B-174839, MAR 23, 1972, 51 COMP GEN 598

B-174839, MAR 23, 1972, 51 COMP GEN 598

VESSELS - CHARTERS - LONG-TERM HIRE COSTS FOR TANKERS TO BE CONSTRUCTED FOR CHARTER TO THE MILITARY SEALIFT COMMAND (MSC) FOR A 5-YEAR TERM WITH OPTIONS TO COVER 15 YEARS, AND THE COSTS OF BREACH, TERMINATION, FAILURE TO EXERCISE A RENEWAL OPTION, OR THE VALUE OF A LOST TANKER ARE OPERATING EXPENSES CHARGEABLE TO THE NAVY INDUSTRIAL FUND SINCE THE CHARTER ARRANGEMENT IS NOT THE PURCHASE OF AN ASSET REQUIRING THE AUTHORIZATION AND APPROPRIATION OF FUNDS. THE FACT THAT MSC ASSUMES CERTAIN TERMINATION COSTS DOES NOT TRANSFORM THE 5- YEAR CHARTER WITH ITS 15-YEAR RENEWAL OPTIONS INTO A 20 YEAR CHARTER, AND OTHER THAN THE AUTHORITY IN SECTION 739 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1972, THERE IS NO AUTHORITY TO SET ASIDE CASH FOR OPTION TERMINATION COSTS; ALSO THE QUESTION OF THE GENERAL, FULL FAITH AND CREDIT OBLIGATIONS OF THE UNITED STATES IS FOR DETERMINATION BY THE ATTORNEY GENERAL; AND THE ONLY WAY TO INSURE INVESTORS OF THE UNCONDITIONAL OBLIGATION OF THE FUND IS TO SO PROVIDE IN THE CHARTER FOR EACH VESSEL.

TO STEPHEN N. SHULMAN, MARCH 23, 1972:

REFERENCE IS MADE TO YOUR LETTER OF DECEMBER 27, 1971, WRITTEN ON BEHALF OF SEVERAL FIRMS THAT ARE INTERESTED IN A PROPOSAL BY THE MILITARY SEALIFT COMMAND (MSC), DEPARTMENT OF THE NAVY, INVOLVING THE CONSTRUCTION AND CHARTER HIRE TO MSC OF NINE 25,000 DWT TANKERS.

IT IS EXPLAINED THAT THE FINANCING OF THE CONSTRUCTION OF THE VESSELS TO BE CHARTERED BY MSC WILL INVOLVE SUBSTANTIAL FINANCIAL COMMITMENTS FROM A VARIETY OF INSTITUTIONS. DURING THE PERIOD OF CONSTRUCTION OF THE VESSELS, TWO GROUPS OF COMMERCIAL BANKS WILL PROVIDE INTERIM FINANCING TO THE RESPECTIVE SHIPYARDS. A THIRD GROUP OF COMMERCIAL BANKS (THE "OWNERS") WILL PURCHASE THE VESSELS UPON THEIR DELIVERY BY THE SHIPYARDS BY REPAYING A PORTION OF THE CONSTRUCTION LOANS. THE BALANCE OF THE CONSTRUCTION LOANS WILL ULTIMATELY BE REFINANCED THROUGH THE PRIVATE SALE TO INSTITUTIONAL INVESTORS, INCLUDING INSURANCE COMPANIES AND PENSION TRUSTS, OF FIRST PREFERRED FLEET MORTGAGE BONDS TO BE SECURED BY AN ASSIGNMENT OF CHARTER HIRE.

A SEPARATE BAREBOAT CHARTER WILL BE ENTERED INTO BY MSC WITH RESPECT TO EACH VESSEL. THESE CHARTERS WILL GIVE MSC THE FULL USE OF THE VESSELS DURING THE CHARTER PERIOD, DURING WHICH MSC WILL BE FULLY RESPONSIBLE FOR THE OPERATION AND MAINTENANCE OF THE VESSELS AND WILL BEAR THE RISK OF LOSS AND SEIZURE OF THE VESSELS. THE CHARTERS WILL PROVIDE FOR A CONSTRUCTION PERIOD DURING WHICH THE SHIPYARDS MAY DELIVER COMPLETED VESSELS. SUCH VESSELS WILL BE CHARTERED BY MSC UNDER THE CHARTERS ON AN INTERIM BASIS UNTIL THE END OF THE CONSTRUCTION PERIOD, WHICH WE UNDERSTAND CONSISTS OF 900 DAYS FOR THE LAST VESSEL. IF A VESSEL IS NOT DELIVERED DURING SUCH CONSTRUCTION PERIOD, MSC WILL REMAIN OBLIGATED TO CHARTER SUCH VESSEL WHEN DELIVERED AND THE SHIPYARD WILL BE REQUIRED TO PAY MSC LIQUIDATED DAMAGES OF UP TO $4,000 PER DAY IF SUCH DELAY IN DELIVERY IS NOT EXCUSABLE. THE CHARTERS WILL PROVIDE AN INITIAL TERM OF 5 YEARS FOLLOWING THE CONSTRUCTION PERIOD AND EITHER WITH OPTIONS TO RENEW FOR FIFTEEN CONSECUTIVE 1-YEAR PERIODS OR WITH OPTIONAL RENEWAL PROVISIONS FOR THREE CONSECUTIVE 5-YEAR PERIODS WITH THE GOVERNMENT HAVING THE PRIVILEGE TO TERMINATE AT THE END OF EVERY 6 MONTH-PERIOD. THE CHARTER HIRE DURING THE ENTIRE 20-YEAR TERM OF THE INITIAL AND OPTIONAL CHARTER PERIODS HAS BEEN COMPUTED TO REPAY TO THE BONDHOLDERS AND THE OWNERS ALL OF THE CAPITALIZED COSTS OF THE VESSELS TOGETHER WITH ACCRUED INTEREST ON THE UNAMORTIZED PORTION THEREOF. IF A DELAY IN THE DELIVERY OF ANY VESSEL REQUIRES THAT SUBSTITUTE FINANCING ARRANGEMENTS BE MADE, CHARTER HIRE WILL BE ADJUSTED TO REFLECT THE TERMS OF SUCH SUBSTITUTE FINANCING. CAPITALIZED COSTS TO BE AMORTIZED WILL BE DEFINED IN THE CHARTERS TO INCLUDE ALL AMOUNTS PAYABLE FOR CONSTRUCTION OF THE VESSELS, INTEREST ON INTERIM LOANS DURING THE CONSTRUCTION PERIOD, COMMITMENT FEES PAYABLE TO THE BOND PURCHASERS, FEES AND EXPENSES PAYABLE TO THE TRUSTEES FOR THE BONDHOLDERS AND OWNERS THROUGHOUT THE TERM OF THE CHARTERS AND OTHER SPECIFIED COSTS RELATING TO THE CONSTRUCTION AND FINANCING OF THE VESSELS.

THE CHARTERS WILL CONTAIN A PROVISION COVERING BREACH, TERMINATION, OR FAILURE BY MSC TO RENEW AT THE END OF THE CONSTRUCTION PERIOD, THE INITIAL PERIOD, OR ANY 1-YEAR PERIOD WHICH IS DESIGNED TO ASSURE THE FINANCIAL INSTITUTIONS THE NECESSARY PROTECTION THAT NO MATTER WHAT SHOULD OCCUR DURING THE TERM OF THE CHARTERS THERE WILL BE SUFFICIENT FUNDS AVAILABLE TO REPAY THE BONDS IN FULL AND TO RETURN THE OWNERS' INVESTMENTS. SUCH FUNDS WILL BE PROVIDED OUT OF THE NET PROCEEDS RECEIVED FROM THE SALE OF THE VESSELS BY THE TRUSTEES IN THE EVENT OF AN MSC BREACH, TERMINATION, OR FAILURE TO EXERCISE A RENEWAL OPTION. MSC WILL BE UNCONDITIONALLY OBLIGATED TO PAY FOR THE BENEFIT OF THE BONDHOLDERS AND THE OWNERS THE AMOUNT, IF ANY, BY WHICH THE NET PROCEEDS OF ANY SUCH SALE ARE LESS THAN A SPECIFIED AMOUNT (THE "TERMINATION VALUE") CALCULATED TO PAY THE OUTSTANDING PRINCIPAL AND INTEREST ON THE BONDS AND TO RETURN TO THE OWNERS THEIR INVESTMENTS AND A RATE OF RETURN TO THE DATE OF TERMINATION AFTER TAKING INTO ACCOUNT RELATED TAX EFFECTS. AS SUCH, TERMINATION VALUE WILL OF COURSE EXCEED CAPITALIZED COSTS TO BE AMORTIZED.

YOU STATE THAT IT IS POSSIBLE THAT THE PROCEEDS OF SALE WILL NOT COVER TERMINATION VALUE IN THAT IT IS NOT POSSIBLE TO PREDICT WHAT THE COMMERCIAL VALUE OF THE VESSELS MAY BE AND BECAUSE AMORTIZATION OF CAPITALIZED COST IS DEFERRED UNTIL THE ELEVENTH YEAR OF THE CHARTERS. A VESSEL IS LOST, MSC WOULD ALSO BE OBLIGATED TO PAY A STIPULATED LOSS VALUE WHICH WILL BE APPROXIMATELY THE SAME AS THE TERMINATION VALUE. THIS CONNECTION, MSC EVALUATES ITS OBLIGATIONS UNDER THE CHARTERS AT $47 MILLION FOR THE INITIAL 5-YEAR PERIOD WITH A TERMINATION VALUE OF APPROXIMATELY $160 MILLION NOT TAKING INTO CONSIDERATION ANY SALES PROCEEDS FROM THE SHIPS. THUS THE MAXIMUM TOTAL CHARGES THAT COULD BE INCURRED UNDER THE PROPOSAL WOULD BE $207 MILLION.

CONSEQUENTLY, WITHOUT A FIRM AND UNCONDITIONAL COMMITMENT BY THE GOVERNMENT TO PAY CHARTER HIRE, AS WELL AS THE DIFFERENCE BETWEEN PROCEEDS OF SALE AND TERMINATION VALUE IN THE EVENT OF BREACH, TERMINATION OR FAILURE TO RENEW OR THE LOSS VALUE IN THE EVENT OF LOSS OR SEIZURE OF THE VESSEL, YOU STATE IT WILL NOT BE FEASIBLE TO ARRANGE THE FINANCING NECESSARY FOR THE CONSTRUCTION OF THE VESSELS.

ACCORDINGLY, YOU REQUEST OUR OPINION AS TO WHETHER MSC HAS ALL REQUISITE AUTHORITY TO PROCEED WITH THE CHARTERS AND OTHER PROPOSED CONTRACTS AS AN APPROPRIATE INDUSTRIAL FUND ACTIVITY, AND PARTICULARLY WHETHER THE OBLIGATIONS INCURRED THEREUNDER WOULD BE ONLY OBLIGATIONS OF THE NAVY INDUSTRIAL FUND OR GENERAL, FULL FAITH AND CREDIT OBLIGATIONS OF THE UNITED STATES.

IN ORDER TO ASSURE THAT ALL ASPECTS OF THE PROPOSED PLAN FOR THE CONSTRUCTION AND CHARTER HIRE OF THE VESSELS RECEIVE CONSIDERATION, COMMENTS WERE REQUESTED OF THE DEPARTMENT OF DEFENSE (DOD).

IN ITS REPLY OF FEBRUARY 15, 1972, DOD REFERRED TO OUR DECISIONS MENTIONED BELOW AND STATED THAT, FOR THE REASONS DISCUSSED IN THEIR REPLY, IT WAS THEIR VIEW THAT THE PROPOSAL IS LEGALLY SUPPORTABLE ON THE BASIS REFLECTED IN THOSE DECISIONS.

CONCERNING THE AUTHORITY OF MSC TO ENTER INTO THE PROPOSED CONTRACT AND CHARTERS AND THE PROPRIETY OF USING THE NAVY INDUSTRIAL FUND TO FINANCE THE PROPOSAL, DOD EXPLAINED THAT -

UNDER THE PROVISIONS OF 10 U.S.C. 2208 THE SCRETARY OF DEFENSE IS AUTHORIZED TO PROVIDE FOR THE ESTABLISHMENT OF WORKING CAPITAL FUNDS IN THE DEPARTMENT OF DEFENSE FOR THE PURPOSE OF PROVIDING WORKING CAPITAL CAPITAL FOR "SUCH INDUSTRIAL TYPE ACTIVITIES AND SUCH COMMERCIAL TYPE ACTIVITIES THAT PROVIDE COMMON SERVICES WITHIN OR AMONG DEPARTMENTS AND AGENCIES OF THE DEPARTMENT OF DEFENSE AS HE MAY DESIGNATE." SUCH WORKING CAPITAL FUNDS ARE TO BE CHARGED WITH THE COST OF SERVICES OR WORK PERFORMED AND BE REIMBURSED, OR OTHERWISE CREDITED, FOR THOSE COSTS INCLUDING THE COST OF USING EQUIPMENT. IT IS CLEAR FROM THE TERMS OF THIS STATUTE THAT THESE WORKING CAPITAL FUNDS POSSESS ALL THE CHARACTERISTICS OF AND ARE REVOLVING FUNDS WITHOUT FISCAL YEAR LIMITATION. THEY HAVE BEEN OPERATED AS SUCH FOR THE MORE THAN 20 YEARS SINCE THEIR INCEPTION; AT THAT TIME THEY WERE EXEMPTED FROM THE APPORTIONMENT REQUIREMENTS OF RS 3679 (31 U.S.C. 665(C)) BY THE THEN DIRECTOR OF THE BUREAU OF THE BUDGET PURSUANT TO HIS AUTHORITY UNDER SUBSECTION (F) OF THAT STATUTE TO SO EXEMPT REVOLVING FUNDS, AND HAVE BEEN CONTINUOUSLY CARRIED ON THE BOOKS OF THE TREASURY AS SUCH WITH A NO-YEAR-SYMBOLIZATION.

THE REGULATIONS GOVERNING INDUSTRIAL FUND OPERATIONS ISSUED PURSUANT TO 10 U.S.C. 2208 (DOD DIRECTIVE 7410.4) PROVIDE FOR THE ESTABLISHMENT OF AN INDUSTRIAL FUND WITHIN EACH MILITARY SERVICE AND VESTS THEIR ADMINISTRATION AND MANAGEMENT IN THE RESPECTIVE MILITARY DEPARTMENTS UNDER THE SUPERVISION OF THEIR SECRETARIES. ADDITIONALLY, THE REGULATIONS PROVIDE AMONG OTHER THINGS, THAT "INDUSTRIAL FUNDS WILL BE USED TO FINANCE THE OPERATING COSTS OF MAJOR SERVICE UNITS (INDUSTRIAL TYPE AND COMMERCIAL TYPE) THAT PRODUCE GOODS AND SERVICES IN RESPONSE TO REQUIREMENTS OF USERS AND CENTRAL MANAGEMENT ORGANIZATIONS WITHIN AND AMONG THE DOD COMPONENTS *** ." "CUSTOMERS OF AN INDUSTRIAL FUND ACTIVITY MAY BE: (1) OPERATIONS FORCE COMMANDS OR MISSION UNITS THEREOF OF OPERATING AGENCIES, COMMODITY COMMANDS, INVENTORY CONTROL POINTS, WEAPONS SYSTEMS OR PROJECT MANAGERS, OR ANY DEPARTMENT OF DEFENSE COMPONENT HAVING MISSIONS AND RESPONSIBILITIES SEPARATE FROM MANAGEMENT AND OPERATION OF THE INDUSTRIAL FUND ACTIVITY *** ." PROVISION IS ALSO MADE FOR ISSUANCE OF CHARTERS SUBJECT TO THE APPROVAL OF THE ASSISTANT SECRETARY OF DEFENSE (COMPTROLLER) PRIOR TO THE FINANCING OF ANY ACTIVITY UNDER AN INDUSTRIAL FUND, WHICH CHARTER SHALL GOVERN THE OPERATIONS OF THE ACTIVITY.

DOD FURTHER EXPLAINED THAT UNDER REGULATIONS PRESCRIBED BY THE SECRETARY OF DEFENSE PURSUANT TO HIS AUTHORITY UNDER THE NATIONAL SECURITY ACT (DOD DIRECTIVE 5160.10) THE MILITARY SEALIFT COMMAND WAS DESIGNATED AS SINGLE MANAGER FOR OCEAN TRANSPORTATION. PERTINENT RESPONSIBILITIES OF MSC ARE SET FORTH IN THOSE REGULATIONS AS FOLLOWS:

VI.A. WITHIN THE MISSION OF MSC, PROVIDE OCEAN TRANSPORTATION PLANNING SUPPORT TO THE ORGANIZATION OF THE JOINT CHIEFS OF STAFF, THE UNIFIED AND SPECIFIED COMMANDS, THE MILITARY SERVICES AND THE DEPARTMENT OF DEFENSE AGENCIES IN SUPPORT OF THE PLANS OF THE JOINT CHIEFS OF STAFF AND OTHER MILITARY OPERATIONS AS REQUIRED.

H. MAINTAIN AND OPERATE A DOD OCEAN TRANSPORTATION SYSTEM WITHIN LIMITS APPROVED BY THE SECRETARY OF DEFENSE TO:

4. PROVIDE OCEAN TRANSPORTATION SERVICE, EXCEPT THAT PERFORMED BY UNITS OF THE FLEET, TO ALL COMPONENTS OF THE DEPARTMENT OF DEFENSE, AND AS AUTHORIZED FOR OTHER AGENCIES OF THE UNITED STATES GOVERNMENT ON A BASIS CONSONANT WITH NATIONAL POLICY, THE NEED FOR EFFICIENT AND ECONOMICAL OPERATIONS, AND RESPONSIVENESS TO MILITARY REQUIREMENTS.

I. PROCURE SHIPS OUTSIDE THE MSC FLEET BY BARE BOAT, TIME, OR VOYAGE CHARTER, OR BY ALLOCATION FROM OTHER GOVERNMENT AGENCIES, AND PROCURE PASSENGER (EXCEPT INDIVIDUAL TRAVEL WHICH MAY BE PROCURED BY THE MILITARY DEPARTMENTS) AND CARGO SPACE IN COMMERCIAL SHIPS TO MEET THE REQUIREMENTS OF THE DEPARTMENT OF DEFENSE AND SUCH OTHER AGENCIES OF THE UNITED STATES GOVERNMENT AS AUTHORIZED BY THE SECRETARY OF DEFENSE. ***

S. PROVIDE TANKERS TO MEET OCEAN TRANSPORTATION BULK POL REQUIREMENTS OF THE MILITARY DEPARTMENTS.

IT IS REPORTED THAT MSC (THEN THE MILITARY SEA TRANSPORTATION SERVICE) WAS CHARTERED FOR OPERATION OF ALL ITS ACTIVITIES, INCLUDING THE FOREGOING UNDER THE NAVY INDUSTRIAL FUND IN 1951.

FURTHER IN ITS REPLY, DOD SUMMARIZES THE PROPOSAL AND RELATIVE TO THE TERMINATION CHARGE STATES THAT -

*** THIS IS A CHARGE FOR THE USE OF THE VESSELS. MSC DOES NOT AT ANY TIME ACQUIRE ANY PROPERTY RIGHTS IN THESE VESSELS BEYOND THE RIGHT TO USE THEM IN ORDER TO PROVIDE THE SERVICES IN ACCORDANCE WITH ITS ASSIGNED AUTHORITY AND RESPONSIBILITY.

TO THE EXTENT THAT SUCH A TERMINATION CHARGE IS INCURRED THE CHARTER HIRE COSTS ARE INCREASED AS PART OF THE CHARGE FOR CHARTER HIRE FOR EACH YEAR OF USE. SUCH COSTS WOULD BE CONSIDERED OPERATING COSTS OF THE MILITARY SEALIFT COMMAND WITHIN THE MEANING OF 10 U.S.C. 2208 AND AS SUCH ARE PROPERLY CHARGEABLE TO THE NAVY INDUSTRIAL FUND. SINCE THE PROPOSAL DOES NOT CONTEMPLATE ACQUISITION OF ANY CAPITAL ASSETS THERE IS NO NEED NOR BASIS FOR CONSIDERING THE AVAILABILITY OF ANY OTHER APPROPRIATIONS OR FUNDS FOR SUCH PURPOSE.

AS STATED IN YOUR QUOTED OPINION CONTRACTS FOR THE INITIAL PERIOD WITH RENEWAL OPTIONS ARE PERMITTED WHERE THE OUTSTANDING OBLIGATIONAL AVAILABILITY IS SUFFICIENT TO COVER AN INITIAL PERIOD, TOGETHER WITH ADDITIONAL CHARGES, IF ANY, NECESSARY TO COVER THE INCREASE IN THE COSTS FOR FAILURE TO EXERCISE OPTIONS OF RENEWAL. IT SHOULD BE MADE CLEAR THAT NO INCREASE IN MSC'S LIABILITY FOR THE PAYMENT OF $47,000,000 FOR THE INITIAL PERIOD OF USE OCCURS IF THE PROCEEDS OF THE SALE OF THE VESSELS EQUALS THE TERMINATION LIABILITY. THE COMMERCIAL VALUE OF THE VESSELS AT THE END OF FIVE YEARS SHOULD BE HIGH SINCE THE OWNERS CONTEMPLATE COMMERCIAL USE OF THESE VESSELS EVEN AFTER 20 YEARS AS STATED IN MR. SHULMAN'S LETTER.

IN ANY EVENT, THE FINANCIAL STATEMENTS OF THE NAVY INDUSTRIAL FUND, AS INCLUDED IN THE PRESIDENT'S ANNUAL BUDGET SUBMISSION (THE LATEST OF WHICH APPEARS ON PAGE 342, APPENDIX "BUDGET OF THE UNITED STATES FOR FISCAL YEAR 1973") DISCLOSE THAT THE UNOBLIGATED BALANCE OF THE FUND AVAILABLE AT THE CLOSE OF FISCAL YEAR 1971 WAS $718,146,000 AND IS ESTIMATED AT $773,964,000 AND $840,907,000 FOR FISCAL YEARS 1972 AND 1973 RESPECTIVELY. AN EXAMINATION OF THESE STATEMENTS SHOWS THAT THE DRAWING ACCOUNT OF THE FUNDS WITH THE TREASURY WAS AT THE END OF FISCAL YEARS 1970 AND 1971 $255,888,000 AND $249,466,000, RESPECTIVELY AND IS ESTIMATED IN FISCAL YEARS 1972 AND 1973 AT $315,166,000 AND $311,966,000, RESPECTIVELY. THE ACCOUNTS RECEIVABLE AT THE END OF FISCAL YEARS 1970 THROUGH 1973, ON A COMPARABLE BASIS, RANGE FROM $229,880,000 TO $138,120,000. ALL OF THESE AMOUNTS SHOW THAT IN ANY OF THESE YEARS INCLUDING THE CURRENT YEAR THE FINANCIAL CONDITION OF THE FUND WAS MORE THAN ADEQUATE TO COVER THE MAXIMUM CONTINGENT LIABILITY THAT COULD OCCUR WITH THE TERMINATION OF THE CHARTER FOR ANY REASON PROVIDED UNDER THE CONTRACT. THE CONTRACT COVERS A FIVE-YEAR PERIOD WHICH HAS AN ANTICIPATED OBLIGATION OF $47 MILLION. A FAILURE TO RENEW COULD INCREASE THIS OBLIGATION FOR THE FIVE-YEAR PERIOD. THE EXISTENCE OR NONEXISTENCE OF THIS OBLIGATION IS BASED UPON THE AMOUNT OF THE RESOURCES WHICH MAY BE GENERATED BY THE SALE OF THE VESSELS AT THE TIME OF SUCH NONRENEWAL. THE EXTREME CASE, THE DEFICIENCY COULD BE THE TOTAL COST OF THE VESSELS BUT ONLY IF THE VALUE OF THE VESSELS IS EQUAL TO THE SCRAP VALUE OF THEIR METALS.

AS INDICATED IN PARAGRAPH (D.) OF THE REFERENCED MSC MEMO THE ESTIMATE OF $160,000,000 FOR THE TERMINATION VALUE MAY BE OVERSTATED SINCE THE FIXED PRICE FOR THE NINE SHIPS IS $146,550,000 PLUS A SUPERVISORY AGENT'S FEE OF APPROXIMATELY $500,000 AND INTEREST DURING THE CONSTRUCTION PERIOD. IT IS HIGHLY IMPROBABLE THAT THE SALE OF THESE VESSELS WOULD NOT GENERATE A FAIR PERCENTAGE OF THEIR COSTS, PARTICULARLY SINCE THE OWNERS EXPECT TO EMPLOY THE VESSELS COMMERCIALLY AFTER THE TWENTY YEAR PERIOD. IN ANY EVENT, EVEN IF THE TERMINATION VALUE WERE CONCEDED TO BE $160,000,000, AND NO CREDIT APPLIED FROM THE PROCEEDS OF SALE OF THE VESSELS THE TOTAL OF THE FUTURE CHARGES WILL BE LESS THAN ONE-THIRD OF EITHER THE ACTUAL UNOBLIGATED BALANCE AT THE END OF FISCAL YEAR 1971 OR OF THE EXPECTED UNOBLIGATED BALANCE AT THE END OF FISCAL YEAR 1972. THE TOTAL CHARGES OF $207,000,000 FOR SERVICES AND MAXIMUM TERMINATION COSTS COMPARES WITH THE FY 1971 ACTUAL UNOBLIGATED BALANCE OF $718,146,000 AND THE 1972 YEAR-END UNOBLIGATED BALANCE OF $773,964,000.

IT IS OBVIOUS FROM THE FOREGOING THAT THE OBLIGATIONAL AVAILABILITY OF THE NAVY INDUSTRIAL FUND IN FISCAL YEAR 1972 IS MORE THAN SUFFICIENT TO COVER OBLIGATIONS FOR THE TOTAL CHARGES PERMITTED UNDER THE INITIAL PERIOD AND ALL SUCCEEDING OBLIGATIONAL PERIODS. UNDER THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT AN OBLIGATION CAN BE CREATED AGAINST THE NAVY INDUSTRIAL FUND AT LEAST TO THE EXTENT OF THE CORPUS OF THE FUND PLUS ANTICIPATED REIMBURSEMENTS FOR ONE YEAR. IF THIS TEST HAS BEEN MET, AS IN THE INSTANT CASE, IT IS NO LONGER NECESSARY TO CONSIDER THE QUESTION OF AVAILABILITY FOR OBLIGATION OF ANTICIPATED REIMBURSEMENTS FOR THE SUCCEEDING FISCAL YEAR.

AS INDICATED ABOVE, THE NAVY INDUSTRIAL FUND IS EXEMPTED FROM APPORTIONMENT UNDER THE PROVISIONS OF RS 3679 (31 U.S.C. 665). CONSEQUENTLY ADMINISTRATIVE ALLOCATIONS TO THE VARIOUS ACTIVITIES FINANCED UNDER THE FUND ARE NOT CONSIDERED ADMINISTRATIVE SUBDIVISIONS OF THE FUND WITHIN THE MEANING OF SUBSECTION (G.) OF THAT STATUTE AND THEREFORE, THE LIMITATION OF THE STATUTE WITH RESPECT TO THE CREATION OF OBLIGATIONS ARE APPLICABLE TO THE TOTAL OF THE FUND AND NOT TO THE ALLOCATIONS. DOD DIRECTIVE 7200.1, GOVERNING THE ADMINISTRATIVE CONTROL OF FUNDS IN THE DEPARTMENT OF DEFENSE, WHICH WAS APPROVED BY THE DIRECTOR OF THE BUREAU OF THE BUDGET, RECOGNIZES THAT THE LIMITATIONS AND SANCTIONS OF THE STATUTE ONLY APPLY TO ADMINISTRATIVE SUBDIVISION OF REVOLVING FUNDS WHICH ARE THEMSELVES SUBJECT TO APPORTIONMENT. IT SHOULD BE RECOGNIZED, OF COURSE, THAT EACH ACTIVITY UNDER THE FUND MUST MAINTAIN ACCOUNTABILITY IN ORDER TO INSURE PROPER APPLICATION OF THE LIMITATION OF THE STATUTE TO THE FUND AS A WHOLE.

IN THIS CONNECTION IT SHOULD BE NOTED, AS OUTLINED IN THE MSC MEMORANDUM, THAT THE OBLIGATIONAL AVAILABILITY OF THE MSC SEGMENTS OF THE FUND IS ADEQUATE TO COVER THESE LIABILITIES. IN ADDITION TO HAVING OBLIGATION AVAILABILITY THE OPERATION OF THE REVOLVING FUND REQUIRES THAT FURTHER CONSIDERATION BE GIVEN TO THE TIMING OF THE RECEIPT OF REVENUES AND THE MAKING OF EXPENDITURES. FOR THIS REASON THE REVENUES MUST BE ESTABLISHED IN A TIME FRAME THAT WOULD MATCH THE FLOW OF EXPENDITURES. SECTION 739 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT (FY 1972) ESTABLISHES A CASH REQUIREMENT WHICH INSURES ON A MINIMUM BASIS THE MATCHING OF REVENUES WITH EXPENDITURE REQUIREMENTS. THIS IS TYPICAL OF ANY INDUSTRIAL OPERATION WHICH MUST MATCH ITS CURRENT LIABILITIES AGAINST ITS CURRENT ASSETS AND MAINTAIN SUFFICIENT CASH FLOW SO THAT IT WILL BE WITHIN A PROPER TIME FRAME ADEQUATELY MEETING ITS CURRENT LIABILITIES AS THEY MATURE. THE STATUTE DOES NOT REQUIRE THE RETENTION OF CASH GREATER THAN THIS BASIC REQUIREMENT OF MEETING BILLS WHEN THEY ARE DUE. AS A MATTER OF PRACTICE, AS CAN BE SEEN BY THE FINANCIAL STATEMENT OF THE FUND, CASH BALANCES HAVE BEEN MAINTAINED THAT ARE MORE THAN ADEQUATE TO MEET THE REQUIREMENT OF MATURING LIABILITIES.

RELATIVE TO THE LAST PARAGRAPH QUOTED ABOVE, THE MSC MEMORANDUM REFERRED TO THEREIN STATES IN PARAGRAPH (C) THEREOF THAT -

AS OF 30 NOVEMBER 1971, THE AMOUNT OF MSC'S CORPUS HAD INCREASED TO $50,000,000, AND ITS OBLIGATIONS APART FROM THIS CONTRACT DECREASED TO $301,000,000. MSC'S ANTICIPATED REVENUE FOR THE NEXT FISCAL YEAR AND THE OBLIGATIONS UNDER THESE CHARTERS FOR THE INITIAL 5-YEAR PERIOD, REMAIN AT $700,000,000 AND $47,000,000 RESPECTIVELY.

ALSO, SECTION 739 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1972, APPROVED DECEMBER 18, 1971, 85 STAT. 734, REFERRED TO ABOVE BY DOD, PROVIDES AS FOLLOWS:

DURING THE CURRENT FISCAL YEAR, CASH BALANCES IN WORKING CAPITAL FUNDS OF THE DEPARTMENT OF DEFENSE ESTABLISHED PURSUANT TO SECTION 2208 OF TITLE 10, U.S.C. MAY BE MAINTAINED IN ONLY SUCH AMOUNTS AS ARE NECESSARY AT ANY TIME FOR CASH DISBURSEMENTS TO BE MADE FROM SUCH FUNDS: PROVIDED, THAT TRANSFERS MAY BE MADE BETWEEN SUCH FUNDS IN SUCH AMOUNTS AS MAY BE DETERMINED BY THE SECRETARY OF DEFENSE, WITH THE APPROVAL OF THE OFFICE OF MANAGEMENT AND BUDGET.

AN EXAMINATION OF THE LEGISLATIVE HISTORY OF THIS PROVISION DISCLOSES THAT LANGUAGE SIMILAR THERETO FIRST WAS CONTAINED IN THE SUPPLEMENTAL DEFENSE APPROPRIATION ACT, 1966, APPROVED MARCH 25, 1966, 80 STAT. 82. APPROVING SUCH PROVISION THE HOUSE COMMITTEE ON APPROPRIATIONS IN REPORT NO. 89-1316 STATED THAT -

THE RECOMMENDED SECTION 101 PROVIDES AUTHORITY FOR THE SECRETARY OF DEFENSE TO TRANSFER CASH BALANCES BETWEEN WORKING CAPITAL FUNDS OF THE DEPARTMENT OF DEFENSE IN SUCH AMOUNTS AS HE MAY DETERMINE, WITH THE APPROVAL OF THE BUREAU OF THE BUDGET. THIS LANGUAGE IS INTENDED TO PROVIDE OPERATIONAL FLEXIBILITY AS AMONG THE WORKING CAPITAL FUNDS, PARTICULARLY THE STOCK FUNDS OF THE VARIOUS MILITARY DEPARTMENTS AND THE DEPARTMENT OF DEFENSE SO AS TO ALLEVIATE SITUATIONS WHEREIN ONE FUND MAY HAVE AN EXCESS OF CASH WHILE ANOTHER MIGHT BE TEMPORARILY SHORT OF CASH. THIS SECTION ALSO CONTAINS LANGUAGE PRESCRIBING MINIMUM CASH BALANCES FOR WORKING CAPITAL FUNDS IN SUCH AMOUNTS AS ARE NECESSARY AT THAT TIME TO MEET CASH DISBURSEMENTS TO BE MADE FROM SUCH FUNDS. THIS AUTHORITY PROVIDES, IN EFFECT, RELIEF FROM CERTAIN ADMINISTRATIVE INTERPRETATIONS OF SECTION 3679 OF THE REVISED STATUTES IN SUCH A MANNER AS TO MINIMIZE THE AMOUNTS OF CASH NECESSARY TO BE TIED UP IN AN INACTIVE STATUS.

AS RECOGNIZED IN YOUR LETTER THE DECISIONS OF OUR OFFICE INVOLVING SOMEWHAT SIMILAR PROPOSALS CONCERNING TERMINATION PAYMENTS TO BE MADE IN THE EVENT THE GOVERNMENT FAILS TO EXERCISE ITS RENEWAL OPTIONS AFTER EXPIRATION OF THE BASIC CONTRACT TERM REQUIRE THAT AMOUNTS EQUAL TO THE MAXIMUM CONTINGENT LIABILITY OF THE GOVERNMENT BE AVAILABLE FOR OBLIGATION AT THE TIME THE CONTRACT IS MADE AND AT THE TIME RENEWALS THEREOF ARE MADE. WITH RESPECT TO REVOLVING FUNDS AND THE REQUIREMENTS OF 31 U.S.C. 665(A) AND 41 U.S.C. 11, WE STATED IN 48 COMP. GEN. 497, 502 (1969) THAT -

WE HAVE NO LEGAL OBJECTION TO CONTRACTING FOR REASONABLE PERIODS OF TIME IN EXCESS OF 1 YEAR SUBJECT TO THE CONDITIONS THAT SUFFICIENT FUNDS ARE AVAILABLE AND OBLIGATED TO COVER THE COSTS UNDER THE ENTIRE CONTRACT. SEE 43 COMP. GEN. 657, 661. NOR AS STATED ABOVE, WOULD WE HAVE ANY OBJECTION UNDER REVOLVING FUNDS TO CONTRACTS FOR A BASIC PERIOD WITH RENEWAL OPTIONS, PROVIDED FUNDS ARE OBLIGATED TO COVER THE COSTS OF THE BASIC PERIOD, INCLUDING ANY CHARGES PAYABLE FOR FAILURE TO EXERCISE THE OPTIONS.

WE WILL CONSIDER YOUR FOUR QUESTIONS IN THE ORDER IN WHICH PRESENTED.

YOUR FIRST QUESTION IS WHETHER THE COMMITMENTS OF MSC DESCRIBED IN YOUR LETTER AND PARTICULARLY THE PROVISIONS REQUIRING MSC TO MAKE UP THE DIFFERENCE, IF ANY, BETWEEN PROCEEDS OF SALE AND TERMINATION VALUE, SERVE TO TRANSFORM THE CHARTERS INTO A PURCHASE OF A CAPITAL ASSET, THE VESSELS, WHICH WOULD REQUIRE AN APPROPRIATION RATHER THAN USE OF THE NAVY INDUSTRIAL FUND. WHILE THE MSC ASSUMES ALL THE LIABILITIES ATTACHED TO OWNERSHIP AND IN EFFECT EQUITABLE OWNERSHIP OF THE VESSELS UPON CONSTRUCTION, THE FACT REMAINS THAT MSC NEVER OBTAINS ACTUAL TITLE TO ALL OR ANY PORTION OF ANY OF THE NINE VESSELS. WE THEREFORE CANNOT SAY THAT THE ARRANGEMENT RESULTS IN THE PURCHASE OF AN ASSET FOR WHICH FUNDS ARE REQUIRED TO BE AUTHORIZED AND APPROPRIATED BY THE CONGRESS.

YOUR SECOND QUESTION IS WHETHER THESE PROVISIONS HAVE THE EFFECT OF TRANSFORMING THE CHARTER FROM ONE FOR 5 YEARS WITH OPTIONS TO RENEW INTO ONE FOR 20 YEARS, WHEN THE CAPITALIZED COSTS OF THE VESSELS WILL BE FULLY AMORTIZED. WHILE THE TERMS OF THE PROPOSAL ARE SUCH THAT THE FAILURE TO RENEW THE OPTIONS WOULD BE SO COSTLY THAT THE OPTIONS UNDER NORMAL CONDITIONS WOULD MOST LIKELY BE RENEWED THROUGH THE 20-YEAR PERIOD, THE PROPOSAL IS NOT ONE FOR A 20-YEAR PERIOD. YOU QUOTE A SENTENCE FROM 48 COMP. GEN. 497 INDICATING THAT WE HAVE NO OBJECTION UNDER REVOLVING FUNDS TO CONTRACTS FOR A BASIC PERIOD WITH RENEWAL OPTIONS, PROVIDING FUNDS ARE OBLIGATED TO COVER THE COST OF THE BASIC PERIOD, INCLUDING ANY CHARGES PAYABLE FOR FAILURE TO EXERCISE THE OPTIONS. THE INSTANT PROPOSAL IS DIFFERENT HOWEVER IN THAT NO CASH IS BEING SET ASIDE TO COVER THE TERMINATION CHARGES FOR THE FAILURE TO EXERCISE ANY OF THE OPTIONS. THIS IS AUTHORIZED DURING THE FISCAL YEAR 1972 BY SECTION 739 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1972, QUOTED ABOVE.

YOUR THIRD QUESTION REFERS TO WHAT WOULD HAPPEN IF EXPENDITURES OR A SHORT FALL IN ANTICIPATED REVENUES SO DEPLETED THE FUND THAT IT LACKED SUFFICIENT MONIES TO PAY THE CHARTER HIRE IN A GIVEN YEAR, OR TO COMPENSATE FOR THE INADEQUATE PROCEEDS OF SALE, IF ANY, OR FOR THE LOSS OR SEIZURE OF THE VESSELS AND ASKS WHETHER IN ANY OF SUCH EVENTS, WOULD THE CHARTERS BE ONLY AN OBLIGATION OF THE FUND OR ARE THEY GENERAL, FULL FAITH AND CREDIT OBLIGATIONS OF THE UNITED STATES.

WE HAVE NEVER RECOGNIZED ANY AUTHORITY OF A FEDERAL AGENCY TO INCUR OBLIGATIONS AGAINST RECEIPTS ANTICIPATED TO BE RECEIVED BEYOND THE END OF THE CURRENT YEAR IN THE ABSENCE OF SPECIFIC AUTHORITY OF LAW THEREFOR AND WE HAVE CONSIDERABLE DOUBT THAT THE MERE DISCLOSURE OF A 5 YEAR DEFENSE PLAN TO THE COMMITTEES AUTHORIZING AND APPROPRIATING FUNDS FOR THE DEPARTMENT OF DEFENSE, CONSTITUTES AUTHORITY TO INCUR OBLIGATIONS AGAINST RECEIPTS ANTICIPATED DURING SUCH 5-YEAR PERIOD. IT IS OF INTEREST THAT SECTION 31.3 OF OMB CIRCULAR NO. A-34 PROVIDES THAT EVEN APPORTIONMENTS OF ANTICIPATED RECEIPTS FOR THE CURRENT YEAR IN NO WAY AUTHORIZES AN AGENCY TO OBLIGATE OR MAKE DISBURSEMENTS IN EXCESS OF THE AMOUNTS TO BECOME AVAILABLE FROM SUCH SOURCES.

WHILE THE MSC IS RESTRICTED TO ITS ANNUAL OPERATING BUDGET IN INCURRING OBLIGATIONS AND MAKING DISBURSEMENTS, THE SECRETARY OF THE NAVY, WITHIN THE LIMITATIONS OF THE NAVY INDUSTRIAL FUND ESTABLISHED BY THE ASSISTANT SECRETARY OF DEFENSE (COMPTROLLER), MAY MAKE ADMINISTRATIVE ALLOCATIONS AND ADJUSTMENTS OF WORKING CAPITAL BETWEEN THE VARIOUS SEGMENTS - INCLUDING THE MSC FUND - OF THE NAVY INDUSTRIAL FUND. SEE DOD DIRECTIVE NO. 7410.4, JANUARY 2, 1970. MOREOVER, THE SECRETARY OF DEFENSE, WITH THE APPROVAL OF THE OFFICE OF MANAGEMENT AND BUDGET, IS AUTHORIZED DURING THE FISCAL YEAR 1972 BY SECTION 739 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1972, TO TRANSFER FUNDS BETWEEN THE INDUSTRIAL FUNDS OF THE THREE MILITARY DEPARTMENTS. IN VIEW OF THE VARIOUS STATUTORY AUTHORITIES RELATING TO THE INDUSTRIAL FUNDS AND THE ASSURANCE OF DOD THAT THE OBLIGATIONAL AVAILABILITY OF THE NAVY INDUSTRIAL FUND IN FISCAL YEAR 1972 IS MORE THAN SUFFICIENT TO COVER OBLIGATIONS FOR THE TOTAL CHARGES PERMITTED UNDER THE INITIAL PERIOD AND ALL SUCCEEDING OBLIGATIONAL PERIODS WITHOUT CONSIDERING ANTICIPATED REIMBURSEMENTS BEYOND 1 YEAR, WE CANNOT QUESTION THE LEGALITY OF THE PROPOSED ARRANGEMENT. THIS DOES NOT MEAN HOWEVER THAT THE CHARTERS ARE GENERAL, FULL FAITH AND CREDIT OBLIGATIONS OF THE UNITED STATES. THIS IS A MATTER WITHIN THE JURISDICTION OF THE ATTORNEY GENERAL AND YOU MAY WANT TO HAVE DOD REQUEST HIS OPINION THEREON. WE ARE NOT CONVINCED THAT THE CASES OF MYERLE V. UNITED STATES, 33 CT. CL. 1 (1897) AND DOUGHERTY V. UNITED STATES, 18 CT. CL. 496 (1883), WHICH WERE CITED IN THE LETTER FROM DOD WOULD BE APPLIED IN A SITUATION WHERE THE CONTRACTOR IS AWARE THAT FUNDS ARE NOT BEING OBLIGATED AND SET ASIDE FOR LIQUIDATION OF THE CONTRACTUAL OBLIGATION OR THAT THE GOVERNMENT IS RELYING UPON ANTICIPATED RECEIPTS. THE FACT OF THE MATTER HERE IS THAT IF THE ENTIRE COST UNDER THE CONTRACTS IS NOT FUNDED, THE MSC FUND WILL BE RELYING FOR THE MOST PART UPON APPROPRIATIONS TO BE MADE BY THE CONGRESS OVER THE 20-YEAR PERIOD TO THE CUSTOMER AGENCIES USING THE NINE TANKERS.

THE FOURTH AREA OF CONCERN TO THE INVESTORS AND THEIR COUNSEL RELATES TO THE QUESTION OF RECEIVING ADEQUATE AND CONCLUSIVE ASSURANCE THAT AT THE TIME THE CHARTER IS ENTERED INTO AND AT OR PRIOR TO THE TIME OF EACH RENEWAL THEREOF MSC HAS FOLLOWED PROPER PROCEDURES NECESSARY TO OBLIGATE UNCONDITIONALLY THE NAVY INDUSTRIAL FUND AND AS TO OBTAINING A CERTIFICATION THAT SUCH PROCEDURES HAVE BEEN FOLLOWED. WE KNOW OF NO WAY TO GET SUCH ASSURANCE UNLESS MSC IS WILLING TO INCLUDE A PROVISION IN ITS CHARTER OF EACH VESSEL AGREEING TO SET ASIDE THE CASH TO COVER ITS OBLIGATIONS THEREON AND PROVIDE YOU WITH AN APPROPRIATE CERTIFICATION. DO NOT BELIEVE IT IS, OR SHOULD BE, OUR RESPONSIBILITY TO ASSURE YOU THAT SUCH AUTHORITY HAS BEEN SO EXERCISED. WHILE WE CAN UNDERSTAND YOUR DESIRE TO HAVE SUCH ASSURANCE, THE NEED THEREFOR WOULD NOT BE AS GREAT IF THE ATTORNEY GENERAL RENDERS AN OPINION THAT THE CHARTERS ARE GENERAL, FULL FAITH AND CREDIT OBLIGATIONS OF THE UNITED STATES.