Air Force Working Capital Fund: Budgeting and Management of Carryover Work and Funding Could Be Improved
Published: 2011-07-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Three Air Force depots support combat readiness by providing repair services to keep Air Force units operating worldwide. To the extent that the depots do not complete work at year end, the work and related funding will be carried into the next fiscal year. Carryover is the reported dollar value of work that has been ordered and funded by customers but not completed at the end of the fiscal year. GAO was asked to determine the extent to which: (1) budget information on depot maintenance carryover approximated actual results from fiscal years 2006 through 2010 and, if not, any needed actions to improve budgeting for carryover; (2) depot maintenance carryover exceeded the allowable amount and any adjustments were made to the allowable amount; and (3) there was growth in carryover at the depots and the reasons for the growth. To address these objectives, GAO (1) reviewed relevant carryover guidance, (2) obtained and analyzed reported carryover and related data at the Air Logistics Centers (ALC), and (3) interviewed DOD and Air Force officials.
section_title: What GAO Found
paragraphs: The Air Force consistently underestimated the dollar amount of carryover that would exceed the allowable amount in the Air Force Working Capital Fund (AFWCF) budgets from fiscal years 2006 through 2010. In 3 of the 5 years, the budgeted carryover amount underestimated the actual amount by over $250 million. The budget information on carryover is critical since decision makers use this information when reviewing the AFWCF budgets. The Air Force began implementing actions to improve budgeting for AFWCF such as including overseas contingency operations funded orders in the AFWCF fiscal year 2012 budget. These actions have the potential to improve the accuracy of budgeting for AFWCF, but their success will only be known when budgeted carryover information is compared to actual results. GAO analysis of AFWCF reports showed that in each year actual carryover exceeded the allowable amount from fiscal years 2006 through 2010. The allowable amount of carryover is based on the amount of new orders received and the outlay rate of customers' appropriations financing the work. The amount of carryover that exceeded the allowable ranged from $4 million to $568 million. Further, the Air Force increased the allowable amount for orders funded with multiyear appropriations by $115 million and $125 million in fiscal years 2009 and 2010, respectively. Without this adjustment, the AFWCF would have exceeded the allowable carryover by corresponding amounts. The DOD regulation on orders funded with multiyear appropriations only pertains to Army ordnance activities that perform a manufacturing function. Therefore, the provision on increasing the allowable amount of carryover for orders funded with multiyear appropriations does not apply to the Air Force. GAO analysis of ALC reports and discussions with Air Force officials identified four reasons for the increase in carryover from $1 billion at the end of fiscal year 2006 to $1.9 billion--nearly 7 months of work--at the end of fiscal year 2010 on depot maintenance work. First, Air Force underestimated its forecasted workload requirements on the number of hours of work to be performed. Second, because the Air Force believed its depot maintenance workload would decrease, it reduced its workforce in November 2007. While the ALCs reduced their workforce by about 2,000 civilian personnel, the actual workload increased instead of decreased--thus resulting in personnel shortages. Third, the Air Force budget underestimated the amount of funds on new orders received from customers, and the work performed by the ALCs did not keep pace with the increase in funding on new orders from year to year. Fourth, the ALCs could not obtain parts when needed to perform repair work that contributed to the growth of carryover. Air Force data showed that the average monthly outstanding backorders for spare parts at the ALCs grew by about 44 percent from fiscal year 2008 to fiscal year 2010. The Air Force is taking action to address these problems but still needs to compare budgeted to actual information, such as the number of hours of work to be performed, and identify the reasons for the differences.
section_title: What GAO Recommends
paragraphs: GAO makes five recommendations to DOD to improve the budgeting and management of carryover, such as comparing budgeted to actual information on carryover and clarifying DOD guidance on allowable carryover funded with multiyear appropriations. DOD concurred with GAO's recommendations and has actions planned or under way to implement them.

section_title: Letter
paragraphs: Three Air Force depots support combat readiness by providing services  necessary to keep Air Force units operating worldwide. The depots repair  and overhaul a wide range of assets, including fighter aircraft such as the  F-16, intercontinental ballistic missiles such as the Minuteman and  Peacekeeper missiles, jet aircraft engines, electronics, avionics, software,  and inventory items for the military services, other government agencies,  and foreign governments. In fiscal year 2010, the Air Force reported that  in-house work performed at the three depots or Air Logistics Centers  (ALC) included major modifications on 698 aircraft, the overhaul of 320  aircraft engines, and repairs of 330,000 inventory items.
The three Air Force depots operate under the working capital fund  concept, where customers are to be charged for the anticipated full cost of  goods and services. To the extent that the depots do not complete work at  year-end, the work and related funding will be carried into the next fiscal  year. Carryover is the reported 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. The congressional  defense committees recognize that some carryover is needed to ensure a  smooth flow of work during the transition from one fiscal year to the next.  However, past congressional defense committee reports have 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. Congress reduced the Air  Force’s fiscal year 2010 operation and maintenance appropriation by $85  million because of concerns about excess carryover.
The Air Force made changes to the calculation of carryover that reduced  both the carryover and the allowable amount of carryover starting in fiscal  year 2009. These changes included the (1) removal of contract depot  maintenance from the Air Force Working Capital Fund (AFWCF) at the  end of fiscal year 2008 and (2) consolidation of the AFWCF depot  maintenance activity group with the material support division of the  supply management activity group at the end of fiscal year 2008, which  eliminated internal transactions between supply and maintenance. As a  result, starting in fiscal year 2009 the only transactions affecting the  AFWCF carryover are orders received from customers that are not part of  the AFWCF, called external customers, to perform depot maintenance  work such as overhauling an aircraft.
In response to your request, we determined the extent to which: (1)  budget information on Air Force depot maintenance carryover for fiscal  years 2006 through 2010 approximated actual results and, if not, any  needed actions the Air Force is taking to improve budgeting for carryover;  (2) the Air Force depot maintenance actual carryover exceeded the  allowable amount of carryover from fiscal years 2006 through 2010 and  any adjustments were made to the allowable amount; and (3) there was  growth in carryover at the Air Force depot maintenance in-house activities  on orders received from customers that were external to AFWCF and the  reasons for the growth.
Financial information in this report was obtained from official Air Force  budget documents and accounting reports. To assess the reliability of the  data, we (1) reviewed and analyzed the factors used in calculating  carryover, (2) interviewed Air Force officials knowledgeable about the  carryover data, (3) reviewed GAO reports on Air Force depot maintenance  activities, and (4) reviewed orders customers submitted to the depots to  determine whether they were adequately supported by documentation. On  the basis of procedures performed, we have concluded that these data  were sufficiently reliable for the purposes of this report. Further details on  our scope and methodology are provided in appendix I.
We conducted this performance audit from July 2010 through July 2011 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. We requested comments on a draft of this  report from the Secretary of Defense or his designee. Written comments  from the Office of the Under Secretary of Defense (OUSD) (Comptroller)  are reprinted in appendix III.
subsections: section_title: Background
paragraphs: AFWCF relies on sales revenue rather than regular appropriations to finance  its continuing operations. AFWCF 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 operations and maintenance  appropriations, to finance orders placed with AFWCF. AFWCF includes a  maintenance division that provides the Air Force with the in-house  industrial capability to repair and overhaul a wide range of weapon systems  and military equipment. The Air Force maintains three ALCs which are  designed to retain, at a minimum, a ready, controlled source of technical  competence and resources to meet military requirements. Table 1 describes  the locations and principal work for each ALC.
subsections: section_title: Carryover and Its Use
paragraphs: Carryover is the reported 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 work that  has not yet begun. Some carryover is necessary at the end of the fiscal  year 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 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. By minimizing the amount of carryover, DOD can use  its resources in the most effective manner and minimize the backlog of  work and “banking” of related funding for work and programs to be  performed in subsequent years.
section_title: DOD’s Carryover Policy
paragraphs: DOD’s carryover policy is included in DOD Financial Management  Regulation 7000.14-R, volume 2B, chapter 9. Under the policy, the  allowable amount of carryover is based on the amount of new orders  received in a given year and the outlay rate of the customers’  appropriations financing the work. For example, the Air Force depots  received about $1.4 billion in new orders funded with operation and  maintenance, Air Force appropriation—one of many appropriations  funding orders received in fiscal year 2010. The DOD outlay rate for this  appropriation was 66 percent. Therefore, the amount of funds the AFWCF  was allowed to carry over into fiscal year 2011 was $476 million ($1.4  billion multiplied by 34 percent, which represents 1 minus the outlay rate  for the underlying appropriation). The DOD carryover policy provides that  the work on these fiscal year 2010 orders is expected to be completed by  the end of fiscal year 2011, and therefore, carryover is only allowed for the  first year. According to the DOD regulation, this carryover metric allows  for an analytical-based approach that holds working capital fund activities  to the same standard as general fund execution and allows for meaningful  budget execution analysis.
In accordance with the DOD Financial Management Regulation, (1)  nonfederal orders, (2) non-DOD orders, (3) foreign military sales, (4) work  related to base realignment and closure, and (5) work-in-progress are  excluded from the carryover calculation. The reported actual carryover  (net of exclusions) is then compared to the amount of allowable carryover  using the above-described outlay-rate method to determine whether the  actual amount is over or under the allowable carryover amount.
section_title: Changes to the AFWCF That Affected the Fiscal Years 2009 and 2010 Calculation of Carryover and the Allowable Amount of Carryover
paragraphs: The Air Force made changes to the calculation of carryover that reduced  both the carryover and the allowable amount of carryover. These changes  included the (1) removal of contract depot maintenance from AFWCF and  (2) consolidation of the AFWCF depot maintenance activity group with the  material support division of the supply management activity group, which  eliminated internal transactions between supply and maintenance.
subsections: section_title: Removal of Contract Depot Maintenance from AFWCF
paragraphs: As stated previously, the AFWCF depot maintenance activity group  supports combat readiness by providing depot repair services necessary to  keep Air Force units operating worldwide. The activity group either  performed the work in-house at its three ALCs or through contracts with  private industry (referred to as contract depot maintenance). Under the  contract depot maintenance process, the activity group accepted customer  orders that obligated their funds. The customers used the activity group as  their purchasing agent when they needed a contractor to perform depot- level maintenance work. The activity group awarded the contracts and  managed the work performed by the contractors.
Beginning in fiscal year 2003, the Air Force began transitioning contract  depot maintenance out of AFWCF. According to the fiscal year 2010  AFWCF budget, the removal of contract depot maintenance from AFWCF  brings the user and provider of contract depot maintenance services  closer together and removes the working capital fund from its current role  as the “middleman.” The action allows depot managers to dedicate time  and effort to in-house production. AFWCF stopped accepting new contract  depot maintenance orders at the end of fiscal year 2008 and at the time of  our review, expected to (1) complete work on fiscal year 2008 and prior  years’ contract depot maintenance orders and (2) close out all related  accounting records by the end of fiscal year 2011. As a result of the  change, AFWCF no longer included contract depot maintenance orders in  its calculation of the allowable carryover amounts starting in fiscal year  2009.
section_title: Consolidation of Depot Maintenance Activity Group and the Material Support Division of the Supply Maintenance Activity Group
paragraphs: In fiscal year 2009, AFWCF consolidated the depot maintenance activity  group with the material support division of the supply management  activity group to form a new activity group—Consolidated Sustainment  Activity Group—to manage depot-level repairable and consumable spares  unique to the Air Force as well as maintenance services. According to the  fiscal year 2010 AFWCF budget and Air Force officials, this consolidation  eliminated the recording of internal transactions such as orders, revenue,  and carryover amounts between depot maintenance and supply within the  AFWCF. The elimination of the recording of orders reduced the amount of  carryover as well as the allowable amount of carryover since the orders  were not included in the dollar amount of work performed. The fiscal year  2011 AFWCF budget indicates that the internal AFWCF transactions were  eliminated beginning in fiscal year 2009. As a result, starting in fiscal year  2009, the only transactions affecting AFWCF carryover are orders received  from customers that are not part of the AFWCF, called external  customers, to perform depot maintenance work.
section_title: Air Force Underestimated Carryover in Its Budgets
paragraphs: In its budget information, the Air Force consistently underestimated the  amount of carryover that would exceed the allowable amount from fiscal  year 2006 through fiscal year 2010. In 3 of the 5 years, the actual amount of  carryover exceeded the budgeted amount by over $250 million. In fiscal  year 2010, Air Force headquarters and Air Force Materiel Command  (AFMC) began implementing actions to improve the accuracy of budgeting  for AFWCF carryover such as incorporating overseas contingency  operations (OCO) funded orders in the fiscal year 2012 AFWCF budget.  These actions have the potential to improve the accuracy of budgeting for  AFWCF carryover, but their success can be determined only when  budgeted carryover information is compared to actual results.
subsections: section_title: Air Force Budgets Consistently Underestimated Carryover Amounts from Fiscal Years 2006 through 2010
paragraphs: From fiscal year 2006 through fiscal year 2010, the AFWCF budget  consistently underestimated the amount of carryover that would exceed  the allowable amount. Reliable budget information on carryover is critical  since decision makers use this information when reviewing the AFWCF  budgets. For example, as shown in table 2 below, the fiscal year 2010  AFWCF budget showed that the carryover would exceed the allowable  amount by $85 million for fiscal year 2010. Congressional defense  committees, relying on this information, reduced the AFWCF fiscal year  2010 customers’ budgets by $85 million. Table 2 shows the amount of  budgeted and actual AFWCF carryover that was over or under the  allowable amount and the actual amount exceeding the budgeted amount  for fiscal years 2006 through 2010.
We analyzed the carryover information for 3 years—fiscal years 2006,  2007, and 2009—to determine contributing factors for the differences  between budgeted and actual amounts because in these years the  budgeted amounts underestimated the actual amounts by the largest  amounts. According to Air Force headquarters officials, several factors  influenced the differences between budgeted and actual amounts  including (1) changes in the outlay rates used to compute the allowable  amount of carryover, (2) changes in customer orders, (3) issues affecting  production of work performed on external orders such as personnel and  parts shortages, and (4) removal of contract depot maintenance from  AFWCF. Specific examples of these factors are discussed below.
Since the actual outlay rates were higher than the outlay rates used for  budgeting for certain appropriations funding orders received by AFWCF,  the actual allowable carryover amount was less than the budgeted amount.  For example, our analysis of Air Force data determined that the outlay  rate used to compute the allowable amount of carryover from customers  that were internal to AFWCF changed from 61 percent to 75 percent for  fiscal year 2006 between budget and execution. Because the rate increased  by 14 percentage points, the allowable amount of carryover was less than  the planned amount for fiscal year 2006.
The budgets underestimated the amount of new orders that would be  received from customers external to AFWCF for fiscal years 2006, 2007,  and 2009. For example, the actual new orders exceeded budgeted new  orders by $242 million in fiscal year 2009 due to the Air Force not  including OCO-funded orders in the AFWCF budget. This contributed to  carryover being higher than planned in fiscal year 2009.
For fiscal year 2009, the AFWCF encountered several problems that  affected production (work performed) and contributed to carryover being  higher than planned. Specifically, the Air Force forecasted a declining  workload for the ALCs in fiscal year 2009. As a result, the Air Force  directed AFMC to reduce its workforce at the ALCs. However, workload  increased instead of decreased in fiscal year 2009. Furthermore, work in  several areas such as engines, was delayed because the depots could not  obtain the spare parts when needed to perform the work. As a result, the  ALCs generated less revenue than customer orders received, thus  increasing the carryover amount in fiscal year 2009. These issues are  discussed in more detail later in the report.
The Air Force’s action to remove contract depot maintenance from the  AFWCF was delayed by one year after the Air Force developed the fiscal  year 2007 AFWCF budget. Because the contract work was not removed in  fiscal year 2007 as budgeted, the budgeted fiscal year 2007 carryover  information presented in the fiscal year 2007 budget was understated  compared to the actual amounts as reported in the fiscal year 2009 budget.
section_title: Actions Under Way to Improve Budgeting for AFWCF Carryover
paragraphs: In fiscal year 2010, Air Force headquarters and AFMC began implementing  actions to improve the accuracy of budgeting for AFWCF carryover. These  actions are, in part, in response to a fiscal year 2009 carryover balance that  exceeded its plan by about $573 million and an $85 million reduction in the  AFWCF fiscal year 2010 budget by the congressional defense committees  due to projected excess carryover. First, the Air Force began including  OCO-funded orders in the fiscal year 2012 AFWCF budget. Second, in the  summer of 2010, the Air Force requested and received from OUSD  (Comptroller) an exemption that allowed AFWCF to use an alternative  outlay rate for software maintenance workloads when calculating the  allowable amount of carryover (discussed in the next section of the  report). The Air Force requested the alternative outlay rate for software  workload because the work is fully funded upfront but requires years to  complete and, in many cases, requires the procurement of hardware from  vendors. The Air Force stated that the alternative outlay rate is expected  to reduce future variances between budgeted and actual allowable  carryover. Third, AFMC is taking several steps aimed at improving  workload and budget forecasts. Specifically, in December 2010, the Air  Force developed a process which improves the coordination among  organizations (systems program office, maintenance wings, and supply  personnel) that affect the performance of depot maintenance work. As  workload requirements change, this initiative includes an approval process  to adjust future budgets and workload estimates. The Air Force anticipates  that these changes will improve on-time aircraft and missile performance  and reduce variances between budgeted and actual carryover. The success  of these actions can be determined only when future AFWCF budgets are  analyzed and compared to actual results.
section_title: AFWCF Actual Carryover Consistently Exceeded the Allowable Carryover
paragraphs: Our analysis of AFWCF reports showed that in each year from fiscal year  2006 through fiscal year 2010 actual carryover exceeded the allowable  carryover amounts. During the 5-year period, the amount of carryover that  exceeded allowable amounts ranged from $4 million to $568 million. The  Air Force began increasing the allowable amount of carryover (1) for  orders funding software work in fiscal year 2010 and (2) for orders funded  with multiyear appropriations in fiscal years 2009 and 2010. Concerning  the software work, the Air Force requested the exemption because large  software upgrades require full funding upfront and years to complete. In  many instances, software development is predicated on procuring  hardware that can take many months to obtain. The Air Force requested in  writing and received approval in writing from OUSD (Comptroller) an  exemption to increase the allowable amount of carryover for software  work. Concerning the use of orders funded with multiyear appropriations,  the Air Force based this decision on a revision to the carryover-allowance  methodology in the DOD Financial Management Regulation. However, the  section in this regulation cited by the Air Force pertains only to Army  ordnance working capital fund activities which perform a manufacturing  function. Furthermore, the Air Force did not request in writing or receive  approval in writing from OUSD (Comptroller) an exemption for increasing  the allowable amount of carryover for orders funded with multiyear  appropriations. Therefore, the Air Force decision to increase the allowable  amount of carryover for orders funded with multiyear appropriations was  not in accordance with the DOD Financial Management Regulation.
subsections: section_title: Actual Carryover Consistently Exceeded Allowable Amounts from Fiscal Year 2006 through Fiscal Year 2010
paragraphs: Our analysis of the budgets and supporting data showed that AFWCF  carryover exceeded its allowable carryover each year for a 5-year period  from fiscal year 2006 through fiscal year 2010. The amount of carryover  exceeding the allowable amount ranged from $4 million in fiscal year 2006  to $568 million in fiscal year 2009. Table 3 shows AFWCF actual carryover,  allowable carryover, and the amount over allowable carryover for fiscal  years 2006 through 2010.
Since the actual carryover exceeded the allowable by $568 million at the  end of fiscal year 2009, Air Force headquarters and AFMC held weekly  meetings, beginning in January 2010 to discuss the reduction of carryover.  Topics discussed at these meetings included: (1) identifying work that was  driving the carryover, (2) hiring additional personnel to perform work that  would reduce carryover, (3) identifying problems with the performance of  work due to the shortage of parts, and (4) reviewing workloads that had  unusual problems. Also, the carryover information was provided  bimonthly to the Under Secretary of the Air Force since the carryover data  has budget and operational implications.
After the carryover exceeded the allowable amount by $568 million at the  end of fiscal year 2009, AFMC and the ALCs took a more proactive  approach in the budgeting and management of carryover. The ALCs are (1)  reviewing and validating the amount of carryover on existing customer  orders and (2) reviewing customer orders prior to acceptance to ensure  that all project orders contain a specific description of the work and  deliverables, and period of performance. Based on their reviews of prior  years’ customer orders, the ALCs either deobligated or completed work on  $72 million of orders between May and September 2010 which reduced  carryover by that amount.
section_title: Exemptions Increased Allowable Carryover Amounts for Fiscal Years 2009 and 2010
paragraphs: For fiscal years 2009 and 2010, the Air Force took $115 million and $229  million, respectively, in additional exemptions that increased the  allowable carryover amounts that were not taken in previous years. These  exemptions were for (1) orders involving the development of software for  weapon systems and test equipment ($104 million in fiscal year 2010) and  (2) prior-year orders financed with multiple year funds such as  procurement and research, development, test, and evaluation  appropriations ($115 million in fiscal year 2009 and $125 million in fiscal  year 2010).
Concerning the orders for software, the Air Force requested the  exemption, in writing, from OUSD (Comptroller) on June 23, 2010, and  OUSD (Comptroller) approved the exemption, in writing, on July 12, 2010.  The Air Force requested that it use alternative outlay rates for calculating  the allowable carryover for software projects based on attributes of the  work and historical information. The Air Force requested the exemption  because large software upgrades to (1) weapon systems or (2) equipment  to test weapon systems or parts, such as avionic parts, requires full  funding upfront but requires years to complete. In many instances,  software development is predicated on procuring hardware that can take  many months to obtain. Furthermore, software work requires time needed  to identify, code, test, flight test, and document the work performed. This  work could take up to 4 to 5 years to complete. Since the software work is  predicated on the Air Force obtaining equipment from vendors, we believe  the Air Force’s use of alternative outlay rates based on historical  information for software projects is reasonable.
Concerning the prior-year orders financed with multiyear funds, Air Force  headquarters officials informed us that they consulted with the OUSD  (Comptroller) officials to discuss a revision to the carryover-allowance  methodology in the DOD Financial Management Regulation. Based on  verbal discussions with the OUSD (Comptroller) officials, Air Force  officials concluded that the DOD Financial Management Regulation  authorized the use of second-year outlay rates for orders funded with  multiyear appropriations, such as procurement and research,  development, test, and evaluation appropriations. The Air Force first  applied this exemption in its fiscal year 2011 budget which increased the  calculation of allowable carryover for fiscal year 2009 and therefore,  decreased the amount of actual carryover that was over the allowable  amount for fiscal year 2009. The Air Force applied this exemption again in  its fiscal year 2012 AFWCF budget which increased the allowable amount  of carryover by $125 million, $74 million, and $90 million for fiscal years  2010, 2011, and 2012, respectively. We requested the Air Force written  request for this exemption and the OUSD (Comptroller) written approval.  The Air Force and OUSD (Comptroller) could not provide us any  documentation. The DOD Financial Management Regulation requires the  Air Force to request approval for the exemption in writing from the  Director for Revolving Funds, OUSD (Comptroller). Furthermore, the Air  Force’s exemption for multiyear appropriations was based on a provision  added to the DOD Financial Management Regulation on Army ordnance  activities which perform a manufacturing function. This provision in the  regulation does not pertain to the Air Force. Therefore, the Air Force  decision to increase the allowable amount of carryover for orders funded  with multiyear appropriations was not in accordance with the DOD  Financial Management Regulation.
section_title: Carryover Increased at ALCs from Fiscal Years 2006 through 2010 on Orders Received from External Customers
paragraphs: Carryover related to external depot maintenance work increased from $1  billion at the end of fiscal year 2006 to $1.9 billion at the end of fiscal year  2010. Our analysis of ALC depot maintenance reports and discussions with  Air Force officials identified four primary reasons for this increase. First,  Air Force underestimated its forecasted workload requirements on the  number of hours of depot maintenance work to be performed on repairing  assets, such as aircraft. Second, because the Air Force believed its depot  maintenance workload would decrease, the Air Force directed AFMC to  reduce its workforce in November 2007. While the ALCs reduced their  workforce by about 2,000 civilian personnel, the actual workload and  related funding increased instead of decreased—thus resulting in  personnel shortages. Third, during the 5-year period, the Air Force budget  underestimated the amount of funds on new orders that would be received  from customers and the work performed by the ALCs did not keep pace  with the increase in funds received on new orders from year to year.  Fourth, the ALCs could not obtain parts when needed to perform repair  work that contributed to the growth of carryover. The Air Force is or has  taken action to address these problems such as hiring personnel to  perform depot maintenance work and including OCO-funded orders in the  fiscal year 2012 AFWCF budget.
subsections: section_title: Carryover Significantly Increased from Fiscal Year 2006 through Fiscal Year 2010 on Orders Received from External Customers
paragraphs: From fiscal years 2006 through 2010, the ALCs in-house carryover  increased from $1 billion to $1.9 billion on orders received from customers  external to AFWCF. The carryover increased because the dollar amount of  new orders exceeded the dollar amount of work performed (revenue) for  every year from fiscal year 2006 through fiscal year 2010. As a result,  carryover increased from 4 months of work at September 30, 2006, to 6.9  months of work at September 30, 2010. The carryover reached a high point  of 7.1 months of work for fiscal year 2009. Figure 1 shows the ALCs’ new  orders, revenue, and carryover for fiscal years 2006 through 2010 on  orders received from customers external to AFWCF.
In order for the ALCs to operate efficiently and effectively and to  accomplish depot maintenance work within planned time frames that  minimizes carryover, the Air Force needs to plan for several key elements.  First, the Air Force needs to accurately forecast workload requirements on  the number of hours of depot maintenance work to be performed repairing  assets such as aircraft, engines, and missiles. Second, the ALCs need  appropriate levels of facilities and support equipment available to support  the forecasted workload. Third, the assets, such as aircraft, needing repair  must be available at the ALC as planned, to ensure that work can begin on  the assets as scheduled. Fourth, the ALCs need to have the right number of  personnel with the right skill mix to perform the work. Fifth, the DOD  supply system must maintain the right mix and sufficient quantities of  spare parts to satisfy the projected workload. Finally, Air Force depot  maintenance customers need to properly fund the work, as budgeted, to  be performed. For the process to work correctly and seamlessly, these  elements must occur and be properly synchronized. If the carryover  becomes too high or low, this is an indication that one or more of the six  elements may not be working properly.
Of the six elements above, we determined the ALCs encountered problems  that contributed to carryover for four of these elements including: (1)  forecasting workload requirements on the number of hours of depot  maintenance work to be performed, (2) determining the right number of  civilian personnel to perform the depot maintenance work, (3) budgeting  for new orders, and (4) obtaining parts to perform the work. Specific  examples of problems experienced by ALCs contributing to carryover are  provided in appendix II.
section_title: Air Force Underestimated its Forecasted Workload Requirements on the Number of Hours of Work to be Performed
paragraphs: Accurately forecasting workload requirements is essential for ensuring  that needed facilities and support equipment, personnel, and spare parts  are available to support the planned workload to keep the ALCs operating  efficiently. However, the Air Force underestimated its forecasted  workload requirements on the number of hours of depot maintenance  work to be performed from fiscal year 2007 through fiscal year 2010,  especially in fiscal year 2009. According to the Air Force’s Workload  Review Guidance and AFMC officials, AFMC and ALCs evaluate their  future planned workload and develop workload forecasts by converting  anticipated customer funding into the number of hours required to  perform the work. The Air Force develops two forecasts for a specific  fiscal year. One forecast is 18 months before a fiscal year and another  forecast is 6 months before the fiscal year. Figure 2 shows the Air Force’s  18- and 6-month forecast and actual depot maintenance workload  requirements for fiscal years 2007 through 2010.
As shown in figure 2, the Air Force anticipated in its 18-month forecast  that its workload requirements would steadily decrease from 22.2 million  hours in fiscal year 2007 to 20.2 million hours in fiscal year 2010—a  reduction of 2 million hours. The reduction in workload requirements was  included in a November 2007 Air Force memorandum. In that  memorandum, the Air Force provided two reasons for the anticipated  workload decrease: (1) the ALCs were more efficient due to the  implementation of transformation efforts focused on improving  operational performance and reducing weapon system sustainment costs  that began in fiscal year 2003, and (2) approved retirements of aircraft  such as the KC-135 platforms would reduce depot maintenance workload  at the ALCs. In addition, Air Force headquarters officials informed us that  at the beginning of fiscal year 2008, the Air Force had not seen an increase  in depot maintenance work as a result of OCO. As a result, the Air Force  directed AFMC to reduce its total workforce to support the forecasted  workload. (Workforce reductions are discussed in the next section.)
The Air Force anticipated a decrease in workload requirements in its 18- month forecast, but the actual workload requirements increased by 2.1  million hours from fiscal year 2007 to fiscal year 2010. Over the same 4- year period, carryover increased from $1.1 billion in fiscal year 2007 to  $1.9 billion in fiscal year 2010. About 65 percent of the increase occurred  in fiscal year 2009 (see fig. 1). Specifically, the fiscal year 2009 actual  workload requirements exceeded the 18- and 6-month forecasts by 1.9  million and 1.7 million hours, respectively, due to (1) additional depot  maintenance work on aircraft that were not retired as planned and (2) the  2009 actual inductions for aircraft and engines exceeding forecasted  inductions. For example, the Air Force forecasted that it would induct 596  aircraft for depot maintenance work at the ALCs in fiscal year 2009, but  691 aircraft were actually inducted—an increase of 95 aircraft or 16  percent.
Significant variance to forecasted workload on the number of hours of  work to be performed and the effect it has on other decisions, such as  determining personnel levels, has a direct effect on carryover balances.  When forecasts are significantly different from results, carryover can  increase significantly as was the case in fiscal year 2009.
section_title: ALCs Reduced Workforce Led to Personnel Shortages
paragraphs: Having the right number of personnel with the right skill mix to perform  depot maintenance work is essential for the ALCs to operate in an efficient  and effective manner. However, the ALCs reduced their workforce in  fiscal year 2008 and the first 4 months of fiscal year 2009 which caused  personnel shortages and contributed to growth in carryover amounts for  fiscal years 2008, 2009, and 2010. Personnel are a critical component in the  ALCs’ ability to repair and maintain an aging Air Force fleet of fighters,  bombers, and cargo aircraft. In a November 2007 Air Force memorandum,  the Air Force stated that “while overall workload is decreasing, we are  seeing manpower growth instead.” As a result, the Air Force directed  AFMC to reduce its total workforce to support the forecasted workload.  The following figure provides AFMC monthly civilian workforce totals for  fiscal years 2006 through 2010.
In the 14 months immediately following the issuance of the November  2007 memorandum, AFMC reduced its workforce by about 2,000 civilian  personnel—primarily through attrition and buy-out incentives. According  to AFMC and ALC officials, these personnel reductions significantly  reduced the operational capabilities at the ALCs and coupled with the  increase in orders led directly to increased carryover amounts from fiscal  years 2008 through 2010.
In the first half of fiscal year 2009, the Air Force determined that the  workforce reductions were not warranted because the dollar amount of  external new orders (workload) received by the ALCs increased instead of  decreasing. For example, the ALCs received $3.4 billion of external new  orders in fiscal year 2009—about a $285 million increase over fiscal year  2008 orders. In order to meet higher workload demands and limit the  growth in fiscal years 2009 and 2010 carryover amounts, the ALCs began  hiring personnel in fiscal year 2009. Most of the hiring occurred at the  Oklahoma City and Warner Robins ALCs. For example, the Oklahoma City  ALC increased civilian personnel from 7,073 to 8,848 in a 20-month period  beginning in February 2009—a 25 percent increase. While increasing the  workforce has helped the ALCs to reduce the growth in carryover, ALC  officials informed us that the new personnel lacked the experience of the  personnel who left in fiscal year 2008 and the first half of fiscal year 2009.  As a result, the new personnel were not always as efficient and required  experienced workers to train them, reducing the productivity of the  existing workforce. Further, the ALCs required time to ramp up hiring and  train new personnel to be certified to repair weapon systems. AFMC and  ALC officials stated that the ALCs should reach their projected personnel  levels in fiscal year 2011.
section_title: External New Orders Consistently Exceeded Budget Estimates
paragraphs: Accurate budgets on the amount of external new orders to be received are  essential for the ALCs to plan their work such as determining the right  number of personnel needed. However, from fiscal year 2006 through  fiscal year 2010, the Air Force consistently underestimated its new orders  when developing its AFWCF budgets for work performed by ALCs on  orders received from customers that were external to AFWCF. Further, for  fiscal years 2009 and 2010, actual new orders exceeded budgeted orders  by $242 million and $597 million, respectively—the largest differences in  the 5-year period. Table 4 shows the dollar amount of actual and budgeted  new orders for fiscal years 2006 through 2010.
When developing its budget for new orders for fiscal year 2006 through  fiscal year 2010, Air Force officials informed us they did not include orders  for work financed with OCO funds. However, for fiscal years 2006 through  2010, the ALCs received $1.7 billion in work financed with OCO funds. The  majority of the funded orders were received in fiscal years 2009 and 2010  when the ALCs received $1 billion in OCO-funded orders over this 5-year  period. Air Force officials told us that they did not include OCO orders in  the budget for two reasons:    Customers’ OCO budgets were finalized and submitted later in the  calendar year than the base budget. Thus, the amount of OCO orders was  not fully determined when the AFWCF budget was completed and  submitted.
For fiscal years 2006 through 2008, the actual orders varied by about $218  million or less than the budgeted orders. Air Force officials said that there  was enough flexibility with the AFWCF to perform the additional amount  of work, such as having employees work overtime.
While the difference between actual and budgeted orders ranged from $74  million to $218 million from fiscal years 2006 through 2008, the difference  grew in fiscal years 2009 and 2010 primarily due to an increase in OCO- funded orders. To correct this problem, the Air Force began including  OCO-funded orders in the fiscal year 2012 AFWCF budget.
section_title: ALCs Could Not Obtain Parts Needed to Perform Repair Work on External Orders
paragraphs: Without the DOD supply system maintaining the right mix and sufficient  quantities of spare parts, the ALCs cannot complete funded workload in a  timely and efficient manner. However, our analysis of Air Force data and  interviews with ALC officials found that parts shortages at the ALCs have  contributed to the growth of carryover. Air Force operations have grown  significantly in support of OCO. These higher operational levels have  resulted in increased wear on the Air Force’s aging fleet of aircraft such as  the KC-135 and C-130 and engines, such as the F110-100 and F108-100,  resulting in a greater demand for spare parts to repair them. When  shortages of parts occur, the ALCs (1) work may be delayed until the parts  are available in the supply system or are manufactured by the ALCs,  potentially increasing the carryover amounts at year end, or (2) costs  increase from the time-consuming efforts taken to obtain (cannibalize)  parts from other aircraft or engines to continue the repair process.
Our analysis of Air Force data showed that the average monthly  backorders for spare parts at the ALCs have grown significantly in recent  years. From fiscal years 2008 to 2010, average backorders at the ALCs  grew by 44 percent. The Defense Logistics Agency and the Air Force’s  Global Logistics Support Center were the ALCs’ primary supply sources  for acquiring spare parts. Table 5 provides the ALCs average monthly  backorders.
According to ALC officials, backorders for spare parts grew because the  supply system did not maintain the right mix or sufficient quantities of  spare parts on hand to meet the higher-than-projected workload  requirements experienced in fiscal years 2009 and 2010. For example,  Oklahoma City Center officials informed us that the F108-100 engine  program experienced a 60 percent increase for the overhaul of these  engines from fiscal years 2008 to 2009, creating shortages of parts such as  the engine mounts and compressor discharge nozzle cases. In addition,  over the 3-year period the average age of backorders for spare parts grew  in all age categories. Spare parts on backorder can delay work and  potentially increase the carryover amounts. Table 6 provides the average  monthly backorders for the three ALCs by age category.
In order to perform the required repair work and to minimize the impact of  parts shortages, the ALCs have used other methods to obtain needed parts  such as obtaining parts from other aircraft (known as cannibalization),  fabricating parts, or obtaining parts through the use of their local  procurement authority. While the alternative methods allowed work to  continue, obtaining the needed parts this way was inefficient. For  example, if the aircraft mechanic does not receive the spare parts from the  supply system, the mechanic may cannibalize parts from other aircraft.  According to reports, the three ALCs cannibalized 5,189, 5,447, and 5,667  items in fiscal years 2008, 2009, and 2010, respectively. According to  officials, the ALCs can cannibalize parts in the short term to resolve spare  part shortages; however, in the long term, the ALCs need the supply  system to obtain the needed parts to continue operations.
We reported in March 2007 that the basic challenge of inventory  management is having the proper amount of items on hand when  required. If inventory levels are too low, DOD and its components may  experience supply shortages and be unable to satisfy customer demands.  If inventory levels are too high, money is invested on items that may never  be used. Because of ineffective and inefficient inventory management  practices and procedures, since 1990 we have identified DOD supply chain  management as a high-risk area.
DOD has acknowledged the longstanding problems concerning its  inventory management and has actions under way to address them. With  the objective of reducing the acquisition and storage of secondary item  inventory that is excess to requirements, section 328 of the National   required the Secretary of  Defense Authorization Act for Fiscal Year 2010Defense to submit to congressional defense committees a comprehensive  plan for improving the inventory management systems of the military  departments and the Defense Logistics Agency. On November 8, 2010,  DOD submitted its Comprehensive Inventory Management Improvement  Plan to the congressional defense committees. Section 328 also requires  GAO to submit to the congressional defense committees an assessment of  the extent to which the plan meets the specified requirements no later  than 60 days after the plan’s submission. We assessed the plan and found  that DOD’s plan addressed each of the eight required elements in section  328. Section 328 also requires GAO to submit another report to the  congressional defense committees not later than 18 months after DOD’s  plan is submitted. The second report is to document our assessment of the  extent to which the plan has been effectively implemented by each  military department and by the Defense Logistics Agency.
Since DOD recently issued its plan in November 2010 to improve the  management of inventory and we will be assessing the implementation of  the plan, we are not making any recommendations in this report on the  parts shortages. However, until DOD resolves its inventory problems, the  ALCs will likely continue to be affected by parts shortages or other supply  chain management problems that affect their efficiency as well as the  dollar amount of carryover.
section_title: Conclusions
paragraphs: Reliable carryover information is essential for Congress and DOD to  perform their oversight responsibilities, including reviewing and making  well-informed decisions on DOD’s budget. However, the Air Force  underestimated the work to be performed and the related resources  needed, thereby impacting its ability to complete the work in an efficient  and effective manner and causing carryover to exceed the allowable  amounts in the AFWCF annual budgets. Budget estimates could be  improved by implementing effective controls to properly consider and  address the major factors that caused variations between budgeted and  actual carryover amounts. Also, correctly interpreting and applying  criteria in the DOD Financial Management Regulation for determining the  allowable carryover amounts would increase the reliability of such  estimates. While the carryover metric is a management tool for controlling  the amount of work that can carry over from one fiscal year to the next,  the metric can also be used as a tool to identify problems in other areas  such as (1) developing workload requirements on the number of hours of  depot maintenance work to be performed, (2) establishing personnel  levels to perform the depot maintenance work, (3) developing budgets on  the amount of new orders for depot maintenance work, and (4) obtaining  spare parts to perform depot maintenance work. For example, in fiscal  year 2009, AFWCF carryover exceeded the allowable amount by over a  half a billion dollars. This was largely due to the ALCs’ reducing their  personnel by about 2,000 shortly after the Air Force issued a memorandum  in November 2007 directing them to do so in anticipation of workload  reductions that did not materialize. The Air Force has initiated actions to  improve the budgeting and management of carryover. These actions have  the potential to improve the accuracy of budgeting for AFWCF carryover.  However, the Air Force needs to routinely compare the budgeted  carryover information with the actual results and determine the reasons  for the differences and consider this information in formulating future  budgets.
section_title: Recommendations for Executive Action
paragraphs: We are making five recommendations to the Secretary of Defense to  improve the budgeting and management of carryover.
We recommend that the Secretary of Defense direct the Under Secretary  of Defense (Comptroller) to take the following action:    Clarify the existing guidance in the DOD Financial Management  Regulation that allows Army ordnance activities to use multiyear  appropriations in the calculation of allowable carryover to ensure that  other working capital fund activities do not use this provision as a basis  for their calculation of allowable carryover.
We recommend that the Secretary of Defense direct the Secretary of the  Air Force to take the following actions:    Take actions to ensure that requests for exemption from the carryover  policy are made in writing and approved by the Director for Revolving  Funds as required by the DOD Financial Management Regulation.
Require Air Force headquarters and Air Force Materiel Command to  routinely compare budgeted carryover that is over or under the allowable  amount to the actual amount to identify the differences and reasons for  the differences, and consider these trends in developing future budget  estimates on carryover.
Require Air Force headquarters and Air Force Materiel Command to  routinely compare budgeted orders to actual orders to identify the  differences and reasons for the differences, and consider them in  developing future years’ budget estimates on new orders to be received  from customers.
Require Air Force headquarters and Air Force Materiel Command to  routinely compare the forecasted workload requirements on the number  of hours of depot maintenance work to be performed to the actual number  and consider these trends in developing future years’ depot maintenance  workload requirements.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report. In its comments,  DOD concurred with the five recommendations and cited actions planned  or under way to address them. For example, DOD stated that the DOD  Financial Management Regulation will be updated to clarify that the intent  of existing guidance is to permit Army ordnance activities to use multiyear  appropriations in the calculation of allowable carryover, and that other  working capital fund activities cannot use this provision without prior  approval in writing from the OUSD (Comptroller) Director for Revolving  Funds. DOD also stated that before DOD direction could be given, Air  Force headquarters had already notified AFMC that written approval from  the OUSD (Comptroller) Director for Revolving Funds is required for  exemptions to the allowable carryover calculation. Further, DOD stated  that Air Force headquarters has tasked AFMC to submit its analyses  comparing budgeted and actual information on carryover, orders, and  workload requirements on the number of hours of depot maintenance  work to be performed to improve the budgeting and management of  carryover in future years. DOD also stated that it is the Air Force’s intent  to include the requirement to perform these analyses in its annual working  capital fund budget guidance.
We are sending copies of this report to the appropriate congressional  committees. We are also sending copies to the Secretary of Defense; the  Under Secretary of Defense (Comptroller); and the Secretary of the Air  Force. The report also is available at no charge on the GAO Web site at  http://www.gao.gov.
Should you or your staff have any questions concerning this report, please  contact Asif A. Khan at (202) 512-9095 or khana@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report are listed in  appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the extent to which (1) budget information on Air Force  depot maintenance carryover for fiscal years 2006 through 2010  approximated actual results and, if not, any needed actions the Air Force  is taking to improve budgeting for carryover, and (2) the Air Force depot  maintenance actual carryover exceeded the allowable amount of  carryover from fiscal years 2006 through 2010 and any adjustments were  made to the allowable amount, we obtained and analyzed Air Force depot  maintenance reports that contained information on budgeted and actual  carryover and the allowable amount of carryover for fiscal years 2006  through 2010. We met with responsible officials from Air Force  headquarters, Air Force Materiel Command (AFMC), and the Air Logistics  Centers (ALC) to determine the reasons for significant variances between  budgeted and actual carryover or actual carryover and the allowable  amount. We also met with these officials to discuss the actions the Air  Force was taking to improve budgeting and management of carryover.  Further, we identified and analyzed any adjustments made by the Air  Force that increased the allowable carryover amounts for fiscal years 2009  and 2010. We discussed the adjustments with Office of the Under  Secretary of Defense (Comptroller) and Air Force headquarters officials to  obtain their explanations for making the adjustments and reviewed  requirements contained in the DOD Financial Management Regulation for  making adjustments to the carryover policy.
To determine the extent to which there was growth in carryover at the Air  Force depot maintenance in-house activities on orders received from  customers that were external to Air Force Working Capital Fund (AFWCF)  and the reasons for the growth, we met with responsible officials from the  three ALCs, AFMC, and Air Force headquarters. Based on those  discussions, we obtained information that affected carryover. First, we  analyzed planned versus actual workload requirement information to  determine if the Air Force developed reliable forecasted workload  requirements. When differences occurred between planned and actual  requirements, we met with Air Force headquarters officials to determine  the reasons for the differences. Second, we analyzed reports that provided  information on personnel levels at the ALCs to determine if they had  reduced their workforce. We met with officials at the three ALCs, AFMC,  and Air Force headquarters to discuss the reduction of personnel at the  ALCs as well as the subsequent hiring and training of personnel. Third, we  analyzed budgeted and actual new orders from fiscal years 2006 through  2010 to determine if the Air Force underestimated the ALCs budgeted  orders. When differences occurred between budgeted and actual new  orders, we met with Air Force headquarters officials to determine the  reasons for these differences. Fourth, we analyzed information on the  ALCs ability to obtain spare parts to perform work to determine if parts  shortages contributed to carryover. We met with AFMC and ALC officials  to discuss parts shortages and what actions the ALCs could take to  alleviate the shortages. Fifth, we identified all high-dollar carryover orders  received by the ALCs in fiscal years 2009 and 2010 to determine the  reasons for the carryover. We focused on these orders because (1)  carryover exceeded the allowable amount by over a half a billion dollars in  fiscal year 2009 and (2) fiscal year 2010 orders were the most recent  orders at the time of our audit.
Financial information in this report was obtained from official Air Force  budget documents and accounting reports. To assess the reliability of the  data, we (1) reviewed and analyzed the factors used in calculating  carryover for the completeness of the elements included in the calculation,  (2) interviewed Air Force officials knowledgeable about the carryover  data, (3) reviewed GAO reports on depot maintenance activities, and (4)  reviewed orders customers submitted to the depots to determine whether  they were adequately supported by documentation. In reviewing these  orders, we obtained the status of the carryover at the end of the fiscal  year. On the basis of procedures performed, we have concluded that these  data were sufficiently reliable for the purposes of this report. We  performed our work at the headquarters of the Office of the Under  Secretary of Defense (Comptroller) and the Office of the Secretary of the  Air Force, Washington, D.C.; Air Force Materiel Command, Wright- Patterson Air Force Base, Ohio; the depot maintenance wing at the  Oklahoma City Air Logistics Center, Tinker Air Force Base, Oklahoma; the  depot maintenance wing at the Ogden Air Logistics Center, Hill Air Force  Base, Utah; and the depot maintenance wing at the Warner Robins Air  Logistics Center, Robins Air Force Base, Georgia. We conducted this  performance audit from July 2010 through July 2011 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: Examples of Problems Experienced by Air Logistics Centers Contributing to Carryover
paragraphs: This appendix contains specific examples showing those problems  experienced by the Air Logistics Centers (ALC) in performing depot  maintenance work that contributed to work carrying over from one fiscal  year to the next. These problems include (1) the lack of personnel, (2)  difficulties encountered in obtaining parts from the Department of  Defense supply system, and (3) changing or increasing workload  requirements. Most of the examples discussed below include two or three  of the problems cited above.
subsections: section_title: F110-100 Engine
paragraphs: The Oklahoma City ALC repairs Air Force F110-100 engines used on the F- 16 Fighting Falcon aircraft. Beginning in fiscal year 2008, the Air Force  began experiencing delays in the engine program due to personnel and  parts shortages that resulted in higher carryover in fiscal years 2009 and  2010. These personnel and parts shortages resulted in the average number  of days necessary to complete an engine from the date the engine was  inducted (flow days) increasing from 135 days at the end of fiscal year  2008 to 371 days at the end of fiscal year 2010—a 175 percent increase.  The personnel and parts shortages are discussed below.
ALC officials told us that personnel shortages occurred because 7 of their  14 experienced mechanics were transferred to another engine repair line  beginning in fiscal year 2008 even though orders for repairing the engine  did not decline. The ALC transferred the mechanics because (1) the  serviceable engines in Air Force’s worldwide inventory exceeded its  wartime requirements and (2) there was an urgent need for the mechanics  on another engine repair line.
ALC officials also told us that work on the engines was delayed because  parts were not always available in the supply system. At the end of fiscal  years 2009 and 2010, program office officials estimated that there were  about 129 and 137 backorders for parts, respectively. For example, the  production unit could not obtain enough service life extension packages to  overhaul the engines. According to officials and documentation, another  delay occurred when some of the engines’ front stator assemblies were  identified as having excessive wear—a new failure mode. The ALC could  not repair the assemblies because it did not have a certified process for  repairing the parts. Thus, the ALC negotiated and awarded a contract to a  vendor. The process to competitively award the contract and have the  parts repaired by the vendor created delays in the program during fiscal  years 2009 and 2010. ALC personnel now have a certified process for  repairing the parts.
Due to the personnel and parts shortages, ALC officials stated that they  did not complete work on their fiscal year 2009 orders and work did not  start on their fiscal year 2010 orders as of November 2010. As a result,  carryover was higher than planned at the end of fiscal years 2009 and 2010.  Specifically, the ALC planned to carry over $56 million on 19 engines into  fiscal year 2010. Instead, it carried over $120 million on 43 engines into  fiscal year 2010—about $64 million and 24 engines more than planned. The  personnel and parts shortages continued on these engines into fiscal year  2010. The ALC planned to carry over $21 million on 7 engines into fiscal  year 2011. Instead, it carried over $81 million on 29 engines into fiscal year  2010—$60 million and 22 engines more than planned.
section_title: F108-100 Engine
paragraphs: Beginning in fiscal year 2009, the requirement for repairing F108-100  engines used on the KC-135 refueling aircraft grew significantly because  the Air Force did not have enough serviceable engines to satisfy its  wartime requirement. Thus, the Oklahoma City ALC began expanding its  production capacity to produce upwards of 120 engines annually—more  than doubling the 53 engines produced in fiscal year 2008. To perform the  additional workload, the ALC transferred 7 mechanics from another  engine repair line and hired an additional 30 mechanics in fiscal years 2009  and 2010. According to our analysis of data and discussions with F108-100  program and production officials, the increased requirement created  significant parts shortages in fiscal year 2010 because the demand for  parts needed to repair these engines exceeded the availability of inventory  in some cases. For example, due to a lack of high pressure compressors  and fan booster assemblies, work on several engines stopped periodically  until replacement parts were obtained. Data showed that the engine  program had 160 backorders at the end of fiscal year 2010—almost  doubling 81 backorders at the end of the previous year. Production of the  engine dropped from 85 in fiscal year 2009 to 67 in fiscal year 2010  primarily due to the parts shortages according to Oklahoma City ALC  officials even though they planned to produce 90 engines in fiscal year  2010. The ALC planned to carry over $11 million on 5 engines into fiscal  year 2011. Instead, it carried over $78 million on 37 engines into fiscal year  2011—$67 million more than planned.
section_title: B-52 Aircraft
paragraphs: Prior to fiscal year 2006, Oklahoma City ALC officials stated that the Air  Force maintained a B-52 fleet size of 93 aircraft. To maintain the B-52s, it  inducted and performed depot maintenance work on about 21 or 22  aircraft annually and retained a workforce of almost 480 personnel to  perform the work. According to a fiscal year 2006 budget document, the  Air Force planned to reduce its fleet size to 56 aircraft in order to  transform its “total force” into a smaller, more lethal and agile force by  eliminating the most expensive, least effective systems. By January 2007,  the Air Force reduced its planned funding for depot-level repairs and  maintenance of B-52 aircraft to 13 annually. Moreover, the B-52 workforce  was reduced to just over 300 personnel—a reduction of about 180.
The National Defense Authorization Act for Fiscal Year 2008 required the  Air Force to retain a larger fleet size of B-52 aircraft than previously  required. According to production officials, when the Air Force increased  its targeted fleet size from 56 to 76 to comply with congressional direction,  the ALC had to increase its workforce to satisfy a higher production  requirement of 17 aircraft annually. The workforce shortage, according to  these officials, created a backlog of work in the B-52 program that  contributed to (1) the average number of days to complete an aircraft  increasing by 76 days between fiscal years 2008 and 2010 from 227 to 303  and (2) $73.3 million of the $75.6 million of orders received in the last 4  months in fiscal year 2009 carried over from fiscal year 2009 into fiscal  year 2010. The ALC increased its workforce to 492 personnel in fiscal year  2010 to handle the additional workload.
section_title: C-5 Aircraft
paragraphs: Because of increasing requirements in the C-5 aircraft program, the  Warner Robins ALC encountered problems with a lack of parts and  personnel to perform the work. The C-5 program fiscal year 2010  requirements increased from 677,103 hours to 1,046,434 hours, or an  increase of 369,331 hours from the initial budget. However, because of a  previous hiring freeze, the C-5 program was understaffed by 145  employees, or about 27 percent of its planned direct labor workforce at  the beginning of fiscal year 2010. Officials informed us that it takes about 2  years before a new hire becomes highly productive. As a result of the lack  of parts and personnel associated with increased requirements, the  average flow days increased from 286 days in fiscal year 2009 to 340 days  in fiscal year 2010. The following example illustrates how the work was  affected by a lack of parts and personnel due to increasing requirements.
In April 2009, the ALC accepted a $20.4 million order that was financed  with fiscal year 2009 Air Force Reserve operation and maintenance  appropriated funds to perform depot maintenance on one C-5 aircraft.
Because the aircraft was inducted on September 30, 2009, the entire $20.4  million carried over into fiscal year 2010. According to ALC officials, aging  of the aircraft increased labor and parts requirements, which affected the  ALCs ability to perform the depot maintenance work. This further  contributed to the carryover problem and resulted in $2.9 million being  carried over into fiscal year 2011. For this C-5 aircraft, labor requirements  increased from 47,965 hours to 58,274 hours, or an increase of 10,309  hours, to perform the depot maintenance work. Our review of  documentation found that there were five backorders of parts and  material associated with the depot maintenance work on the C-5 aircraft.  In addition, in order to perform the required depot maintenance work and  help minimize the impact of part shortages on the C-5 program, the ALC  either obtained parts from other aircraft (cannibalized) to use on this  aircraft or removed parts from this aircraft to use on other aircraft.  Documentation showed that a total of 94 parts were either obtained from  other aircraft or removed from this aircraft to alleviate part shortages.
section_title: C-130 Aircraft
paragraphs: Because of increasing requirements in the C-130 program, the Warner  Robins ALC encountered problems with a lack of parts and personnel to  perform the work. The C-130 program fiscal year 2010 requirements  increased from 1,277,855 hours to 1,324,476 hours, or an increase of 46,621  hours from the initial budget. However, because of a previous hiring  freeze, the C-130 program was understaffed by 186 employees, or about 22  percent of its planned direct labor workforce at the beginning of fiscal  year 2010. Officials informed us that it takes about 2 years before a new  hire becomes highly productive. The following example illustrates how the  work was affected by a lack of parts and personnel due to increasing  requirements.
In June 2009, the ALC accepted a $4.8 million order that was financed with  fiscal year 2009 Air Force operation and maintenance appropriated funds  to perform depot maintenance work on one C-130 aircraft. According to  officials, increased requirements in the C-130 program required the ALC to  use more labor and parts than planned to perform the depot maintenance  work. As a result, the ALC carried over $3.9 million into fiscal year 2010.  For this C-130 aircraft, labor requirements increased from 27,959 hours to  30,405 hours, or an increase of 2,446 hours, to perform the depot  maintenance work. In addition, in order to perform the required depot  maintenance work and help minimize the impact of part shortages on the  C-130 program, the ALC either obtained parts from other aircraft to use on  this aircraft or removed parts from this aircraft to use on other aircraft.
Documentation showed that a total of 31 parts were either obtained from  other aircraft or removed from this aircraft to alleviate part shortages.
section_title: A-10 Aircraft
paragraphs: In fiscal year 2010, the Ogden ALC performed depot maintenance work on  Air Force A-10 aircraft to extend its service life. According to Ogden ALC  officials and documentation on the A-10 service life extension program,  the A-10 aircraft was originally designed to fly approximately 8,000 hours  and be replaced by a newer, more modern aircraft. The aircraft was  originally expected to fly through fiscal year 2005; however, the Air Force  decided to extend the aircraft’s service life to fiscal year 2028 due to its  unique mission capabilities. This decision required the aircraft to undergo  a major overhaul including its wings, fuselage, and fuel cells. According to  A-10 officials, the lack of a sufficient number of serviceable aircraft wings  in Air Force supply created significant program delays in fiscal year 2010  that increased the ALCs carryover above plan. The officials informed us  they planned to complete work on A-10 aircraft, on average, in about 180  days in fiscal year 2010; however, maintenance on the wings alone took,  on average, about 220 days. The ALC planned to carry over $53 million into  fiscal year 2011. Instead, it carried over $64 million—$11 million more than  planned.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: GAO Contact and Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Greg Pugnetti, Assistant Director;  Steve Donahue; Keith McDaniel; and Hal Santarelli made key contributions  to this report.