Defense Working Capital Fund: Military Services Did Not Calculate and Report Carryover Amounts Correctly
Published: 2006-06-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: According to the Department of Defense's (DOD) fiscal year 2006 budget estimates, working capital fund activity groups (depot maintenance, ordnance, and research and development) will have about $6.3 billion of funded work that will be carried over from fiscal year 2006 into fiscal year 2007. The congressional defense committees recognize that these activity groups need some carryover to ensure smooth work flow from one fiscal year to the next. However, the committees have previously raised concern that the amount of carryover may be more than is needed. GAO was asked to determine (1) if the military services' carryover calculations were in compliance with DOD's new carryover policy and (2) if customers were submitting orders to working capital fund activities late in the fiscal year and, if so, the effect this practice has had on carryover.
section_title: What GAO Found
paragraphs: The military services have not consistently implemented DOD's revised policy in calculating carryover. Instead, the military services used different methodologies for calculating the reported actual amount of carryover and the allowable amount of carryover since DOD changed its carryover policy in December 2002. The military services did not consistently calculate the allowable amount of carryover that was reported in their fiscal year 2004, 2005, and 2006 budgets because they used different outlay rates for the same appropriation. The Air Force did not follow DOD's regulation on calculating carryover for its depot maintenance activity group, which affected the amount of allowable carryover and actual carryover by tens of millions of dollars and whether the actual carryover exceeded the allowable amount as reported in the fiscal year 2004, 2005, and 2006 budgets. The Army depot maintenance and ordnance activity groups' actual carryover was understated in fiscal years 2002 and 2003 because carryover associated with prior year orders was not included. While the Navy generally followed DOD's policy for calculating carryover, the Navy consolidated the reporting of carryover information for research and development activities. The Navy budgets no longer provide information to show if any of the five research and development subactivity groups individually exceeded the carryover ceiling as the Navy budgets did prior to the change in the carryover policy. As a result, carryover data provided to decision makers who review and use the data for budgeting are erroneous and not comparable across the three military services. For example, the Air Force reported to Congress that the actual fiscal year 2002 carryover for depot maintenance was $87 million less than the ceiling. If the Air Force followed DOD's policy, GAO's calculations show its carryover would have exceeded the ceiling by $216 million. Carryover is greatly affected by orders accepted by working capital fund activities late in the fiscal year that generally cannot be completed by fiscal year end, and in some cases cannot even be started prior to the end of the fiscal year. GAO's analysis of 68 fiscal year-end orders identified four key factors contributing to orders generally being issued by customers late in the fiscal year and being accepted by the working capital fund activities during the last month of the fiscal year. These reasons included (1) funds provided to the customer late in the fiscal year to finance existing requirements, (2) new work requirements identified at year end, (3) problems encountered in processing orders, and (4) work scheduled at year end. GAO's analysis showed that over half of the orders reviewed were not completed at the end of the next fiscal year, generating a second year of carryover on the same order. As a result, some orders may not have been the most effective use of DOD resources at that time and may not have complied with all of the order acceptance provisions cited in the DOD Financial Management Regulation.

section_title: Letter
paragraphs: According to the Department of Defense’s (DOD) fiscal year 2006 budget  estimates, working capital fund activity groups (depot maintenance,  ordnance, and research and development) will have about $6.3 billion of  funded work that will be carried over from fiscal year 2006 into fiscal year  2007. The congressional defense committees recognize that these activity  groups need some carryover to ensure a smooth flow of work during the  transition from one fiscal year to the next. However, past congressional  defense committee reports raised concerns that the level of carryover may  be more than is needed. Excessive amounts of carryover financed with  customer appropriations are subject to reductions by DOD and the  congressional defense committees during the budget review process. To  the extent that carryover is too high, Congress may redirect the funds  gained from such reductions to other priority initiatives. For example,  Congress reduced the Army’s fiscal year 2003 Operation and Maintenance  appropriation by $48 million due to excessive carryover.
In May 2001, we reported that DOD did not have a sound analytical basis  for its 3-month carryover standard which it established in 1996. Based on  our recommendation, in December 2002 DOD revised its carryover policy  to eliminate the 3-month across-the-board standard for allowable  carryover. Under the new policy, the allowable amount of carryover is to be  based on the outlay rate of the customers’ appropriations financing the  work. This means that in determining allowable carryover, the first year  outlay rate is used for new orders received in the current year (first year of  the work order). However, during our review of Army depot maintenance  operations, we reported in June 2005 that the Army encountered several  problems implementing DOD’s new policy on calculating actual carryover  as well as the allowable amount of carryover. In that report, we also  determined that activities exceeded the carryover ceiling because they  received and accepted orders late in the fiscal year.
As requested and agreed to with your office, the objectives of this  assignment were to determine (1) if the military services’ carryover  calculations were in compliance with DOD’s new carryover policy and   (2) if customers were submitting orders to working capital fund activities  late in the fiscal year and, if so, the effect that this practice has had on  carryover. Our review was performed from July 2005 through March 2006  in accordance with U.S. generally accepted government auditing standards.  The carryover information in this report is budget data obtained from  official Army, Navy, and Air Force budget documents. To assess the  reliability of the data, we (1) reviewed and analyzed the factors used in  calculating carryover and (2) interviewed officials knowledgeable about  the data. We determined that the data were sufficiently reliable for the  purposes in this report. Further details on our scope and methodology can  be found in appendix I. We requested comments on a draft of this report  from the Secretary of Defense or his designee. Written comments from the  Under Secretary of Defense (Comptroller) are reprinted in appendix II.
subsections: section_title: Background
paragraphs: A working capital fund relies on sales revenue rather than direct  appropriations to finance its continuing operations. A working capital fund  is intended to (1) generate sufficient resources to cover the full costs of its  operations and (2) operate on a break-even basis over time—that is, neither  make a gain nor incur a loss. Customers use appropriated funds, primarily  Operation and Maintenance appropriations, to finance orders placed with  the working capital fund. DOD estimates that in fiscal year 2006, the  Defense Working Capital Fund—which consists of the Army, Navy, Air  Force, Defense-wide, and Defense Commissary Agency working capital  funds—will have revenue of about $105 billion.
The Defense Working Capital Fund finances the operations of three  fundamentally different types of support organizations: (1) stock fund  activities, which provide spare parts and other items to military units and  other customers; (2) industrial activities, which provide depot  maintenance, research and development, ordnance, and other services to  their customers; and (3) other service activities, which provide various  services such as accounting (Defense Finance and Accounting Service) and  computer services (Defense Information Systems Agency). Because  carryover is primarily associated with industrial operations, this report  discusses the results of our review of Defense Working Capital Fund  industrial operations.
subsections: section_title: What Is Carryover and Why Is It Important?
paragraphs: Carryover is the dollar value of work that has been ordered and funded  (obligated) by customers but not completed by working capital fund  activities at the end of the fiscal year. Carryover consists of both the  unfinished portion of work started but not completed, as well as requested  work that has not yet commenced. Some carryover is necessary at fiscal  year end if working capital funds are to operate efficiently and effectively.  For example, if customers do not receive new appropriations at the  beginning of the fiscal year, carryover is necessary to ensure that the  working capital fund activities have enough work to ensure a smooth  transition between fiscal years. Too little carryover could result in some  personnel not having work to perform at the beginning of the fiscal year.  On the other hand, too much carryover could result in an activity group  receiving funds from customers in one fiscal year but not performing the  work until well into the next fiscal year or subsequent years. By minimizing  the amount of carryover, DOD can use its resources in the most effective  manner and minimize the “banking” of funds for work and programs to be  performed in subsequent years.
section_title: DOD Revised Its Carryover Policy
paragraphs: In 1996, DOD established a 3-month carryover standard for all working  capital fund activities except for the contract portion of the Air Force depot  maintenance activity group. In May 2001, we reported that DOD did not  have a basis for its carryover standard and recommended that DOD  determine the appropriate carryover standard for the depot maintenance,  ordnance, and research and development activity groups. According to  Office of the Under Secretary of Defense (Comptroller) officials, DOD  provided verbal guidance concerning its new carryover policy for working  capital fund activities in December 2002. Subsequently, DOD included its  revised carryover policy in its DOD Financial Management Regulation  7000.14-R, Volume 2B, Chapter 9, dated June 2004, which eliminated the 3- month standard for allowable carryover. Under the new policy, the  allowable amount of carryover is to be based on the outlay rate of the  customers’ appropriations financing the work. This meant that in  determining allowable carryover, the first year outlay rate would be used  for new orders received in the current year (first year of the work order).
According to the DOD regulation, this new metric allows for an analytical- based approach that holds working capital fund activities to the same  standard as general fund execution and allows for more meaningful budget  execution analysis.
Further, based on our work on Army depot maintenance operations, we  recommended in our June 2005 report that DOD clarify its written  guidance for calculating the actual amount of carryover as well as the  allowable amount of carryover. On June 29, 2005, DOD issued clarifying  guidance on carryover. The guidance specified that (1) the actual amount  of carryover associated with current and prior year orders is required to be  the amount reported to Congress and within DOD, (2) the allowable  amount of carryover is to be calculated based on current year customer  orders received and the first year outlay rate for the appropriations  financing those orders for all activity groups except shipyards, and   (3) shipyards are authorized to use 2 years of customer orders in the  calculation of the allowable amount of carryover and to use the first and  second year outlay rates for the appropriations financing those orders.
section_title: The Military Services Did Not Follow DOD Policy in Calculating Carryover
paragraphs: The military services have not consistently implemented DOD’s 2002  revised policy in calculating carryover. Instead, the military services used  different methodologies for calculating the reported actual and the  allowable amount of carryover since DOD changed its carryover policy in  December 2002. Specifically, (1) the military services did not consistently  calculate the allowable amount of carryover that was reported in their  fiscal year 2004, 2005, and 2006 budgets because they used different tables  (both provided by DOD) that contained different outlay rates for the same  appropriation; (2) the Air Force did not follow DOD’s regulation on  calculating carryover, which affected the amount of allowable carryover  and actual carryover by tens of millions of dollars and whether the actual  amount of carryover exceeded the allowable amount as reported in the  fiscal year 2004, 2005, and 2006 budgets; and (3) the Army depot  maintenance and ordnance activity groups’ actual carryover was  understated in fiscal years 2002 and 2003 because carryover associated  with prior year orders was not included in the carryover calculation as  required. Further, while the Navy generally followed DOD’s policy for  calculating carryover, the Navy consolidated the reporting of carryover  information for research and development activities. As a result, the Navy  budgets no longer provide information to show if any of the five research  and development subactivity groups individually exceed the carryover  ceiling. This information had been provided in the Navy budgets prior to  the change in the carryover policy in December 2002. The primary factor  for these inconsistencies is that DOD’s December 2002 guidance was verbal  and DOD did not issue detailed written procedures for calculating  carryover and the allowable amount of carryover until June 2004.  Afterwards, DOD issued clarifying written guidance in June 2005, January  2006, and February 2006. As a result, year-end carryover data provided to  decision makers who review and use these data for budgeting—Office of  the Under Secretary of Defense (Comptroller) and congressional decision  makers—are erroneous and not comparable across the three military  services.
subsections: section_title: Military Services Used Different Outlay Rate Tables to Calculate the Allowable Amount of Carryover
paragraphs: The military services used different outlay rate tables that provided  different outlay rates for the same appropriation when calculating the  allowable amount of carryover. The outlay rate tables came from two  sources—the Office of the Under Secretary of Defense (Comptroller),  Revolving Funds Directorate, and the Financial Summary Tables  published by Office of the Under Secretary of Defense (Comptroller),  Directorate for Program and Financial Control. Because the outlay rates in  these documents sometimes differ, this could affect whether an activity  group exceeded the carryover ceiling or not. Under the new carryover  policy, the allowable amount of carryover is to be based on the outlay rates  of the customers’ appropriations financing the work. In implementing this  policy, it is important for the services to use the same outlay rate tables so  that their calculations on the allowable amount of carryover are consistent.  However, when DOD changed the carryover policy in December 2002, DOD  did not instruct the services, in writing, on which outlay rate tables should  be used to calculate the allowable amount of carryover. Table 1 shows  which outlay rate source each of the military services used.
Table 2 shows the differences between the outlay rates for selected  appropriations in the tables provided by the Office of the Under Secretary  of Defense (Comptroller) and the DOD Financial Summary Tables that  were used to calculate the allowable amount of carryover, which is  included in the fiscal year 2005 budget. Some of the differences are large  while others are small. These outlay rates, along with the amount of  appropriations financing orders, are used to determine the allowable  carryover (ceiling). Because the dollar amount of appropriations financing  orders is sometimes in the hundreds of millions of dollars, even a small rate  difference could result in significantly more or less allowable carryover.  For example, the Navy estimated that the naval aviation depots would  receive $694 million for new Operation and Maintenance, Navy orders in  fiscal year 2005. Using the outlay rate provided in the DOD Financial  Summary Tables, the Navy would be allowed to carry over about $146  million. In contrast, using the outlay rate table provided by the Office of the  Under Secretary of Defense (Comptroller), the Navy would be allowed to  carry over $180 million—about a $34 million difference for just this one  appropriation financing orders received by the naval aviation depots.
In addition to using different outlay rate tables, there appeared to be  uncertainties regarding which year’s outlay rates to use. For the fiscal year  2006 budget, the Army and Navy used the DOD Financial Summary Tables  to determine the appropriation outlay rates used in calculating the  allowable amount of carryover. These tables contain different  appropriation outlay rates for each fiscal year. Military service officials  stated that DOD had not provided any written guidance on whether the  services should use the fiscal year 2004 or 2005 outlay rates or both when  determining the allowable amount of carryover in preparing the fiscal year  2006 budget. An excerpt of the outlay rates from the DOD Financial  Summary Tables dated February 2004 follows.
The Navy used the fiscal year 2005 outlay rates for calculating the  allowable amount of carryover for fiscal years 2004, 2005, 2006, and 2007— the fiscal years that are included in the fiscal year 2006 budget. The Army  used the same document but instead used the fiscal year 2004 outlay rates  for calculating the allowable carryover for fiscal year 2004. The Army used  the fiscal year 2005 rates for calculating the allowable carryover for fiscal  years 2005, 2006, and 2007. While this might appear to be a small matter  because the rates are generally the same or almost the same from one fiscal  year to the next, using the different rates (2004 versus 2005) for calculating  the allowable carryover for the Army industrial operations activity group in  fiscal year 2004 results in a different outcome. Based on its calculations,  the Army reported that its actual carryover was $141 million below the  ceiling for fiscal year 2004. However, using the fiscal year 2005 rates (the  rates that the Navy used) would show the Army exceeded the ceiling by  about $275 million—a swing of $416 million. This difference is attributable  to the outlay rate for the Operation and Maintenance, Army appropriation  being 52.03 percent for fiscal year 2004 but 68.8 percent for fiscal year 2005.  According to Army officials, the outlay rate varied significantly for these 2  fiscal years because of the supplemental appropriations received during  fiscal year 2004.
Based on our work involving the Army depot maintenance activity group,  we recommended in our June 2005 report that DOD clarify its written  guidance for calculating the actual amount of carryover as well as the  allowable amount of carryover. DOD concurred with our recommendations  and on June 29, 2005, DOD issued clarifying guidance on carryover.  Among  other things, the guidance specified that (1) the allowable amount of  carryover is to be calculated based on current year customer orders  received and the first year outlay rates for the appropriations financing  those orders for all activity groups except shipyards and (2) the outlay  rates are to be based on historic outlay rates in the DOD Financial  Summary Tables. DOD’s guidance clarifies which source document should  be used to identify the outlay rates. However, it does not address the  question of which fiscal year or years that are contained in the DOD  Financial Summary Tables are to be used.
During our current review, we informed Office of the Under Secretary of  Defense (Comptroller) officials that the services did not always comply  with DOD’s policy on calculating the allowable amount of carryover.  Specifically, the services (1) did not always use the correct outlay rate  tables in determining the amount of allowable carryover and (2) used  different outlay rates contained in the DOD Financial Summary Tables for  calculating the allowable amount of carryover for specific fiscal years. In  responding to our discussions, DOD took two actions. First, DOD included  carryover guidance in its January 17, 2006, memorandum on the fiscal year  2007 budget justification book material for Congress. This guidance  specifies that the services are to use the fiscal year 2006 DOD Financial  Summary Tables to calculate carryover. The guidance further specifies that  the services must use the rates in the DOD Financial Summary Tables  unless a waiver is approved in writing by the Office of the Under Secretary  of Defense (Comptroller), Director for Revolving Funds. Second, in  February 2006, the Office of the Under Secretary of Defense (Comptroller)  provided additional guidance to the services for the fiscal year 2007 budget  specifying that the (1) fiscal year 2005 outlay rates in the DOD Financial  Summary Tables will be used for calculating the allowable amount of  carryover for fiscal year 2005 and (2) fiscal year 2006 outlay rates in the  DOD Financial Summary Tables will be used for calculating the allowable  amount of carryover for fiscal years 2006 and 2007.
section_title: Air Force Did Not Calculate Actual Carryover and Allowable Carryover Correctly
paragraphs: In reviewing the Air Force carryover figures shown in the fiscal year 2004,  2005, and 2006 budgets to Congress, we found a number of problems with  how the Air Force calculated the reported actual as well as the allowable  amount of carryover for the depot maintenance activity group. These  problems significantly affected the determination of allowable carryover  and whether the Air Force depot maintenance activity group exceeded that  ceiling. With one exception, the Air Force took action and corrected the  problems when preparing the fiscal year 2007 budget. These problems are  discussed below.
The Air Force used the fiscal year 2001 outlay rates provided by the  Office of the Under Secretary of Defense (Comptroller) to determine the  allowable amount of carryover in the fiscal year 2004 budget. This was  the appropriate outlay rate table to use for that budget. However, even  though the Office of the Under Secretary of Defense (Comptroller)  provided updated outlay rates for the next fiscal year, the Air Force did  not use the updated outlay rates when calculating its allowable  carryover in the fiscal year 2005 budget. Instead, the Air Force  continued to use the fiscal year 2001 outlay rates. Moreover, the Air  Force continued to use the fiscal year 2001 outlay rates to calculate the  allowable carryover in the fiscal year 2006 budget instead of using the  updated outlay rates published by DOD.
The Air Force used all orders received (both prior year and current year  orders) in calculating the allowable amount of carryover in the fiscal  year 2004, 2005, and 2006 budgets. For example, in calculating the  allowable carryover for fiscal year 2004, the Air Force included about  $1.8 billion of prior year orders in the calculation. DOD carryover policy  states that only current year orders should be used in determining the  allowable carryover. The Air Force method of including all orders  allowed too much carryover.
The Air Force excluded orders received from the U.S. Transportation  Command when calculating the amount of actual carryover in the fiscal  year 2004, 2005, and 2006 budgets. DOD Financial Management  Regulation 7000.14-R, Volume 2B, Chapter 9, permits excluding some  orders financed with non-DOD funds, such as orders received from  foreign countries, but does not permit excluding U.S. Transportation  Command orders. For example, because the Air Force excluded about  $214 million of U.S. Transportation Command orders when calculating  its actual carryover for fiscal year 2004, its carryover was understated.
The Air Force’s fiscal year 2006 budget to Congress expressed carryover  in equivalent months of work (this is the old method of reporting  carryover) rather than in terms of the allowable and actual carryover  dollar amounts as required by DOD Financial Management Regulation  7000.14-R, Volume 2B, Chapter 9.
The problems cited above had a significant impact on the amount of  allowable carryover and actual carryover and whether the actual carryover  exceeded the allowable amount, as shown in table 4.
In discussing the carryover calculations with Air Force officials, they  agreed that they were not calculating either the allowable amount of  carryover or the actual amount of carryover correctly in the fiscal year  2004, 2005, and 2006 budgets. They informed us that in preparing the  carryover information contained in the fiscal year 2004 budget, DOD  budget analysts who review the budget information, including the  carryover information, did not raise questions with the Air Force carryover  calculations. Accordingly, they continued to use the same methodology for  calculating the allowable carryover and actual carryover that was included  in the fiscal year 2005 and 2006 budgets to Congress. Based on our  discussions with them, these officials informed us that the Air Force would  be developing the carryover figures that will be used in the fiscal year 2007  budget in accordance with DOD policy.
In reviewing the Air Force fiscal year 2005 carryover calculations included  in the fiscal year 2007 budget, we determined that the Air Force was  complying with DOD’s carryover policy with one exception. For orders  financed with the Air Force working capital fund supply account, the Air  Force used a 61 percent outlay rate to calculate its allowable carryover  instead of the 73.5 percent outlay rate for the Air Force operation and  maintenance appropriation contained in the DOD Financial Summary  Tables and required by the Office of the Under Secretary of Defense  (Comptroller), Revolving Fund Directorate. Using the 61 percent figure, the  Air Force reported that its actual carryover for fiscal year 2005 was about  $193 million under the carryover ceiling. However, if the Air Force used the  73.5 percent outlay rate, our analysis show that the fiscal year 2005 actual  carryover would have exceeded the carryover ceiling by about $148  million. In discussing the outlay rate difference with the Air Force, officials  stated that they used the 61 percent figure because the rate was more  consistent with the actual outlay rate of the Air Force working capital fund  supply account. However, the Air Force could not provide us with  documentation supporting how they arrived at the 61 percent figure. On  February 7, 2006, the Air Force requested from the Office of the Under  Secretary of Defense (Comptroller) that it be allowed to use the 61 percent  figure in developing the carryover ceilings contained in the fiscal year 2007  budget. The Office of the Under Secretary of Defense (Comptroller)  approved the Air Force’s request on March 6, 2006.
section_title: Army’s Reported Actual Carryover Was Understated in Fiscal Years 2002 and 2003 because Prior Year Orders Were Not Included
paragraphs: In June 2005, we reported that the Army understated the reported actual  carryover for the depot maintenance activity group for fiscal years 2002  and 2003 because it interpreted DOD’s 2002 carryover guidance as requiring  only the inclusion of customer orders received in the current year when  calculating actual carryover. During this review, we found this same  problem affected the reported actual carryover for the ordnance activity  group. Thus, the Army did not include customer orders received in prior  years and the carryover related to those orders. The Army corrected this  problem and included all carryover when it prepared its fiscal year 2006  budget. Table 5 provides information on the actual amount of carryover  reported to Congress for fiscal years 2002 and 2003 and the amount of  carryover not included.
Army officials at headquarters acknowledged that the reported actual  carryover did not include carryover related to prior year orders. Although  DOD changed its carryover policy in December 2002, it did not issue  detailed written procedures for calculating actual carryover until June  2004. Army headquarters officials stated that prior to the issuance of the  written guidance in June 2004, the new carryover calculation was based on  verbal instructions that the Army received from the Office of the Under  Secretary of Defense (Comptroller). The Army said they interpreted the  new guidance to include only actual carryover on orders received in the  current year and instructed the Army Materiel Command to calculate  carryover accordingly. When DOD issued the revised DOD regulation in  June 2004, Army officials said they realized that they were not calculating  reported actual carryover correctly and changed their methodology in  developing the fiscal year 2006 budget so that the actual carryover  calculation would include prior year orders and be in accordance with  DOD’s written guidance.
section_title: Navy Generally Followed DOD’s Carryover Policy but Better Disclosure Is Needed for Reporting on Research and Development Activity Group’s Carryover
paragraphs: In analyzing the Navy’s actual carryover figures for the naval shipyards,  aviation depots, and research and development activity groups shown in  the fiscal year 2004, 2005, 2006, and 2007 budgets to Congress, we found  that the Navy generally followed DOD’s policy on calculating the actual  amount of carryover as well as the allowable amount of carryover. Our  analysis of the Navy budgets submitted to Congress shows that the naval  aviation depots have consistently exceeded the carryover ceilings as shown  in table 6. According to Navy budget documents and officials, the reasons  why the actual reported carryover exceeded the ceiling for the aviation  depots were (1) the lack of material to repair the components being fixed;  (2) the increased deterioration of components, leading to longer repair  cycles; and (3) the large dollar amount of orders financed with  supplemental appropriations for fiscal year 2003.
While the budgets show that the Navy research and development activity  group did not exceed the ceiling for any of the 4 years, the budgets no  longer provide information that shows if any of the five subactivity groups  individually exceeded the carryover ceiling, as the Navy budgets did prior  to the change in the carryover policy in December 2002. Prior to the Office  of the Under Secretary of Defense (Comptroller) changing its carryover  policy in December 2002, the Navy Working Capital Fund budget provided  carryover information, such as the dollar amount of carryover and the  number of months of carryover for each of the subactivity groups. An  analysis of the budget documents would show if any of the subactivity  groups exceeded the 3-month carryover standard. After DOD changed the  carryover policy in December 2002, the Navy changed the level of reporting  carryover information to be at the aggregate level and no longer provided  carryover information at the subactivity group level. Our analysis of Navy  reports showed that the Naval Air Warfare Center exceeded the ceiling for  fiscal years 2003, 2004, and 2005, and the Naval Surface Warfare Center  exceeded the ceiling for fiscal year 2002, as shown in table 7.
According to the Navy, there are two reasons why carryover should be  reported at the activity group level and not at the subactivity group level.  First, the Office of the Under Secretary of Defense (Comptroller) required  the research and development activities to use a higher outlay rate for  orders financed with procurement appropriations than the official  published procurement outlay rates. Using a higher procurement outlay  rate for calculating the carryover ceiling lowers the amount of allowable  carryover. Because of this higher rate, a Navy official stated that the  carryover should be reported at the aggregate level since subactivity  groups reporting under the ceiling will offset those subactivity groups  reporting over the ceiling. Second, the new methodology did not allow the  exclusion of intrafund orders from the carryover calculation. These are  orders placed by one research and development activity with another  research and development activity. Since intrafund orders were no longer  allowed to be excluded from the carryover calculation, this resulted in the  double counting of actual carryover associated with these intrafund orders.  Because the above two reasons reduce the carryover ceiling and increase  the actual amount of carryover, the Navy reports the carryover information  at the activity group level.
However, we believe that the carryover associated with the research and  development activity group should be reported at the subactivity group  level for several reasons. First, according to the fiscal year 2007 budget, the  research and development activity group is the largest Navy activity  group—it received about $10 billion of new orders and carried over about  $3.5 billion for fiscal year 2005. By comparison, for fiscal year 2005, the  Navy shipyards received about $1.8 billion of new orders and carried over  about $636 million, and the aviation depots also received about $1.8 billion  and carried over about $470 million. Further, the dollar amount of new  orders received by three research and development subactivity groups  (Naval Surface Warfare Center--$3.4 billion, Naval Air Warfare Center--$2.7  billion, and Space and Naval Warfare Systems Centers--$2.2 billion)  exceeded the amount of new orders received by the shipyards and aviation  depots for fiscal year 2005. Because of the dollar magnitude of research  and development subactivity groups, we believe carryover reporting at the  subactivity group level is needed for Congress and DOD to maintain  oversight.
Second, concerning the Navy’s comment on using a higher outlay rate for  calculating the carryover ceiling, we agree with the Office of the Under  Secretary of Defense (Comptroller) that the Navy should use a higher rate.  We also believe that the Navy should report carryover information at the  subactivity group level from a disclosure standpoint. Otherwise, subactivity  groups reporting under the ceiling will offset those subactivity groups  reporting over the ceiling and this information would not be available in the  budgets to Congress. In the December 2002 management initiative  decision, the Office of the Under Secretary of Defense (Comptroller) stated  that research and development activities could achieve better results than  the established outlay rates for orders financed with procurement  appropriations because of the type of work performed by these activities.  DOD further stated that 45 percent of the fiscal year 2002 carryover was  linked to contractual efforts and 55 percent supported in-house  requirements. DOD concluded that carryover linked to contractual  obligations would disburse at the procurement appropriations rate.  However, the amount supporting the in-house requirements would disburse  at a higher rate because such requirements tend to be funded on an  annualized basis. The Office of the Under Secretary of Defense  (Comptroller) requested that the Navy examine the nature and scope of the  procurement-funded work and report its recommendations by February 15,  2003, to the Comptroller. At the time DOD issued the management initiative  decision in December 2002, the Navy reported carryover information to  Congress at the subactivity group level. The Navy determined, based on  work performed by one Warfare Center, that the outlay rate for Navy  procurement appropriations should be 40 percent, which is higher than the  actual outlay rate for these appropriations. However, the December 2002  management initiative decision did not discuss the Navy changing its level  of reporting carryover information from the subactivity group level to the  aggregate level.
Third, concerning the Navy’s comments on intrafund orders, the Navy is  correct in that the amount of actual carryover will be double counted.  However, the effect of this is negated since the amount of allowable  carryover is also double counted since both of these activities will include  the intrafund order as a new order and include the new order in their  calculations for determining the allowable amount of carryover.  Furthermore, in May 2001 we reported that the Navy was not following  DOD’s guidance on calculating carryover on intrafund orders. Specifically,  Navy working capital fund activities reduced carryover for orders received  from other working capital fund activities. However, Navy working capital  fund activities categorized orders they sent to other working capital fund  activities as contractual obligations and used these obligations to reduce  reported year-end carryover. As a result, not only did the Navy eliminate the  double counting of such orders, it eliminated all these orders from its  calculations, thus understating the equivalent number of months of  carryover work.
section_title: Carryover Increased Due to Military Services Placing Orders Late in the Fiscal Year
paragraphs: Carryover is greatly affected by orders accepted late in the fiscal year that  generally cannot be completed, and in some cases cannot even be started,  prior to the end of the fiscal year. As a result, almost all orders accepted  late in the fiscal year increase the amount of carryover. We analyzed 68  orders accepted in September 2003 and September 2004 by certain activity  groups for the three military services. Our analysis identified four key  factors contributing to orders generally being issued by customers late in  the fiscal year and being accepted by the working capital fund activities  during the last month of the fiscal year. These reasons included (1) funds  provided to customers late in the fiscal year to finance existing  requirements, (2) new work requirements identified at year end,   (3) problems encountered in processing orders, and (4) work scheduled at  year end. Further, our analysis showed that 39 of the 68 orders—over half  of the orders reviewed—were not complete at the end of the next fiscal  year, generating a second year of carryover. In addition to increasing  carryover amounts, orders accepted by working capital fund activities late  in the fiscal year, in which these activities do not perform the work until  well into the next fiscal year or even subsequent years, may not (1) be the  most effective use of DOD resources at that time and (2) have complied  with all of the order acceptance provisions cited in the DOD Financial  Management Regulation. As noted in our scope and methodology (app. I),  the scope of our work for this review did not include determining whether  there was a bona fide need for the work being ordered by customers.
subsections: section_title: Reasons Customer Orders Are Placed Late in the Fiscal Year
paragraphs: As shown in figure 1, our review of 68 fiscal year-end orders for 2003 and  2004 identified four key factors contributing to orders generally being  issued by customers late in the fiscal year and being accepted by the  working capital fund activities during the last month of the fiscal year.
As depicted in figure 1, the factor contributing most frequently to orders  being accepted by working capital fund activities late in the fiscal year—29  of the 68 orders (43 percent) we reviewed—is the late receipt of funds from  customers to finance existing requirements. DOD customers stated that it  is common for the military services to provide funds to them late in the  fiscal year after the military services review their programs to identify  funds that will not be obligated by year end. When these funds are  identified, the military services realign the funds to programs that can use  them. These funds are then used to finance orders placed with working  capital fund activities at year end. Further, in fiscal years 2003 and 2004, the  military services received supplemental appropriations from Congress to  fund ongoing military operations. Some of these funds were distributed to  DOD customers late in the fiscal year to finance repairs on DOD assets. The  following examples illustrate situations when funds were provided to  customers late in the fiscal year.
On September 4, 2003, the Ogden Air Logistics Center accepted an order  from the Air Force Ground Theater Air Control System program office  totaling about $4.8 million financed with operation and maintenance  funds that would have expired on September 30, 2003. This order  provided for Ground Theater Air Control System hardware and software  upgrades. According to program office officials, the Air Combat  Command traditionally funds about 60 to 70 percent of its total software  development requirements annually. However in August 2003, the  Command provided the program office with funding to cover 100  percent of its fiscal year 2003 software requirements. Thus, the program  office applied the funds to its next highest priority workload and issued  the $4.8 million order.
On September 27 and 29, 2003, the Space and Naval Warfare Systems  Center in San Diego accepted two orders from the U.S. Pacific Fleet  totaling approximately $4.15 million financed with operation and  maintenance funds that would have expired on September 30, 2003.  These two orders were to provide the technical and engineering support  for the relocation of a Sea-Based Battle Laboratory from the USS  Coronado to a new ashore headquarters activity. The Pacific Fleet  identified this requirement in early fiscal year 2003; however, funds were  not made available until the end of the fiscal year, when additional funds  were identified from other programs.
On September 26, 2003, the Red River Army Depot accepted an order  from the Army Tank-automotive and Armaments Command totaling  $17.9 million financed with operation and maintenance funds that would  have expired on September 30, 2003. The order was for the repair and  upgrade of 41 Bradley Fighting Vehicles needed to support the war  effort in Iraq and Afghanistan. These vehicles were to be prepositioned  in the theater of operation. According to a Tank-automotive and  Armaments Command official, the order was issued late in fiscal year  2003 because the Army Materiel Command did not provide them with  funding until September 2003. An Army Materiel Command official  noted that the effort was funded by a supplemental appropriation used  to support war operations.
The second most significant factor that contributed to the year-end orders  we reviewed—17 of the 68 orders (25 percent)—was the identification of  new requirements at year end. Some examples of DOD customers  identifying requirements at year end include (1) a Navy aviation depot in  performing scheduled maintenance identified damage to aircraft beyond  what was originally included in its statement of work, (2) an Army depot  identified inspection requirements at year end to keep ammunition storage  inspections current and to satisfy requisitions to support the soldiers in the  field, (3) Navy aircraft repair requirements were moved from fiscal year  2004 to fiscal year 2003 to meet an earlier deployment schedule, (4) the  Army identified new requirements at year end for repair of Army assets  necessary to support ongoing military operations, and (5) the Navy  identified the need for additional capabilities for several aircraft and also  needed to perform emergency repairs on one of its aircraft carriers. Two  examples of some of the reasons for new requirements being identified at  year end follow.
On September 27 and 30, 2004, the Space and Naval Warfare Systems  Center in Charleston accepted an order and an amendment from the  Commander, Naval Air Force, U.S. Atlantic Fleet, totaling $425,000  financed with operation and maintenance funds that would have  expired on September 30, 2004. A fleet official stated that it had received  a casualty report from the USS Harry S. Truman on September 24, 2004,  indicating repairs needed to be made to the ship’s announcing system.  An activity official stated that the order was accepted regardless of  carryover concerns due to the urgency associated with a casualty  report. Additionally, a fleet official noted that the time to complete the  needed repairs was limited due to the ship’s impending deployment.
On September 8, 2004, the Army Rock Island Arsenal accepted an order  from the Tank-automotive and Armaments Command totaling about $1.4  million financed with operation and maintenance funds that would have  expired on September 30, 2004. The order was for the reconditioning of  chemical biological protective shelters. The shelters mount on high-  mobility, multipurpose wheeled vehicles and provide an  environmentally controlled work area that filters out nuclear, biological,  and chemical agents. According to a logistics manager, in the fourth  quarter of fiscal year 2004 the Tank-automotive and Armaments  Command identified 11 shelters that needed reconditioning and issued  an order to the Army Rock Island Arsenal for the work.
Further, we found 12 of the 68 orders (18 percent) were accepted by  working capital fund activities in the last month of the fiscal year due to  problems encountered with processing the orders. These problems  included (1) delays in processing forms through different activities and  multiple nonintegrated systems, (2) data input errors that were not  corrected until September, and (3) difficulties encountered in processing  documents and related funding from non-DOD customers to working  capital fund activities. Two examples follow.
In July 2003, the Air National Guard Headquarters prepared  documentation that directed the Pennsylvania Air National Guard to  send its ground mobile navigation radar to the Tobyhanna Army Depot  to repair damage sustained by the radar system from multiple lightening  strikes and power surges and to overhaul the system. The order was not  accepted by the depot until September 26, 2003, about 3 months later.  The delay in acceptance of the order was due to (1) the normal time  required to process forms through six different activities using  nonintegrated systems, (2) paperwork processing delays due to missing  information, (3) confusion on how to process the workload in a new  Army system implemented in July 2003, and (4) errors made in entering  data into the Army system.
Due to delays in correcting input errors on an order, the Warner Robins  Air Logistics Center did not accept a $2.8 million order from the F-15  program office, financed with operation and maintenance funds, until  September 17, 2004. The order was for the maintenance of an Air  National Guard F-15 aircraft. When an order was generated by the F-15  program office on June 10, 2004, the office entered the program control  and serial numbers into the project order system incorrectly. On  September 17, 2004, the Center established a new order with the  corrected information.
Finally, we found 10 of the 68 orders (15 percent) were accepted by  working capital fund activities in the last month of the fiscal year when  DOD assets were scheduled for maintenance. According to Air Force and  Navy officials, planning for the repair of major assets such as aircraft,  ships, and engines begins several years prior to the date on which repairs  will actually be performed. The assets are scheduled for maintenance  based on routine cycles, such as numbers of years since the last depot  maintenance was performed. The services include funding requirements  for these repairs in their annual budget submissions. Generally, in the  quarter the assets are scheduled for maintenance, the major commands  distribute the repair funds to their customers and the customers, in turn,  issue orders to fund the repair. Two examples follow.
On September 16, 2003, the Oklahoma City Air Logistics Center  accepted an order from the Air National Guard totaling about $7.2  million financed with operation and maintenance funds set to expire on  September 30, 2003. The order was for the scheduled maintenance of  the 39th Air National Guard KC-135E aircraft in fiscal year 2003. During  fiscal year 2001, the Air National Guard determined that 39 KC-135E  aircraft required maintenance in fiscal year 2003 in accordance with  their 5-year maintenance schedule. In fiscal year 2001, the Air National  Guard began planning and budgeting for the maintenance of these  aircraft. The 39th aircraft arrived at the air logistics center in mid- September 2003 as planned. The Air National Guard issued the order in  September 2003 once it determined that the work on this aircraft would  be performed at the air logistics center instead of contracting out the  workload.
On September 29, 2003, the Naval Air Warfare Center-Aircraft Division  accepted an order from the U.S. Atlantic Fleet in the amount of  approximately $2.4 million financed with operation and maintenance  funds set to expire the next day. The order required repairs and/or  replacement of deteriorated and worn components to support flight  deck operations on the USS Harry S. Truman. This work was scheduled  for overhaul in fiscal year 2003. A fleet official stated that they did not  perform an inspection of the ship to determine specific repair  requirements until late in the fiscal year.
section_title: Impact of Late Orders on Carryover
paragraphs: Our further review of the 68 fiscal year-end orders for 2003 and 2004  disclosed that 39 of these orders—over half—were not completed within  the next fiscal year, which resulted in carryover of 2 or more years. As we  reported in June 2005, two reasons generally caused work to carryover  into a second fiscal year. First, the depots received orders late in the fiscal  year and were unable to complete the effort by year end, as discussed in  the previous section; and second, some depots were unable to obtain the  materials/parts needed in a timely manner to complete the work. In  addition to these reasons, we found that some working capital fund  activities were unable to complete work within 1 year because of delays  caused by backlogged or other higher priority work and broken or unsafe  repair equipment. These factors have resulted in orders being carried over  for more than 1 fiscal year and increased the carryover balances for  subsequent years. As a result, these orders may not have been the most  effective use of DOD resources at that time and may not have complied  with all of the order acceptance provisions cited in the DOD Financial  Management Regulation.
The DOD Financial Management Regulation 7000.14-R, Volume 11A,  Chapters 2 and 3, prescribes regulations governing the use of orders placed  with working capital fund activities. When a working capital fund activity  accepts an order, the customer’s funds financing the order are obligated.  The DOD regulation identifies a number of requirements before a working  capital fund activity accepts an order. For example, work to be performed  under the order shall be expected to begin within a reasonable time after  the order is accepted by the performing DOD activity. As a minimum  requirement, it should be documented that when an order is accepted, the  work is expected to (1) begin without delay (usually within 90 days) and   (2) be completed within the normal production period for the specific work  ordered. Further, the regulation states that no project order shall be issued  if commencement of work is contingent upon the occurrence of a future  event. Our review of 68 orders accepted by the working capital fund  activities at year end determined that work on some of these orders did not  begin within 90 days or was not completed within the normal production  period for the work being performed. The following examples illustrate  orders that were accepted by working capital fund activities at year end  and (1) may not be the most effective use of DOD resources at that time  and (2) may not have complied with all of the provisions contained in this  regulation.
On September 25, 2003, the Crane Army Ammunition Activity accepted  an order totaling $1,885,000 that was financed with operation and  maintenance funds for X-ray work to determine the safety and usability  of 200,000 rounds of 40-millimeter high-explosive ammunition. However,  due to problems with the X-ray inspection machine, the activity had to  suspend work on the ammunition until the inspection machine was  qualified as safe to use. According to the program engineer, work was  delayed because imaging panels in the inspection machine were burning  up and had to be replaced. Compounding this problem was a delay in  the approval process for the safe operation of the machine. As a result,  very little work was completed on this order over 3 fiscal years.  Specifically, $1,885,000 carried over into fiscal year 2004 and $1,881,105  carried over into fiscal year 2005 and again into fiscal year 2006.
On September 14, 2004, the Ogden Air Logistics Center accepted an  order totaling $3.4 million that was financed with operation and  maintenance funds to build an F-16 radar test station on behalf of the Air  National Guard. According to a center official, even though the depot  did not have the material to build the station, it accepted the order late  in the fiscal year. Thus, the entire $3.4 million order carried over into  fiscal year 2005. The center official noted that during fiscal year 2005,  the activity group ordered the material and began work assembling the  station, but as of the end of fiscal year 2005 all the material had not yet  been received from contractors. Therefore, $277,898 carried over into  fiscal year 2006.
On September 29, 2003, the Sierra Army Depot accepted an order  totaling $11,680,175 that was financed with operation and maintenance  funds for the receipt, inspection, storage, and re-containerizing of 203  containers of gas and oil pipeline equipment returned from Iraq and  Afghanistan. Because this order was received so late in the fiscal year,  the entire amount of the order—$11,680,175—was carried over into  fiscal year 2004. According to the mission director, this order was  delayed because (1) some containers were not returned from the war  zones in a timely manner so the depot could refurbish them and (2) the  depot received other, higher priority workloads, such as armored plating  on wheeled vehicles. As a result, over half of the dollar amount of the  order—$6,847,529—carried over into fiscal year 2005 and $2,643,093  carried over into fiscal year 2006.
On September 16, 2003, the Space and Naval Warfare Systems Center in  Charleston accepted an order for $232,200 that was financed with  operation and maintenance funds. The U.S. Naval Forces Central  Command identified and funded this emergent requirement in August  2003 in support of the Combat Terrorism Initiative during the Iraq war.  More specifically, this order was for technical and installation services  for a new communications link between Bahrain and Dubai. An activity  official stated that minimal engineering services were initiated prior to  the end of fiscal year 2003, so almost the entire dollar amount of the  order—$230,000—carried over into fiscal year 2004. This official also  stated the center encountered delays when the government of Dubai  would not allow the leased line into the country from Bahrain. This  resulted in $207,000 being carried over into fiscal year 2005, and $12,000  being carried over into fiscal year 2006.
On September 11, 2003, the Oklahoma City Air Logistics Center  accepted an order totaling about $1.8 million that was financed with  operation and maintenance funds for the analytical condition  inspection of a F110-129 engine. According to an Oklahoma City Air  Logistics Center official, the center brought the engine in for repair in  September 2003 to ensure that the funds were obligated by fiscal year  end. Otherwise, the funds would expire and be unavailable for new  workload. However, the center did not begin work on the engine until  March 2004 due to a backlog of engines waiting for repair. Since the  engine was accepted for repair in the last month of the fiscal year,  almost the entire $1.8 million was carried over into fiscal year 2004.  Further, because of production delays and a failed serviceability test,  the center carried funds into fiscal year 2005 and again into fiscal year  2006—more than 2 years after the order was accepted.
section_title: Conclusions
paragraphs: The military services have provided erroneous carryover information to  Congress and DOD decision makers because the services have not  consistently applied DOD’s revised policy on carryover. Reliable and  consistent carryover information is essential for Congress and DOD  decision makers to perform their oversight, including reviewing DOD’s  budget to determine if an activity group has too much or not enough  carryover. To provide greater assurance that the military services provide  reliable and consistent carryover information, the military services must be  held accountable for the accuracy of reported carryover information and  ensure the timely identification of unneeded customer funds. While DOD’s  guidance on calculating carryover was not adequate when it revised its  carryover policy in 2002, DOD began improving the guidance in 2004.  However, DOD has not updated the Financial Management Regulation so  that it includes comprehensive carryover guidance to the military services,  and the services have not always complied with the carryover guidance in  the past. Until this is done, Congress and DOD decision makers will be  forced to make key budget decisions, such as whether to enhance or  reduce customer budgets, based on unreliable information. In addition,  DOD working capital fund activities’ acceptance of year-end orders   (1) increases the amount of carryover and (2) in some cases, contributes to  DOD working capital fund activities’ actual carryover amounts exceeding  their allowable amounts by tens of millions of dollars. Excessive amounts  of year-end carryover tie up customer funds that could be put to better  near-term use and are subject to reductions by DOD and the congressional  defense committees during the budget review process.
section_title: Recommendations for Executive Action
paragraphs: In order to improve the business operations of the Department of Defense  Working Capital Fund, we are making the following eight  recommendations to the Secretary of Defense.
We recommend that the Secretary of Defense direct the Under Secretary of  Defense (Comptroller) to take the following actions:  Issue written instructions in its DOD Financial Management Regulation  7000.14-R specifying the outlay rates to be used by DOD working capital  fund activities for calculating the allowable amount of carryover and  continue to issue carryover guidance to the military services in its  annual guidance on preparing budget justification book material for  Congress.
Review the carryover information provided in the military services’  annual budget submissions to help ensure the services are calculating  their allowable and actual carryover amounts in accordance with DOD  policy.
Reiterate the requirements in the DOD Financial Management  Regulation 7000.14-R to help ensure that working capital fund activities  are in compliance with the regulations governing acceptance of orders,  particularly at fiscal year end.
We recommend that the Secretary of Defense direct the Secretary of the Air  Force to take the following actions:  Use the current outlay rate tables that are included in the DOD Financial  Summary Tables when calculating the allowable carryover amounts for  the Air Force depot maintenance activity group, consistent with DOD  policy.
Use only current year orders for calculating the allowable carryover  amounts for the Air Force depot maintenance activity group, as required  by DOD carryover policy.
Include all orders when calculating the amount of actual carryover for  the Air Force depot maintenance activity group, except those orders  that are specifically excluded in DOD Financial Management Regulation  7000.14-R or are excluded by the Under Secretary of Defense  (Comptroller) in writing.
Include the allowable and actual dollar amounts of carryover for the Air  Force depot maintenance activity group in the Air Force’s annual budget  to Congress, as required by DOD Financial Management Regulation  7000.14-R.
We recommend that the Secretary of Defense direct the Secretary of the  Navy to include the allowable and actual amounts of carryover for each of  the five Navy research and development subactivity groups in the Navy’s  annual budget to Congress.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report. DOD concurred  with all eight of our recommendations. Regarding its plans for  implementing the eight recommendations, DOD stated that it is in the  process of updating its financial management regulations and issuing  budget guidance for the fiscal year 2008/2009 President’s Budget, which  will address calculating the allowable amount of carryover. Further, DOD  stated that it made a more rigorous review of the services’ carryover  information in the fiscal year 2007 President’s Budget submission and that  it will continue reviewing the services’ budgets to ensure that the services  are calculating allowable and actual amounts of carryover in accordance  with DOD policy. DOD also stated that it will direct the Navy to report  carryover information for each of the five Navy research and development  subactivity groups in the Navy’s annual budget to Congress. Finally, as  preparation for the close out of fiscal year 2006, DOD will reiterate the  guidance in its Financial Management Regulation governing the working  capital fund acceptance of orders which obligates customers’ funds,  particularly at year end.
DOD also commented that the inaccuracies we identified in reported  carryover did not materially distort the evaluation of depot operations or  projected workload levels. While we do not know how DOD defines  materiality, we believe that the reporting inaccuracies affect the evaluation  of depot operations from a workload standpoint because the inaccuracies  understated the carryover balances for some activity groups by hundreds  of millions of dollars. For example, as stated in our report, the Air Force  reported that its fiscal year 2002 depot maintenance carryover was $87  million under the ceiling but our calculation shows that the carryover  exceeded the ceiling by $216 million, a difference of $303 million. In  another case, the Army reported that its fiscal year 2003 depot maintenance  carryover was $127 million over the ceiling but our calculations show that  it was over the ceiling by $322 million, a difference of $195 million. As a  result of these understatements, the amount of work carried over from one  year to next was not reliable and could have affected DOD’s and the  congressional defense committees’ review and evaluation of carryover  during their annual budget review.
We are sending copies of this report to the Chairmen and Ranking Minority  Members of the Senate Committee on Armed Services; the Subcommittee  on Readiness and Management Support, Senate Committee on Armed  Services; the Subcommittee on Defense, Senate Committee on  Appropriations; the House Committee on Armed Services; the  Subcommittee on Readiness, House Committee on Armed Services; and the  Ranking Minority Member, Subcommittee on Defense, House Committee  on Appropriations. We are also sending copies to the Secretary of Defense,  Secretaries of the Army, Navy, and Air Force, and other interested parties.  Copies will be made available to others upon request. Should you or your  staff have any questions concerning this report, please contact McCoy  Williams, Director, at (202) 512-9095 or williamsm1@gao.gov, or William M.  Solis, Director, at (202) 512-8365 or solisw@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: Scope and Methodology
paragraphs: To determine if the military services’ carryover calculations were in  compliance with the Department of Defense’s (DOD) new carryover policy,  we obtained and analyzed the services’ calculations for the (1) reported  year-end actual carryover balances for fiscal years 2002 through 2005 and  (2) allowable amount of carryover for fiscal years 2002 through 2005. We  recomputed the services’ calculations following DOD’s regulation on  carryover and compared our carryover calculations with the services’  carryover calculations. We met with officials from the Army, Navy, and Air  Force to discuss (1) the methodology the services used to calculate  carryover and (2) any differences between our calculations and their  calculations. We also met with officials from the Office of the Under  Secretary of Defense (Comptroller) to discuss DOD’s new carryover policy,  including the proper calculation for actual carryover and the allowable  amount of carryover. To assess the reliability of the carryover data, we   (1) reviewed and analyzed the factors used in calculating carryover and   (2) interviewed officials knowledgeable about the data. We determined that  the data were sufficiently reliable for the purposes in this report.
To determine if customers were submitting orders to working capital fund  activities late in the fiscal year and, if so, the effect that this practice has  had on carryover, we obtained data on orders accepted by working capital  fund activities in September 2003 and September 2004. Initially, we  obtained information on the top 20 orders from a dollar standpoint that  selected working capital fund activities accepted from customers in  September 2003 and September 2004. We analyzed the information on the  orders, which included the appropriation financing the order, the date the  order was accepted by the working capital fund activity, and a description  of the work to be performed. We then selected and analyzed 68 orders with  large dollar amounts that working capital fund activities accepted in  September. We also interviewed (1) working capital fund officials to  determine the current status of performing the work on the orders and   (2) customers to determine the reasons why they sent the orders to the  working capital fund activities late in the fiscal year. In performing our  work on these orders, we did not review these orders to determine if there  was a bona fide need for the work being ordered by customers.
We performed our work at the headquarters offices of the Under Secretary  of Defense (Comptroller), the Assistant Secretary of the Army (Financial  Management and Comptroller), the Assistant Secretary of the Navy  (Financial Management and Comptroller), and the Assistant Secretary of  the Air Force (Financial Management and Comptroller), Washington, D.C.  In performing our work on reviewing the services’ carryover calculations,  we obtained carryover information on the following Defense Working  Capital Fund activity groups: (1) Army depot maintenance, (2) Army  ordnance, (3) Army industrial operations, (4) Air Force depot maintenance,  (5) Naval aviation depots, (6) Naval shipyards, and (7) Naval research and  development. The Naval research and development activity group consists  of the following five subgroups: Naval Air Warfare Center, Naval Surface  Warfare Center, Naval Undersea Warfare Center, Naval Research  Laboratory, and the Space and Naval Warfare Systems Command Center.
In performing our work on reviewing individual orders, we obtained  information from the following working capital fund activities and their  customers that submitted the orders.
subsections: section_title: Air Force
section_title: Navy
section_title: Army
paragraphs: Blue Grass Army Depot, Richmond, Kentucky  Crane Army Ammunition Activity, Crane, Indiana  Rock Island Arsenal, Rock Island, Illinois  Sierra Army Depot, Herlong, California  Red River Army Depot, Texarkana, Texas  Tobyhanna Army Depot, Tobyhanna, Pennsylvania The carryover information in this report is budget data obtained from  official Army, Navy, and Air Force budget documents. We conducted our  work from July 2005 through March 2006 in accordance with U.S. generally  accepted government auditing standards. We requested comments on a  draft of this report from the Secretary of Defense or his designee. The  Under Secretary of Defense (Comptroller) provided written comments, and  these comments are presented in the Agency Comments and Our  Evaluation section of this report and are reprinted in appendix II.
section_title: Comments from the Department Of Defense
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: Staff who made key contributions to this report were Richard Cambosos,  Francine DelVecchio, Keith McDaniel, Clara Mejstrik, Greg Pugnetti, Chris  Rice, and Hal Santarelli.