B-202690, Feb 01, 1991

B-202690, Feb 01, 1991

DIGEST: Audit of the Commodity Credit Corporation's 1989 Financial Statements (Job Code 917118; B-202690). The Commodity Credit Corporation violated statutory restrictions on the use of its 1988 appropriations. CCC used its entire $21 billion appropriation to reduce its debt to the Treasury in violation of the 17 purpose and amount limitations specified in CCC's appropriation act. CCC also did not perform the fiscal year-end close out procedures required by 31 U.S.C. Sec. 1552. After reconstructing CCC's actions in the manner most favorable to it consistent with applicable law, CCC must adjust its Treasury accounts to reflect $2.9 billion in expired appropriations which should have been withdrawn to the Treasury at the end of fiscal year 1988.

Director, Civil Audit Group, AFMD - Dennis Duquette:

During our review of the draft report on the financial statement audit of the Commodity Credit Corporation (CCC), we identified a complicated legal question concerning CCC's use of its 1988 appropriation for "Operating Expenses." See Pub. L. No. 100-202, 101 Stat. 1329, 1329-335 (1987). Specifically, CCC's financial statements and notes indicated that CCC had used part of its 1988 appropriation as a reimbursement for 1989 net realized losses. We began to question whether CCC had the authority to "carry over" the 1988 appropriations, rather than treating them as expired and returning them to the Treasury.

During those discussions, your staff advised us that, contrary to the representations in its financial statements, CCC may have used the entire 1988 appropriation to reduce its Treasury debt, and used subsequent borrowing to finance its operations. This practice raised a second question as to whether CCC obligated its entire $21.1 billion appropriation without regard to the purpose, amount, and time limitations imposed upon the 17 line item amounts included in the appropriations act. See 101 Stat. at 1329-335.

On December 17, 1990, representatives of AFMD and OGC met with representatives of the Department of Agriculture and CCC to discuss these issues. At that meeting, Agriculture and CCC officials confirmed that CCC used the entire 1988 appropriation to reduce CCC's Treasury debt. These officials also stated that, in their opinion, CCC was not bound by either: (1) the purpose and amount limitations in the 17 line items; or (2) the general provision in the act limiting all appropriations to one year availability unless explicitly stated otherwise. These positions were based upon a proviso in the appropriations act stating that the appropriation "provisions would not interfere with CCC's discharge of its corporate responsibilities." Id. at 1329-336.

We have completed our analysis of these issues, and conclude that CCC was bound by the purpose, amount, and time limitations contained in the appropriations act. Accordingly, CCC violated these limitations when it used the entire appropriation to reduce its Treasury debt, and did not return expired appropriations to the Treasury at the end of fiscal year 1988. We have also reviewed information provided by CCC, and reconstructed CCC's transactions in a manner most favorable to CCC consistent with applicable law. Based upon this reconstruction, it is our opinion that about $2.9 billion of CCC's 1988 appropriation expired as unobligated at the end of the fiscal year. CCC should make the appropriate adjustments to its Treasury accounts to reflect the amount of expired 1988 appropriations.

Attached is a detailed discussion of these matters which we propose for the draft report on compliance with laws and regulations.

Attachment

cc: Mr. Chapin, AFMD

Mr. Crowley, AFMD

Mr. Dodaro, AFMD

Mr. Stoltz, AFMD

Mr. Neff, AFMD

Mr. Kepplinger, OGC/AFMD

Attachment

PROPOSED DISCUSSION FOR COMPLIANCE REPORT

CCC did not follow statutory requirements applicable to its use of the $21.1 billion in appropriations received in fiscal year 1988. CCC failed to limit the use of its appropriations to the 17 line items specified in its 1988 appropriations act, and did not perform the required fiscal year- end close out procedures at the end of 1988. By reconstructing CCC's use of its appropriations in a manner most favorable to it consistent with applicable law, we conclude that about $2.9 billion in CCC's 1988 appropriations expired as unobligated at the end of fiscal year 1988. CCC should make the appropriate adjustments to its accounts with the Treasury to reflect these expired appropriations.

Normally when a federal agency receives an appropriation, the Treasury establishes an account for the agency's use. The agency then incurs obligations against the amount appropriated, and liquidates the obligations by directing the Treasury to make payments out of the appropriation account. All the obligations made against that appropriation must be consistent with the purpose, time, and amount limitations applicable to the appropriation. /1/ Any amount not obligated consistent with these requirements at the end of an appropriation's period of availability expires and must be returned to the Treasury.

CCC's normal operations, however, differ greatly from those of typical federal agencies. Rather than relying upon appropriations, CCC pays its annual operating expenses out of its program income and permanent authority to borrow from the Treasury. These fund sources are not controlled by the same statutes and regulations which control the use of appropriations.

Because its expenses historically exceed program income, CCC incurs losses each year which are financed through its borrowing authority. Prior to fiscal year 1988, CCC annually received a single lump sum appropriation for "Reimbursement for Net Realized Losses." Since these appropriations reimbursed CCC for losses previously financed by Treasury borrowings, CCC obligated and expended each year's appropriation to pay back funds borrowed from the Treasury. These obligations paid for realized losses sustained by CCC in prior years which had not been reimbursed, and were limited to the amount of the appropriation. Thus, CCC's historical treatment of its annual lump sum appropriation was consistent with the applicable purpose, time, and amount limitations. Furthermore, since CCC historically obligated the entire appropriation, there were no unobligated appropriations which expired and had to be returned to the Treasury.

For fiscal year 1988, however, CCC did not receive a single appropriation solely to reimburse it for its net realized losses. Rather, CCC received a total of $21.1 billion for "Operating Expenses," which was divided into 17 line item appropriations. CCC officials told us that, consistent with its prior practices, CCC used the entire 1988 appropriation to immediately reduce its outstanding debt with the Treasury. CCC then financed its 1988 expenditures by borrowing additional funds from the Treasury.

In our view, CCC's use of its fiscal year 1988 appropriations was not consistent with the applicable limitations. The 1988 appropriations were made available for entirely different purposes than CCC's prior appropriation. For example, CCC's 1987 appropriation was available "to reimburse the Commodity Credit Corporation for net realized losses sustained, but not previously reimbursed, pursuant to 15 U.S.C. Secs. 713- 11 and 713-12. ..."

Pub.L. No. 99-500, 101(a), 100 Stat. 1783, 1783-12 (1986). In contrast, CCC's 1988 appropriation was available "for operating expenses as authorized by the Charter of the Commodity Credit Corporation (15 U.S.C. Sec. 714) to be available for financing the Corporation's programs and activities only as follows. ..."

Pub.L. No. 199-202, 101 Stat. 1329, 1329-335 (1987). The appropriations act then appropriated discrete amounts for 17 specific purposes. Id. /2/ Moreover, the 1988 appropriations act stated that "no part of any appropriation contained in this Act shall remain available for obligation beyond the current fiscal year unless expressly so provided herein." Id. at 609, 100 Stat. 1329-353. There are no provisions expressly stating that the CCC "Operating Expenses" appropriation was available for obligation beyond 1988. Thus, CCC's 1988 "Operating Expense" appropriation was subject to express purpose, time, and amount limitations which limited CCC's use of the funds.

Table 1 shows CCC's use of its 1988 appropriation, and Table 2 shows our reconstruction of CCC's transactions in a manner most favorable to CCC consistent with applicable law. Table 1 reflects CCC's application of its $21.1 billion "Operating Expenses" appropriation to pay outstanding Treasury debt. However, as shown on Table 2, only $6.3 billion appropriated for 1988 program activities ($5.3 billion appropriated for "Other Expenses, and the $1 billion which could be transferred from the other line items) could be used to pay CCC's outstanding Treasury debt. /3/ CCC's use of its 1988 appropriations in excess of those amounts to pay its outstanding Treasury debt violated the restrictions on the use of its appropriation.

Based upon our analysis of CCC's records, we conclude that CCC could have properly obligated a total of $18.2 billion of its appropriations in 1988 ($6.3 billion in reduction of Treasury debt and $11.9 billion in program operations financed by appropriations). As shown in Table 2, the balance of CCC's appropriation was about $2.9 billion. This amount would, under the assumptions most favorable to CCC, have expired at the end of 1988. CCC should make the appropriate adjustments to its Treasury accounts to reflect the amount of the expired appropriations.

Table 1

CCC's Appropriation and Program Activity in 1988 (in 000's)

TABLE OMITTED

CCC Program Activities

TABLE OMITTED

Notes:

1. The 1988 Appropriations Act, P. L. No. 100-202, provided CCC with the authority to transfer up to 7% of the amount listed for each line item to other line items. This column shows that CCC did not make any transfers between the line items under the transfer authority.

2. This column shows CCC's application of its line items to pay its outstanding Treasury debt, other than line items intended to be specific reimbursements of prior costs financed through Treasury borrowing. Because the Wool and Mohair and Prior Year Losses line items are specifically intended to reimburse CCC's prior expenses financed through borrowing, the application of those items is shown as a 1988 program activity.

3. These amounts are taken from CCC's records. They reflect CCC's program activity amounts which CCC administratively allocated to the 17 activities listed as line items in the 1988 appropriation.

4. This column shows how CCC derived the amount of Appropriated Capital that was shown on CCC's 1988 financial statements. (GAO/AFMD 89-83.) This amount was simply the overall amounts appropriated to CCC less the program activity amounts CCC allocated to the 17 activities listed as line items in the appropriations act. (See note 3.) As shown in Column h, these amounts did not reflect the amount of appropriated funds CCC had remaining as the end of fiscal year 1988. Table 2

CCC's Appropriation and Program Activity in 1988

As Recomputed By GAO (in 000's)

TABLE OMITTED

CCC Program Activities

TABLE OMITTED)

Jim Hinchman,

The audit of CCC's 1989 financial statements has raised an issue about CCC's use of its 1988 Operating Expenses appropriation. We are all in agreement with the attached, which is consistent with our only previous decision on CCC's 1988 appropriation.

Our position would compel CCC to make adjustments to its Treasury accounts to reflect that about $3 billion in appropriations expired at the end of 1988. This will doubtless be of great concern to CCC and of interest to CCC's congressional committees.

For these reasons, I am providing you with our proposed position. We are ready to meet with you at your convenience.

Gary Kepplinger:

P.S. CCC may want to discuss this matter directly with you and us.

Mr. Hinchman,

Your January 8th note to me about our memo on CCC's use of its 1988 appropriation asked us to address several points.

1. Is the legislative history of the appropriation (committee report, etc.) consistent with our interpretation.? Have we talked to the Appropriations Committee staff.?

The legislative history of the 1988 appropriations act fully supports our interpretation of the CCC appropriation. The report of the House Committee on Appropriations stated:

"In order to carry out the programs of the Corporation in line with the authority provided in its Charter, the Committee has recommended appropriations for the Corporation, based on the anticipated spending levels reported to the Congress. ... Therefore, the Committee recommends appropriations be available only for specific purposes as follows."

H.R. Rep. No. 386, 100th Cong., 1st Sess. 74 (1987). The report then listed 17 line items and amounts. The Conference Report on the final bill states:

The conference agreement appropriates $21,133,658,000 for the operating expenses of the Commodity Credit Corporation under 17 major program accounts as proposed by the House. The Senate bill had proposed a single appropriation for the reimbursement for net realized losses."

H.R. Rep. No. 498, 100th Cong., 1st Sess. 1108 (1987). Thus, the legislative history is clear that CCC's 1988 appropriation was controlled by the 17 line items contained in the appropriations act. The history specifically points out that CCC was not given a single appropriation for net realized losses. As you suggest, we will speak with the Appropriations Committee staff about these issues. However, I would like to point out that it is not necessary for CCC to receive an appropriation before it restores the $2.89 billion to the Treasury. Since CCC improperly used the 1988 appropriation to reduce its outstanding Treasury debt, CCC could restore the 1988 expired appropriation account by "reversing" that transaction, i.e. increasing its debt. This would place CCC in essentially the same financial position it should have been in at the end of 1988.

We also believe that the adjustment of CCC's accounts will not have a budgetary impact. The reconstruction of CCC's use of its 1988 appropriation would also engender a reconstruction of CCC's use of its budget authority for that year. The net effect of reconstructing CCC's budget authority is as follows:

Budget Authority (000's)

Per CCC Actions As Reconstructed

Appropriations $ O $ 10,395,973

Borrowings $ 14,992,773 $ 4,496,800

Total $ 14,992,773$ 14,992,773

As shown, there would be no increase in total budget authority used, and therefore no budgetary effect. Even if an adjustment of the budget authority was "scored" as a use of budget authority, there would not be an impact on the discretionary domestic limits under the Budget Enforcement Act of 1990. The CCC fund is a mandatory account which is exempt from the limits on budget authority in 1991. H.R. Rep. No. 964, 101th Cong., 2d Sess. ***, 136 Cong. Rec. H12423, H12751 (daily ed. Oct. 26, 1990).

CCC's use of its borrowing authority to finance the deficiency in the 1988 appropriation will not require an immediate appropriation for CCC to repay the additional debt. CCC could continue to finance its operations from its borrowing authority. Thus, appropriations to repay debt used to finance the 1988 appropriation deficiency could be given to CCC immediately, over a number of years, or withheld indefinitely. CCC would only need an appropriation to continue its operations at the time when it approaches or meets the $30 billion limit on its borrowing authority.

However, any such appropriation given to CCC to repay its debt to the Treasury will not contribute to the need for a sequester under the Budget Enforcement Act of 1990. Sequesters under the Act are caused by deficits, which in turn are a function of outlays. Pub. L. No. 101 508, 13101 Stat. -- (1990). Outlays are defined as expenditures made under budget authority. 2 U.S.C. Sec. 662. An appropriation to repay debt is not budget authority. Office of Management Budget Circular No. A-34, Aug. 26, 1985 at II-3. Thus, expenditures from an appropriation given to CCC to repay the debt used to finance the deficiency in the 1988 appropriation will not be counted as outlays in determining whether the deficit will be large enough to cause a sequester.

For the same reasons, an appropriation given to CCC to directly finance the deficiency in the 1988 account would also not be counted as part of the deficit. Appropriations to finance deficiencies are also not considered to be budget authority. OMB Circ. No. A-34, at II-3.

2. Is the final sentence of the first paragraph correct.? How can the 88 appropriation be used to pay 89 net realized losses.?

It can't. However, CCC's financial statements represent that CCC applied an unobligated balance from its 88 appropriation against its 89 losses. During our inquiry into CCC's authority to carry over the 88 funds, we found that CCC had actually fully expended its 1988 appropriation to pay off Treasury debt. Our memo addresses CCC's authority to use the entire appropriation to pay debt, and not the fact that CCC misstated the use of the appropriation on its financial statements. We have clarified this point in the memo.

We are available to discuss this further with you if you desire.

/1/ Purpose limitations restrict obligations to those meeting an authorized use of the appropriation. 31 U.S.C. Sec. 1301(a). Time limitations require that obligations only pay for agency expenses properly incurred during (or meet the bona fide need of) the time period that the appropriation is available to be obligated. 31 U.S.C. Sec. 1502. Amount limitations restrict the aggregate level of obligations to the total amount appropriated. 31 U.S.C. Sec. 1341(a)(1)(A).

/2/ CCC's "Operating Expense" appropriation also contained a proviso stating that "such provisions shall not interfere with the Commodity Credit Corporation's discharge of its corporate responsibilities. ..." Pub.L. No. 100-202, 101 Stat. at 1329-336. This proviso cannot be said to override the amount and purpose limitations applicable to the appropriation. There is an "elementary canon of statutory construction that a statute should be interpreted so as not to render one part inoperative." Colautti v. Franklin, 439 U.S. 379, 392 (1979). Both GAO and the Department of Agriculture have interpreted the proviso to be consistent with the limitations. 67 Comp.Gen. 332, 335 and n. 3 (1988). The Comptroller General previously interpreted the proviso to mean that if CCC exhausted the enacted appropriations, CCC remained authorized under other law to use its assets or borrowing authority to pay the types of expenses included in the 17 line items. Id. Thus, the proviso would allow CCC to incur obligations in excess of the amounts appropriated for each line item, but CCC would be prohibited from financing those obligations with unobligated amounts from other line items.

/3/ We also do not object to CCC's use of the $126 million appropriated for the Wool and Mohair program and the $1.4 billion appropriated for prior year losses to pay outstanding Treasury debt. These appropriations were given to make repayments to the Treasury for borrowings CCC used to finance prior year activities.