United States Government Accountability Office

Washington, DC 20548 

October 20, 2005 

The Honorable Thad Cochran 

Chairman 

The Honorable Robert C. Byrd 

Ranking Minority Member 

Committee on Appropriations 

United States Senate 

The Honorable Kay Bailey Hutchison 

Chairman 

The Honorable Dianne Feinstein

Ranking Minority Member 

Subcommittee on Military Construction and Veterans Affairs 

Committee on Appropriations 

United States Senate 

The Honorable Jerry Lewis 

Chairman 

The Honorable David R. Obey 

Ranking Minority Member 

Committee on Appropriations 

House of Representatives 

The Honorable James T. Walsh 

Chairman 

The Honorable Chet Edwards 

Ranking Minority Member 

Subcommittee on Military Quality of Life 

 and Veterans Affairs and Related Agencies 

Committee on Appropriations 

House of Representatives 

Subject: American Battle Monuments Commission: New Approach to Forecasting 

Exchange Rates for its Foreign Currency Fluctuation Account 

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.1

 This account is intended to maintain the spending power of funds 

 1

Pub. L. No. 108-447; H. Rept. 108-792. 

GAO-06-50R American Battle Monuments Commission 
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. 

To accomplish these objectives we interviewed OMB officials and ABMC’s budget 

officer, and reviewed ABMC documents and OMB and Department of Defense (DOD) 

budget guidance. We also reviewed balances of the ABMC foreign currency fluctuation 

account for fiscal years 2000–2005, levels of the euro-dollar exchange rate over the same 

period, and ABMC’s budget request for fiscal year 2006. We conducted our work between 

April and September 2005 in accordance with generally accepted government auditing 

standards. 

 

Results in Brief 

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 report2

 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 (see fig. 1). ABMC continued to use DOD PBD 660 to set 

 2

GAO, Review of DOD’s Report on Budgeting for Exchange Rates for Foreign Currency Fluctuations, 

GAO-05-800R (Washington, D.C.: June 16, 2005).

Page 2 GAO-06-50R American Battle Monuments Commission 
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. 

Figure 1: Euro-Dollar Exchange Rate and ABMC Foreign Currency Fluctuation Account, FY 2000-2005 

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. 

Background 

ABMC was created in 1923 and, as of September 30, 2004, maintained 24 cemeteries as 

well as 29 monuments, memorials, and markers commemorating the achievements in 

battle of the United States Armed Forces since 1917.3

 All the cemeteries are located 

 3

The Commission’s enabling legislation is codified in 36 U.S.C. Chapter 21. 

Page 3 GAO-06-50R American Battle Monuments Commission 
outside the United States and inter about 131,000 U.S. military war dead and U.S. 

civilians. 4 Although ABMC receives appropriations in dollars, about 70 percent of its 

funds are expended in foreign currencies, principally the euro. ABMC also uses the 

British pound, the Mexican peso, the Philippine peso, and the Tunisian dinar. ABMC uses

its budget dollars to purchase foreign currencies to pay a substantial amount of its 

salaries and expenses.5

 

In 1988, Congress created a foreign currency fluctuation account to pay for ABMC’s dayto-day operations if—because of exchange rate fluctuations occurring after budget 

submissions to Congress—they exceeded dollar appropriations.6

 According to OMB 

officials, few other federal agencies have similar accounts although the Department of 

State, the Peace Corps, and other agencies do engage in foreign currency transactions. 

Some of these federal agencies that use foreign currencies do not require large amounts 

of foreign currencies in relation to the size of their overall budgets and thus are more 

easily able to absorb the impact of a depreciating dollar. Most federal agencies have to 

absorb the effects of exchange rate fluctuation subsequent to budget approval; they do 

so by reallocating budgeted amounts or requesting supplemental appropriations. 

However, DOD does have a Foreign Currency Fluctuation Defense Account that is used 

to cover unforeseen losses due to foreign currency rate fluctuations.7

Before Fiscal Year 2006, ABMC Used DOD Method for Estimating Exchange 

Rates, Which Produced Unreliable Forecasts 

Prior to the fiscal year 2006 budget, ABMC, with OMB agreement, used DOD PBD 660 to 

estimate exchange rates in formulating its budget request for the foreign currency 

adjustment account (see table 1). DOD PBD 660 outlined a method intended to address 

changes in the dollar in relation to other currencies after the President’s budget was 

released so that the correct amount of dollars could be budgeted to maintain the 

purchasing power of the appropriation that was provided for in the budget. 

 4

GAO, Financial Audit: American Battle Monuments Commission’s Financial Statements for Fiscal 

Years 2004 and 2003, GAO-05-298 (Washington, D.C.: Mar. 1, 2005). 

5

Codified at 31 U.S.C. 2109. OMB officials noted that under the language authorizing its foreign currency

adjustment account, DOD had substantially greater flexibility in managing the account than ABMC had 

with its smaller account. 

6

The U. S. government routinely holds foreign currencies to fund its overseas operations. Foreign 

 currencies acquired are either purchased with dollars from commercial sources or received without 

 direct purchase for dollars. For example, non-purchase foreign currencies are received in exchange for 

 agricultural commodities, in repayment of loans, and by other mechanisms. According to the Financial 

Management Service of the Department of the Treasury, between October 1, 2004, and March 31, 2005, 

 the federal government reported $2.3 billion in foreign currency purchased from commercial sources and 

 a balance of $162.5 million as of March 31, 2005. See Financial Management Service, Department of the

 Treasury, Foreign Currencies Held by the U.S. Government: October 1, 2004 through March 31, 2005. 

7

GAO-05-800R. 

Page 4 GAO-06-50R American Battle Monuments Commission 
Table 1: Actual Average Euro-Dollar Exchange Rate Versus DOD PBD Rates, FY 2000-2005 

Fiscal 

year 

Actual average eurodollar exchange rate 

DOD PBD 660 rates 

for euro-dollar 

exchange rate

2000 1.0626a b

2001 1.1255 b 

2002 1.0877 1.1916

2003 0.9980 1.1386

2004 0.8216 1.1386

2005 0.7755c1.1386 

Sources: DOD, ABMC, Federal Reserve, and GAO. 

a

Calculated average during the fiscal year from the January 1, 2000 inauguration of the

 euro to September 30, 2000. 

b

Not applicable; these budgets were prepared prior to the inauguration of the euro.

c

Average calculated through June 30, 2005. 

Note: We calculated the actual average euro-dollar rate based on Federal Reserve data on foreign exchange rates. 

In past years, to develop the exchange rates, DOD tracked foreign currency exchange 

rates in The Wall Street Journal on a daily basis during the months immediately 

preceding the budget submission and then selected the most favorable foreign currency 

exchange rates during this time frame. The most favorable rate was the rate that 

provided the highest amount of foreign currency per dollar. For the fiscal year 2004 

budget submission, DOD selected the most favorable rates from August through 

November 2002. Further, DOD did not revise its rates in its fiscal year 2005 budget 

submission. 

According to ABMC’s budget officer and OMB officials, ABMC’s use of DOD PBD 660 

worked reasonably well when the dollar was not quickly depreciating. Moreover, OMB 

concurred with ABMC’s use of DOD PBD 660 and did not question this method. 

However, both ABMC’s budget officer and OMB officials noted that ABMC’s use of DOD 

PBD 660 led to serious problems beginning in fiscal year 2004. 

In particular, DOD PBD 660 did not anticipate the significant depreciation of the dollar 

against the euro (see again table 1). We discuss the effects of recent currency 

fluctuations in more detail in the next section of this report. 

We have criticized DOD’s PBD 660 methodology.8

 Exchange rates respond directly to 

events—tangible and psychological—including inflation rates, business cycles, interest 

rates, balance of payment statistics, political developments, tax laws, stock market news, 

inflationary expectations, international investment patterns, and government and central 

bank policies. As a result, forecasting exchange rates is inherently difficult and the 

methods used to do so must address multiple and complex variables. In particular, we 

have noted that DOD’s method did not produce exchange rate forecasts that would lead 

 

8

GAO-05-800R.

Page 5 GAO-06-50R American Battle Monuments Commission 
to realistic budgets. Unlike ABMC, DOD did continue to request funding for its currency 

fluctuation fund. As we reported previously, the use of the most favorable foreign 

currency rate underestimates the impact of foreign currency fluctuations and reduces 

the dollar amount in the foreign currency budget when the dollar depreciates relative to 

foreign currencies. Because the ABMC foreign currency fluctuation account is funded 

according to the exchange rate estimates, when the estimates are wrong ABMC’s 

spending power diminishes and the commission must cut overall spending. 

According to OMB officials, OMB does not provide guidance to federal agencies on how 

to handle foreign currency fluctuations in budget formulation, and each agency is 

responsible for determining the appropriate exchange rate for budgeting purposes. For 

example, OMB Circular A-11 does not provide guidance on addressing exchange rate 

fluctuations in budgeting.9

 The administration does not publish foreign exchange 

projections because they could affect currency markets. According to OMB officials, 

agencies that have foreign operations have different amounts of currency exposure to 

different currencies. That is, each federal agency that operates outside the United States 

has its own mix of spending in foreign currencies, necessitating agency-specific 

approaches to accommodating exchange rate fluctuations in budgeting. According to 

these officials, at one time, OMB performed several broad reviews of individual agency 

approaches, but no common approach to budgeting for foreign currency risk was 

developed for the government as a whole. 

Declining Value of the Dollar Depleted ABMC’s Foreign Currency; as a Result, 

the Account Required an Additional Appropriation 

Because ABMC used the approach in DOD PBD 660 when the dollar was declining in 

relation to the euro and ABMC and OMB did not request appropriations for the 

fluctuation account in fiscal years 2004 and 2005, ABMC had to curtail overall spending 

in fiscal year 2005. As we noted previously, the forecasts derived from DOD PBD 660 

underestimated the dollar’s decline relative to the euro. More specifically, ABMC 

experienced significant budget problems in fiscal years 2004 and 2005, when the dollar 

depreciated substantially against the euro. ABMC would not have been able to cover its 

foreign currency obligations under the estimates of the dollar’s value incorporated in the 

foreign currency fluctuation account. The foreign currency fluctuation account suffered 

losses of more than $4.1 million in fiscal year 2003 and losses of more than $4.7 million in 

fiscal year 2004 and the account balance diminished to less than $1 million at the 

beginning of fiscal year 2005 (see table 2). With roughly 70 percent of ABMC’s spending 

in foreign currencies, and about 66 percent of its total budget allocated for payrolls 

issued in foreign currencies, the agency did not have any additional margin if the dollar 

depreciated substantially. 

 

9

Office of Management and Budget, Circular No. A-11: Preparation, Submission, and Execution of the 

Budget (Washington, D.C.: July 2004). 

Page 6 GAO-06-50R American Battle Monuments Commission 
Table 2: ABMC Foreign Currency Fluctuation Account Activity, FY 2000–2005 

Fiscal year 2000 2001 2002 2003 2004 2005a

Account balance as of 

October 1 $4,517,181 $7,068,010 $9,614,297 $9,637,890 $5,532,057 $785,376

Appropriation $0 $0 $0 $0 $0 $11,904,000b

Change (net foreign 

currency gains, losses, 

and transfers)c

$2,550,829 $2,546,287 $ 23,593 ($4,105,833) ($4,746,681) ($6,552,436)

Account balance as of 

September 30 $7,068,010 $9,614,297 $9,637,890 $5,532,057 $785,376 $7,400,011

Sources: OMB and ABMC. 

a

These numbers are as of August 31, 2005, and are unaudited.

b Pub. L. No. 108-477 authorized $12 million in appropriations less a .0080 recission of $96,000. 

C

Numbers shown reflect the net amount of gains or losses in the foreign currency fluctuation account and the amount of funds 

deobligated from prior years and transferred from ABMC’s salaries and expenses account into the foreign currency fluctuation 

account. Parentheses indicate a loss. 

According to ABMC’s budget officer, because of the long time frames needed to prepare 

budgets and the uncertainty of currency forecasting, the commission could not have 

foreseen the dollar’s depreciation during fiscal years 2004 and 2005. OMB officials and 

the ABMC budget officer acknowledged that neither agency requested an additional 

appropriation for ABMC’s currency fluctuation fund in the fiscal year 2005 budget. 

However, during fiscal year 2005, Congress provided additional funding for the ABMC 

foreign currency account (about $12 million). OMB did not issue a Statement of 

Administration Policy or other communication objecting to this additional funding. 

ABMC Used a Different Method to Prepare Fiscal Year 2006 Budget Request for 

Foreign Currency Fluctuation Account 

As a result of the problems incurred when using DOD PBD 660, beginning with its fiscal 

year 2006 budget submission, ABMC, with OMB agreement, began using the exchange 

rates (principally the euro-dollar rate) prevailing when final budget numbers must be 

entered into OMB’s budget system10(see fig. 2). ABMC’s budget request for FY 2006 was 

$35.3 million for salaries and expenses and $15.25 million for the foreign currency 

fluctuation account. In contrast to its previous method, ABMC’s revised approach is 

reasonable in that it is nonjudgmental and has a transparent method—criteria that we 

believe are appropriate for selecting exchange rates for budgetary purposes. Further, 

ABMC and OMB officials told us that they are continuously evaluating the new ABMC 

method of budgeting for exchange rate changes as part of the ongoing budget review 

process. 

More specifically, ABMC and OMB officials told us that the rate they used in the fiscal 

year 2006 budget request for salaries and expenses was based on spending estimates in 

the foreign currencies, converted into dollars using the exchange rates prevailing during 

 10According to OMB, ABMC and OMB also review exchange rate trends to ensure that the exchange rates 

used do not represent short term spikes or drops in the dollar’s value. 

Page 7 GAO-06-50R American Battle Monuments Commission 
the budget formulation process in the summer of 2004. Then, when ABMC was required 

to submit its exchange rate estimate for the foreign currency fluctuation account, the 

commission applied the rate prevailing in December 2004. The euro-dollar rate used in 

the fiscal year 2006 budget formulation process for the ABMC foreign currency 

fluctuation account was €0.72 per $1.00. In contrast, the euro rate prevailing during July 

2004 was €0.81 per $1.00, illustrating the potential movement of exchange rates during 

preparation of a budget. 

Figure 2: Timeline for ABMC’s Fiscal Year 2006 Budget Formulation 

a

Used to develop budget amounts for salaries and expenses. Average based on July 2004 data. 

b

This number is the average for December 2004 and was used to develop the foreign currency fluctuation account budget amount. 

Similarly, DOD has changed its approach to forecasting exchange rates for budget 

purposes. Rather than using the most favorable or strongest value of the dollar, DOD 

recently selected a statistical method referred to as the “centered weighted average,” 

which combines both a long-run average of exchange rates and the most recently 

observed exchange rates to predict future exchange rates. DOD chose this approach 

because it was based on historical and current data and could be universally replicated; 

therefore, it was not dependent on subjective judgment. We recently reported that this 

was also a reasonable approach for forecasting foreign currency rates and could produce 

a more realistic estimate than DOD’s historical approach.11

Conclusions 

ABMC has the important charter of overseeing cemeteries located outside the United 

States that inter about 131,000 war dead, including overseas memorials and markers that 

commemorate the achievements in battle of the United States Armed Forces since 1917. 

Most of its appropriated dollars must be converted and spent in foreign currencies. 

Recognizing the changing value of the dollar in relation to other currencies, a foreign 

currency fluctuation fund was created to maintain the spending power of appropriated 

funds. ABMC relied on DOD estimates of exchange rates in developing its budget 

requests for the fund. 

 11GAO-05-800R.

Page 8 GAO-06-50R American Battle Monuments Commission 
In fiscal year 2004 the balance in this account diminished to less than $1 million as the 

dollar continued to decline against the euro, forcing ABMC to curtail spending. The 

exchange rate estimates used in preparing the ABMC budget did not change while the 

dollar declined in value. The President’s budget for 2005 did not request funding for this 

account. Congress provided supplemental appropriation for the account in fiscal year 

2005. 

In the fiscal year 2006 budget, funds were requested for the foreign currency fluctuation 

account and this request was based on the exchange rate prevailing when the budget was 

finalized. This exchange rate approach has the advantage of being transparent and avoids 

the judgment that was incorporated in the DOD estimates that ABMC had used 

previously. Recognizing the need to avoid future problems, ABMC and OMB officials 

told us that they are continuously evaluating the new method of budgeting for exchange 

rate changes as part of the ongoing budget review process. 

Agency Comments 

We provided a copy of a draft of this report to OMB and ABMC for comment. OMB and 

ABMC did not provide formal comments. Their staffs did provide technical comments 

that were incorporated as appropriate. 

 - - - - - 

We are sending copies of this report to the Secretary of the Treasury, the Director of the 

Office of Management and Budget, the Chairman of the American Battle Monuments 

Commission, and other interested parties. In addition, this report will be available at no 

charge on the GAO Web site at http://www.gao.gov. 

Page 9 GAO-06-50R American Battle Monuments Commission 
Should you or your staff have any questions concerning this report, please contact me at 

(202) 512-2717 or jonesy@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. GAO Staff who 

made major contributions to this report were Patrick S. Dynes, James M. McDermott, 

and Charles W. Perdue. 

Yvonne Jones 

Director 

Financial Markets 

 and Community Investment 

(250240) 

Page 10 GAO-06-50R American Battle Monuments Commission 
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