American Battle Monuments Commission:

New Approach to Forecasting Exchange Rates for its Foreign Currency Fluctuation Account

GAO-06-50R: Published: Oct 20, 2005. Publicly Released: Oct 20, 2005.

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The conference report for the Fiscal Year 2005 Consolidated Appropriations Act required that we review the past and current methodologies used by the American Battle Monuments Commission (ABMC) and the Office of Management and Budget (OMB) to estimate exchange rates used in preparing the budgets for ABMC's foreign currency fluctuation account. This account is intended to maintain the spending power of funds appropriated for ABMC operations in the event that the U.S. dollar depreciates against the currencies used to pay for these operations, which include designing, constructing, operating, and maintaining permanent American military burial grounds in foreign countries. In light of recent low foreign currency fluctuation account levels, the appropriations committees' conferees were concerned with the failure of OMB to adequately address the effect of foreign currency rate fluctuations on ABMC in its original budget submission for fiscal year 2005, or through a supplementary budget request. In response to this mandate, we examined (1) ABMC's method of forecasting exchange rates in preparing budgets for the foreign currency fluctuation account prior to its fiscal year 2006 budget submission and OMB guidance on that method; (2) changes that occurred in the ABMC foreign currency fluctuation fund as the dollar depreciated in value relative to the currencies used by ABMC in its operations; and (3) changes that ABMC made in preparing its fiscal year 2006 budget submission.

Prior to the budget proposal that it submitted for fiscal year 2006, ABMC used the same exchange rates as DOD did to estimate the amount of foreign currency per dollar for funding the foreign currency fluctuation account. In a prior report we explained DOD's approach, which allowed staff to exercise judgment in selecting often highly favorable exchange rates published in the DOD Program Budget Decision 660 (DOD PBD 660) for each fiscal year. We criticized this approach because it produced unrealistic results and allowed for substantial judgment and discretion in the selection of exchange rates for budgeting purposes. However, OMB concurred with ABMC and did not question this method. Further, OMB does not provide guidance, such as a central exchange rate forecast or a consistent forecasting method, for federal agencies to use in preparing their budgets. According to OMB officials, each agency is responsible for determining the appropriate exchange rate to convert its expected foreign currency spending into dollars for budgeting purposes. The administration does not publish foreign currency projections, according to OMB, because they could affect foreign currency markets. Beginning in fiscal year 2002, the euro appreciated substantially against the dollar and losses steadily decreased ABMC's currency fluctuation account as the commission increasingly drew upon it. ABMC continued to use DOD PBD 660 to set foreign currency rates and did not include a request for an additional appropriation for the account as part of its budget submission for fiscal years 2003 and 2004. Further, the President's budget did not request funding for the foreign currency fluctuation fund for fiscal year 2005. However, as fiscal year 2004 progressed, ABMC recognized that the account had fallen to a level that necessitated curtailing overall commission spending. Congress provided about $12 million in supplemental appropriations for fiscal year 2005. In the President's fiscal year 2006 budget submission, $15.25 million was requested for ABMC's foreign currency fluctuation account. In its budget submission for fiscal year 2006, ABMC stopped using exchange rates set by DOD PBD 660; instead, it used the exchange rate that prevailed on the date when it had to make its final submission to OMB. This method does not depend on staff judgment and discretion; we believe avoiding such judgment and discretion is appropriate in selecting exchange rates for budgetary purposes. Given the difficulty of forecasting exchange rates, this approach is reasonable.

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