Defense Working Capital Fund: Improvements Needed for Managing the Backlog of Funded Work
Highlights
This report examines the working capital fund activities for the Department of Defense (DOD). GAO (1) identifies potential changes in current management processes or policies that, if made, would result in a more efficient operation and (2) evaluates various aspects of the DOD policy that allow Defense Working Capital Fund activities to carry over a 3-month level of work from one fiscal year to the next. GAO found that DOD lacks a sound analytical basis for its current 3-month carryover standard. DOD established a 3-month carryover standard for most working capital fund activity groups, although it has not done the analysis necessary to support the 3-month standard. Without a validation process, neither DOD nor congressional decisionmakers can be sure that the 3-month standard is providing activity groups with reasonable amounts of carryover to ensure a smooth transition from one fiscal year to the next or whether the carryover is excessive. In addition, carryover information currently reported under the 3-month standard is not comparable between services and is misleading to DOD and congressional decisionmakers. Specifically, results can differ markedly because the military services use different methods to calculate the number of months of carryover. Further complicating the congressional budget review of carryovers is that some activity groups have underestimated their budgeted carryover year after year, thereby providing decisionmakers with misleading year-end carryover information and resulting in more funding being provided than was intended. GAO also reviewed the potential financial impact of reducing the amount of fiscal year-end carryover permitted by DOD policy. GAO's analysis showed that if a 30-day, 60-day or 75-day carryover policy had been in effect during the fiscal year 2001 budget review process, the amount of budgeted customer orders could have been reduced by about $2.9 billion, $1.6 billion, or $1.0 billion, respectively.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Defense | The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to determine the appropriate carryover standard for the depot maintenance, ordnance, and research and development activity groups because these groups account for about 90 percent of the dollar amount of carryover. The carryover standard should be based on the type of work performed by the activity group and its business practices, such as whether it performs the work in-house or contracts it out. As part of this effort, DOD needs to have sound analytical basis for determining the appropriate level of carryover. |
Closed – Implemented
DOD concurred with this recommendation, and in December 2002, revised its methodology for calculating acceptable carryover for the depot maintenance, ordnance, and research and development activity groups. The new methodology uses outlay rates of the appropriation financing the work being performed by the working capital fund. The new methodology allows for a unique business area carryover target, as well as an analytical approach that supports a more meaningful budget execution analysis, rather than just performance against an arbitrary 3-month target. In June 2004, DOD finalized its written procedures for implementing the new carryover methodology, and these procedures are included in the DOD Financial Management Regulation. Volume 2B, chapter 9.
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| Department of Defense | The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to clarify the carryover policy to obtain consistency in calculating the amount of carryover for use in determining whether the activity groups have exceeded the carryover standard. Specifically, in calculating the number of months of carryover, the policy needs to clarify (1) the type of obligations to be included in the contractual obligation category, such as contracts with private industry and outstanding material requisition and (2) that the revenue used must be adjusted for certain purposes, such as revenue earned for work performed by contractors. All internal and external reporting of carryover should be done using the same methodology. |
Closed – Implemented
DOD concurred with this recommendation, and in December 2002, revised its methodology for calculating the amount of carryover. Under the revised methodology, working capital fund activities are to use outlay rates to calculate carryover. This will result in a uniform approach for calculating the months of carryover because deductions allowed by the old methodology for obligations, such as contracts with private industry and material requisitions, are no longer allowed. In addition, revenue is no longer a factor in the carryover calculation. The new methodology was adopted by DOD for fiscal year 2004, and has been incorporated into the working capital fund activities' fiscal year 2004 budget submissions.
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| Department of Defense | The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to ensure that the military services calculate carryover consistently during the budget review process so that the carryover figures are comparable. |
Closed – Implemented
DOD concurred with this recommendation and, in December 2002, revised the methodology for calculating carryover for budget review purposes. Doing so eliminated those adjustments used under the old method that were open for interpretation, and that GAO found were not being used consistently by the military services to calculate the months of carryover. The new methodology was adopted by DOD for fiscal year 2004, and has been incorporated into the working capital fund activities' fiscal year 2004 budget submissions.
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| Department of Defense | The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) and the Acting Secretaries of the military services to enforce the current policy that specifies that one activity should report carryover on interfund and intrafund orders. |
Closed – Implemented
DOD concurred with this recommendation, and in December 2002, revised its methodology for calculating carryover. Under the revised methodology, working capital fund activities are to use outlay rates to calculate carryover, and as such, interfund and intrafund orders have been eliminated from the carryover calculation. The new methodology was adopted by DOD for fiscal year (FY) 2004, and has been incorporated into the working capital funds' FY2004 budget submissions. Furthermore, GAO's review of available budget data pertinent to Navy's reported carryover in its FY2003 budget submission, found that the Navy correctly used interfund and intrafund orders in calculating carryover.
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| Department of Defense | The Secretary of Defense should direct the Acting Secretaries of the military services to use more realistic carryover figures in developing their budgets by considering historical actual carryover data. |
Closed – Implemented
DOD concurred with this recommendation and DOD budget officials have discussed this issue with the military services. They have reiterated to the services that budgeted orders for working capital fund activity groups must be in line with customers' budgeted requirements, orders to be provided, which directly effect carryover. In determining budgeted orders, the activity groups are to consider past trends of customer orders received (and thus carryover). Budget officials from the three services told GAO that they are now considering historical actual order/carryover data as part of the budget development process to help ensure the budgeted carryover is more realistic.
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