Army Working Capital Fund: Actions Needed to Reduce Carryover at Army Depots

To address the intent of our recommendation, the Office of the Under Secretary of Defense (Comptroller)(OUSD(C)) issued a memorandum, dated August 6, 2008, that(1) reiterated its current policy prohibiting the manipulation of customer order balances to reduce the reported carryover levels; (2) directed its components to conduct internal reviews of accounting procedures currently in use, to include year-end adjustments, to ensure that manipulation of carryover levels is not occurring; and (3) OUSD(C) will evaluate future carryover violations and take appropriate action as warranted. With the issuance of the memorandum directing its components to comply with existing carryover policies and OUSD(C)'s commitment to address any future violations, reliability of carryover data and their usefulness as a management tool should improve significantly.

DOD updated the DOD Financial Management Regulation in September 2008 to require requests for exemptions to the carryover policy to be submitted to the Under Secretary of Defense (Comptroller) Director of Revolving Funds separate from the budget documents. DOD then evaluates these requests to determine the impact the requests have on actual carryover balances reported to Congress and whether granting such exemptions reduce the visibility over and financial incentives to resolve long-standing problems. If DOD grants a waiver, the amount of the waiver and the reason for the waiver is listed in the budget justification book. To illustrate the implementation of the procedure, DOD provided GAO an example of a Navy exemption request that was submitted to DOD in September 2009 for approval. DOD denied a portion of the requested waiver amount because some of the work identified in the Navy's memo was considered no different that other depot workload and should not be inducted into the depots unless the work could be performed within the criteria identified in the Financial Management Regulations.

DOD concurred with our recommendation and established a program to monitor carryover information throughout the fiscal year. Specifically, the Army has established a Depot Maintenance Execution Council that meets quarterly to discuss planned versus actual carryover, new requirements impact on carryover (i.e., whether the requirements will increase or decrease carryover), and projected carryover completions by fiscal year. In 2008, the Council met in June, September, and November. With the establishment of the Council, the Army should have sufficient high-level visibility over carryover issues that will allow them to identify and implement ways to further reduce depot maintenance carryover if carryover goals are not being met.

DOD concurred with the recommendation and the Army separately identified the allowable and the actual amounts of carryover for the Army depot maintenance activities in the fiscal years 2010 and 2011 President's Budget Request Justification Books provided to Congress. With the additional information Congress should have better visibility over the Army Working Capital Fund's carryover.

On November 19, 2008, the Assistant Secretary of the Army (Financial Management and Comptroller) issued a memorandum to the Army Material Command prohibiting the deobligation of customer funds at year end for the sole purpose of reducing carryover amounts. The Army now tracks adjustments to carryover for the depots and monitors the adjustments to prohibit this type of action. With the issuance of the Army memorandum directing its activities to comply with existing carryover policies and implementation of procedures for monitoring depot adjustments, the reliability of carryover data and their usefulness as a management tool should improve significantly.

DOD concurred with the recommendation and the Assistant Secretary of the Army (Financial Management and Comptroller) issued a memorandum on November 19, 2008 to the U.S. Army Material Command reemphasizing the need to follow the DOD Financial Management Regulation when accepting new orders. The guidance provides the conditions that must be followed when accepting new orders. The Army follows-up periodically on compliance with the guidance during site visits. This meets the intent of our recommendation.

In April 2009, the Army updated the Air Force Working Capital Fund Resource Formulation Guidance to encourage Army depots to consider prior year trends when estimating future workloads. Further, the Army in June 2009 established procedures for more accurately forecasting budgeted new orders using a seven year trend analysis comparing historical new orders to new orders found in the current budget submission. The Army noted that the trend analysis tool would be very useful going forward to identify any large deviations in recent years. Using the trend analysis tool, the Army revised upward the fiscal year 2010 new order forecast contained in the fiscal year 2011 Army Working Capital Fund budget submission by $604 million. The fiscal year 2010 budgeted new order amount was within 2 percent of the actual amount. By revising the Resource Formulation Guidance and implementing the trend analysis tool, the Army should have more accurate budget and workload estimates that allow them to put in place the necessary resources (manpower and material) to perform work to better address carryover and expected orders.

The Army incorporated the critical maintenance repair parts reactive system into the Commander's Critical Item Requirement process, which is monitored on a daily, weekly, and monthly basis by the Army and the Office of the Undersecretary of Defense (OUSD)(Comptroller) to ensure parts shortages do not impact production. The critical maintenance repair parts reactive system provides quantifiable data on parts shortages or potential parts shortages that have or will cause the depots to resort to "work-around" methods to try to prevent work stoppage. Further, the Army began in 2009 including the amount of carryover attributed to parts shortages and the actions the activities are taking to reduce carryover in their quarterly budget execution reviews with OUSD (Comptroller). For example, the Army identified one program that experienced parts shortages resulting in carryover for small arms. The shortage, which has been resolved, was caused by defective/non-conforming parts provided by the supplier. The resulting carryover amount was $31 million in fiscal year 2007. With the implementation of these actions, the Army should have better information to determine the effectiveness of actions taken to resolve spare parts shortages and its impact on carryover.