Defense-Wide Working Capital Fund: Action Needed to Maintain Cash Balances within Required Levels
Published: 2017-06-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Defense Finance and Accounting Service, the Defense Information Systems Agency, and DLA use the DWWCF to charge for goods and services provided to the military services and other customers. The DWWCF relies primarily on sales revenue rather than annual appropriations to finance its continuing operations. The DWWCF reported total revenue of $45.7 billion in fiscal year 2016 from (1) providing finance, accounting, information technology, and energy solution services to the military services and (2) managing inventory items for the military services.
GAO was asked to review issues related to DWWCF cash management. GAO's objectives were to determine to what extent (1) the DWWCF's reported monthly cash balances were within DOD's upper and lower cash requirements from fiscal years 2007 through 2016 and (2) the DWWCF's projected monthly cash balances were within the upper and lower cash requirements for fiscal year 2017. To address these objectives, GAO reviewed relevant DOD cash management guidance, analyzed DWWCF actual reported and projected cash balances and related data, and interviewed DWWCF officials.
section_title: What GAO Found
paragraphs: The Defense-wide Working Capital Fund's (DWWCF) reported monthly cash balances were outside the upper and lower cash requirements as defined by the Department of Defense's (DOD) Financial Management Regulation (FMR) for 87 of 120 months, and more than 12 consecutive months on three separate occasions during fiscal years 2007 through 2016. Reasons why the balances were outside the requirements at selected periods of time include the following:
The Defense Logistics Agency (DLA) disbursed about $1.3 billion more in fiscal year 2008 for, among other things, the purchase of fuel than it collected from the sale of fuel because of higher fuel costs.
DOD transferred $1.4 billion to the DWWCF in fiscal year 2013 because of cash shortfalls that resulted from DLA paying higher costs for fuel.
DLA collected about $3.7 billion more from the sale of fuel than it disbursed for fuel in fiscal year 2015 because of lower fuel costs.
Although the DOD FMR contains guidance on tools DOD managers can use to help ensure that the monthly cash balances are within the requirements, the regulation does not provide guidance on when to use the tools. Without this guidance, DOD risks not taking prompt action to bring the monthly cash balances within requirements. When monthly cash balances are outside requirements for long periods of time, the DWWCF is at further risk of not paying its bills on time or holding funds that could be used for other higher priorities.
Initially, the DWWCF's cash plan that supports the fiscal year 2017 President's Budget, dated February 2016, showed the monthly balances were projected to be above the upper cash requirement for most of fiscal year 2017. However, its October 2016 revised plan showed that the monthly cash balances were projected to be within the requirements for all 12 months. The plan changed because (1) DOD made unplanned cash transfers out of the DWWCF in the second half of fiscal year 2016 and (2) DOD reduced the standard fuel price in September 2016, leading to lower projected cash balances for fiscal year 2017.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOD update the FMR to include guidance on the timing of when DOD managers should use available tools to help ensure that monthly cash balances are within the upper and lower cash requirements. DOD concurred with GAO's recommendation and cited related actions planned.

section_title: Letter
paragraphs: The Defense Finance and Accounting Service (DFAS), the Defense  Information Systems Agency (DISA), and the Defense Logistics Agency  (DLA) use the Defense-wide Working Capital Fund (DWWCF) to charge  for goods and services provided to a variety of customers, including the  Army, the Navy, the Air Force, other Department of Defense (DOD) and  non-DOD agencies, and foreign countries. Under the working capital fund  concept, the DWWCF charges these customers for the anticipated full  cost of these goods and services. For fiscal year 2016, the three DOD  agencies reported total revenue of $45.7 billion for the DWWCF,  including, among other things, (1) DFAS providing finance and accounting  services to the military services and defense agencies; (2) DISA providing  global information technology solutions to the military services and  defense agencies; and (3) DLA managing about 6.2 million inventory  items and providing comprehensive worldwide energy solutions for the  military services, which included selling about 99 million barrels of fuel to  customers.
The DWWCF needs to maintain a sufficient cash balance to pay its bills  and sustain operations to achieve its mission. The availability of cash in  the DWWCF depends on the outcome of many decisions made during  DOD’s budget process with regard to (1) projecting workloads,   (2) estimating costs, and (3) setting prices to recover the estimated full  cost of providing goods and services. The DWWCF cash balance is  directly affected by collections from the sale of goods and services;  disbursements for salaries, inventory purchases, and other items;  appropriations passed by Congress and enacted into law; and transfers  into and out of the DWWCF. A disbursement in excess of available cash  would potentially constitute an Antideficiency Act violation. Conversely, if  the DWWCF builds excess cash balances, it could be subject to reduced  budget requests by DOD, transfers from the DWWCF to other  appropriation accounts, or rescissions. For example, because of an  excess cash balance in the DWWCF, Congress rescinded $1.037 billion  from the DWWCF in fiscal year 2016. Consequently, it is important for the  DWWCF to manage its cash balance to stay within the upper and lower  cash requirements.
You asked us to review issues related to DWWCF cash management.  Our objectives were to determine to what extent (1) the DWWCF’s  reported monthly cash balances were within DOD’s upper and lower cash  requirements from fiscal years 2007 through 2016 and (2) the DWWCF’s  projected monthly cash balances were within the upper and lower cash  requirements for fiscal year 2017.
To address the first objective, we (1) obtained the DWWCF reported  monthly cash balances for fiscal years 2007 through 2016 and   (2) compared the upper and lower cash requirements to the month- ending reported cash balances. If the cash balances were not within the  upper and lower requirement amounts, we met with DLA, DISA, and  DFAS officials and reviewed DWWCF budgets and other documentation  to ascertain the reasons. Further, to determine the extent that cash  transfers for fiscal years 2007 through 2016 caused the DWWCF cash  balances to be above or below the cash requirements, we analyzed DOD  budget and accounting reports to determine the dollar amount of transfers  made for the period. We analyzed cash transfers to determine if any of  the transfers contributed to the cash balances falling outside the upper or  lower cash requirements and, if so, the amount that fell outside those  requirements. We also obtained and analyzed documents that provide  information on transfer of funds into and out of the DWWCF and  interviewed key DLA, DISA, and DFAS officials to determine the reasons  for the transfers.
To address the second objective, we obtained and analyzed DWWCF  budget documents and cash management plans for fiscal year 2017. We  compared the upper and lower cash requirements to the month-ending  projected cash balances. If the projected monthly cash balances were  above or below the cash requirement, we discussed these balances with  DLA officials to ascertain the reasons.
We obtained the DWWCF financial data in this report from DOD budget  documents and accounting reports. To assess the reliability of these data,  we (1) obtained the DOD regulation on calculating the upper and lower  cash requirements; (2) reviewed DLA’s calculations of the cash  requirements to determine if they were calculated in accordance with  DOD regulations; (3) interviewed DLA, DISA, and DFAS officials  knowledgeable about the cash data; (4) compared DWWCF cash balance  information (including collections and disbursements) contained in  different reports to ensure that the data reconciled; (5) obtained an  understanding of the process DFAS used to reconcile DWWCF cash  balances with Department of the Treasury records; and (6) obtained and  analyzed documentation supporting the amount of funds transferred into  and out of the DWWCF. On the basis of these procedures, we have  concluded that these data were sufficiently reliable for the purposes of  this report. A more detailed discussion of our scope and methodology is  contained in appendix I.
We conducted this performance audit from June 2016 to June 2017 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.
subsections: section_title: Background
paragraphs: The DWWCF 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 DWWCF. Cash  generated from the sale of goods and services, rather than annual  appropriations, is the DWWCF’s primary means of maintaining an  adequate level of cash to sustain its operations. The ability to operate on  a break-even basis and generate cash consistent with DOD’s regulations  depends on accurately (1) projecting workload, (2) estimating costs, and  (3) setting prices to recover the full costs of producing goods and  services. DOD policy requires the DWWCF 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 permit  customers to execute their programs as authorized by Congress.
Developing accurate prices is challenging because the process to  determine the prices begins about 2 years in advance of when the  DWWCF actually receives customers’ orders and performs the work. In  essence, the DWWCF’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 DWWCF estimates labor,  material, and other costs based on anticipated demand for work as  projected by customers. Higher-than-expected costs or lower-than- expected customer sales for goods and services can result in lower cash  balances. Conversely, lower-than-expected costs or higher-than-expected  customer sales for goods and services can result in higher cash  balances. Because the DWWCF must base sales prices on assumptions  made as long as 2 years before the prices go into effect, some variance  between expected and actual costs and sales is inevitable.
If projections of cash disbursements and collections indicate that cash  balances will drop below the lower cash requirement, the DWWCF may  need to generate additional cash. One way this may be done is to bill  customers in advance for work not yet performed. Advance billing  generates cash almost immediately by billing DWWCF customers for  work that has not been completed. This method is a temporary solution  and is used only when cash reaches critically low balances because it  requires manual intervention in the normal billing and payment processes.
subsections: section_title: Description of DWWCF Work Performed by DLA, DISA, and DFAS
paragraphs: During fiscal year 2016, DLA, DISA, and DFAS reported total revenue of  $45.7 billion through the DWWCF.
DLA: During fiscal year 2016, DLA reported total revenue of   $37.5 billion. In addition to centrally managing DWWCF cash, DLA  operates three activity groups: Supply Chain Management, Energy  Management, and Document Services. The Supply Chain  Management activity group manages material from initial purchase, to  distribution and storage, and finally to disposal or reutilization. This  activity group fills about 36.6 million customer orders annually and  manages approximately 6.2 million consumable items, including   (1) 2.6 million repair parts and operating supply items to support  aviation, land, and maritime weapon system platforms; (2) dress and  field uniforms, field gear, and personal chemical protective items to  support military servicemembers and other federal agencies;   (3) 1.3 million medical items for military servicemembers and their  dependents; and (4) subsistence and construction items to support  our troops both at home and abroad. The Energy Management  activity group provides comprehensive worldwide energy solutions to  DOD as well as other authorized customers. This activity group  provides goods and services, including petroleum, aviation, and  natural gas products; facility and equipment maintenance on fuel  infrastructure; coordination of bulk petroleum transportation; and  energy-related environmental assessments and cleanup. The  Document Services activity group is responsible for DOD printing,  duplicating, and document automation programs.
DISA: During fiscal year 2016, DISA reported total revenue of   $6.8 billion. DISA is a combat support agency responsible for  planning, engineering, acquiring, fielding, and supporting global  information technology solutions to serve the needs of the military  services and defense agencies. It operates the Information Services  activity group within the DWWCF. This activity group consists of two  components: Computing Services and Telecommunications  Services/Enterprise Acquisition Services.
The Computing Services component operates eight Defense  Enterprise Computing Centers, which provide mainframe and server  processing operations, data storage, production support, technical  services, and end-user assistance for command and control, combat  support, and enterprise service applications across DOD. The  computing centers support over 4 million users through 21  mainframes and almost 14,500 servers. Among other things, these  services enable DOD components to (1) provide for the command and  control of operating forces; (2) ensure weapons systems availability  through management and control of maintenance and supply; and   (3) provide operating forces with information on the location,  movement, status, and identity of units and supplies.
The Telecommunications Services/Enterprise Acquisition Services  component provides telecommunications services to meet DOD’s  command and control requirements. One element of this component  is the Defense Information System Network. The Defense Information  System Network is a collection of telecommunication networks that  provides secure and interoperable connectivity of voice, data, text,  imagery, and bandwidth services for DOD, coalition partners,  combatant commands, and other federal agencies. Another element  of this component is the Enterprise Acquisition Services, which  provides contracting services for information technology and  telecommunications acquisitions from the commercial sector and  provides contracting support to the Defense Information System  Network programs as well as to other DISA, DOD, and authorized  non-Defense customers.
DFAS: During fiscal year 2016, DFAS reported total revenue of   $1.4 billion. DFAS pays all DOD military and civilian personnel,  military retirees and annuitants, and DOD contractors and vendors. In  fiscal year 2016, DFAS processed about 122 million pay transactions,  paid 12 million commercial invoices, accounted for 1,359 active DOD  appropriations while maintaining 152 million general ledger accounts,  and made $535 billion in disbursements to about 6.4 million  customers.
section_title: DOD Cash Management Policy
paragraphs: DOD requires each of its working capital funds to maintain a minimum  cash balance sufficient to pay bills, which, for the DWWCF, includes  payments for (1) consumable items (spare parts) and petroleum products  from vendors; (2) employees’ salaries to perform material management,  information services, and finance and accounting functions; and   (3) expenses associated with the maintenance and operations of DLA,  DISA, and DFAS facilities. The provisions of the DOD Financial  Management Regulation that provides guidance on the calculation of  DOD working capital funds’ upper and lower cash requirements, have  changed several times over the past 10 years—the period covered by our  audit—as discussed below.
Prior to June 2010, DOD’s Financial Management Regulation stated 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 consisted of 6 months of capital requirements  plus 7 days of operational cost, and the maximum cash requirement  consisted of 6 months of capital requirements plus 10 days of operational  cost. The regulation further provided that a goal of DOD working capital  funds was to minimize the use of advance billing of customers to maintain  cash solvency, unless advance billing is required to avoid Antideficiency  Act violations.
The DOD Financial Management Regulation was amended in June 2010.  As a result, from June 2010 through June 2015, DOD working capital  funds were allowed—with the approval of the Office of the Under  Secretary of Defense (Comptroller), Director of Revolving Funds—to  incorporate three new adjustments into the formula for calculating the  minimum and maximum cash requirements. These adjustments would  increase the minimum and maximum cash requirements. First, a working  capital fund could increase the cash requirements by the amount of  accumulated profits planned for return to customer accounts. A working  capital fund returns accumulated profits 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 was for funds appropriated to the working capital fund that  were obligated in the year received but not fully spent until future years.  The adjustment allowed the working capital fund to retain these amounts  as an addition to their normal operational costs. Finally, a working capital  fund could increase the minimum and maximum cash requirements by  the marginal cash required to purchase goods and services from the  commodity or business market at a higher price than that submitted in the  President’s Budget. The adjustment reflected the cash impact of the  specified market fluctuation.
Beginning in July 2015, DOD revised its cash management policy to  maintain a positive cash balance throughout the year and an adequate  ending balance to support continuing operations into the subsequent  year. In setting the upper and lower cash requirements, DOD working  capital funds are to consider the following four elements:
Rate of disbursement. The rate of disbursement is the average  amount disbursed between collection cycles. It is calculated by  dividing the total amount of disbursements planned for the year by the  number of collection cycles planned for the year. The rate describes  the average amount of cash needed to cover disbursements from one  collection cycle to the next.
Range of operation. The range of operation is the difference  between the highest and lowest expected cash levels based on  budget assumptions and past experience. The DOD Financial  Management Regulation noted that cash balances are not static and  volatility can be expected because of annual, quarterly, and more  frequent seasonal trends and significant onetime events.
Risk mitigation. Some amount of cash is required, beyond the range  of operation discussed above, to mitigate the inherent risk of  unplanned and uncontrollable events. The risks may include budget  estimation errors, commodity price fluctuations, and crisis response  missions.
Reserves. Cash reserves are funds held for known future  requirements. This element provides for cash on hand to cover  specific requirements that are not expected to disburse until  subsequent fiscal years.
section_title: The DWWCF’s Reported Monthly Cash Balances Frequently Fell Outside the Upper and Lower Cash Requirements from Fiscal Years 2007 through 2016
paragraphs: Our analysis of DWWCF cash data showed that the DWWCF monthly  cash balances fluctuated significantly from fiscal years 2007 through 2016  and were outside the upper and lower cash requirements for 87 of the  120 months—about 73 percent of the time for this period. Reasons why  the monthly cash balances were outside the cash requirements included,  among other things, (1) DLA charging its customers more or less than it  cost to purchase, refine, transport and store fuel and (2) DOD transferring  funds into or out of the DWWCF to pay for combat fuel losses or other  higher priorities. During this 10-year period, DOD took actions to adjust  the DWWCF cash balance, such as transferring funds to other  appropriation accounts, but the actions did not always bring the balances  within the requirements in a timely manner. As a result, the monthly cash  balances were above or below the cash requirements for more than 12  consecutive months on three separate occasions from fiscal years 2007  through 2016. Figure 1 shows the DWWCF monthly cash balances  compared to the upper and lower cash requirements from fiscal years  2007 through 2016.
Further, for the 10-year period, the DWWCF’s reported monthly cash  balances were above the cash requirement 62 times, between the upper  and lower cash requirements 33 times, and below the cash requirement  25 times. Table 1 shows the number of months the DWWCF monthly  cash balances were above, between, or below the upper and lower cash  requirements for each of the 10 years reviewed.
subsections: section_title: The DWWCF’s Reported Monthly Cash Balances Were Outside Upper and Lower Cash Requirements for More Than 12 Consecutive Months Three Times during Fiscal Years 2007 through 2016
paragraphs: The monthly cash balances were above or below the cash requirements  more than 12 consecutive months on three separate occasions from fiscal  years 2007 through 2016. Specifically, the monthly cash balances were  (1) below the lower cash requirement for 13 consecutive months  beginning in October 2007, (2) above the upper cash requirement for 29  consecutive months beginning in March 2010, and (3) above the upper  cash requirement for 15 consecutive months beginning in April 2015.
The draft DOD Financial Management Regulation currently being  implemented by the DWWCF provides information on the management  tools DOD cash managers can use to bring cash balances within the  upper and lower cash requirements. The draft regulation states that  these tools include, but are not limited to,  changing the frequency of collections;  controlling the timing of contract renewals and large obligations or  disbursements; negotiating the timing of customer orders and subsequent work; and  requesting policy waivers, when necessary.
In addition, the draft DOD Financial Management Regulation also  provides guidance on transfers of cash between DOD working capital  fund activities or between DOD working capital fund activities and  appropriation-funded activities. DOD has used transfers to increase or  decrease cash balances in the past, under authorities provided in annual  appropriations acts.
We determined that DOD took actions during fiscal years 2007 through  2016 to increase or decrease cash balances in the DWWCF. An Office of  the Under Secretary of Defense (OUSD) (Comptroller) official informed us  that DLA provides the OUSD (Comptroller) monthly information on  DWWCF cash balances compared to the upper and lower cash  requirements. This information is used by the OUSD (Comptroller) and  DWWCF officials to determine whether actions are needed to increase or  decrease the DWWCF cash balance, such as transferring funds into or  out of the DWWCF. Our analysis of accounting documentation and  discussions with OUSD (Comptroller) and DLA officials showed that DOD  used two types of actions to increase or decrease the monthly cash  balances to help bring the cash balances within the cash requirements  during the 10-year period of our review.
First, DOD transferred a total of about $9 billion into and out of the  DWWCF to adjust the cash balance during this period. For example,  DOD transferred about $3 billion from the DWWCF to other DOD  appropriation accounts throughout fiscal year 2016. This reduced the  DWWCF cash balance to within the cash requirements after remaining  above the upper cash requirement for 15 consecutive months from April  2015 to July 2016. Second, the OUSD (Comptroller), in coordination with  DLA, adjusted the standard fuel prices upward or downward a total of 16  times outside of the normal budget process. For example, in fiscal year  2012, DOD lowered the standard fuel price three times from October  2011 through July 2012 to help offset cash increases by DLA Energy  Management on the sale of fuel to its customers. These price changes  helped offset further increases in the cash balances, but they did not  reduce the monthly cash balances to within the cash requirements during  this period.
Although DOD managers used management tools such as transfers and  price adjustments to help bring the DWWCF monthly cash balances  within upper and lower cash requirements, such actions did not always  bring the balances within the requirements in a timely manner.  Specifically, as noted above, the DWWCF monthly cash balances were  outside the upper and lower cash requirements for 12 consecutive  months on three separate occasions during the 10-year period of our  audit. We selected the 12-month period for comparing the monthly cash  balances to the cash requirements because (1) DOD develops a budget  every 12 months; (2) the DWWCF annual budget projects fiscal year-end  cash balances and the upper and lower cash requirements based on 12- month cash plans that include information on projected monthly cash  balances, and whether those projected monthly cash balances fall within  the cash requirements; and (3) DOD revises the DWWCF stabilized  prices that it charges customers for goods and services every 12 months  during the budget process.
Our analysis of both the current official DOD Financial Management  Regulation and the provisions of the draft version that DOD has begun  implementing determined that the regulations do not provide guidance on  the timing of when DOD managers should use available management  tools so that they would be effective in helping to ensure monthly cash  balances are within the upper and lower cash requirements. Without this  guidance, DOD risks not taking prompt action to bring the monthly cash  balances within the cash requirements.
When DWWCF monthly cash balances are below the lower cash  requirements for long periods, the DWWCF is at greater risk of either   (1) not paying its bills on time or (2) making a disbursement in excess of  available cash, which would potentially constitute an Antideficiency Act  violation. In cases of cash balances above the upper requirement, the  DWWCF may be holding funds that could be used for higher priorities.
section_title: Fiscal Years 2007 through 2009: DWWCF-Reported Cash Balances Were Below the Lower Cash Requirement for 19 Months
paragraphs: The DWWCF monthly cash balances were below the lower cash  requirement for 19 of the 36 months from fiscal years 2007 through 2009,  as shown in table 1. During the 3-year period, the DWWCF reported that  monthly cash balances were below the lower cash requirement for 13  consecutive months from October 2007 through October 2008, falling to  their lowest point in December 2007 at $574 million—$890 million below  the lower cash requirement.
According to DLA and DISA officials and our analysis of financial  documentation, the monthly cash balances were below the lower cash  requirement for more than half of the 3-year period for four primary  reasons.
First, during the first 4 months of fiscal year 2007, DISA disbursed  $340 million more than it collected because (1) DISA’s customers  received funding late in the first quarter of fiscal year 2007, which  delayed certain support service contracts with DISA that in turn  delayed DWWCF collections until the second quarter of fiscal year  2007, and (2) DISA reduced fiscal year 2007 prices to return prior  year accumulated profits to its customers.
Second, DOD transferred $262 million in November 2006 from the  DWWCF to the Air Force Working Capital Fund to cover increased  fiscal year 2006 Air Force fuel costs.
Third, DLA monthly cash balances declined during the first 4 months  of fiscal year 2007 because of financial systems issues affecting  collections when certain DLA activities transitioned to another  financial system.
Fourth, in fiscal year 2008, DLA disbursed about $1.3 billion more for,  among other things, the purchase, refinement, transportation, and  storage of fuel than it collected for the sale of fuel to its customers  because of higher fuel costs.
When DWWCF monthly cash balances are below the lower cash  requirements for long periods, the DWWCF is at greater risk of either   (1) not paying its bills on time or (2) or making a disbursement in excess  of available cash, which would potentially constitute an Antideficiency Act  violation.
section_title: Fiscal Years 2010 through 2012: DWWCF-Reported Cash Balances Were Above the Upper Cash Requirement for 29 Consecutive Months Beginning in March 2010
paragraphs: The DWWCF reported monthly cash balances increased from about   $1.5 billion at the beginning of fiscal year 2010 (October 1, 2009) to   $3 billion at the end of fiscal year 2010—about $1.5 billion more than the  beginning balance and $1.1 billion above the upper cash requirement.  The reported monthly cash balance remained high for most of the next 2  fiscal years, with an average monthly cash balance of $3.1 billion. During  the 3-year period, the monthly cash balances were above the upper cash  requirement for 29 of the 36 months, as shown in table 1. All 29 months  were consecutive.
According to DLA officials and our analysis of financial documentation,  the monthly cash balances were above the upper cash requirement for  four primary reasons.
First, DWWCF monthly cash balances increased when the DWWCF  received $1.4 billion in appropriations from fiscal year 2010 through  fiscal year 2012 to pay mostly for, among other things, combat fuel  losses and fuel transportation charges associated with operations in  Iraq and Afghanistan.
Second, in fiscal year 2010, DLA Energy Management charged its  customers more per barrel of fuel than it cost to purchase, refine,  transport, and store the product (among other things), causing an  increase in cash of approximately $659 million.
Third, DLA Supply Chain Management collected more from the sale of  inventory to its customers than it disbursed for the purchase of  inventory from its suppliers in the second half of fiscal year 2010,  resulting in a $296 million increase in cash.
Fourth, in June 2012, DOD transferred $1 billion into the DWWCF  from the Afghanistan Security Forces Fund (a onetime infusion of  cash) to compensate for the reduced price that DLA Energy  Management was charging its customers for fuel.
section_title: Fiscal Year 2013: DWWCF-Reported Monthly Cash Balances Were Below the Lower Cash Requirement Three Times Before Ending the Fiscal Year Above the Upper Cash Requirement
paragraphs: DWWCF monthly cash balances were below the lower cash requirement  three times in the beginning of fiscal year 2013 before ending the fiscal  year at a level above the upper cash requirement. During fiscal year  2013, the DWWCF monthly cash balances were outside the cash  requirements for 7 of 12 months, as shown in table 1. There was a wide  range in the reported monthly cash balances, from a low of $929 million in  January 2013 to a high of $2.8 billion in June 2013.
According to DLA officials and our analysis of financial documentation,  the monthly cash balances were below the cash requirements in  November 2012, January 2013, and February 2013 for two primary  reasons.
First, in the first 5 months of fiscal year 2013, DLA Energy  Management disbursed $588 million more to purchase, refine,  transport, and store fuel than it was paid from its customers for the  sale of fuel.
Second, DLA Supply Chain Management disbursed $280 million more  for the purchase of inventory than it collected from the sale of  inventory to its customers in the first 5 months of fiscal year 2013.
On the other hand, the monthly cash balances were above the cash  requirement for the last 4 months of fiscal year 2013 because funds were  transferred into the DWWCF in June and September 2013. Specifically,  DOD transferred $1.4 billion into the DWWCF from various defense  appropriations accounts to mitigate cash shortfalls that resulted from DLA  Energy Management paying higher costs for refined fuel products.
section_title: Fiscal Years 2014 through 2016: DWWCF-Reported Cash Balances Were Above the Upper Cash Requirement for 25 Months
paragraphs: DWWCF monthly cash balances were above the upper cash  requirements for 25 of 36 months from fiscal years 2014 through 2016.  During the 3-year period, the reported monthly cash balances averaged  $2.9 billion, reaching a high point of $4.7 billion in May 2016—about   $1.9 billion above the upper cash requirement. Furthermore, the monthly  cash balances remained above the upper cash requirement for 15  consecutive months, from April 2015 through June 2016.
According to DLA officials and our analysis of financial documentation,  the monthly cash balances were above the upper cash requirement for  three primary reasons.
First, the DWWCF cash balance at the beginning of fiscal year 2014  was above the upper cash requirement because of the $1.4 billion  transferred into the fund during the last 4 months of fiscal year 2013.
Second, in fiscal year 2015, DLA Energy Management’s price for the  sale of fuel to its customers was considerably more than the cost to  purchase, refine, transport, and store fuel. As a result, DLA Energy  Management collected about $3.7 billion more than it disbursed for  fuel during the year.
Third, in fiscal year 2016, DLA Energy Management continued to  charge its customers more for fuel than it cost.
section_title: The DWWCF’s Revised Monthly Cash Balances Are Projected to Be within the Upper and Lower Cash Requirements for Fiscal Year 2017
paragraphs: Initially, the DWWCF monthly cash plan that supports the fiscal year 2017  President’s Budget, dated February 2016, showed the monthly cash  balances were projected to be above the upper cash requirement for  most of fiscal year 2017. However, after the DWWCF revised its fiscal  year 2017 cash plan in October 2016, cash balances were projected to be  within the upper and lower cash requirement for all 12 months, in  accordance with the DOD Financial Management Regulation.
According to DOD officials, the DWWCF changed its plan after the  President’s Budget was issued because (1) DOD made unplanned cash  transfers out of the DWWCF in the second half of fiscal year 2016 and   (2) DOD reduced the fiscal year 2017 standard fuel price in September  2016, leading to lower projected cash balances. Figure 2 shows the  DWWCF’s initial cash plan under the President’s Budget and the revised  monthly cash plans compared to the upper and lower cash requirements  for fiscal year 2017.
As shown in figure 2, the DWWCF’s revised cash plan for fiscal year 2017  shows that the cash balance at the end of fiscal year 2016 (September  2016) was about $1.1 billion lower than the President’s Budget cash plan.  According to DOD officials and our review of documentation on transfers,  this decrease was largely due to DOD’s transfer of about $2 billion out of  the DWWCF in the second half of fiscal year 2016, which occurred after  the fiscal year 2017 President’s Budget cash plan was submitted in  February 2016. The $2 billion of DWWCF cash was transferred to other  DOD appropriations accounts to pay for, among other things, unforeseen  military requirements to maintain a larger troop presence in Afghanistan  than that planned for in the President’s Budget and funding shortfalls in  fuels, consumable inventory items, repair parts, and medical supplies and  services.
The DWWCF monthly cash balances under the revised cash plan are  projected to remain within the upper and lower cash requirements for all  12 months in fiscal year 2017. This is a significant change from the  President’s Budget cash plan that showed the DWWCF monthly cash  balances exceeding the upper cash requirement for 9 of the 12 months.  Another factor that contributed to the improved results reflected in the  revised plan is that the OUSD (Comptroller) lowered the standard fuel  price in September 2016 from $105.00 per barrel to $94.92—a $10.08  difference. DOD lowered the standard fuel price for refined petroleum  products because the fiscal year 2017 costs for those products were  expected to remain lower than initially projected when the fiscal year 2017  President’s Budget was developed. In connection with its decision to  lower fuel prices, DOD stated that the lower refined product costs have  had a positive impact on the DWWCF cash balance (i.e., higher cash  balances), and the department anticipated an associated congressional  reduction as a result of the positive cash balance. Thus, DOD reduced  the fiscal year 2017 standard fuel price effective October 1, 2016.
In November 2016, DLA officials informed us that several factors could  nevertheless cause the DWWCF monthly cash balances to fall outside  the upper and lower cash requirements in fiscal year 2017. These factors  could include (1) higher or lower fuel product costs than expected,   (2) higher or lower customer sales than expected, (3) the timing of vendor  payments on a daily basis versus collections from customers on a weekly  or monthly basis, and (4) nonpayment from customers for goods or  services provided to them. While DWWCF officials stated that these  factors could affect whether the DWWCF monthly cash balances are  within the cash requirements for all 12 months in fiscal year 2017, the  officials believe that the cash balances will remain within the cash  requirements for the entire period.
section_title: Conclusions
paragraphs: The DWWCF supports military readiness by providing energy solutions,  inventory management, information system solutions, and financial  services for DOD in times of peace and war. Maintaining the DWWCF  cash balance within the upper and lower cash requirements as defined by  DOD regulation is critical for the DWWCF to continue providing these  services for its customers. During fiscal years 2007 through 2016, DOD  transferred a total of $9 billion into and out of the DWWCF and adjusted  fuel prices 16 times outside of the normal budget process to try to bring  the cash balances within the cash requirements. However, the cash  balances were outside the upper and lower cash requirements almost  three quarters of that time and for more than a year on three separate  occasions.
Although the DOD Financial Management Regulation provides guidance  on tools DOD managers can use to help bring the monthly cash balances  within the upper and lower cash requirements, the regulation does not  provide guidance on the timing of when DWWCF managers should use  these tools to help ensure that the monthly cash balances are within the  cash requirements. Without this guidance, DOD risks not taking prompt  action in response to changes in fuel costs, inventory costs,  appropriations, or other events to bring the monthly cash balances within  the cash requirements. When DWWCF monthly cash balances are below  the lower cash requirements for long periods of time, the DWWCF is at  greater risk of either (1) not paying its bills on time or (2) making a  disbursement in excess of available cash, which would potentially result  in an Antideficiency Act violation. In cases of cash balances above the  upper requirement, the DWWCF may restrict funds that could be used for  other higher priorities.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Secretary of Defense direct the Office of the  Under Secretary of Defense (Comptroller) to provide guidance in the  DOD Financial Management Regulation on the timing of when DOD  managers should use available tools to help ensure that monthly cash  balances are within the upper and lower cash requirements.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOD for comment. In its written  comments, which are reprinted in appendix II, DOD concurred with our  recommendation and stated that it plans to update the DOD Financial  Management Regulation as we recommended to provide additional  guidance on the timing of when DOD managers should use available  tools to help ensure that monthly cash balances are within the upper and  lower cash requirements. DOD also stated that this change will be  incorporated for the fiscal year 2019 President’s Budget submission and  subsequent budgets. DOD also provided a technical comment, which we  incorporated as appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Under Secretary of Defense  (Comptroller), and the Directors of the Defense Logistics Agency, the  Defense Finance and Accounting Service, and the Defense Information  Systems Agency. In addition, the report is available at no charge on the  GAO website at http://www.gao.gov.
If you or your staff members 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 III.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine to what extent the Defense-wide Working Capital Fund’s  (DWWCF) reported monthly cash balances were within the Department of  Defense’s (DOD) upper and lower cash requirements from fiscal years  2007 through 2016, we (1) obtained the DWWCF’s reported monthly cash  balances for fiscal years 2007 through 2016, (2) used the DOD Financial  Management Regulation that was in effect at that time to determine the  upper and lower cash requirements, and (3) compared the upper and  lower cash requirements to the month-ending reported cash balances. If  the cash balances were not within the upper and lower requirement  amounts, we met with the Defense Logistics Agency (DLA), the Defense  Information Systems Agency (DISA), and the Defense Finance and  Accounting Service (DFAS) officials and reviewed DWWCF budgets and  other documentation to ascertain the reasons. We also identified  instances in which monthly cash balances were outside the upper and  lower cash requirements for 12 consecutive months or more to assess  the timeliness of DOD actions to bring them within the upper and lower  cash requirements. We selected the 12-month period for comparing the  monthly cash balances to the cash requirements because (1) DOD  develops a budget every 12 months; (2) the DWWCF annual budget  projects fiscal year-end cash balances and the upper and lower cash  requirements based on 12-month cash plans that include information on  projected monthly cash balances, and whether those projected monthly  cash balances fall within the cash requirements; and (3) DOD revises the  DWWCF stabilized prices that it charges customers for goods and  services every 12 months during the budget process.
In addition, we performed a walk-through of DFAS processes for  reconciling the Department of the Treasury trial balance monthly cash  amounts for the DWWCF to the balances reported on the DWWCF cash  management reports. Further, to determine the extent cash transfers for  fiscal years 2007 through 2016 contributed to the DWWCF cash balances  being above or below the cash requirements, we (1) analyzed DOD  budget and accounting reports to determine the dollar amount of transfers  made for the period and (2) obtained journal vouchers from DFAS that  documented the dollar amounts of the cash transfers. We analyzed cash  transfers to determine if any of the transfers contributed to the cash  balances falling outside the upper or lower cash requirements and, if so,  the amount outside those requirements. We also obtained and analyzed  documents that provide information on transfer of funds into and out of  the DWWCF and interviewed key DLA, DISA, and DFAS officials to  determine the reasons for the transfers.
To determine to what extent the DWWCF’s projected monthly cash  balances were within the upper and lower cash requirements for fiscal  year 2017, we obtained and analyzed DWWCF budget documents and  cash management plans for fiscal year 2017. We compared the upper  and lower cash requirements to the month-ending projected cash  balances. If the projected monthly cash balances were above or below  the cash requirement, we discussed these balances with DLA officials to  ascertain the reasons.
We obtained the DWWCF financial data in this report from budget  documents and accounting reports. To assess the reliability of these data,  we (1) obtained the DOD regulation on calculating the upper and lower  cash requirements; (2) reviewed DLA’s calculations of the cash  requirements to determine if they were calculated in accordance with  DOD regulations; (3) interviewed DLA, DISA, and DFAS officials  knowledgeable about the cash data; (4) compared DWWCF cash balance  information (including collections and disbursements) contained in  different reports to ensure that the data reconciled; (5) obtained an  understanding of the process DFAS used to reconcile DWWCF cash  balances with the Department of the Treasury records; and (6) obtained  and analyzed documentation supporting the amount of funds transferred  in and out of the DWWCF. On the basis of these procedures, 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), Washington, D.C.; DLA,  Fort Belvoir, Virginia; DISA, Columbus, Ohio; and DFAS, Indianapolis,  Indiana.
We conducted this performance audit from June 2016 to June 2017 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.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Greg Pugnetti (Assistant  Director), John Craig, Steve Donahue, and Keith McDaniel made key  contributions to this report.