Background

The AFWCF relies on sales revenue rather than regular appropriations to  finance its continuing operations. The AFWCF is intended to (1) generate  sufficient resources to cover the full cost of its operations and (2) operate  on a break-even basis over time—that is, neither make a gain nor incur a  loss. Customers primarily use appropriated funds to finance orders placed  with the AFWCF. Cash generated from the sale of goods and services is  the AFWCF’s primary means of maintaining an adequate level of cash to  sustain its operations. The ability to generate cash consistent with DOD’s  regulations depends on (1) accurately projecting workload, such as the  number of aircraft, engines, missiles, and components needed to be  repaired during the year or annual transportation requirements needed to  move United States forces, equipment, and supplies around the globe,  and (2) accurately setting prices to recover the full costs of producing  goods and services. DOD policy requires the AFWCF to establish its  sales prices prior to the start of each fiscal year and to apply these  predetermined or “stabilized” prices to most orders received during the  year—regardless of when the work is accomplished or what costs are  incurred. Stabilized prices provide customers with protection during the  year of execution from prices greater than those assumed in the budget  and permits customers to execute their programs as approved by  Congress.
Developing accurate prices is challenging because the process to  determine the prices begins about 2 years in advance of when the work is  actually received and performed. In essence, the AFWCF’s budget  development has to coincide with the development of its customers’  budgets so that they both use the same set of assumptions. To develop  prices, the AFWCF estimates (1) labor, material, overhead, and other  costs based on anticipated demand for work as projected by customers;  (2) total direct labor hours for each type of work performed, such as work  related to aircraft, engines, and repairable inventory items; (3) the  workforce’s productivity; and (4) savings because of productivity and  other cost avoidance initiatives. In order for the AFWCF to operate on a  break-even basis, it is extremely important that the AFWCF accurately  estimate the work it will perform and the costs of performing the work.  Higher-than-expected costs or lower-than-expected customer demand for  goods and services can cause the working capital fund to incur losses.  Conversely, lower-than-expected costs or higher-than-expected customer  demand for goods and services can result in profits. With sales prices  based on assumptions that are made as long as 2 years before the prices  go into effect, some variance between expected and actual costs is  inevitable.
If projections of cash disbursements and collections indicate that cash  balances will drop below the minimum cash requirement, the AFWCF  may need to generate additional cash. One method that may be used is  to bill customers in advance for work not yet performed. Advance billing  generates cash almost immediately by billing AFWCF customers for work  that has not been completed. This method is a temporary solution and is  only used when cash reaches critically low balances because it requires  manual intervention in the normal billing and payment processes.

		Description of the AFWCF

During fiscal year 2013, the AFWCF earned $21.2 billion in revenue. The  AFWCF consists of three business entities: the Consolidated Sustainment  Activity Group (CSAG), the Supply Management Activity Group-Retail  (SMAG-R), and the Transportation Working Capital Fund (TWCF). The  Air Force manages the CSAG and the SMAG-R and acts as an executive  agent for the TWCF. The Air Force assumed responsibility for TWCF  cash in fiscal year 1998 and TWCF cash is included in the AFWCF cash  balance. However, USTRANSCOM rather than the Air Force has the  day-to-day management responsibility for TWCF operations. The  following is a description of the three business entities.
CSAG: During fiscal year 2013, the CSAG earned $7.4 billion in  revenue. The CSAG provides repairable supply items and  consumable supply items as well as maintenance services. The Air  Force operates two CSAG divisions: the supply division and the  maintenance division. The supply division is primarily responsible for  managing repairable and consumable spare parts unique to the Air  Force. The supply division issued about 1.7 million repairable or  consumable spare parts in fiscal year 2013. The maintenance division  is responsible for economically repairing, overhauling, and modifying  aircraft, engines, missiles, and components to meet customer  demands. The Air Force operated three air logistics complexes  performing about 21 million direct labor hours of work in fiscal year  2013.
SMAG-R: During fiscal year 2013, the SMAG-R earned $3.3 billion in  revenue. The Air Force’s SMAG-R manages inventory items,  including weapon system spare parts, medical-dental supplies and  equipment, and other supply items used in non-weapon system  applications. It also procures material and makes spare parts  available to authorized customers. The SMAG-R comprises three  divisions: the General Support Division, the Medical-Dental Division,  and the United States Air Force Academy Division. The General  Support Division manages nearly 1.4 million items procured from the  Defense Logistics Agency  and the General Services Administration to support field and depot maintenance of aircraft, ground and  airborne communication, and electronic systems. The Medical-Dental  Division manages items for 74 medical treatment facilities worldwide.  Finally, the United States Air Force Academy Division purchases  uniforms and uniform accessories for sale to approximately 4,000  cadets at the Air Force Academy.
TWCF: During fiscal year 2013, the TWCF earned $10.5 billion in  revenue. USTRANSCOM’s mission is to provide air, land, and sea  transportation for DOD in times of peace and war, with a primary  focus on wartime readiness. USTRANSCOM submits the TWCF  budget as a distinct subset of the AFWCF budget submission. It  reflects the authority needed to meet peacetime operations, overseas  contingency operations, the surge/readiness requirements to  support military strategy, and other priorities needed to meet its  transportation mission. According to the USTRANSCOM fiscal year  2012 annual report, the airlift component of USTRANSCOM flew  almost 85,000 sorties supporting 31,181 missions around the world  and transported over 1.8 million passengers and 659,000 short tons of  cargo to their destinations in fiscal year 2012. Further, the sealift and  surface movement components of USTRANSCOM moved more than  500,000 measurement tons of cargo (sea transportation) and 14.5  million square feet of cargo (surface transportation) in support of U.S.  forces worldwide in fiscal year 2012.

		DOD Cash Management Policy

Effective cash management in DOD largely depends on managers  receiving accurate and timely data on cash balances, collections, and  disbursements. Currently, DOD cash balances are visible only in official  reports at the end of each month. According to DOD’s Financial  Management Regulation, volume 2B, chapter 9, DOD working capital  funds are to maintain the minimum cash balance necessary to meet  disbursement requirements in support of both operations and the capital  asset program. The DOD working capital funds are to maintain a  minimum cash balance sufficient to pay bills, such as (1) paying  employees’ salaries for repairing aircraft, weapon systems, and  equipment; (2) purchasing inventory items (spare parts) from vendors;  and (3) transporting troops, equipment, and supplies worldwide. DOD’s  Financial Management Regulation requires that “cash levels should be  maintained at 7 to 10 days of operational cost and cash adequate to meet  six months of capital disbursements.” Thus, the minimum cash  requirement consists of cash that is sufficient to meet 6 months of capital  requirements plus 7 days of operational cost. The maximum cash  requirement consists of 6 months of capital requirements plus 10 days of  operational cost. The regulation further provides that a goal of DOD  working capital funds is to minimize the use of advance billing of  customers to maintain cash solvency unless advance billing is required to  avoid Antideficiency Act violations.
In June 2010, the DOD Financial Management Regulation was amended  to allow DOD working capital fund activities, with the approval of the  Office of the Under Secretary of Defense (Comptroller), Director of  Revolving Funds, to incorporate into the formula for calculating the  minimum and maximum cash requirements three new adjustments.  These adjustments would increase the minimum and maximum cash  requirements. First, a working capital fund may increase the minimum  and maximum cash requirements for the amount of accumulated  operating results planned for return to customer accounts. The working  capital fund returns accumulated profits back to its customers by reducing  future prices so it can operate on a break-even basis over time. The  second adjustment allowed by the revised DOD Financial Management  Regulation is an allowance for funds appropriated directly to a working  capital fund that are obligated in the year received but not fully spent until  future years. The adjustment allows the working capital fund to retain  these amounts as an addition to its normal operational costs. Finally, a  working capital fund may increase the minimum and maximum cash  requirements by the marginal cash required to purchase goods and  services from the commodity/business market at a higher price than was  submitted in the President’s Budget. The adjustment reflects the cash  impact of the specified market fluctuation.

	AFWCF Monthly Cash Balances Did Not Consistently Fall within the Minimum and Maximum Cash Requirements

The AFWCF’s monthly cash balances fell within the minimum and  maximum cash requirements about one-third of the time during fiscal  years 2009 through 2013. Our analysis of AFWCF cash data showed that  the AFWCF monthly cash balances fluctuated significantly from fiscal  years 2009 through 2013 but were almost equally distributed above,  between, and below the minimum and maximum cash requirements. The  AFWCF monthly cash balances were above the maximum cash  requirement for 19 of the 60 months, between the minimum and  maximum cash requirements for 21 of the 60 months, and below the  minimum cash requirement for 20 of the 60 months. Figure 1 shows the  AFWCF monthly cash balances compared to the minimum and maximum  cash requirements for fiscal years 2009 through 2013.
Our analysis of the AFWCF monthly cash balances showed that the  average monthly cash balance declined each year from fiscal year 2009  through fiscal year 2013. Further, as monthly cash balances declined (1)  more months were above the maximum cash requirement in fiscal years  2009 and 2010 compared to the next 3 fiscal years and (2) more months  were below the minimum cash requirement in fiscal years 2012 and 2013  compared to the prior years. Table 1 shows AFWCF monthly cash  balance information for each of the 5 fiscal years reviewed and the  number of months the AFWCF cash balances were above, between, or  below the minimum and maximum cash requirements.
Our analysis of AFWCF financial documents and discussions with Air  Force headquarters, Air Force Materiel Command, and USTRANSCOM  officials provided the following information on the AFWCF monthly cash  balances and the relationship of the monthly cash balances to the  minimum and maximum cash requirements from fiscal years 2009  through 2013. First, the monthly cash balances were generally high in  fiscal years 2009 and 2010 because the Air Force charged more than it  cost for spare parts. Second, the monthly cash balances fluctuated  because of the cyclical nature of events, such as the DOD operating  under a continuing resolution. Finally, large-dollar transactions, such as  transfers in and out of the AFWCF, affected the monthly cash balances.  These factors affecting the AFWCF cash balance are discussed further in  the sections that follow.

		Monthly Cash Balances Were High in Fiscal Years 2009 and 2010 Because the Air Force Set Its Rates Too High for Supply Items

The AFWCF entered fiscal year 2009 with a cash balance of $1,384  million—about $224 million or 19 percent above the maximum cash  requirement for fiscal year 2009. Air Force headquarters officials informed  us that when they set the rates to be charged to CSAG and SMAG-R  customers for supply items in fiscal years 2009 and 2010, they wanted  the cash balance to be at the maximum cash requirement because the  AFWCF changed the method for charging customers for supply items.  Specifically, the Air Force changed the method for charging customers for  spare parts from (1) selling individual parts to customers on a transaction- by-transaction basis to (2) charging customers for spare parts based on  actual hours flown by aircraft. Because the Air Force did not have  historical data on applying the new method, the Air Force wanted to make  sure it charged customers enough for supply items so that the AFWCF  would have a sufficient cash balance. In doing so, the Air Force charged  more than it cost for spare parts, which resulted in a higher-than-expected  cash balance. According to Air Force headquarters and Air Force Materiel  Command officials and our analysis of financial documents, the monthly  cash balance was above the maximum amount for 14 of the 24 months  during fiscal years 2009 and 2010.

		Monthly Cash Balances Fluctuated Because of the Cyclical Nature of Events

Air Force headquarters, Air Force Materiel Command, and  USTRANSCOM officials informed us that fluctuations in the AFWCF  monthly cash balances occurred because of the cyclical nature of events  that affect the AFWCF. Customer orders do not execute in a smooth  pattern throughout the fiscal year but instead fluctuate on a seasonal  basis as discussed below. These seasonal fluctuations can result in cash  balances falling below the minimum cash requirement early in the fiscal  year and rising above the maximum in the second half of the fiscal year.
In the beginning of the fiscal year, the monthly cash balances  generally decrease if DOD operates under a continuing resolution  because AFWCF customers’ funding is constrained, which, in turn,  suppresses customer demand for AFWCF goods and services. For  fiscal years 2009 through 2013, except for fiscal year 2009, DOD  operated under a continuing resolution. For example, our analysis of  fiscal year 2012 financial reports showed that for November 2011,  December 2011, and January 2012, the AFWCF monthly cash  balances were below the minimum cash requirement. In another case,  our analysis of fiscal year 2010 financial reports showed that for the  first 3 months of fiscal year 2010, the AFWCF monthly cash balances  were lower than the ending cash balance for fiscal year 2009. The  October and December 2009 cash balances were below the minimum  cash requirement.
Beginning in the April and May time frame and continuing through the  summer months, the AFWCF monthly cash balances generally  increase because the Air Force flies more training missions during  these months because of the better weather conditions. The  additional hours flown results in the CSAG and SMAG-R earning  more revenue, which, in turn, increases AFWCF collections and its  monthly cash balance. For example, our analysis of financial reports  showed that in fiscal year 2009, the three highest AFWCF monthly  cash balances were in June, July, and August, as shown in figure 1.  For these 3 months, the monthly cash balances were above the  maximum cash requirement by over $500 million. In another case, our  analysis of financial reports showed that in fiscal year 2011, the two  highest AFWCF monthly cash balances were in July and August, as  shown in figure 1. For these 2 months, the monthly cash balances (1)  were the highest cash balances for the fiscal year and (2) were the  only two months when the monthly cash balance was above the  maximum cash requirement.

		Monthly Cash Balances Were Affected by Large- Dollar Transactions

Air Force headquarters, Air Force Materiel Command, and  USTRANSCOM officials stated that fluctuations in the AFWCF monthly  cash balances also occurred because of large-dollar transactions, such  as appropriations received by the AFWCF or large transfers to and from  the AFWCF. These fluctuations occurred in the month that a transaction  was made and resulted in large fluctuations in the cash balance from  month to month as well as the monthly cash balances fluctuating from  below the minimum cash requirement to above the maximum cash  requirement or vice versa. For example, at the end of August 2010, the  AFWCF monthly cash balance was $1,395 million (above the maximum  cash requirement). During August 2010, the AFWCF received an $847  million appropriation to fund fuel increases. If the AFWCF had not  received this appropriation, the August 2010 monthly cash balance would  have been $548 million (below the minimum cash requirement).
On the other hand, the AFWCF cash balance fluctuated downward and  was reduced when transfers were made from the AFWCF to other  appropriations. For example, the Air Force transferred $251 million out of  the AFWCF in the last quarter of fiscal year 2009. These transfers ($105  million in July 2009 and $146 million in September 2009) reduced the  amount of cash that was over the maximum cash requirement.  Specifically, the September 2009 AFWCF cash balance was over the  maximum cash requirement by about $249 million. If the $251 million had  not been transferred, the AFWCF fiscal year 2009 ending cash balance  would have been over the maximum cash requirement by about $500  million.
Further, large transactions can affect the monthly cash balances for  several months and thus affect the AFWCF’s ability to fall within the  minimum and maximum cash requirements. In developing the fiscal year  2013 AFWCF budget, the Air Force set its fiscal year 2013 rates to return  prior year gains to its customers. Air Force officials informed us that the  fiscal year 2013 rates were expected to lower the AFWCF cash balance  by about $500 million and the projected cash balance would be close to  the minimum cash requirement. However, the cash balance fell below the  minimum cash requirement because of an unplanned $370 million  transfer from the AFWCF made in August 2012. The transfer was  needed to fund overseas contingency operations requirements, such as  aircraft depot maintenance. From September 2012 through May 2013, the  monthly cash balance was below the minimum cash requirement for 8 of  the 9 months. If the $370 million transfer had not occurred, the monthly  cash balance would have been above the maximum cash requirement for  4 months, between the minimum and maximum cash requirements for 3  months, and below the minimum cash requirement for 2 months. From  June 2013 through September 2013, the monthly cash balance was  between or above the cash requirement.
For further details on the cash balances for fiscal years 2009 through  2013, see appendix II.

	AFWCF Monthly Cash Balances Are Projected to Be Above the Maximum Requirement in Fiscal Year 2014 but to Fall Below the Minimum Requirement by the End of Fiscal Year 2015

The AFWCF’s fiscal year 2015 budget information shows that the fund’s  projected monthly cash balances are only expected to fall within the  minimum and maximum cash requirements about 25 percent of the time  in fiscal years 2014 and 2015. Specifically, our analysis of the AFWCF’s  fiscal year 2015 budgeted information that contains its cash management  plans for fiscal years 2014 and 2015 showed that the projected monthly  cash balances are expected to be above the projected maximum cash  requirement for the first 17 months, between the projected minimum and  maximum cash requirements for the next 6 months, and below the  projected minimum cash requirement for the final month. Figure 2 shows  the AFWCF projected monthly cash balances compared to the projected  minimum and maximum cash requirements for fiscal years 2014 and  2015.
Our analysis of AFWCF financial documents and interviews with AFWCF  headquarters officials identified two reasons for the fiscal year 2014  projected AFWCF cash balances being above the projected maximum  cash requirement: (1) the AFWCF entered fiscal year 2014 with a cash  balance ($1,458 million) that was above the projected maximum cash  requirement for fiscal year 2014 by about $260 million or 22 percent and  (2) the AFWCF is building or maintaining a higher cash balance in  preparation for the October 1, 2014, implementation of a Treasury  initiative to provide visibility over daily cash balances for all  appropriations, including the AFWCF. The higher cash balance is needed  to cover the volatility in the daily cash balance. By the final month of fiscal  year 2015, the projected AFWCF cash balance is expected to decrease  below the projected minimum cash requirement. The projected decline  occurred because of an expected shortfall of $927 million in the Airlift  Readiness Account (ARA) resulting from the Air Force including only a  portion ($150 million) of the total projected fiscal year 2015 ARA  requirement ($1,077 million) in the fiscal year 2015 Air Force operation  and maintenance appropriated budget request. Further, achieving the  AFWCF projected cash balances in fiscal year 2015 depends on the Air  Force and USTRANSCOM successfully implementing cost reduction and  efficiency initiatives to save $620 million during that fiscal year.

		Daily Cash Balance Reporting Could Increase Minimum and Maximum Cash Requirement for the AFWCF

Treasury is modernizing and streamlining its reporting processes through  its government-wide accounting initiative. One result of this initiative will  be for Treasury to provide daily cash balances for all appropriations,  including the AFWCF, beginning in fiscal year 2015. Currently, the cash  balance is visible only in official reports at the end of each month. In  preparation for DOD’s implementation of Treasury’s initiative, the Office of  the Under Secretary of Defense (Comptroller) initiated a study in  February 2013 to evaluate the impact daily cash reporting will have on  working capital fund policies and management. The goal of the study was  to assist working capital fund managers to identify necessary  modifications to current controls, processes, and policies needed to  prevent potential Antideficiency Act violations. As part of the study, the Air  Force and USTRANSCOM collected daily disbursement and collection  data from their systems to determine the impact these transactions had  on their daily cash balances. In analyzing these data, they noted the  following.
The AFWCF’s day-to-day cash balances are more volatile than cash  balances measured on a monthly basis and can fluctuate by hundreds  of millions of dollars on a given day. These fluctuations increase the  risk that the cash balance could become negative on a particular day.
DOD systems generally bill customers once or twice a month. The  billing systems run in the middle of the month and at the end of the  month. Since disbursements are made daily, the daily cash balance is  generally at its lowest level at about the middle of the month before  the first billing cycle occurs for that month.
Air Force and USTRANSCOM officials informed us that managing cash  daily rather than monthly will require them to take two actions. First, these  officials stated that the AFWCF will need to maintain a higher cash  balance to offset the day-to-day volatility of cash during the month. The  higher cash balance will reduce the risk that (1) the AFWCF daily cash  balance will become negative on a particular day during the month and  (2) the AFWCF will incur a potential Antideficiency Act violation. However,  the Air Force and USTRANSCOM have not determined how much the  minimum and maximum cash requirements should be increased to cover  the additional cash needed. Second, the Air Force is considering adding  another billing cycle for the work performed by depot maintenance to  increase collections during the early part of the month and offset  disbursements made during the same time period.
The implementation of Treasury’s initiative to provide daily cash balances  was planned for October 1, 2014 (beginning of fiscal year 2015).  However, according to Office of the Under Secretary of Defense  (Comptroller) officials, DOD systems will not be ready to provide the  necessary data to meet the implementation date because (1) DOD has  multiple disbursing systems and nonintegrated disbursing locations and  (2) DOD has a requirement to protect classified or sensitive information.  As of May 2014, the officials stated that they have not established a new  implementation date.
See DOD Financial Management Regulation 7000.14-R, Accounting for Cash and Fund  Balances with Treasury, vol. 4, ch. 2, p. 2-14 (December 2009). monthly basis, our analysis showed that this policy will need to be  updated to recognize that DOD has visibility over daily cash balances,  especially if the cash balances become negative during the month.  For example, if the cash balance becomes negative on a particular  day during the month, a reconciliation will need to be performed to  determine if the cash balance is actually negative or if an error had  occurred in determining the cash balance.
While DOD realizes that the Financial Management Regulation needs to  be revised to effectively implement Treasury’s initiative to provide daily  cash balances, DOD has not revised it to include guidance on (1)  Treasury’s initiative to provide daily cash balances instead of monthly  cash balances, (2) maintaining sufficient cash balances on a daily basis  to avoid potential Antideficiency Act violations, and (3) the reconciliation  of daily cash balances to ensure the integrity and accuracy of the data.  Further, DOD has not determined the full impact of Treasury’s initiative to  provide daily cash balances for the AFWCF or developed an analytical  approach for calculating the minimum and maximum cash requirements  to adjust for the day-to-day volatility of cash balances in the AFWCF and  reduce the risk that the AFWCF may incur an Antideficiency Act violation.  Once the updated cash requirement is determined, this will affect whether  the projected AFWCF cash balances for fiscal year 2015 will be above,  between, or below the cash requirement. Internal control standards state  that policies, procedures, techniques, and mechanisms are needed to  enforce management’s directives, such as the process of adhering to  requirements for budget development and execution. They help ensure  that actions are taken to address risks.Financial Management Regulation does not reflect the effect that daily  cash balances will have on the AFWCF and thereby increases the risk of  a cash shortage and an Antideficiency Act violation.

		ARA Funding Is Expected to Be Sufficient in Fiscal Year 2014, but a Funding Shortfall May Occur in Fiscal Year 2015 That Could Affect AFWCF Cash

The DOD Financial Management Regulation contains a provision that  pertains to the airlift services provided by USTRANSCOM and that affects  the TWCF as well as the AFWCF cash balances. To enable it to better  compete with commercial providers, USTRANSCOM’s airlift rates are set  to compete with private sector rates and do not cover the full cost of the  Air Force’s readiness requirements for military airlift operations. The  difference between the full cost and the revenue received from airlift  customers is to be provided to USTRANSCOM in the ARA through the  use of Air Force appropriated funds. This requirement exists in both  peacetime and contingency environments.
USTRANSCOM officials stated that since they set rates that are  benchmarked to private sector rates, USTRANSCOM does not recover its  full cost of operations and the TWCF incurs losses that in turn result in a  lower cash balance. To recover these losses, the TWCF identifies the  peacetime and contingency airlift requirements and the customers include  these amounts in their budget requests. During the year of execution, the  TWCF bills the services once a month. Specifically, the TWCF receives  funding from (1) the Air Force to pay for the peacetime airlift requirement  (Air Force Operation and Maintenance appropriation) and (2) the military  services for the contingency airlift requirement (overseas contingency  operations appropriation). Over the last several years, the TWCF has  received hundreds of millions of dollars that has helped it maintain cash  solvency.
According to the TWCF budget request, USTRANSCOM estimates the  fiscal year 2014 ARA funding requirement to be $150 million plus $691  million for the contingency airlift requirement, for a total of $841 million.  However, in the fiscal year 2015 TWCF budget, USTRANSCOM  estimates the fiscal year 2015 ARA funding requirement to be $1,077  million, while the fiscal year 2015 Air Force Operation and Maintenance  budget provides for $150 million for the ARA. This estimated shortfall of  $927 million could negatively affect the TWCF as well as the AFWCF  cash balances. Maintaining sufficient cash balances in the TWCF and  AFWCF while minimizing the overall ARA bill to the Air Force presents  major management challenges for Air Force and USTRANSCOM. If the  ARA is overfunded, the Air Force may not be using its resources  efficiently to fund other Air Force program priorities to meet mission  requirements. Alternatively, if the ARA is underfunded, reductions to Air  Force programs may be required to maintain adequate levels of cash in  the AFWCF.
The Air Force and USTRANSCOM have had a history of problems with  the Air Force requesting full funding in the Air Force’s budget for the  USTRANSCOM ARA requirement. For example, according to the TWCF  budget, USTRANSCOM included a requirement for $294 million to fund  the ARA in fiscal year 2013, but the Air Force did not include funding for  the ARA in the fiscal year 2013 Air Force operation and maintenance  budget request. Though the Air Force did not request funding for the ARA  in the fiscal year 2013 budget, the Air Force paid its fiscal year 2013 ARA  bill.
In reviewing past AFWCF budgets, the Office of the Under Secretary of  Defense (Comptroller) has also been concerned with ARA funding issues.  To address its concerns on these funding issues, in February 2012, the  Office of the Under Secretary of Defense (Comptroller) directed (1) the Air  Force to ensure that both the AFWCF and TWCF cash levels are  adequate to support operational and mobilization requirements in fiscal  years 2013 and subsequent years; (2) the Air Force and USTRANSCOM  to determine the appropriate methodology for fully funding  USTRANSCOM, including the ARA, and estimating the funding sources  for fiscal year 2014; and (3) the Air Force to ensure that it funds its  responsibilities for USTRANSCOM, including the ARA, updated for more  current workload assumptions, in the fiscal year 2014 budget and all  future budgets.
Although the Office of the Under Secretary of Defense (Comptroller) has  previously raised concerns about ARA funding issues, the funding issues  are projected to continue into fiscal year 2015. As stated above, the  estimated funding shortfall of $927 million could negatively affect the  TWCF and AFWCF cash balances in fiscal year 2015. Air Force officials  stated that although the AFWCF projected cash balance is expected to be  above the projected maximum cash requirement at the beginning of fiscal  year 2015, they expect the cash balance to decrease to $853 million and  below the projected minimum cash requirement by fiscal year-end. This  decline is expected to occur because Air Force did not fully fund the  estimated ARA requirement in the fiscal year 2015 budget. Air Force  officials informed us that it did not fully fund the ARA requirement  because it funded other higher-priority requirements.
Air Force officials are aware of the estimated funding shortfall and stated  that the ARA funding requirement will be best managed in fiscal year  2015 when they can better estimate the actual ARA funding requirement.  Air Force officials stated that Air Force and USTRANSCOM senior  leadership currently meet monthly to collaborate on AFWCF cash  challenges and will be evaluating the ARA funding during fiscal year  2015—the year of execution. They stated that workload and cash levels  are monitored closely during the year of execution and that any potential  issues involving workload and cash levels, including ARA funding, would  be identified several months in advance and brought to senior  leadership’s attention. If a shortfall in the AFWCF cash balance begins to  materialize in the year of execution because of the unfunded ARA  requirement, Air Force officials stated that they have several options,  including (1) reviewing ongoing programs funded by the Air Force  operation and maintenance appropriation accounts to identify where  requirements have changed that would allow the AFWCF to obtain  additional funds for the ARA or (2) reviewing their investment accounts for  excess funding to transfer to the AFWCF. Air Force officials believe any  potential cash shortfall would be identified in sufficient time to take action.  While USTRANSCOM officials understand the Air Force’s position on  funding the ARA, USTRANSCOM officials informed us that they believe it  is more prudent for the Air Force to request a significant amount of  funding for the ARA in the Air Force budget. These officials further stated  that if a funding shortfall occurs, the Air Force faces the risk of  transferring large amounts in the year of execution to cover the unfunded  requirement.
Because the Air Force plans to address potential ARA cash shortfalls in  the year of execution, the AFWCF projected cash balances are currently  expected to decline during fiscal year 2015 and be below the minimum  cash requirement by the end of fiscal year 2015, which could impair the  ability of the AFWCF to maintain adequate cash balances. The ARA  funding issue could affect the Air Force’s efforts to build cash in  anticipation of the Treasury initiative to provide daily cash balances.  Because daily cash balances are more volatile, the lower projected cash  balance caused by the lack of funding for the fiscal year 2015 ARA  requirement increases the risk of a cash shortfall and the risk of a  potential Antideficiency Act violation.

		Achieving Expected Savings from AFWCF Initiatives Is Necessary to Meet AFWCF Fiscal Years 2014 and 2015 Projected Monthly Cash Balances

As stated previously, our analysis of fiscal year 2015 AFWCF budget  information that contains the AFWCF cash management plans for fiscal  years 2014 and 2015 showed that the projected monthly cash balances  are expected to be above the maximum cash requirement in fiscal year  2014 and decline in fiscal year 2015 and fall below the minimum cash  requirement in September 2015. According to Air Force and  USTRANSCOM officials, achieving the AFWCF projected monthly cash  balances for fiscal years 2014 and 2015 depends on the Air Force and  USTRANSCOM successfully implementing cost reduction and efficiency  initiatives for fiscal years 2014 and 2015. Specifically, the savings from  these initiatives were a factor used to (1) set prices to charge customers  in fiscal years 2014 and 2015 and (2) estimate projected disbursements.
Air Force and USTRANSCOM documentation shows that the fiscal year  2015 AFWCF budget includes $114 million and $620 million in budgeted  savings for fiscal years 2014 and 2015, respectively. For fiscal year 2014,  the $114 million in budgeted savings represents less than 10 percent of  the projected cash balance for any month during fiscal year 2014. On the  other hand, $620 million in budgeted savings represents about 73 percent  of the $853 million projected cash balance at the end of September  2015—the lowest projected balance in fiscal year 2015. If the budgeted  savings are not achieved, the AFWCF cash balance would be adversely  affected because disbursements would be higher than expected, which  would reduce the AFWCF cash balance below that already projected.
The Air Force and USTRANSCOM have cost reduction and efficiency  initiatives that are designed to reduce costs and related disbursements for  fiscal years 2014 and 2015, as discussed below.
The fiscal year 2015 AFWCF budget includes $503 million in fiscal  year 2015 budgeted savings associated with Air Force initiatives. Air  Force initiatives to reduce costs and related disbursements include (1)  reducing the Air Force workforce at CSAG locations by up to 2,000  personnel, (2) refining forecasting models to more accurately reflect  future parts requirements, and (3) reducing government travel and  contracts where appropriate.
The fiscal year 2015 AFWCF budget includes budgeted savings of  $114 million and $117 million for fiscal years 2014 and 2015,  respectively, for USTRANSCOM initiatives. USTRANSCOM initiatives  to reduce costs and related disbursements include (1) reducing  management overhead costs by 20 percent by fiscal year 2019, (2)  reducing spending on information technology projects, and (3)  transferring base operating support costs to Air Force operations and  maintenance.
Since the $620 million in savings initiatives represents 73 percent of the  September 2015 projected cash balance, it is critical that the Air Force  and USTRANSCOM achieve these savings. If these savings are not  realized, it can put a further strain on the AFWCF cash balance, which is  already projected to be under the minimum cash requirement at the end  of fiscal year 2015. In managing the AFWCF projected cash balance in  fiscal year 2015, there are several factors that may affect these balances  and increase the risk of an Antideficiency Act violation, including (1) the  Treasury cash initiative that will require additional cash to cover the  volatility of cash on a day-to-day basis, (2) the lack of funding for the  fiscal year 2015 ARA requirement, and (3) initiatives to achieve savings. If  a cash shortfall occurs, regardless of the reason, the Air Force will have  to determine how to fund the shortfall.

	Conclusions

The work that the AFWCF performs supports military readiness by  repairing aircraft and engines; selling inventory items (spare parts); and  providing air, land, and sea transportation for DOD in times of peace and  war. Maintaining the AFWCF cash balance within the minimum and  maximum cash requirements as defined by DOD regulation is critical for  the Air Force and USTRANSCOM to continue to provide maintenance,  supply, and transportation services for their fund’s customers. Over the  past 5 years, the AFWCF has managed to maintain a sufficient cash  balance to pay its bills and sustain operations without disruption even  though the cash balances were outside the minimum and maximum cash  requirements about two-thirds the time. While the projected cash  balances are expected to be above the maximum cash requirement for  fiscal year 2014 and the first half of fiscal year 2015, Air Force officials  face challenges in managing the AFWCF cash in fiscal year 2015. The  challenges include Treasury’s initiative to provide visibility over daily cash  balances for all appropriations, including the AFWCF; funding ARA  requirements; and meeting established savings goals for AFWCF cost  reduction and efficiency initiatives. First, the Air Force has not determined  the appropriate minimum and maximum cash requirements for the  AFWCF that will be needed to cover the volatility of daily cash balances  that can fluctuate by hundreds of millions of dollars each day and reduce  the risk that the AFWCF will incur an Antideficiency Act violation, nor has  DOD updated its policies to reflect daily reporting of working capital fund  cash balances versus monthly cash balances. Second, the Air Force did  not fully fund the ARA requirement in its operations and maintenance  budget for fiscal year 2015, which increases the risk of a cash shortfall in  fiscal year 2015. Third, it is critical that the Air Force and USTRANSCOM  achieve the estimated $620 million savings in fiscal year 2015 as this  represents a significant amount of the fiscal year 2015 year-end cash  balance.

	Recommendations for Executive Action

We are making three recommendations to the Secretary of Defense to  improve the management of the AFWCF’s cash balances.
We recommend that the Secretary of Defense direct the Under Secretary  of Defense (Comptroller) to take the following action:
Update the DOD Financial Management Regulation to include  guidance on (1) maintaining sufficient cash balances on a daily basis  to avoid potential Antideficiency Act violations and (2) the  reconciliation of daily cash balances to ensure the integrity and  accuracy of the data once DOD implements Treasury’s initiative.
We recommend that the Secretary of Defense direct the Secretary of the  Air Force, in conjunction with the Under Secretary of Defense  (Comptroller), to take the following action:
Develop an analytical approach for calculating the minimum and  maximum cash requirements to take into consideration the additional  cash needed to cover the day-to-day volatility in the cash balances  once DOD implements Treasury’s initiative.
We recommend that the Secretary of Defense direct the Secretary of the  Air Force and the Commander of USTRANSCOM to take the following  action:
Take steps to help ensure that the AFWCF receives the appropriate  funding if a cash shortfall occurs because of (1) the implementation of  the daily cash requirement, (2) a lack of fiscal year 2015 ARA funding,  and (3) fiscal year 2015 budgeted savings not being realized.

	Agency Comments

DOD provided written comments on a draft of this report. In its comments,  which are reprinted in appendix III, DOD concurred with the three  recommendations and cited actions planned or under way to address  them. Specifically, DOD commented that consistent with forthcoming  instructions from Treasury regarding daily cash balances, the Under  Secretary of Defense (Comptroller) will revise the Financial Management  Regulation on or about the implementation date for daily cash reporting.  In addition, DOD stated that while the Financial Management Regulation  is in draft, guidance consistent with this recommendation will be published  for component submissions of each Program and Budget Review and  President’s Budget. Further, DOD stated that in the upcoming Program  and Budget review (fiscal year 2016), the working capital fund activities  will submit information that will provide more clarity to minimum and  maximum cash requirements. Finally, DOD indicated that cash levels and  potential shortfalls will be monitored closely, and if an unfavorable trend  develops, appropriate actions will be taken.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretary of the Air Force, the  Under Secretary of Defense (Comptroller), and the Commander,  USTRANSCOM. In addition, the report is available at no charge on the  GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-9869 or khana@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors to this report are listed in appendix  IV.

Appendix I: Scope and Methodology

To determine to what extent the Air Force Working Capital Fund  (AFWCF) monthly cash balances were within the Department of Defense  (DOD) minimum and maximum cash requirements for fiscal years 2009  through 2013, we (1) obtained the DOD regulation on calculating the  minimum and maximum cash requirements, (2) calculated the cash  requirements for fiscal years 2009 through 2013 based on the regulation,  and (3) obtained monthly cash balances for fiscal years 2009 through  2013. We compared the minimum and maximum cash requirements to  the end-of-month reported cash balances. If the cash balances were  above the maximum amount or were below the minimum amount, we met  with Air Force and United States Transportation Command  (USTRANSCOM) officials and reviewed AFWCF budgets and other Air  Force and USTRANSCOM documentation to ascertain the reasons. In  addition, we performed a walk-through of the Defense Finance and  Accounting Service’s (DFAS) processes for reconciling the Department of  the Treasury (Treasury) trial balance monthly cash amounts for the  AFWCF to the balances reported on the AFWCF cash management  reports. Further, to determine the extent cash transfers for fiscal years  2009 through 2013 resulted in the AFWCF cash balances either falling  below the minimum cash requirement or being above the maximum cash  requirement, we (1) analyzed DOD budget and accounting reports to  determine the dollar amount of transfers made for fiscal years 2009  through 2013 and (2) obtained journal vouchers from DFAS that  documented the dollar amount of the cash transfers. We analyzed cash  transfers to determine if any of the transfers resulted in the cash balances  falling outside the minimum or maximum cash requirements and, if so, the  amount outside those requirements. We also obtained and analyzed  reprogramming documents and journal vouchers and interviewed key Air  Force and USTRANSCOM officials to determine the reasons for the  transfers.
To determine to what extent the AFWCF projected monthly cash  balances were within the minimum and maximum cash requirements for  fiscal years 2014 and 2015 and if not why, we obtained and analyzed  AFWCF budget documents and cash management plans for the 2 fiscal  years. We used the DOD regulation to calculate the minimum and  maximum cash requirements for each of those years and compared it to  the projected cash balances. If the projected cash balances were above  or below the cash requirement, we met with Air Force and  USTRANSCOM officials to ascertain the reasons. Further, we interviewed  Office of the Under Secretary of Defense (Comptroller), Air Force,  USTRANSCOM, and DFAS officials on the initiative to begin receiving  daily cash balances in fiscal year 2015 and the potential effect on the  management of the AFWCF cash. We also interviewed Air Force and  USTRANSCOM officials to determine what actions the AFWCF plans to  take to increase collections or decrease disbursements to avoid potential  AFWCF cash shortages.
We obtained the AFWCF financial data in this report from official budget  documents and accounting reports. To assess the reliability of these data,  we (1) reviewed and analyzed the factors used in calculating the  minimum and maximum cash requirements for the completeness of the  elements included in the calculation; (2) interviewed Air Force,  USTRANSCOM, and DFAS officials knowledgeable about the cash data;  (3) compared AFWCF cash balance information, including collections and  disbursements that were contained in different reports, to ensure that the  data reconciled; (4) obtained an understanding of the process used by  DFAS to reconcile AFWCF cash balances with Treasury records; and (5)  obtained and analyzed documentation supporting the amount of funds  transferred in and out of the AFWCF. On the basis of procedures  performed, we have concluded that these data were sufficiently reliable  for the purposes of this report. We performed our work at the  headquarters of the Office of the Under Secretary of Defense  (Comptroller) and the Office of the Secretary of Air Force in Washington,  D.C.; Air Force Materiel Command at Wright-Patterson Air Force Base,  Ohio; USTRANSCOM at Scott Air Force Base, Illinois; and DFAS in  Columbus, Ohio.
We conducted this performance audit from July 2013 to July 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Reasons for Year-to-Year Changes in AFWCF Cash Balances from Fiscal Years 2009 through 2013

Over the 5-year period from fiscal years 2009 through 2013, our analysis  of Air Force Working Capital Fund (AFWCF) data showed that the  number of months each year (1) above the maximum cash requirement  generally decreased and (2) below the minimum cash requirement  generally increased. AFWCF officials stated that AFWCF monthly cash  balances generally decreased at the beginning of the fiscal year when the  Department of Defense (DOD) operated under continuing resolutions  because AFWCF customers’ funding was constrained, which, in turn,  suppressed customer demand for AFWCF goods and services. Beginning  in the April and May time frame each year, AFWCF monthly cash  balances generally increased because the AFWCF generated more  revenue from customers for spare parts that result from the Air Force  flying more training mission hours during the spring and summer months  because of better weather conditions.
This appendix contains the year-to-year analysis of the reasons for  fluctuations in the AFWCF cash balances from fiscal years 2009 through  2013. Actual AFWCF cash balances fluctuated each year because of the  dollar amounts that were collected by, disbursed by, appropriated to, and  transferred to or from the AFWCF.

	Reasons for the Change in the Fiscal Year 2009 AFWCF Cash Balance

The AFWCF ended fiscal year 2009 with a cash balance of $1,409  million—$25 million more than the beginning balance. Our analysis of  financial documents and interviews with AFWCF officials identified three  reasons for the net increase in the fiscal year 2009 cash balance. First,  the AFWCF collected about $200 million more than it disbursed because  the rates charged to customers of the Consolidated Sustainment Activity  Group (CSAG) and the Supply Management Activity Group-Retail for  flying hours were higher than the anticipated costs. Second, the AFWCF  received about $76 million in direct appropriations to fund the  transportation of fallen heroes killed in military operations and to pay for  medical and dental war reserve materials.transferred $251 million from the AFWCF to other DOD appropriations in   Third, the Air Force  the last quarter of fiscal year 2009. If the $251 million had not been  transferred, the AFWCF fiscal year 2009 ending cash balance would have  been $1,660 million or $500 million above the maximum cash  requirement.

	Reasons for the Change in the Fiscal Year 2010 AFWCF Cash Balance

The AFWCF ended fiscal year 2010 with a cash balance of $945 million— $464 million less than the fiscal year 2010 beginning balance of $1,409  million. The ending cash balance for fiscal year 2010 was between the  fiscal year 2010 minimum and maximum cash requirements. Our analysis  of financial documents and interviews with AFWCF officials identified  three reasons for the net decrease in the fiscal year 2010 cash balance.  First, AFWCF disbursements exceeded collections by $1,054 million  primarily because (1) CSAG reduced customer billings associated with  the Air Force flying hour program in July and August 2010 to return gains  to its customers collected in prior years and (2) the United States  Transportation Command reduced its rates for transportation services,  relieved the Air Force of its requirement to fund the Airlift Readiness  Account, and waived the military services’ overseas contingency  operations funding requirement (known as the cash recovery charge)  because of high balances in the Transportation Working Capital Fund  (TWCF) cash account in fiscal year 2010. Second, the AFWCF  transferred $337 million to other DOD appropriations in fiscal year 2010.  Specifically, (1) $250 million was transferred to the Air Force operation  and maintenance appropriation to compensate for an equivalent reduction  in that appropriation, which was described as excess AFWCF cash; (2)  $47 million was transferred to the Air Force military personnel  appropriation to cover shortages in the account; and (3) $40 million was  transferred to the Defense Logistics Agency in support of a process  improvement initiative. Third, offsetting some of these reductions, the  AFWCF received direct appropriations of about $927 million that  increased the AFWCF cash balance. The appropriations were for TWCF  and CSAG fuel price increases, medical and dental war reserve materiel,  and support for the transportation of fallen heroes.

	Reasons for the Change in the Fiscal Year 2011 AFWCF Cash Balance

The AFWCF ended fiscal year 2011 with a cash balance of $1,026  million—$81 million more than the fiscal year 2011 beginning balance of  $945 million. The ending cash balance for fiscal year 2011 was between  the fiscal year 2011 minimum and maximum cash requirements. For the  fiscal year, financial documents showed that disbursements exceeded  collections by about $3 million. The AFWCF ending cash balance was  higher because the AFWCF received direct appropriations of about $84  million in fiscal year 2011 for medical and dental war reserve material,  support for the transportation of fallen heroes, and a TWCF container  deconsolidation project.

	Reasons for the Change in the Fiscal Year 2012 AFWCF Cash Balance

The AFWCF ended fiscal year 2012 with a cash balance of $811 million— $215 million less than the fiscal year 2012 beginning balance of $1,026  million. The ending cash balance for fiscal year 2012 was below the  minimum cash requirement. Our analysis of financial documents identified  three reasons for the net decrease in the fiscal year 2012 cash balance:  (1) AFWCF collections exceeded disbursements by about $78 million; (2)  the AFWCF received direct appropriations of $77 million for medical and  dental war reserve material, support for the transportation of fallen  heroes, and a TWCF container deconsolidation project; and (3) $370  million was transferred from the AFWCF to the Air Force operation and  maintenance appropriation in the last quarter of fiscal year 2012 to fund  overseas contingency operations requirements. According to a DOD  financial document, the transfer would reduce available cash, but  available cash would be sufficient to support AFWCF disbursements.

	Reasons for the Change in the Fiscal Year 2013 AFWCF Cash Balance

The AFWCF ended fiscal year 2013 with a cash balance of $1,458  million—$647 million more than the fiscal year 2013 beginning balance of  $811 million or $344 million above the maximum cash requirement. Our  analysis of financial documents and interviews with AFWCF officials  identified three reasons for the net increase in the fiscal year 2013  AFWCF cash balance. First, collections exceeded disbursements by $250  million. Second, the AFWCF received $56 million in direct appropriations  for medical and dental war reserve material and support for the  transportation of fallen heroes. Finally, $341 million was transferred from  the Air Force aircraft procurement appropriation to the AFWCF in August  and September 2013.

Appendix III: Comments from the Department of Defense

Appendix IV: GAO Contact and Staff Acknowledgments

	GAO Contact

	Staff Acknowledgments

In addition to the contact named above, Greg Pugnetti (Assistant  Director), Steve Donahue, Keith McDaniel, and Hal Santarelli made key  contributions to this report.

Summary:
Why GAO Did This Study

The AFWCF earned revenue of $21.2 billion in fiscal year 2013 by, among other things, (1) repairing aircraft and engines; (2) selling inventory items (parts); and (3) providing air, land, and sea transportation. Cash generated from the sale of goods and services is used by the AFWCF to cover its expenses, such as paying employees. As requested, GAO reviewed issues related to AFWCF cash management.
GAO's objectives were to determine to what extent (1) the AFWCF monthly cash balances were within the DOD minimum and maximum cash requirements for fiscal years 2009 through 2013 and (2) the AFWCF projected monthly cash balances were within the minimum and maximum cash requirements for fiscal years 2014 and 2015 and if not why. To address these objectives, GAO reviewed relevant DOD cash management guidance, analyzed AFWCF actual and projected cash balances and related data, and interviewed Air Force and United States Transportation Command officials.

What GAO Found

GAO's analysis of Air Force Working Capital Fund (AFWCF) cash data showed that monthly cash balances fell within the minimum and maximum cash requirements about one-third of the time in fiscal years 2009 through 2013. GAO identified three reasons why monthly cash balances were above the maximum or below the minimum cash requirements. First, the cash balance began fiscal year 2009 above the maximum requirement and generally remained above the maximum requirement in fiscal years 2009 and 2010 because the AFWCF charged more than it cost for spare parts. Second, cash balances fluctuated each year because of the cyclical nature of events. For example, in the spring and summer months, the Air Force flies more training missions, which increases revenue for parts and thus the cash balance. Finally, large-dollar transactions caused cash balances to fluctuate above and below cash requirements. These transactions were used to increase cash to pay for costs such as fuel price increases or reduce cash if it was above the maximum requirement.
AFWCF projected monthly cash balances are expected to fall within cash requirements about 25 percent of the time in fiscal years 2014 and 2015. In managing cash for those fiscal years, the AFWCF faces three challenges:
The AFWCF plans to implement a Department of the Treasury initiative to provide daily cash balances, instead of monthly balances, in October 2014. Because daily balances are more volatile, the AFWCF faces a greater risk that a cash shortfall would occur. However, the Department of Defense (DOD) has not updated its regulation on receiving daily cash balances.
Because airlift rates are set to compete with private sector rates, they do not cover the full cost. The difference between the full cost and revenue received is to be provided by the Airlift Readiness Account (ARA) funded by the Air Force. The projected cash balance declines in fiscal year 2015 because the Air Force did not fully fund the ARA by $927 million. If a cash shortfall materializes, the Air Force stated its intent to fund the requirement from other programs. Without sufficient ARA funding, the AFWCF cash balance is at risk of falling below the minimum cash requirement in fiscal year 2015.
The AFWCF has included $620 million in savings from Air Force and United States Transportation Command initiatives in its fiscal year 2015 projected monthly cash balances. If these saving are not realized, the Air Force may need to take action to reduce the risk of a cash shortfall.

What GAO Recommends

GAO is making three recommendations to DOD that are aimed at implementing the Department of the Treasury's daily cash balance initiative and ensuring that the AFWCF receives the appropriate funding if a cash shortfall occurs because of a lack of ARA funding or estimated savings not being realized. DOD concurred with GAO's recommendations and cited related actions planned or under way.