Defense Working Capital Fund:

Military Services Did Not Calculate and Report Carryover Amounts Correctly

GAO-06-530: Published: Jun 27, 2006. Publicly Released: Jun 27, 2006.

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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.

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.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: In order to improve the business operations of the Department of Defense Working Capital Fund, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and as part of the fiscal years 2007 and 2008/2009 annual budgets submitted to Congress, the Air Force included the allowable and actual carryover amounts.

    Recommendation: In order to improve the business operations of the Department of Defense Working Capital Fund, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and the Undersecretary of Defense (Comptroller) restated the requirements for calculating and reporting carryover during the fiscal years 2007 and 2008/2009 budget review processes. Our review of the carryover reports prepared by the Air Force depot maintenance activity group for the fiscal years 2007 and 2008/2009 budget submissions found that the Air Force was calculating the actual carryover amounts in accordance with DOD policy.

    Recommendation: In order to improve the business operations of the Department of Defense Working Capital Fund, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and directed the Air Force to use the current year orders only for calculating the allowable amount of carryover in its fiscal years 2007 and 2008/2009 budget submission. Further,this guidance was also included in the DOD Financial Management Regulations. Our review of the carryover reports prepared by the Air Force depot maintenance activity group for the fiscal years 2007 and 2008/2009 budget submissions found that the Air Force was calculating the allowable carryover amounts in accordance with DOD policy.

    Recommendation: In order to improve the business operations of the Department of Defense Working Capital Fund, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and directed the Air Force to use the outlay rates from the DOD Financial Summary Tables in its budget guidance to the Air Force for the fiscal years 2007 and 2008/2009 budget submissions. Our review of the carryover reports prepared by the Air Force depot maintenance activity group for the fiscal years 2007 and 2008/2009 budget submissions found that the Air Force was calculating the allowable carryover amounts in accordance with DOD policy.

    Recommendation: In order to improve the business operations of the Department of Defense Working Capital Fund, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and on August 9, 2006, DOD issued a memorandum to the military services directing them to comply with the requirements in the DOD FMR 7000.14-R for accepting customer orders, particularly at fiscal year end. Specifically, DOD directed Defense Working Capital Fund managers to take the appropriate action to ensure that work commences within a reasonable period of time after the acceptance of customer orders.

    Recommendation: In order to improve the business operations of the Department of Defense Working Capital Fund, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and implemented a more rigorous review of the Services' carryover reporting for the fiscal years 2007 and 2008/2009 budget submissions. Our review of selected carryover reports prepared by the Services' for the fiscal years 2007 and 2008/2009 budget submissions found that the Services were calculating the allowable and actual carryover amounts in accordance with DOD policy.

    Recommendation: In order to improve the business operations of the Department of Defense Working Capital Fund, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and updated its Financial Management Regulations in June 2006 to include instructions specifying the outlay rates to be used by DOD working capital fund activities. Further, DOD included in their fiscal years 2007 and 2008/2009 budget justification guidance instructions directing the military services to use the outlay rates in DOD's financial summary tables.

    Recommendation: In order to improve the business operations of the Department of Defense Working Capital Fund, the Secretary of Defense should 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 Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and directed the Navy to comply with our recommendation. Our review of Navy carryover reports for the fiscal year 2008/2009 budget submission to Congress found that the Navy reported its allowable and actual carryover amounts for the five Navy research and development subactivity groups.

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