation. • The Air Force 
did not follow DOD’s regulation on calculating carryover for its depot 
maintenance activity group, which affected the amount of allowable 
carryover and actual carryover by tens of millions of dollars and 
whether the actual carryover exceeded the allowable amount as reported 
in the fiscal year 2004, 2005, and 2006 budgets. • The Army depot 
maintenance and ordnance activity groups’ actual carryover was 
understated in fiscal years 2002 and 2003 because carryover associated 
with prior year orders was not included. • While the Navy generally 
followed DOD’s policy for calculating carryover, the Navy consolidated 
the reporting of carryover information for research and development 
activities. The Navy budgets no longer provide information to show if 
any of the five research and development subactivity groups 
individually exceeded the carryover ceiling as the Navy budgets did 
prior to the change in the carryover policy. 

As a result, carryover data provided to decision makers who review and 
use the data for budgeting are erroneous and not comparable across the 
three military services. For example, the Air Force reported to 
Congress that the actual fiscal year 2002 carryover for depot 
maintenance was $87 million less than the ceiling. If the Air Force 
followed DOD’s policy, GAO’s calculations show its carryover would have 
exceeded the ceiling by $216 million. 

Carryover is greatly affected by orders accepted by working capital 
fund activities late in the fiscal year that generally cannot be 
completed by fiscal year end, and in some cases cannot even be started 
prior to the end of the fiscal year. GAO’s analysis of 68 fiscal year-
end orders identified four key factors contributing to orders generally 
being issued by customers late in the fiscal year and being accepted by 
the working capital fund activities during the last month of the fiscal 
year. These reasons included (1) funds provided to the customer late in 
the fiscal year to finance existing requirements, (2) new work 
requirements identified at year end, (3) problems encountered in 
processing orders, and (4) work scheduled at year end. GAO’s analysis 
showed that over half of the orders reviewed were not completed at the 
end of the next fiscal year, generating a second year of carryover on 
the same order. As a result, some orders may not have been the most 
effective use of DOD resources at that time and may not have complied 
with all of the order acceptance provisions cited in the DOD Financial 
Management Regulation. 

What GAO Recommends: 

GAO makes recommendations to DOD to (1) improve the military services’ 
calculations of the allowable amount of carryover and actual carryover, 
(2) improve the reporting of carryover information to Congress and DOD 
decision makers, and (3) ensure that the military services follow the 
DOD regulation concerning the acceptance of orders placed with working 
capital fund activities. DOD concurred with all the recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-530]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact McCoy Williams at (202) 
512-9095 or Williamsm1@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

The Military Services Did Not Follow DOD Policy in Calculating 
Carryover: 

Carryover Increased Due to Military Services Placing Orders Late in the 
Fiscal Year: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Department Of Defense: 

Appendix III: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Schedule of the Source of Outlay Rates Used in Calculating the 
Allowable Amount of Carryover by Service: 

Table 2: Schedule of Selected Appropriation Outlay Rates Used in 
Calculating the Allowable Amount of Carryover for the Fiscal Year 2005 
Budget (in percent): 

Table 3: Schedule of Selected Outlay Rates Used to Calculate Allowable 
Carryover That Was Included in the Fiscal Year 2006 Budget (in 
percent): 

Table 4: Air Force's Reported Actual Carryover and GAO's Calculation of 
the Amount of Actual Carryover with Respect to the Ceiling: 

Table 5: Dollar Amount of Reported Actual Carryover that Exceeded the 
Ceiling and the Amount of Carryover Not Included (dollars in millions): 

Table 6: Navy's Reported Actual Carryover in Relationship to the 
Ceiling by Activity Group: 

Table 7: Navy's Reported Actual Carryover in Relationship to the 
Ceiling for the Research and Development Subactivity Groups: 

Figure: 

Figure 1: Factors Contributing to Year-end Orders for 2003 and 2004: 

Letter: 
June 27, 2006: 

The Honorable C. W. Bill Young: 
Chairman, Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

Dear Mr. Chairman: 

According to the Department of Defense's (DOD) fiscal year 2006 budget 
estimates, working capital fund activity groups (depot maintenance, 
ordnance, and research and development) will have about $6.3 billion of 
funded work that will be carried over from fiscal year 2006 into fiscal 
year 2007.[Footnote 1] The congressional defense committees recognize 
that these activity groups need some carryover to ensure a smooth flow 
of work during the transition from one fiscal year to the next. 
However, past congressional defense committee reports raised concerns 
that the level of carryover may be more than is needed. Excessive 
amounts of carryover financed with customer appropriations are subject 
to reductions by DOD and the congressional defense committees during 
the budget review process. To the extent that carryover is too high, 
Congress may redirect the funds gained from such reductions to other 
priority initiatives. For example, Congress reduced the Army's fiscal 
year 2003 Operation and Maintenance appropriation by $48 million due to 
excessive carryover. 

In May 2001, we reported[Footnote 2] that DOD did not have a sound 
analytical basis for its 3-month carryover standard which it 
established in 1996. Based on our recommendation, in December 2002 DOD 
revised its carryover policy to eliminate the 3-month across-the-board 
standard for allowable carryover. Under the new policy, the allowable 
amount of carryover is to be based on the outlay rate[Footnote 3] of 
the customers' appropriations financing the work. This means that in 
determining allowable carryover, the first year outlay rate is used for 
new orders received in the current year (first year of the work order). 
However, during our review of Army depot maintenance operations, we 
reported[Footnote 4] in June 2005 that the Army encountered several 
problems implementing DOD's new policy on calculating actual carryover 
as well as the allowable amount of carryover. In that report, we also 
determined that activities exceeded the carryover ceiling because they 
received and accepted orders late in the fiscal year. 

As requested and agreed to with your office, the objectives of this 
assignment were to determine (1) if the military services' carryover 
calculations were in compliance with DOD's new carryover policy and (2) 
if customers were submitting orders to working capital fund activities 
late in the fiscal year and, if so, the effect that this practice has 
had on carryover. Our review was performed from July 2005 through March 
2006 in accordance with U.S. generally accepted government auditing 
standards. The carryover information in this report is budget data 
obtained from official Army, Navy, and Air Force budget documents. To 
assess the reliability of the data, we (1) reviewed and analyzed the 
factors used in calculating carryover and (2) interviewed officials 
knowledgeable about the data. We determined that the data were 
sufficiently reliable for the purposes in this report. Further details 
on our scope and methodology can be found in appendix I. We requested 
comments on a draft of this report from the Secretary of Defense or his 
designee. Written comments from the Under Secretary of Defense 
(Comptroller) are reprinted in appendix II. 

Results in Brief: 

The military services have not consistently implemented DOD's revised 
policy in calculating carryover. Instead, the military services have 
used different methodologies for calculating the reported actual amount 
of carryover and the allowable amount of carryover since DOD changed 
its carryover policy in December 2002. Specifically, (1) the military 
services did not consistently calculate the allowable amount of 
carryover that was reported in their fiscal year 2004, 2005, and 2006 
budgets because they used different tables (both provided by DOD) that 
contained different outlay rates for the same appropriation; 
(2) the Air Force did not follow DOD's regulation on calculating 
carryover for its depot maintenance activity group, which affected the 
amount of allowable carryover and actual carryover by tens of millions 
of dollars as well as whether the actual amount of carryover exceeded 
the allowable amount as reported in the fiscal year 2004, 2005, and 
2006 budgets; and (3) the Army depot maintenance and ordnance activity 
groups' actual carryover was understated in fiscal years 2002 and 2003 
because carryover associated with prior year orders was not included in 
the carryover calculation as required. Further, while the Navy 
generally followed DOD's policy for calculating carryover, the Navy 
consolidated the reporting of carryover information for research and 
development activities beginning with the fiscal year 2004 budget that 
included actual carryover information for fiscal year 2002. As a 
result, the Navy budgets no longer provide information to show if any 
of the five research and development subactivity groups individually 
exceeded the carryover ceiling as the Navy budgets did prior to the 
change in the carryover policy in December 2002. For example, Navy 
budget documents to Congress show that the Navy research and 
development activity group did not exceed the carryover ceiling for 
fiscal years 2003, 2004, and 2005. However, our analysis of Navy 
reports showed that the Naval Air Warfare Center--one of the 
subactivity groups--exceeded the carryover ceiling for these 3 fiscal 
years by $19 million, $57 million, and $52 million, respectively. The 
primary factor for these inconsistencies is that DOD's December 2002 
guidance was verbal and DOD did not issue detailed written procedures 
for calculating carryover and the allowable amount of carryover until 
June 2004. As a result, year-end carryover data provided to decision 
makers who review and use the data for budgeting--Office of the Under 
Secretary of Defense (Comptroller) and congressional decision makers-- 
are erroneous and not comparable across the three military services. 
For example, the Air Force reported to Congress that the actual fiscal 
year 2002 carryover for depot maintenance was $87 million less than the 
carryover ceiling. However, if the Air Force had followed DOD's policy, 
our calculations show that its carryover would have actually exceeded 
the ceiling by $216 million. 

Carryover is greatly affected by orders accepted by working capital 
fund activities late in the fiscal year that generally cannot be 
completed by fiscal year end, and in some cases cannot even be started 
prior to the end of the fiscal year. As a result, almost all orders 
accepted late in the fiscal year increase the amount of carryover. We 
analyzed 68 orders accepted in September 2003 and September 2004 by 
certain activity groups for the three military services.[Footnote 5] 
Our analysis identified four key factors contributing to orders 
generally being issued by customers late in the fiscal year and being 
accepted by the working capital fund activities during the last month 
of the fiscal year. These reasons included (1) funds provided to the 
customer late in the fiscal year to finance existing requirements, (2) 
new work requirements identified at year end, (3) problems encountered 
in processing orders, and (4) work scheduled at year end. Further, our 
analysis showed that 39 of the 68 orders--over half of the orders 
reviewed--were not completed at the end of the next fiscal year, 
generating a second year of carryover. For example, on September 29, 
2004, an Army working capital fund activity accepted an order for about 
$2 million for 17,848 illumination candles with parachutes.[Footnote 6] 
Due to the late acceptance of this order, about $2 million was carried 
over into fiscal year 2005. However, because another Army activity 
failed to supply enough component parachutes to meet the production 
schedule, about $1.9 million was carried over into fiscal year 2006. 
DOD Financial Management Regulation 7000.14-R, Volume 11A, identifies a 
number of requirements before a working capital fund activity accepts 
an order. For example, the work is expected to (1) begin without delay 
(usually within 90 days) and (2) be completed within the normal 
production period for the specific work ordered. However, our review of 
68 orders accepted by the working capital fund activities at year end 
determined that work on some of these orders did not begin within 90 
days or was not completed within the normal production period for the 
work being performed. As a result, these orders may not have been the 
most effective use of DOD resources at that time and may not have 
complied with all of the provisions cited in the above regulation. 

We are making eight recommendations to DOD to (1) improve the military 
services' calculations of the allowable amount of carryover and actual 
carryover, (2) improve the reporting of carryover information to 
Congress and DOD decision makers, and (3) ensure that the military 
services follow the DOD regulation concerning the acceptance of orders 
placed with working capital fund activities. DOD concurred with all the 
recommendations and identified corrective actions it is taking. It also 
commented that the inaccuracies we identified in reported carryover did 
not materially distort the evaluation of depot operations or projected 
workload levels. While we do not know how DOD defines materiality, the 
reporting inaccuracies we identified totaled hundreds of millions of 
dollars. DOD's comments are reprinted in appendix II. 

Background: 

A working capital fund relies on sales revenue rather than direct 
appropriations to finance its continuing operations. A working capital 
fund is intended to (1) generate sufficient resources to cover the full 
costs of its operations and (2) operate on a break-even basis over 
time--that is, neither make a gain nor incur a loss. Customers use 
appropriated funds, primarily Operation and Maintenance appropriations, 
to finance orders placed with the working capital fund. DOD estimates 
that in fiscal year 2006, the Defense Working Capital Fund--which 
consists of the Army, Navy, Air Force, Defense-wide, and Defense 
Commissary Agency working capital funds--will have revenue of about 
$105 billion. 

The Defense Working Capital Fund finances the operations of three 
fundamentally different types of support organizations: (1) stock fund 
activities, which provide spare parts and other items to military units 
and other customers; 
(2) industrial activities, which provide depot maintenance, research 
and development, ordnance, and other services to their customers; 
and (3) other service activities, which provide various services such 
as accounting (Defense Finance and Accounting Service) and computer 
services (Defense Information Systems Agency). Because carryover is 
primarily associated with industrial operations, this report discusses 
the results of our review of Defense Working Capital Fund industrial 
operations. 

What Is Carryover and Why Is It Important? 

Carryover is the dollar value of work that has been ordered and funded 
(obligated) by customers but not completed by working capital fund 
activities at the end of the fiscal year. Carryover consists of both 
the unfinished portion of work started but not completed, as well as 
requested work that has not yet commenced. Some carryover is necessary 
at fiscal year end if working capital funds are to operate efficiently 
and effectively. For example, if customers do not receive new 
appropriations at the beginning of the fiscal year, carryover is 
necessary to ensure that the working capital fund activities have 
enough work to ensure a smooth transition between fiscal years. Too 
little carryover could result in some personnel not having work to 
perform at the beginning of the fiscal year. On the other hand, too 
much carryover could result in an activity group receiving funds from 
customers in one fiscal year but not performing the work until well 
into the next fiscal year or subsequent years. By minimizing the amount 
of carryover, DOD can use its resources in the most effective manner 
and minimize the "banking" of funds for work and programs to be 
performed in subsequent years. 

DOD Revised Its Carryover Policy: 

In 1996, DOD established a 3-month carryover standard for all working 
capital fund activities except for the contract portion of the Air 
Force depot maintenance activity group.[Footnote 7] In May 2001, we 
reported[Footnote 8] that DOD did not have a basis for its carryover 
standard and recommended that DOD determine the appropriate carryover 
standard for the depot maintenance, ordnance, and research and 
development activity groups. According to Office of the Under Secretary 
of Defense (Comptroller) officials, DOD provided verbal guidance 
concerning its new carryover policy for working capital fund activities 
in December 2002. Subsequently, DOD included its revised carryover 
policy in its DOD Financial Management Regulation 7000.14-R, Volume 2B, 
Chapter 9, dated June 2004, which eliminated the 3-month standard for 
allowable carryover. Under the new policy, the allowable amount of 
carryover is to be based on the outlay rate[Footnote 9] of the 
customers' appropriations financing the work. This meant that in 
determining allowable carryover, the first year outlay rate would be 
used for new orders received in the current year (first year of the 
work order). According to the DOD regulation, this new metric allows 
for an analytical-based approach that holds working capital fund 
activities to the same standard as general fund execution and allows 
for more meaningful budget execution analysis. 

Further, based on our work on Army depot maintenance operations, we 
recommended in our June 2005 report[Footnote 10] that DOD clarify its 
written guidance for calculating the actual amount of carryover as well 
as the allowable amount of carryover. On June 29, 2005, DOD issued 
clarifying guidance on carryover.[Footnote 11] The guidance specified 
that (1) the actual amount of carryover associated with current and 
prior year orders is required to be the amount reported to Congress and 
within DOD, (2) the allowable amount of carryover is to be calculated 
based on current year customer orders received and the first year 
outlay rate for the appropriations financing those orders for all 
activity groups except shipyards, and (3) shipyards are authorized to 
use 2 years of customer orders in the calculation of the allowable 
amount of carryover and to use the first and second year outlay rates 
for the appropriations financing those orders. 

The Military Services Did Not Follow DOD Policy in Calculating 
Carryover: 

The military services have not consistently implemented DOD's 2002 
revised policy in calculating carryover. Instead, the military services 
used different methodologies for calculating the reported actual and 
the allowable amount of carryover since DOD changed its carryover 
policy in December 2002. Specifically, (1) the military services did 
not consistently calculate the allowable amount of carryover that was 
reported in their fiscal year 2004, 2005, and 2006 budgets because they 
used different tables (both provided by DOD) that contained different 
outlay rates for the same appropriation; (2) the Air Force did not 
follow DOD's regulation on calculating carryover, which affected the 
amount of allowable carryover and actual carryover by tens of millions 
of dollars and whether the actual amount of carryover exceeded the 
allowable amount as reported in the fiscal year 2004, 2005, and 2006 
budgets; and (3) the Army depot maintenance and ordnance activity 
groups' actual carryover was understated in fiscal years 2002 and 2003 
because carryover associated with prior year orders was not included in 
the carryover calculation as required. Further, while the Navy 
generally followed DOD's policy for calculating carryover, the Navy 
consolidated the reporting of carryover information for research and 
development activities. As a result, the Navy budgets no longer provide 
information to show if any of the five research and development 
subactivity groups individually exceed the carryover ceiling. This 
information had been provided in the Navy budgets prior to the change 
in the carryover policy in December 2002. The primary factor for these 
inconsistencies is that DOD's December 2002 guidance was verbal and DOD 
did not issue detailed written procedures for calculating carryover and 
the allowable amount of carryover until June 2004. Afterwards, DOD 
issued clarifying written guidance in June 2005, January 2006, and 
February 2006. As a result, year-end carryover data provided to 
decision makers who review and use these data for budgeting--Office of 
the Under Secretary of Defense (Comptroller) and congressional decision 
makers--are erroneous and not comparable across the three military 
services. 

Military Services Used Different Outlay Rate Tables to Calculate the 
Allowable Amount of Carryover: 

The military services used different outlay rate tables that provided 
different outlay rates for the same appropriation when calculating the 
allowable amount of carryover. The outlay rate tables came from two 
sources--the Office of the Under Secretary of Defense (Comptroller), 
Revolving Funds Directorate,[Footnote 12] and the Financial Summary 
Tables published by Office of the Under Secretary of Defense 
(Comptroller), Directorate for Program and Financial Control. Because 
the outlay rates in these documents sometimes differ, this could affect 
whether an activity group exceeded the carryover ceiling or not. Under 
the new carryover policy, the allowable amount of carryover is to be 
based on the outlay rates of the customers' appropriations financing 
the work. In implementing this policy, it is important for the services 
to use the same outlay rate tables so that their calculations on the 
allowable amount of carryover are consistent. However, when DOD changed 
the carryover policy in December 2002, DOD did not instruct the 
services, in writing, on which outlay rate tables should be used to 
calculate the allowable amount of carryover. Table 1 shows which outlay 
rate source each of the military services used. 

Table 1: Schedule of the Source of Outlay Rates Used in Calculating the 
Allowable Amount of Carryover by Service: 

Service: Army; 
Fiscal year 2004 budget: Office of the Under Secretary of Defense 
(Comptroller) table; 
Fiscal year 2005 budget: Office of the Under Secretary of Defense 
(Comptroller) table; 
Fiscal year 2006 budget: DOD Financial Summary Tables. 

Service: Navy; 
Fiscal year 2004 budget: DOD Financial Summary Tables; 
Fiscal year 2005 budget: DOD Financial Summary Tables; 
Fiscal year 2006 budget: DOD Financial Summary Tables. 

Service: Air Force; 
Fiscal year 2004 budget: Office of the Under Secretary of Defense 
(Comptroller) table; 
Fiscal year 2005 budget: Office of the Under Secretary of Defense 
(Comptroller) table; 
Fiscal year 2006 budget: Office of the Under Secretary of Defense 
(Comptroller) table. 

Source: GAO analysis. 

[End of table] 

Table 2 shows the differences between the outlay rates for selected 
appropriations in the tables provided by the Office of the Under 
Secretary of Defense (Comptroller) and the DOD Financial Summary Tables 
that were used to calculate the allowable amount of carryover, which is 
included in the fiscal year 2005 budget. Some of the differences are 
large while others are small. These outlay rates, along with the amount 
of appropriations financing orders, are used to determine the allowable 
carryover (ceiling). Because the dollar amount of appropriations 
financing orders is sometimes in the hundreds of millions of dollars, 
even a small rate difference could result in significantly more or less 
allowable carryover. For example, the Navy estimated that the naval 
aviation depots would receive $694 million for new Operation and 
Maintenance, Navy orders in fiscal year 2005. Using the outlay rate 
provided in the DOD Financial Summary Tables, the Navy would be allowed 
to carry over about $146 million. In contrast, using the outlay rate 
table provided by the Office of the Under Secretary of Defense 
(Comptroller), the Navy would be allowed to carry over $180 million-- 
about a $34 million difference for just this one appropriation 
financing orders received by the naval aviation depots. 

Table 2: Schedule of Selected Appropriation Outlay Rates Used in 
Calculating the Allowable Amount of Carryover for the Fiscal Year 2005 
Budget (in percent): 

Appropriation: Operation and Maintenance, Army; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 78; 
Outlay rates in the DOD Financial Summary Tables: 68.8. 

Appropriation: Operation and Maintenance, Army Reserve; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 68; 
Outlay rates in the DOD Financial Summary Tables: 71.5. 

Appropriation: Research, Development, Test, and Evaluation, Army; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 53; 
Outlay rates in the DOD Financial Summary Tables: 51.5. 

Appropriation: Missile Procurement, Army; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 13; 
Outlay rates in the DOD Financial Summary Tables: 10.0. 

Appropriation: Operation and Maintenance, Navy; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 74; 
Outlay rates in the DOD Financial Summary Tables: 79.0. 

Appropriation: Operation and Maintenance, Navy Reserve; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 67; 
Outlay rates in the DOD Financial Summary Tables: 70.2. 

Appropriation: Other Procurement, Navy; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 39; 
Outlay rates in the DOD Financial Summary Tables: 36.5. 

Appropriation: Procurement, Marine Corps; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 26; 
Outlay rates in the DOD Financial Summary Tables: 30.0. 

Appropriation: Research, Development, Test, and Evaluation, Navy; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 59; 
Outlay rates in the DOD Financial Summary Tables: 56.0. 

Appropriation: Operation and Maintenance, Air Force; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 70; 
Outlay rates in the DOD Financial Summary Tables: 72.5. 

Appropriation: Operation and Maintenance, Air Force Reserve; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 70; 
Outlay rates in the DOD Financial Summary Tables: 80.8. 

Appropriation: Operation and Maintenance, Air National Guard; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 68; 
Outlay rates in the DOD Financial Summary Tables: 82.0. 

Appropriation: Research, Development, Test, and Evaluation, Air Force; 
Outlay rates in the Office of the Under Secretary of Defense 
(Comptroller) table: 57; 
Outlay rates in the DOD Financial Summary Tables: 61.58. 

Sources: Office of the Under Secretary of Defense (Comptroller) table 
and the DOD Financial Summary Tables. 

[End of table] 

In addition to using different outlay rate tables, there appeared to be 
uncertainties regarding which year's outlay rates to use. For the 
fiscal year 2006 budget, the Army and Navy used the DOD Financial 
Summary Tables to determine the appropriation outlay rates used in 
calculating the allowable amount of carryover. These tables contain 
different appropriation outlay rates for each fiscal year. Military 
service officials stated that DOD had not provided any written guidance 
on whether the services should use the fiscal year 2004 or 2005 outlay 
rates or both when determining the allowable amount of carryover in 
preparing the fiscal year 2006 budget. An excerpt of the outlay rates 
from the DOD Financial Summary Tables dated February 2004 follows. 

Table 3: Schedule of Selected Outlay Rates Used to Calculate Allowable 
Carryover That Was Included in the Fiscal Year 2006 Budget (in 
percent): 

Appropriation: Operation and Maintenance, Army; 
Fiscal year 2004 outlay rates: 52.03; 
Fiscal year 2005 outlay rates: 68.80. 

Appropriation: Operation and Maintenance, Navy; 
Fiscal year 2004 outlay rates: 76.08; 
Fiscal year 2005 outlay rates: 79.00. 

Appropriation: Operation and Maintenance, Air Force; 
Fiscal year 2004 outlay rates: 66.59; 
Fiscal year 2005 outlay rates: 73.50. 

Source: DOD Financial Summary Tables, dated February 2004. 

[End of table] 

The Navy used the fiscal year 2005 outlay rates for calculating the 
allowable amount of carryover for fiscal years 2004, 2005, 2006, and 
2007--the fiscal years that are included in the fiscal year 2006 
budget. The Army used the same document but instead used the fiscal 
year 2004 outlay rates for calculating the allowable carryover for 
fiscal year 2004. The Army used the fiscal year 2005 rates for 
calculating the allowable carryover for fiscal years 2005, 2006, and 
2007. While this might appear to be a small matter because the rates 
are generally the same or almost the same from one fiscal year to the 
next, using the different rates (2004 versus 2005) for calculating the 
allowable carryover for the Army industrial operations activity group 
in fiscal year 2004 results in a different outcome. Based on its 
calculations, the Army reported that its actual carryover was $141 
million below the ceiling for fiscal year 2004. However, using the 
fiscal year 2005 rates (the rates that the Navy used) would show the 
Army exceeded the ceiling by about $275 million--a swing of $416 
million. This difference is attributable to the outlay rate for the 
Operation and Maintenance, Army appropriation being 52.03 percent for 
fiscal year 2004 but 68.8 percent for fiscal year 2005. According to 
Army officials, the outlay rate varied significantly for these 2 fiscal 
years because of the supplemental appropriations received during fiscal 
year 2004. 

Based on our work involving the Army depot maintenance activity group, 
we recommended in our June 2005 report[Footnote 13] that DOD clarify 
its written guidance for calculating the actual amount of carryover as 
well as the allowable amount of carryover. DOD concurred with our 
recommendations and on June 29, 2005, DOD issued clarifying guidance on 
carryover. Among other things, the guidance specified that (1) the 
allowable amount of carryover is to be calculated based on current year 
customer orders received and the first year outlay rates for the 
appropriations financing those orders for all activity groups except 
shipyards and (2) the outlay rates are to be based on historic outlay 
rates in the DOD Financial Summary Tables. DOD's guidance clarifies 
which source document should be used to identify the outlay rates. 
However, it does not address the question of which fiscal year or years 
that are contained in the DOD Financial Summary Tables are to be used. 

During our current review, we informed Office of the Under Secretary of 
Defense (Comptroller) officials that the services did not always comply 
with DOD's policy on calculating the allowable amount of carryover. 
Specifically, the services (1) did not always use the correct outlay 
rate tables in determining the amount of allowable carryover and (2) 
used different outlay rates contained in the DOD Financial Summary 
Tables for calculating the allowable amount of carryover for specific 
fiscal years. In responding to our discussions, DOD took two actions. 
First, DOD included carryover guidance in its January 17, 2006, 
memorandum on the fiscal year 2007 budget justification book material 
for Congress. This guidance specifies that the services are to use the 
fiscal year 2006 DOD Financial Summary Tables to calculate carryover. 
The guidance further specifies that the services must use the rates in 
the DOD Financial Summary Tables unless a waiver is approved in writing 
by the Office of the Under Secretary of Defense (Comptroller), Director 
for Revolving Funds. Second, in February 2006, the Office of the Under 
Secretary of Defense (Comptroller) provided additional guidance to the 
services for the fiscal year 2007 budget specifying that the (1) fiscal 
year 2005 outlay rates in the DOD Financial Summary Tables will be used 
for calculating the allowable amount of carryover for fiscal year 2005 
and (2) fiscal year 2006 outlay rates in the DOD Financial Summary 
Tables will be used for calculating the allowable amount of carryover 
for fiscal years 2006 and 2007. 

Air Force Did Not Calculate Actual Carryover and Allowable Carryover 
Correctly: 

In reviewing the Air Force carryover figures shown in the fiscal year 
2004, 2005, and 2006 budgets to Congress, we found a number of problems 
with how the Air Force calculated the reported actual as well as the 
allowable amount of carryover for the depot maintenance activity group. 
These problems significantly affected the determination of allowable 
carryover and whether the Air Force depot maintenance activity group 
exceeded that ceiling. With one exception, the Air Force took action 
and corrected the problems when preparing the fiscal year 2007 budget. 
These problems are discussed below. 

* The Air Force used the fiscal year 2001 outlay rates provided by the 
Office of the Under Secretary of Defense (Comptroller) to determine the 
allowable amount of carryover in the fiscal year 2004 budget. This was 
the appropriate outlay rate table to use for that budget. However, even 
though the Office of the Under Secretary of Defense (Comptroller) 
provided updated outlay rates for the next fiscal year, the Air Force 
did not use the updated outlay rates when calculating its allowable 
carryover in the fiscal year 2005 budget. Instead, the Air Force 
continued to use the fiscal year 2001 outlay rates. Moreover, the Air 
Force continued to use the fiscal year 2001 outlay rates to calculate 
the allowable carryover in the fiscal year 2006 budget instead of using 
the updated outlay rates published by DOD. 

* The Air Force used all orders received (both prior year and current 
year orders) in calculating the allowable amount of carryover in the 
fiscal year 2004, 2005, and 2006 budgets. For example, in calculating 
the allowable carryover for fiscal year 2004, the Air Force included 
about $1.8 billion of prior year orders in the calculation. DOD 
carryover policy states that only current year orders should be used in 
determining the allowable carryover. The Air Force method of including 
all orders allowed too much carryover. 

* The Air Force excluded orders received from the U.S. Transportation 
Command when calculating the amount of actual carryover in the fiscal 
year 2004, 2005, and 2006 budgets. DOD Financial Management Regulation 
7000.14-R, Volume 2B, Chapter 9, permits excluding some orders financed 
with non-DOD funds, such as orders received from foreign countries, but 
does not permit excluding U.S. Transportation Command orders. For 
example, because the Air Force excluded about $214 million of U.S. 
Transportation Command orders when calculating its actual carryover for 
fiscal year 2004, its carryover was understated. 

* The Air Force's fiscal year 2006 budget to Congress expressed 
carryover in equivalent months of work (this is the old method of 
reporting carryover) rather than in terms of the allowable and actual 
carryover dollar amounts as required by DOD Financial Management 
Regulation 7000.14-R, Volume 2B, Chapter 9. 

The problems cited above had a significant impact on the amount of 
allowable carryover and actual carryover and whether the actual 
carryover exceeded the allowable amount, as shown in table 4. 

Table 4: Air Force's Reported Actual Carryover and GAO's Calculation of 
the Amount of Actual Carryover with Respect to the Ceiling: 

Fiscal year and Air Force activity group: Fiscal year 2002 depot 
maintenance; 
Air Force reported actual carryover: $87 million under ceiling; 
GAO calculated actual carryover[A]: $216 million over ceiling; 
Difference: $303 million. 

Fiscal year and Air Force activity group: Fiscal year 2003 depot 
maintenance; 
Air Force reported actual carryover: $396 million under ceiling; 
GAO calculated actual carryover[A]: $428 million under ceiling; 
Difference: ($32 million). 

Fiscal year and Air Force activity group: Fiscal year 2004 depot 
maintenance; 
Air Force reported actual carryover: $722 million under ceiling; 
GAO calculated actual carryover[A]: $598 million under ceiling; 
Difference: $124 million. 

Source: GAO analysis based on Air Force carryover data. 

[A] We calculated the allowable amount of carryover and actual amount 
of carryover in accordance with DOD guidance in its regulation to 
determine the amount of actual carryover in relationship to the 
ceiling. 

[End of table] 

In discussing the carryover calculations with Air Force officials, they 
agreed that they were not calculating either the allowable amount of 
carryover or the actual amount of carryover correctly in the fiscal 
year 2004, 2005, and 2006 budgets. They informed us that in preparing 
the carryover information contained in the fiscal year 2004 budget, DOD 
budget analysts who review the budget information, including the 
carryover information, did not raise questions with the Air Force 
carryover calculations. Accordingly, they continued to use the same 
methodology for calculating the allowable carryover and actual 
carryover that was included in the fiscal year 2005 and 2006 budgets to 
Congress. Based on our discussions with them, these officials informed 
us that the Air Force would be developing the carryover figures that 
will be used in the fiscal year 2007 budget in accordance with DOD 
policy. 

In reviewing the Air Force fiscal year 2005 carryover calculations 
included in the fiscal year 2007 budget, we determined that the Air 
Force was complying with DOD's carryover policy with one exception. For 
orders financed with the Air Force working capital fund supply account, 
the Air Force used a 61 percent outlay rate to calculate its allowable 
carryover instead of the 73.5 percent outlay rate for the Air Force 
operation and maintenance appropriation contained in the DOD Financial 
Summary Tables and required by the Office of the Under Secretary of 
Defense (Comptroller), Revolving Fund Directorate. Using the 61 percent 
figure, the Air Force reported that its actual carryover for fiscal 
year 2005 was about $193 million under the carryover ceiling. However, 
if the Air Force used the 73.5 percent outlay rate, our analysis show 
that the fiscal year 2005 actual carryover would have exceeded the 
carryover ceiling by about $148 million. In discussing the outlay rate 
difference with the Air Force, officials stated that they used the 61 
percent figure because the rate was more consistent with the actual 
outlay rate of the Air Force working capital fund supply account. 
However, the Air Force could not provide us with documentation 
supporting how they arrived at the 61 percent figure. On February 7, 
2006, the Air Force requested from the Office of the Under Secretary of 
Defense (Comptroller) that it be allowed to use the 61 percent figure 
in developing the carryover ceilings contained in the fiscal year 2007 
budget. The Office of the Under Secretary of Defense (Comptroller) 
approved the Air Force's request on March 6, 2006. 

Army's Reported Actual Carryover Was Understated in Fiscal Years 2002 
and 2003 because Prior Year Orders Were Not Included: 

In June 2005, we reported[Footnote 14] that the Army understated the 
reported actual carryover for the depot maintenance activity group for 
fiscal years 2002 and 2003 because it interpreted DOD's 2002 carryover 
guidance as requiring only the inclusion of customer orders received in 
the current year when calculating actual carryover. During this review, 
we found this same problem affected the reported actual carryover for 
the ordnance activity group. Thus, the Army did not include customer 
orders received in prior years and the carryover related to those 
orders. The Army corrected this problem and included all carryover when 
it prepared its fiscal year 2006 budget. Table 5 provides information 
on the actual amount of carryover reported to Congress for fiscal years 
2002 and 2003 and the amount of carryover not included. 

Table 5: Dollar Amount of Reported Actual Carryover that Exceeded the 
Ceiling and the Amount of Carryover Not Included (dollars in millions): 

Fiscal year and Army activity group: Fiscal year 2002 depot 
maintenance; 
Reported carryover that exceeded ceiling: $36. 1; 
Carryover not included: $94.4; 
Total carryover exceeding ceiling: $130.5. 

Fiscal year and Army activity group: Fiscal year 2003 depot 
maintenance; 
Reported carryover that exceeded ceiling: 127.1; 
Carryover not included: 195.1; 
Total carryover exceeding ceiling: 322.2. 

Fiscal year and Army activity group: Fiscal year 2002 ordnance; 
Reported carryover that exceeded ceiling: 3.9; 
Carryover not included: 98.0; 
Total carryover exceeding ceiling: 101.9. 

Fiscal year and Army activity group: Fiscal year 2003 ordnance; 
Reported carryover that exceeded ceiling: 96.6; 
Carryover not included: 138.9; 
Total carryover exceeding ceiling: 235.5. 

Source: GAO analysis of Army carryover data. 

[End of table] 

Army officials at headquarters acknowledged that the reported actual 
carryover did not include carryover related to prior year orders. 
Although DOD changed its carryover policy in December 2002, it did not 
issue detailed written procedures for calculating actual carryover 
until June 2004. Army headquarters officials stated that prior to the 
issuance of the written guidance in June 2004, the new carryover 
calculation was based on verbal instructions that the Army received 
from the Office of the Under Secretary of Defense (Comptroller). The 
Army said they interpreted the new guidance to include only actual 
carryover on orders received in the current year and instructed the 
Army Materiel Command to calculate carryover accordingly. When DOD 
issued the revised DOD regulation in June 2004, Army officials said 
they realized that they were not calculating reported actual carryover 
correctly and changed their methodology in developing the fiscal year 
2006 budget so that the actual carryover calculation would include 
prior year orders and be in accordance with DOD's written guidance. 

Navy Generally Followed DOD's Carryover Policy but Better Disclosure Is 
Needed for Reporting on Research and Development Activity Group's 
Carryover: 

In analyzing the Navy's actual carryover figures for the naval 
shipyards, aviation depots, and research and development activity 
groups shown in the fiscal year 2004, 2005, 2006, and 2007 budgets to 
Congress, we found that the Navy generally followed DOD's policy on 
calculating the actual amount of carryover as well as the allowable 
amount of carryover. Our analysis of the Navy budgets submitted to 
Congress shows that the naval aviation depots have consistently 
exceeded the carryover ceilings as shown in table 6. According to Navy 
budget documents and officials, the reasons why the actual reported 
carryover exceeded the ceiling for the aviation depots were (1) the 
lack of material to repair the components being fixed; (2) the 
increased deterioration of components, leading to longer repair cycles; 
and (3) the large dollar amount of orders financed with supplemental 
appropriations for fiscal year 2003. 

Table 6: Navy's Reported Actual Carryover in Relationship to the 
Ceiling by Activity Group: 

Activity group: Aviation depots; 
Fiscal year 2002: $113 million over ceiling; 
Fiscal year 2003: $205 million over ceiling; 
Fiscal year 2004: $5 million; 
over ceiling; 
Fiscal year 2005: $0.2 million; 
over ceiling. 

Activity group: Shipyards; 
Fiscal year 2002: $76 million under ceiling; 
Fiscal year 2003: $195 million over ceiling; 
Fiscal year 2004: $210 million under ceiling; 
Fiscal year 2005: $226 million under ceiling. 

Activity group: Research and development; 
Fiscal year 2002: $442 million under ceiling; 
Fiscal year 2003: $435 million under ceiling; 
Fiscal year 2004: $439 million under ceiling; 
Fiscal year 2005: $310 million under ceiling. 

Source: Navy Working Capital Fund budgets. 

Note: We highlighted the years when the activity group exceeded the 
carryover ceiling. 

[End of table] 

While the budgets show that the Navy research and development activity 
group did not exceed the ceiling for any of the 4 years, the budgets no 
longer provide information that shows if any of the five subactivity 
groups individually exceeded the carryover ceiling, as the Navy budgets 
did prior to the change in the carryover policy in December 2002. Prior 
to the Office of the Under Secretary of Defense (Comptroller) changing 
its carryover policy in December 2002, the Navy Working Capital Fund 
budget provided carryover information, such as the dollar amount of 
carryover and the number of months of carryover for each of the 
subactivity groups. An analysis of the budget documents would show if 
any of the subactivity groups exceeded the 3-month carryover standard. 
After DOD changed the carryover policy in December 2002, the Navy 
changed the level of reporting carryover information to be at the 
aggregate level and no longer provided carryover information at the 
subactivity group level. Our analysis of Navy reports showed that the 
Naval Air Warfare Center exceeded the ceiling for fiscal years 2003, 
2004, and 2005, and the Naval Surface Warfare Center exceeded the 
ceiling for fiscal year 2002, as shown in table 7. 

Table 7: Navy's Reported Actual Carryover in Relationship to the 
Ceiling for the Research and Development Subactivity Groups: 

Subactivity group: Naval Air Warfare Center; 
Fiscal year 2002: $201 million under ceiling; 
Fiscal year 2003: $19 million; 
over ceiling; 
Fiscal year 2004: $57 million; 
over ceiling; 
Fiscal year 2005: $52 million; 
over ceiling. 

Subactivity group: Naval Surface Warfare Center; 
Fiscal year 2002: $95 million; 
over ceiling; 
Fiscal year 2003: $211 million under ceiling; 
Fiscal year 2004: $247 million under ceiling; 
Fiscal year 2005: $166 million under ceiling. 

Subactivity group: Naval Undersea Warfare Center; 
Fiscal year 2002: $78 million under ceiling; 
Fiscal year 2003: $87 million under ceiling; 
Fiscal year 2004: $80 million under ceiling; 
Fiscal year 2005: $58 million under ceiling. 

Subactivity group: Space and Naval Warfare Center; 
Fiscal year 2002: $148 million under ceiling; 
Fiscal year 2003: $76 million under ceiling; 
Fiscal year 2004: $81 million under ceiling; 
Fiscal year 2005: $51 million under ceiling. 

Subactivity group: Naval Research Laboratory; 
Fiscal year 2002: $79 million under ceiling; 
Fiscal year 2003: $81 million under ceiling; 
Fiscal year 2004: $88 million under ceiling; 
Fiscal year 2005: $86 million under ceiling. 

Subactivity group: Total; 
Fiscal year 2002: $411 million under ceiling[A]; 
Fiscal year 2003: $436 million under ceiling[B]; 
Fiscal year 2004: $439 million under ceiling; 
Fiscal year 2005: $309 million under ceiling[B]. 

Source: Navy reports on the research and development subactivity 
groups. 

Note: We highlighted the years when the subactivity group exceeded the 
carryover ceiling. 

[A] There is a $31 million difference between the amount shown here and 
the amount shown in table 6 for the research and development activity 
group. The Navy's report to Congress and its internal report on the 
subactivity groups contained different amounts. 

[B] Due to rounding, there is a $1 million difference between the 
amount shown here and the amount shown on table 6 for the research and 
development activity group. 

[End of table] 

According to the Navy, there are two reasons why carryover should be 
reported at the activity group level and not at the subactivity group 
level. First, the Office of the Under Secretary of Defense 
(Comptroller) required the research and development activities to use a 
higher outlay rate for orders financed with procurement appropriations 
than the official published procurement outlay rates. Using a higher 
procurement outlay rate for calculating the carryover ceiling lowers 
the amount of allowable carryover. Because of this higher rate, a Navy 
official stated that the carryover should be reported at the aggregate 
level since subactivity groups reporting under the ceiling will offset 
those subactivity groups reporting over the ceiling. Second, the new 
methodology did not allow the exclusion of intrafund orders from the 
carryover calculation. These are orders placed by one research and 
development activity with another research and development activity. 
Since intrafund orders were no longer allowed to be excluded from the 
carryover calculation, this resulted in the double counting of actual 
carryover associated with these intrafund orders. Because the above two 
reasons reduce the carryover ceiling and increase the actual amount of 
carryover, the Navy reports the carryover information at the activity 
group level. 

However, we believe that the carryover associated with the research and 
development activity group should be reported at the subactivity group 
level for several reasons. First, according to the fiscal year 2007 
budget, the research and development activity group is the largest Navy 
activity group--it received about $10 billion of new orders and carried 
over about $3.5 billion for fiscal year 2005. By comparison, for fiscal 
year 2005, the Navy shipyards received about $1.8 billion of new orders 
and carried over about $636 million, and the aviation depots also 
received about $1.8 billion and carried over about $470 million. 
Further, the dollar amount of new orders received by three research and 
development subactivity groups (Naval Surface Warfare Center--$3.4 
billion, Naval Air Warfare Center--$2.7 billion, and Space and Naval 
Warfare Systems Centers--$2.2 billion) exceeded the amount of new 
orders received by the shipyards and aviation depots for fiscal year 
2005. Because of the dollar magnitude of research and development 
subactivity groups, we believe carryover reporting at the subactivity 
group level is needed for Congress and DOD to maintain oversight. 

Second, concerning the Navy's comment on using a higher outlay rate for 
calculating the carryover ceiling, we agree with the Office of the 
Under Secretary of Defense (Comptroller) that the Navy should use a 
higher rate. We also believe that the Navy should report carryover 
information at the subactivity group level from a disclosure 
standpoint. Otherwise, subactivity groups reporting under the ceiling 
will offset those subactivity groups reporting over the ceiling and 
this information would not be available in the budgets to Congress. In 
the December 2002 management initiative decision, the Office of the 
Under Secretary of Defense (Comptroller) stated that research and 
development activities could achieve better results than the 
established outlay rates for orders financed with procurement 
appropriations because of the type of work performed by these 
activities. DOD further stated that 45 percent of the fiscal year 2002 
carryover was linked to contractual efforts and 55 percent supported in-
house requirements. DOD concluded that carryover linked to contractual 
obligations would disburse at the procurement appropriations rate. 
However, the amount supporting the in-house requirements would disburse 
at a higher rate because such requirements tend to be funded on an 
annualized basis. The Office of the Under Secretary of Defense 
(Comptroller) requested that the Navy examine the nature and scope of 
the procurement-funded work and report its recommendations by February 
15, 2003, to the Comptroller. At the time DOD issued the management 
initiative decision in December 2002, the Navy reported carryover 
information to Congress at the subactivity group level. The Navy 
determined, based on work performed by one Warfare Center, that the 
outlay rate for Navy procurement appropriations should be 40 percent, 
which is higher than the actual outlay rate for these appropriations. 
However, the December 2002 management initiative decision did not 
discuss the Navy changing its level of reporting carryover information 
from the subactivity group level to the aggregate level. 

Third, concerning the Navy's comments on intrafund orders, the Navy is 
correct in that the amount of actual carryover will be double counted. 
However, the effect of this is negated since the amount of allowable 
carryover is also double counted since both of these activities will 
include the intrafund order as a new order and include the new order in 
their calculations for determining the allowable amount of carryover. 
Furthermore, in May 2001 we reported[Footnote 15] that the Navy was not 
following DOD's guidance on calculating carryover on intrafund orders. 
Specifically, Navy working capital fund activities reduced carryover 
for orders received from other working capital fund activities. 
However, Navy working capital fund activities categorized orders they 
sent to other working capital fund activities as contractual 
obligations and used these obligations to reduce reported year-end 
carryover. As a result, not only did the Navy eliminate the double 
counting of such orders, it eliminated all these orders from its 
calculations, thus understating the equivalent number of months of 
carryover work. 

Carryover Increased Due to Military Services Placing Orders Late in the 
Fiscal Year: 

Carryover is greatly affected by orders accepted late in the fiscal 
year that generally cannot be completed, and in some cases cannot even 
be started, prior to the end of the fiscal year. As a result, almost 
all orders accepted late in the fiscal year increase the amount of 
carryover. We analyzed 68 orders accepted in September 2003 and 
September 2004 by certain activity groups for the three military 
services. Our analysis identified four key factors contributing to 
orders generally being issued by customers late in the fiscal year and 
being accepted by the working capital fund activities during the last 
month of the fiscal year. These reasons included (1) funds provided to 
customers late in the fiscal year to finance existing requirements, (2) 
new work requirements identified at year end, (3) problems encountered 
in processing orders, and (4) work scheduled at year end. Further, our 
analysis showed that 39 of the 68 orders--over half of the orders 
reviewed--were not complete at the end of the next fiscal year, 
generating a second year of carryover. In addition to increasing 
carryover amounts, orders accepted by working capital fund activities 
late in the fiscal year, in which these activities do not perform the 
work until well into the next fiscal year or even subsequent years, may 
not (1) be the most effective use of DOD resources at that time and (2) 
have complied with all of the order acceptance provisions cited in the 
DOD Financial Management Regulation. As noted in our scope and 
methodology (app. I), the scope of our work for this review did not 
include determining whether there was a bona fide need for the work 
being ordered by customers. 

Reasons Customer Orders Are Placed Late in the Fiscal Year: 

As shown in figure 1, our review of 68 fiscal year-end orders for 2003 
and 2004 identified four key factors contributing to orders generally 
being issued by customers late in the fiscal year and being accepted by 
the working capital fund activities during the last month of the fiscal 
year. 

Figure 1: Factors Contributing to Year-end Orders for 2003 and 2004: 

[See PDF for image] 

[End of figure] 

As depicted in figure 1, the factor contributing most frequently to 
orders being accepted by working capital fund activities late in the 
fiscal year--29 of the 68 orders (43 percent) we reviewed--is the late 
receipt of funds from customers to finance existing requirements. DOD 
customers stated that it is common for the military services to provide 
funds to them late in the fiscal year after the military services 
review their programs to identify funds that will not be obligated by 
year end. When these funds are identified, the military services 
realign the funds to programs that can use them. These funds are then 
used to finance orders placed with working capital fund activities at 
year end. Further, in fiscal years 2003 and 2004, the military services 
received supplemental appropriations from Congress to fund ongoing 
military operations. Some of these funds were distributed to DOD 
customers late in the fiscal year to finance repairs on DOD assets. The 
following examples illustrate situations when funds were provided to 
customers late in the fiscal year. 

* On September 4, 2003, the Ogden Air Logistics Center accepted an 
order from the Air Force Ground Theater Air Control System program 
office totaling about $4.8 million financed with operation and 
maintenance funds that would have expired on September 30, 2003. This 
order provided for Ground Theater Air Control System hardware and 
software upgrades. According to program office officials, the Air 
Combat Command traditionally funds about 60 to 70 percent of its total 
software development requirements annually. However in August 2003, the 
Command provided the program office with funding to cover 100 percent 
of its fiscal year 2003 software requirements. Thus, the program office 
applied the funds to its next highest priority workload and issued the 
$4.8 million order. 

* On September 27 and 29, 2003, the Space and Naval Warfare Systems 
Center in San Diego accepted two orders from the U.S. Pacific Fleet 
totaling approximately $4.15 million financed with operation and 
maintenance funds that would have expired on September 30, 2003. These 
two orders were to provide the technical and engineering support for 
the relocation of a Sea-Based Battle Laboratory from the USS Coronado 
to a new ashore headquarters activity. The Pacific Fleet identified 
this requirement in early fiscal year 2003; 
however, funds were not made available until the end of the fiscal 
year, when additional funds were identified from other programs. 

* On September 26, 2003, the Red River Army Depot accepted an order 
from the Army Tank-automotive and Armaments Command totaling $17.9 
million financed with operation and maintenance funds that would have 
expired on September 30, 2003. The order was for the repair and upgrade 
of 41 Bradley Fighting Vehicles needed to support the war effort in 
Iraq and Afghanistan. These vehicles were to be prepositioned in the 
theater of operation. According to a Tank-automotive and Armaments 
Command official, the order was issued late in fiscal year 2003 because 
the Army Materiel Command did not provide them with funding until 
September 2003. An Army Materiel Command official noted that the effort 
was funded by a supplemental appropriation used to support war 
operations. 

The second most significant factor that contributed to the year-end 
orders we reviewed--17 of the 68 orders (25 percent)--was the 
identification of new requirements at year end. Some examples of DOD 
customers identifying requirements at year end include (1) a Navy 
aviation depot in performing scheduled maintenance identified damage to 
aircraft beyond what was originally included in its statement of work, 
(2) an Army depot identified inspection requirements at year end to 
keep ammunition storage inspections current and to satisfy requisitions 
to support the soldiers in the field, (3) Navy aircraft repair 
requirements were moved from fiscal year 2004 to fiscal year 2003 to 
meet an earlier deployment schedule, (4) the Army identified new 
requirements at year end for repair of Army assets necessary to support 
ongoing military operations, and (5) the Navy identified the need for 
additional capabilities for several aircraft and also needed to perform 
emergency repairs on one of its aircraft carriers. Two examples of some 
of the reasons for new requirements being identified at year end 
follow. 

* On September 27 and 30, 2004, the Space and Naval Warfare Systems 
Center in Charleston accepted an order and an amendment from the 
Commander, Naval Air Force, U.S. Atlantic Fleet, totaling $425,000 
financed with operation and maintenance funds that would have expired 
on September 30, 2004. A fleet official stated that it had received a 
casualty report from the USS Harry S. Truman on September 24, 2004, 
indicating repairs needed to be made to the ship's announcing system. 
An activity official stated that the order was accepted regardless of 
carryover concerns due to the urgency associated with a casualty 
report. Additionally, a fleet official noted that the time to complete 
the needed repairs was limited due to the ship's impending deployment. 

* On September 8, 2004, the Army Rock Island Arsenal accepted an order 
from the Tank-automotive and Armaments Command totaling about $1.4 
million financed with operation and maintenance funds that would have 
expired on September 30, 2004. The order was for the reconditioning of 
chemical biological protective shelters. The shelters mount on high- 
mobility, multipurpose wheeled vehicles and provide an environmentally 
controlled work area that filters out nuclear, biological, and chemical 
agents. According to a logistics manager, in the fourth quarter of 
fiscal year 2004 the Tank-automotive and Armaments Command identified 
11 shelters that needed reconditioning and issued an order to the Army 
Rock Island Arsenal for the work. 

Further, we found 12 of the 68 orders (18 percent) were accepted by 
working capital fund activities in the last month of the fiscal year 
due to problems encountered with processing the orders. These problems 
included (1) delays in processing forms through different activities 
and multiple nonintegrated systems, (2) data input errors that were not 
corrected until September, and (3) difficulties encountered in 
processing documents and related funding from non-DOD customers to 
working capital fund activities. Two examples follow. 

* In July 2003, the Air National Guard Headquarters prepared 
documentation that directed the Pennsylvania Air National Guard to send 
its ground mobile navigation radar to the Tobyhanna Army Depot to 
repair damage sustained by the radar system from multiple lightening 
strikes and power surges and to overhaul the system. The order was not 
accepted by the depot until September 26, 2003, about 3 months later. 
The delay in acceptance of the order was due to (1) the normal time 
required to process forms through six different activities using 
nonintegrated systems, (2) paperwork processing delays due to missing 
information, (3) confusion on how to process the workload in a new Army 
system implemented in July 2003, and (4) errors made in entering data 
into the Army system. 

* Due to delays in correcting input errors on an order, the Warner 
Robins Air Logistics Center did not accept a $2.8 million order from 
the F-15 program office, financed with operation and maintenance funds, 
until September 17, 2004. The order was for the maintenance of an Air 
National Guard F-15 aircraft. When an order was generated by the F-15 
program office on June 10, 2004, the office entered the program control 
and serial numbers into the project order system incorrectly. On 
September 17, 2004, the Center established a new order with the 
corrected information. 

Finally, we found 10 of the 68 orders (15 percent) were accepted by 
working capital fund activities in the last month of the fiscal year 
when DOD assets were scheduled for maintenance. According to Air Force 
and Navy officials, planning for the repair of major assets such as 
aircraft, ships, and engines begins several years prior to the date on 
which repairs will actually be performed. The assets are scheduled for 
maintenance based on routine cycles, such as numbers of years since the 
last depot maintenance was performed. The services include funding 
requirements for these repairs in their annual budget submissions. 
Generally, in the quarter the assets are scheduled for maintenance, the 
major commands distribute the repair funds to their customers and the 
customers, in turn, issue orders to fund the repair. Two examples 
follow. 

* On September 16, 2003, the Oklahoma City Air Logistics Center 
accepted an order from the Air National Guard totaling about $7.2 
million financed with operation and maintenance funds set to expire on 
September 30, 2003. The order was for the scheduled maintenance of the 
39th Air National Guard KC-135E aircraft in fiscal year 2003. During 
fiscal year 2001, the Air National Guard determined that 39 KC-135E 
aircraft required maintenance in fiscal year 2003 in accordance with 
their 5-year maintenance schedule. In fiscal year 2001, the Air 
National Guard began planning and budgeting for the maintenance of 
these aircraft. The 39TH aircraft arrived at the air logistics center 
in mid-September 2003 as planned. The Air National Guard issued the 
order in September 2003 once it determined that the work on this 
aircraft would be performed at the air logistics center instead of 
contracting out the workload. 

* On September 29, 2003, the Naval Air Warfare Center-Aircraft Division 
accepted an order from the U.S. Atlantic Fleet in the amount of 
approximately $2.4 million financed with operation and maintenance 
funds set to expire the next day. The order required repairs and/or 
replacement of deteriorated and worn components to support flight deck 
operations on the USS Harry S. Truman. This work was scheduled for 
overhaul in fiscal year 2003. A fleet official stated that they did not 
perform an inspection of the ship to determine specific repair 
requirements until late in the fiscal year. 

Impact of Late Orders on Carryover: 

Our further review of the 68 fiscal year-end orders for 2003 and 2004 
disclosed that 39 of these orders--over half--were not completed within 
the next fiscal year, which resulted in carryover of 2 or more years. 
As we reported in June 2005,[Footnote 16] two reasons generally caused 
work to carryover into a second fiscal year. First, the depots received 
orders late in the fiscal year and were unable to complete the effort 
by year end, as discussed in the previous section; 
and second, some depots were unable to obtain the materials/parts 
needed in a timely manner to complete the work. In addition to these 
reasons, we found that some working capital fund activities were unable 
to complete work within 1 year because of delays caused by backlogged 
or other higher priority work and broken or unsafe repair equipment. 
These factors have resulted in orders being carried over for more than 
1 fiscal year and increased the carryover balances for subsequent 
years. As a result, these orders may not have been the most effective 
use of DOD resources at that time and may not have complied with all of 
the order acceptance provisions cited in the DOD Financial Management 
Regulation. 

The DOD Financial Management Regulation 7000.14-R, Volume 11A, Chapters 
2 and 3, prescribes regulations governing the use of orders placed with 
working capital fund activities. When a working capital fund activity 
accepts an order, the customer's funds financing the order are 
obligated. The DOD regulation identifies a number of requirements 
before a working capital fund activity accepts an order. For example, 
work to be performed under the order shall be expected to begin within 
a reasonable time after the order is accepted by the performing DOD 
activity. As a minimum requirement, it should be documented that when 
an order is accepted, the work is expected to (1) begin without delay 
(usually within 90 days) and (2) be completed within the normal 
production period for the specific work ordered. Further, the 
regulation states that no project order shall be issued if commencement 
of work is contingent upon the occurrence of a future event. Our review 
of 68 orders accepted by the working capital fund activities at year 
end determined that work on some of these orders did not begin within 
90 days or was not completed within the normal production period for 
the work being performed. The following examples illustrate orders that 
were accepted by working capital fund activities at year end and (1) 
may not be the most effective use of DOD resources at that time and (2) 
may not have complied with all of the provisions contained in this 
regulation. 

* On September 25, 2003, the Crane Army Ammunition Activity accepted an 
order totaling $1,885,000 that was financed with operation and 
maintenance funds for X-ray work to determine the safety and usability 
of 200,000 rounds of 40-millimeter high-explosive ammunition. However, 
due to problems with the X-ray inspection machine, the activity had to 
suspend work on the ammunition until the inspection machine was 
qualified as safe to use. According to the program engineer, work was 
delayed because imaging panels in the inspection machine were burning 
up and had to be replaced. Compounding this problem was a delay in the 
approval process for the safe operation of the machine. As a result, 
very little work was completed on this order over 3 fiscal years. 
Specifically, $1,885,000 carried over into fiscal year 2004 and 
$1,881,105 carried over into fiscal year 2005 and again into fiscal 
year 2006. 

* On September 14, 2004, the Ogden Air Logistics Center accepted an 
order totaling $3.4 million that was financed with operation and 
maintenance funds to build an F-16 radar test station on behalf of the 
Air National Guard. According to a center official, even though the 
depot did not have the material to build the station, it accepted the 
order late in the fiscal year. Thus, the entire $3.4 million order 
carried over into fiscal year 2005. The center official noted that 
during fiscal year 2005, the activity group ordered the material and 
began work assembling the station, but as of the end of fiscal year 
2005 all the material had not yet been received from contractors. 
Therefore, $277,898 carried over into fiscal year 2006. 

* On September 29, 2003, the Sierra Army Depot accepted an order 
totaling $11,680,175 that was financed with operation and maintenance 
funds for the receipt, inspection, storage, and re-containerizing of 
203 containers of gas and oil pipeline equipment returned from Iraq and 
Afghanistan. Because this order was received so late in the fiscal 
year, the entire amount of the order--$11,680,175--was carried over 
into fiscal year 2004. According to the mission director, this order 
was delayed because (1) some containers were not returned from the war 
zones in a timely manner so the depot could refurbish them and (2) the 
depot received other, higher priority workloads, such as armored 
plating on wheeled vehicles. As a result, over half of the dollar 
amount of the order--$6,847,529--carried over into fiscal year 2005 and 
$2,643,093 carried over into fiscal year 2006. 

* On September 16, 2003, the Space and Naval Warfare Systems Center in 
Charleston accepted an order for $232,200 that was financed with 
operation and maintenance funds. The U.S. Naval Forces Central Command 
identified and funded this emergent requirement in August 2003 in 
support of the Combat Terrorism Initiative during the Iraq war. More 
specifically, this order was for technical and installation services 
for a new communications link between Bahrain and Dubai. An activity 
official stated that minimal engineering services were initiated prior 
to the end of fiscal year 2003, so almost the entire dollar amount of 
the order--$230,000--carried over into fiscal year 2004. This official 
also stated the center encountered delays when the government of Dubai 
would not allow the leased line into the country from Bahrain. This 
resulted in $207,000 being carried over into fiscal year 2005, and 
$12,000 being carried over into fiscal year 2006. 

* On September 11, 2003, the Oklahoma City Air Logistics Center 
accepted an order totaling about $1.8 million that was financed with 
operation and maintenance funds for the analytical condition 
inspection[Footnote 17] of a F110-129 engine. According to an Oklahoma 
City Air Logistics Center official, the center brought the engine in 
for repair in September 2003 to ensure that the funds were obligated by 
fiscal year end. Otherwise, the funds would expire and be unavailable 
for new workload. However, the center did not begin work on the engine 
until March 2004 due to a backlog of engines waiting for repair. Since 
the engine was accepted for repair in the last month of the fiscal 
year, almost the entire $1.8 million was carried over into fiscal year 
2004. Further, because of production delays and a failed serviceability 
test, the center carried funds into fiscal year 2005 and again into 
fiscal year 2006--more than 2 years after the order was accepted. 

Conclusions: 

The military services have provided erroneous carryover information to 
Congress and DOD decision makers because the services have not 
consistently applied DOD's revised policy on carryover. Reliable and 
consistent carryover information is essential for Congress and DOD 
decision makers to perform their oversight, including reviewing DOD's 
budget to determine if an activity group has too much or not enough 
carryover. To provide greater assurance that the military services 
provide reliable and consistent carryover information, the military 
services must be held accountable for the accuracy of reported 
carryover information and ensure the timely identification of unneeded 
customer funds. While DOD's guidance on calculating carryover was not 
adequate when it revised its carryover policy in 2002, DOD began 
improving the guidance in 2004. However, DOD has not updated the 
Financial Management Regulation so that it includes comprehensive 
carryover guidance to the military services, and the services have not 
always complied with the carryover guidance in the past. Until this is 
done, Congress and DOD decision makers will be forced to make key 
budget decisions, such as whether to enhance or reduce customer 
budgets, based on unreliable information. In addition, DOD working 
capital fund activities' acceptance of year-end orders (1) increases 
the amount of carryover and (2) in some cases, contributes to DOD 
working capital fund activities' actual carryover amounts exceeding 
their allowable amounts by tens of millions of dollars. Excessive 
amounts of year-end carryover tie up customer funds that could be put 
to better near-term use and are subject to reductions by DOD and the 
congressional defense committees during the budget review process. 

Recommendations for Executive Action: 

In order to improve the business operations of the Department of 
Defense Working Capital Fund, we are making the following eight 
recommendations to the Secretary of Defense. 

We recommend that the Secretary of Defense direct the Under Secretary 
of Defense (Comptroller) to take the following actions: 

* Issue written instructions in its DOD Financial Management Regulation 
7000.14-R specifying the outlay rates to be used by DOD working capital 
fund activities for calculating the allowable amount of carryover and 
continue to issue carryover guidance to the military services in its 
annual guidance on preparing budget justification book material for 
Congress. 

* Review the carryover information provided in the military services' 
annual budget submissions to help ensure the services are calculating 
their allowable and actual carryover amounts in accordance with DOD 
policy. 

* Reiterate the requirements in the DOD Financial Management Regulation 
7000.14-R to help ensure that working capital fund activities are in 
compliance with the regulations governing acceptance of orders, 
particularly at fiscal year end. 

We recommend that the Secretary of Defense direct the Secretary of the 
Air Force to take the following actions: 

* Use the current outlay rate tables that are included in the DOD 
Financial Summary Tables when calculating the allowable carryover 
amounts for the Air Force depot maintenance activity group, consistent 
with DOD policy. 

* Use only current year orders for calculating the allowable carryover 
amounts for the Air Force depot maintenance activity group, as required 
by DOD carryover policy. 

* Include all orders when calculating the amount of actual carryover 
for the Air Force depot maintenance activity group, except those orders 
that are specifically excluded in DOD Financial Management Regulation 
7000.14-R or are excluded by the Under Secretary of Defense 
(Comptroller) in writing. 

* Include the allowable and actual dollar amounts of carryover for the 
Air Force depot maintenance activity group in the Air Force's annual 
budget to Congress, as required by DOD Financial Management Regulation 
7000.14-R. 

We recommend that the Secretary of Defense direct the Secretary of the 
Navy to include the allowable and actual amounts of carryover for each 
of the five Navy research and development subactivity groups in the 
Navy's annual budget to Congress. 

Agency Comments and Our Evaluation: 

DOD provided written comments on a draft of this report. DOD concurred 
with all eight of our recommendations. Regarding its plans for 
implementing the eight recommendations, DOD stated that it is in the 
process of updating its financial management regulations and issuing 
budget guidance for the fiscal year 2008/2009 President's Budget, which 
will address calculating the allowable amount of carryover. Further, 
DOD stated that it made a more rigorous review of the services' 
carryover information in the fiscal year 2007 President's Budget 
submission and that it will continue reviewing the services' budgets to 
ensure that the services are calculating allowable and actual amounts 
of carryover in accordance with DOD policy. DOD also stated that it 
will direct the Navy to report carryover information for each of the 
five Navy research and development subactivity groups in the Navy's 
annual budget to Congress. Finally, as preparation for the close out of 
fiscal year 2006, DOD will reiterate the guidance in its Financial 
Management Regulation governing the working capital fund acceptance of 
orders which obligates customers' funds, particularly at year end. 

DOD also commented that the inaccuracies we identified in reported 
carryover did not materially distort the evaluation of depot operations 
or projected workload levels. While we do not know how DOD defines 
materiality, we believe that the reporting inaccuracies affect the 
evaluation of depot operations from a workload standpoint because the 
inaccuracies understated the carryover balances for some activity 
groups by hundreds of millions of dollars. For example, as stated in 
our report, the Air Force reported that its fiscal year 2002 depot 
maintenance carryover was $87 million under the ceiling but our 
calculation shows that the carryover exceeded the ceiling by $216 
million, a difference of $303 million. In another case, the Army 
reported that its fiscal year 2003 depot maintenance carryover was $127 
million over the ceiling but our calculations show that it was over the 
ceiling by $322 million, a difference of $195 million. As a result of 
these understatements, the amount of work carried over from one year to 
next was not reliable and could have affected DOD's and the 
congressional defense committees' review and evaluation of carryover 
during their annual budget review. 

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Armed Services; 
the Subcommittee on Readiness and Management Support, Senate Committee 
on Armed Services; the Subcommittee on Defense, Senate Committee on 
Appropriations; the House Committee on Armed Services; the Subcommittee 
on Readiness, House Committee on Armed Services; and the Ranking 
Minority Member, Subcommittee on Defense, House Committee on 
Appropriations. We are also sending copies to the Secretary of Defense, 
Secretaries of the Army, Navy, and Air Force, and other interested 
parties. Copies will be made available to others upon request. Should 
you or your staff have any questions concerning this report, please 
contact McCoy Williams, Director, at (202) 512-9095 or 
williamsm1@gao.gov, or William M. Solis, Director, at (202) 512-8365 or 
solisw@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Key contributors to this report are listed in appendix III. 

Sincerely yours, 

Signed by: 

McCoy Williams: 
Director, Financial Management and Assurance: 

Signed by: 

William M. Solis: 
Director, Defense Capabilities and Management: 

[End of section] 

Appendix I: 
Scope and Methodology: 

To determine if the military services' carryover calculations were in 
compliance with the Department of Defense's (DOD) new carryover policy, 
we obtained and analyzed the services' calculations for the (1) 
reported year-end actual carryover balances for fiscal years 2002 
through 2005 and (2) allowable amount of carryover for fiscal years 
2002 through 2005. We recomputed the services' calculations following 
DOD's regulation on carryover and compared our carryover calculations 
with the services' carryover calculations. We met with officials from 
the Army, Navy, and Air Force to discuss (1) the methodology the 
services used to calculate carryover and (2) any differences between 
our calculations and their calculations. We also met with officials 
from the Office of the Under Secretary of Defense (Comptroller) to 
discuss DOD's new carryover policy, including the proper calculation 
for actual carryover and the allowable amount of carryover. To assess 
the reliability of the carryover data, we (1) reviewed and analyzed the 
factors used in calculating carryover and (2) interviewed officials 
knowledgeable about the data. We determined that the data were 
sufficiently reliable for the purposes in this report. 

To determine if customers were submitting orders to working capital 
fund activities late in the fiscal year and, if so, the effect that 
this practice has had on carryover, we obtained data on orders accepted 
by working capital fund activities in September 2003 and September 
2004. Initially, we obtained information on the top 20 orders from a 
dollar standpoint that selected working capital fund activities 
accepted from customers in September 2003 and September 2004. We 
analyzed the information on the orders, which included the 
appropriation financing the order, the date the order was accepted by 
the working capital fund activity, and a description of the work to be 
performed. We then selected and analyzed 68 orders with large dollar 
amounts that working capital fund activities accepted in September. We 
also interviewed (1) working capital fund officials to determine the 
current status of performing the work on the orders and (2) customers 
to determine the reasons why they sent the orders to the working 
capital fund activities late in the fiscal year. In performing our work 
on these orders, we did not review these orders to determine if there 
was a bona fide need for the work being ordered by customers. 

We performed our work at the headquarters offices of the Under 
Secretary of Defense (Comptroller), the Assistant Secretary of the Army 
(Financial Management and Comptroller), the Assistant Secretary of the 
Navy (Financial Management and Comptroller), and the Assistant 
Secretary of the Air Force (Financial Management and Comptroller), 
Washington, D.C. In performing our work on reviewing the services' 
carryover calculations, we obtained carryover information on the 
following Defense Working Capital Fund activity groups: (1) Army depot 
maintenance, (2) Army ordnance, (3) Army industrial operations, (4) Air 
Force depot maintenance, (5) Naval aviation depots, (6) Naval 
shipyards, and (7) Naval research and development. The Naval research 
and development activity group consists of the following five 
subgroups: Naval Air Warfare Center, Naval Surface Warfare Center, 
Naval Undersea Warfare Center, Naval Research Laboratory, and the Space 
and Naval Warfare Systems Command Center. 

In performing our work on reviewing individual orders, we obtained 
information from the following working capital fund activities and 
their customers that submitted the orders. 

Air Force: 

* Ogden Air Logistics Center, Hill Air Force Base, Utah: 

* Oklahoma City Air Logistics Center, Tinker Air Force Base, Oklahoma: 

* Warner Robins Air Logistics Center, Robins Air Force Base, Georgia: 

Navy: 

* Naval Air Systems Command, Patuxent River, Maryland: 

* Naval Air Warfare Center, Aircraft Division, Patuxent River, 
Maryland: 

* Naval Air Warfare Center, Weapons Division, China Lake, California: 

* Naval Aviation Depot, San Diego, California: 

* Space and Naval Warfare Systems Command, San Diego, California: 

* Space and Naval Warfare Systems Center, San Diego, California: 

* Space and Naval Warfare Systems Center, Charleston, South Carolina: 

Army: 

* Blue Grass Army Depot, Richmond, Kentucky: 

* Crane Army Ammunition Activity, Crane, Indiana: 

* Rock Island Arsenal, Rock Island, Illinois: 

* Sierra Army Depot, Herlong, California: 

* Red River Army Depot, Texarkana, Texas: 

* Tobyhanna Army Depot, Tobyhanna, Pennsylvania: 

The carryover information in this report is budget data obtained from 
official Army, Navy, and Air Force budget documents. We conducted our 
work from July 2005 through March 2006 in accordance with U.S. 
generally accepted government auditing standards. We requested comments 
on a draft of this report from the Secretary of Defense or his 
designee. The Under Secretary of Defense (Comptroller) provided written 
comments, and these comments are presented in the Agency Comments and 
Our Evaluation section of this report and are reprinted in appendix II. 

[End of section] 

Appendix II: Comments from the Department Of Defense: 

Under Secretary Of Defense: 
1100 Defense Pentagon Washington, DC 20301-1 100: 

Comptroller: 

May 30 2006: 

Mr. McCoy Williams, Director, Financial Management and Assurance: 
Mr. William M. Solis, Director, Defense Capabilities and Management: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Williams and Mr. Solis: 

This is the Department of Defense response to the Government 
Accountability Office (GAO) draft report, "DEFENSE WORKING CAPITAL 
FUND: Military Services Did Not Calculate and Report Carryover Amounts 
Correctly," dated April 20, 2006, (GAO Code 195066/GAO-06-530). We have 
received and reviewed the draft report. Specific comments on the draft 
report are attached. 

The Department remains committed to providing accurate budget data. The 
Department believes that the reporting inaccuracies included in this 
draft report did not materially distort the evaluation of depot 
operations or projected workload levels. The Department will provide 
increased visibility of Navy Research and Development activity group 
carryover. 

Sincerely, 

Signed by: 

Tina W. Jonas:

Attachment: 
As stated: 

Gao Draft Report - Dated April 20,2006 GAO Code 195066/GAO-06-530: 

"Defense Working Capital Fund: Military Services Did Not Calculate And 
Report Carryover Amounts Correctly" 

Department Of Defense Comments To The Recommendations: 

RECOMMENDATION 1: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense (Comptroller) to issue written 
instructions in its DOD Financial Management Regulation 7000.14-R 
specifying the outlay rates to be used by DOD working capital fund 
activities for calculating the allowable amount of carryover and 
continue to issue carryover guidance to the military services in its 
annual guidance on preparing budget justification book material for 
Congress. (p. 39/GAO Draft Report): 

DOD RESPONSE: Concur. The Department issued budget guidance for the FY 
2007 President's Budget submission that specified the outlay rates to 
use for calculating the allowable amount of carryover. Additionally, 
the Department is in the process of updating the DOD Financial 
Management Regulations (FMR) and issuing budget guidance for the: 

FY 2008/FY 2009 President's Budget. Both documents will include the 
recommended improvements. 

RECOMMENDATION 2: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense (Comptroller) to review the 
carryover information provided in the military services' annual budget 
submissions to help ensure the services are calculating their allowable 
and actual carryover amounts in accordance with DOD policy. (p. 39/GAO 
Draft Report). 

DOD RESPONSE: Concur. A more rigorous review of the Services' carryover 
reporting was performed for the preparation of the FY 2007 President's 
Budget submission. For future budget submissions, the Under Secretary 
of Defense (Comptroller) will ensure that the Services' budget 
submission complies with the approved carryover policy. 

RECOMMENDATION 3: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense (Comptroller) to reiterate the 
requirements in the DOD Financial Management Regulation 7000.14-R to 
help ensure that working capital fund activities are in compliance with 
the regulations governing acceptance of orders, particularly at fiscal 
year end. (p. 39/GAO Draft Report): 

DOD RESPONSE: Concur. As preparation for the close out of FY 2006, the 
Department will reiterate the requirements in the DOD FMR to help 
ensure that working capital fund activities comply with the regulations 
governing acceptance of orders, particularly at fiscal year end. 

RECOMMENDATION 4: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Air Force to use the current outlay rate 
tables that are included in the DOD Financial Summary Tables when 
calculating the allowable carryover amounts for the Air Force Depot 
Maintenance Activity Group, consistent with DOD policy. (p. 39/GAO 
Draft Report): 

DOD RESPONSE: Concur. The Under Secretary of Defense (Comptroller) has 
already directed the Air Force to use approved outlay rates when 
calculating the allowable carryover amounts. For the FY 2008/FY 2009 
budget submission, the Department will ensure that the Services' 
correctly follow outlay rate guidance. 

RECOMMENDATION 5: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Air Force to use only current year orders 
for calculating the allowable carryover amounts for the Air Force Depot 
Maintenance Activity Group, as required by DOD carryover policy. (p. 
39/GAO Draft Report): 

DOD RESPONSE: Concur. During the FY 2007 budget review, the Under 
Secretary of Defense (Comptroller) restated the requirements for 
calculating and reporting carryover. These restated requirements will 
be included in the next update of the DOD FMR. The Department will 
ensure that the Services' budget submissions comply with the revised 
carryover policy. 

RECOMMENDATION 6: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Air Force to include all orders when 
calculating the amount of actual carryover for the Air Force depot 
maintenance activity group, except those orders that are specifically 
excluded in DOD Financial Management Regulation 7000.14-R or are 
excluded by the Under Secretary of Defense (Comptroller) in writing. 
(p. 39/GAO Draft Report): 

DOD RESPONSE: Concur. During the FY 2007 budget review, the Under 
Secretary of Defense (Comptroller) restated the requirements for 
calculating and reporting carryover. These restated requirements will 
be included in the next update of the DOD FMR. The Department will 
ensure that the Services' budget submissions comply with the revised 
carryover policy. 

RECOMMENDATION 7: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Air Force to include the allowable and 
actual dollar amounts of carryover for the Air Force depot maintenance 
activity group in the Air Force's annual budget to Congress, as 
required by DOD Financial Management Regulation 7000.14-R. (p. 40/GAO 
Draft Report): 

DOD RESPONSE: Concur. During the FY 2007 budget review, the Under 
Secretary of Defense (Comptroller) restated the requirements for 
calculating and reporting carryover. These restated requirements will 
be included in the next update of the DOD FMR. The Department will 
ensure that the Services' budget submissions comply with the revised 
carryover policy. 

RECOMMENDATION 8: The GAO recommended that the Secretary of Defense 
direct the Secretary of the Navy to include the allowable and actual 
amounts of carryover for each of the five Navy research and development 
sub-activity groups in the Navy's annual budget to Congress. (p. 40/GAO 
Draft Report): 

DOD RESPONSE: Concur. For the FY 2008 President's Budget the Department 
will direct the Navy to include the allowable and actual amounts of 
carryover for each of the five Navy Research and Development sub- 
activity groups in the Navy's annual budget submission to Congress. 

[End of section] 

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

McCoy Williams, (202) 512-9095: 
William M. Solis, (202) 512-8365: 

Acknowledgments: 

Staff who made key contributions to this report were Richard Cambosos, 
Francine DelVecchio, Keith McDaniel, Clara Mejstrik, Greg Pugnetti, 
Chris Rice, and Hal Santarelli. 

(195066): 

FOOTNOTES 

[1] The carryover amount includes work for which obligations have been 
made by requesting organizations but that has not yet started and the 
cost to complete work that has been started. 

[2] GAO, Defense Working Capital Fund: Improvements Needed for Managing 
the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 30, 
2001). 

[3] The amount of allowable carryover using the outlay rate follows. 
For example, customers order $100 of work, which is financed with a 
specific appropriation. If the outlay rate for this appropriation at 
the appropriation level is 60 percent, then this would result in the 
working capital fund activity group being allowed to carry over $40 
($100 - $60 [$100 x 60 percent] = $40). 

[4] GAO, Army Depot Maintenance: Ineffective Oversight of Depot 
Maintenance Operations and System Implementation Efforts, GAO-05-441 
(Washington, D.C.: June 30, 2005). 

[5] As noted in our scope and methodology (app. I), the scope of our 
work for this review did not include determining whether there was a 
bona fide need for the work being ordered by the customers. 

[6] Illumination candles are devices used by the military to provide 
light in the battlefield to see the enemy. The illumination candles are 
fired from a mortar and are held up in the sky with parachutes. 

[7] The Air Force is the only military service that included its 
contract depot maintenance operation in its working capital fund. To 
reflect this difference, DOD established a 4.5-month carryover standard 
to account for the additional administrative functions associated with 
awarding contracts. The Air Force is currently taking its contract 
depot maintenance operation out of the working capital fund and plans 
to complete this action by the end of fiscal year 2006. 

[8] GAO, Defense Working Capital Fund: Improvements Needed for Managing 
the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 30, 
2001). 

[9] The amount of allowable carryover using the outlay rate follows. 
For example, customers order $100 of work, which is financed with a 
specific appropriation. If the outlay rate for this appropriation at 
the appropriation level is 60 percent, then this would result in the 
working capital fund activity group being allowed to carry over $40 
($100 - $60 [$100 x 60 percent] = $40). 

[10] GAO, Army Depot Maintenance: Ineffective Oversight of Depot 
Maintenance Operations and System Implementation Efforts, GAO-05-441 
(Washington, D.C.: June 30, 2005). 

[11] Office of the Under Secretary of Defense (Comptroller), Director 
of Revolving Funds, memorandum on clarifying guidance on carryover, 
June 29, 2005. 

[12] Unless otherwise noted in this report, the tables provided by the 
Office of the Under Secretary of Defense (Comptroller), Revolving 
Funds, will be referred to as the Office of the Under Secretary of 
Defense (Comptroller) tables. 

[13] GAO, Army Depot Maintenance: Ineffective Oversight of Depot 
Maintenance Operations and System Implementation Efforts, GAO-05-441 
(Washington, D.C.: June 30, 2005). 

[14] GAO, Army Depot Maintenance: Ineffective Oversight of Depot 
Maintenance Operations and System Implementation Efforts, GAO-05-441 
(Washington, D.C.: June 30, 2005). 

[15] GAO, Defense Working Capital Fund: Improvements Needed for 
Managing the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 
30, 2001). 

[16] GAO, Army Depot Maintenance: Ineffective Oversight of Depot 
Maintenance Operations and System Implementation Efforts, GAO-05-441 
(Washington, D.C.: June 30, 2005). 

[17] An analytical condition inspection is a systematic disassembly and 
inspection of a representative sample of end items to find hidden 
defects, deteriorating conditions, corrosion fatigue, overstress, or 
other deficiencies in an aircraft structure or systems. These 
inspections are normally over and above those inspections in normal 
program depot maintenance. 

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