Navy Working Capital Fund: Budgeting for Carryover at Fleet Readiness Centers Could Be Improved
Published: 2015-06-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Three Navy FRCs support combat readiness by providing repair services to keep Navy units operating worldwide. To the extent that the FRCs do not complete work ordered and funded by year-end, the work and related funding will be carried over into the next fiscal year. The Department of Defense (DOD) established a formula based on new orders received from customers for determining the allowable carryover amount at year-end as defined by the DOD Financial Management Regulation. As requested, GAO reviewed issues related to FRC carryover.
GAO's objectives were to determine (1) the extent to which the FRCs' actual carryover differed from the allowable amounts and the reasons for any differences, (2) the extent to which the FRCs' reported budget information on carryover differed from reported actual information and the reasons for any differences, and (3) the key drivers for orders with large carryover balances for fiscal years 2013 and 2014 and the actions the FRCs are taking or planning to take to reduce carryover. GAO reviewed carryover guidance, analyzed carryover and related data for the FRCs for fiscal years 2004 to 2014, and interviewed Navy officials.
section_title: What GAO Found
paragraphs: GAO's analysis of Navy Working Capital Fund Fleet Readiness Centers' (FRC) budgets found that actual adjusted carryover exceeded allowable carryover in 10 of 11 fiscal years reviewed because orders exceeded work performed (revenue) by more than expected. As a result, total carryover grew to about $1 billion at the end of fiscal year 2014. In fiscal year 2014, the FRCs' actual adjusted carryover amount was under the allowable amount because the FRCs received a new waiver that reduced the adjusted carryover below the allowable amount. The FRCs did not present the purpose and amount of the waiver in their budget to Congress. Having complete information in the budget is needed to help policymakers make informed decisions.
The FRCs budgeted the carryover amount to be under the allowable amount in 10 out of the 11 fiscal years GAO reviewed. In fiscal year 2004, the budgeted amount was greater than the allowable amount by $40 million. In 10 of the 11 years, the actual carryover information was greater than the budgeted carryover information by a low of $30 million in fiscal year 2010 to a high of $285 million in fiscal year 2007. According to Navy officials, these differences can be attributed to uncertainty in overseas contingency operations orders or changing customer requirements after budget preparations. Although the Navy has efforts ongoing to address these two issues in the future, GAO found that the Navy's guidance does not require trend analysis. Such analysis could help ensure more accurate estimates.
GAO identified four key drivers for large FRC carryover balances in fiscal years 2013 and 2014: (1) orders for work scheduled to begin in the fourth quarter carried over into the next fiscal year; (2) work on F/A-18 Hornet aircraft required structural repair and the FRCs had limited engineers and artisans, support equipment, and facilities to perform the work; (3) work on crash-damaged aircraft was difficult to predict and required nonstandard repairs that necessitated long lead time for parts to perform the work; and (4) the unavailability of parts to perform work. The Navy is taking several actions, such as hiring engineers and artisans to perform F/A-18 Hornet work.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOD improve the budgeting for carryover by reporting the purpose and amount of waivers in FRC budgets and augmenting Navy guidance to include trend data on actual orders in developing budget estimates. DOD concurred with GAO's recommendations and cited related actions planned or under way.

section_title: Letter
paragraphs: The Navy operates three depot maintenance Fleet Readiness Centers  (FRC) that are part of the Navy Working Capital Fund. These FRCs  repair aircraft, engines, and components; manufacture parts and  assemblies; provide engineering services for developing hardware design  changes; and furnish technical and other services on maintenance and  logistics problems. From fiscal year 2004 through fiscal year 2014, the  amount of new orders received to perform this work ranged from $1.7  billion to $2.3 billion. In fiscal year 2014, the Navy reported that in-house  work performed at the three FRCs included the repair of 419 aircraft,  1,622 aircraft engines, and 34,280 inventory items. Work completed at  the FRCs ensures that deployed and next-to-deploy units have the battle- ready items needed to train and fight in current and future military  operations.
When Navy FRC work has been ordered and funded (obligated) by  customers (such as the military services) but has not been completed at  the end of a fiscal year, it is referred to as carryover. The Department of  Defense (DOD) has established a formula based on new orders received  from customers for determining the amount of carryover allowed at the  end of each fiscal year as defined by the DOD Financial Management  Regulation. The congressional defense committees have recognized that  some carryover is appropriate to facilitate 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 in military service working capital funds may be more  than is needed. Too much carryover could result in the working capital  fund receiving funds from customers in one fiscal year but not performing  the work until well into the next fiscal year or years. Further, excessive  amounts of carryover may result in future appropriations or budget  requests being subject to reductions by DOD and the congressional  defense committees during the budget review process. For example,  according to the explanatory statement accompanying DOD’s fiscal year  2013 appropriations, congressional conferees agreed to reduce Army,  Navy, Air Force, and Marine Corps fiscal year 2013 operation and  maintenance appropriations by a total of $332.3 million because of  concerns about excess carryover.
You asked us to review issues related to Navy FRC carryover. Our  objectives were to determine (1) the extent to which the Navy FRCs’  actual carryover differed from the allowable amounts from fiscal years  2004 through 2014 and the reasons for any differences; (2) the extent to  which the Navy FRCs’ reported budget information on carryover differed  from reported actual information on carryover from fiscal years 2004  through 2014 and the reasons for any differences; and (3) the key drivers  for orders with large carryover balances for fiscal years 2013 and 2014  and the actions, if any, the Navy’s FRCs are taking or planning to take to  reduce carryover.
To address the first and second objectives, we obtained and analyzed  FRC reports and Navy Working Capital Fund budget estimates submitted  to Congress that contained information on budgeted and actual carryover  and the allowable amount of carryover for fiscal years 2004 to 2014. We  analyzed carryover since fiscal year 2004 because prior to fiscal year  2004, DOD had a different policy for determining the allowable amount of  carryover. We met with responsible officials from Navy headquarters and  the FRCs to determine the reasons for variances between (1) actual  carryover and the allowable amount of carryover and (2) budgeted and  actual carryover. We also met with these officials to discuss actions the  Navy was taking to improve budgeting and management of carryover,  including the reduction of carryover amounts. Further, we identified and  analyzed any adjustments made by the Navy that increased the allowable  carryover amounts or reduced the amount of carryover. We reviewed  DOD’s guidance for exceptions to the carryover policy and discussed any  exceptions with officials from the Office of the Under Secretary of  Defense (Comptroller), Navy headquarters, and the FRCs to obtain  explanations for the exceptions.
To address the third objective, we met with responsible officials from  Navy headquarters and the FRCs to identify contributing factors that led  to carryover. We focused on fiscal year 2013 and 2014 carryover  balances to identify current issues contributing to carryover. We also  performed walk-throughs of the three FRCs’ depot maintenance  operations to observe the work being performed and discussed with  officials the causes for workload carrying over from one fiscal year to the  next. Further, to corroborate the information provided by FRC officials, we  obtained and analyzed 60 customer orders to repair, among other things,  aircraft, engines, and components (30 orders each for fiscal years 2013  and 2014) that had the largest dollar amount of carryover. Carryover  amounts associated with these orders represented 38 percent and 33  percent of the FRCs’ total carryover for fiscal years 2013 and 2014,  respectively. We also discussed and obtained documentation on the  actions the FRCs are taking to better manage and reduce carryover.
We obtained the financial and logistical data in this report from official  budget documents and the Defense Industrial Financial Management  System used by the FRCs. To assess the reliability of the data, we  analyzed carryover and related data, interviewed Navy officials  knowledgeable about the carryover data, and reviewed customer orders  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. See  appendix I for additional details on our scope and methodology.
We conducted this performance audit from June 2014 to June 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The three Navy FRCs provide services for a variety of customers,  including the Army, the Navy, the Air Force, non-DOD agencies, and  foreign countries. Most of the work is for the Navy. Operating under the  working capital fund concept, these FRCs are intended to (1) generate  sufficient resources to cover the full costs of their operations and (2)  operate on a break-even basis over time. Customers, such as the Navy,  use appropriated funds (typically operation and maintenance or  procurement appropriations) to finance orders placed with the FRCs. The  FRCs provide the Navy an in-house industrial capability to conduct depot- level maintenance, repair, and upgrade of aircraft, engines, and aircraft  components. Table 1 describes the locations and principal work for each  FRC.
subsections: section_title: Carryover and Its Use
paragraphs: When Navy FRC work has been ordered and funded (obligated) by  customers but has not been completed at the end of a fiscal year, it is  referred to as carryover. Some carryover is appropriate in order for  working capital fund activities, such as the FRCs, to ensure the continuity  of operations from one fiscal year to the next. For example, if customers  do not receive sufficient appropriations at the beginning of the fiscal year,  carryover is necessary to ensure that the FRCs (1) have enough work to  continue operations in the new fiscal year and (2) retain the appropriate  number of personnel with sufficient skill sets to perform depot  maintenance work. Too little carryover could result in inefficient use of  resources with some personnel not having work to perform at the  beginning of the fiscal year. On the other hand, too much carryover could  result in the working capital fund receiving funds from customers in one  fiscal year but not performing the work until well into the next fiscal year  or years. By optimizing the amount of carryover, DOD can use its  resources in the most efficient and effective manner and minimize the  backlog of work.
section_title: DOD’s Carryover Policy
paragraphs: DOD’s Financial Management Regulation 7000.14-R, volume 2B, chapter  9, provides that the allowable amount of carryover each year is to be  based on the dollar amount of new orders received that year and the  outlay rate of the customers’ appropriations financing the work. For  example, customer orders financed with a specific appropriation total  $100. If the outlay rate for this appropriation is 60 percent, then the  working capital fund activity group is allowed to carry over $40 (i.e., $100  -  = $40). The DOD carryover policy further provides  that the work on the current fiscal year’s orders is expected to be  completed by the end of the following fiscal year. For example, for an  order accepted in fiscal year 2014, the work is expected to be completed  at the end of fiscal year 2015.
For orders funded with procurement appropriations, the Office of the  Under Secretary of Defense (Comptroller) implemented a change to the  DOD Financial Management Regulation to require the second year  published outlay rate be used to calculate the allowable carryover  amount. This change became effective for the fiscal year 2015 budget  which affected the fiscal year 2013 actual calculation for allowable  carryover. For example, for a procurement-funded order accepted in fiscal  year 2014, the work is expected to be completed at the end of fiscal year  2016. DOD’s Financial Management Regulation also provides that (1)  nonfederal orders, non-DOD orders, foreign military sales, work related to  base realignment and closure, and work in progress are to be excluded  from the carryover calculation; (2) exceptions to the carryover policy  approved by the Director for Revolving Fund, Office of the Under  Secretary of Defense (Comptroller), are to be excluded from the carryover  calculation; and (3) the reported actual carryover after applying these  exclusions and exceptions (which is referred to as actual adjusted  carryover in this report) is then compared to the amount of allowable  carryover that was calculated using the above-described outlay rate  method to determine whether the actual carryover amount is over or  under the allowable carryover amount.
To the extent that actual adjusted carryover exceeds the allowable  carryover, DOD and the congressional defense committees may reduce  future budgets. According to the DOD Financial Management Regulation,  this carryover policy allows for an analytical-based approach that holds  working capital fund activities to the same outlay standard as the general  fund and allows for meaningful budget execution analysis. Requests for  exceptions to the carryover policy (referred to as waivers for the purposes  of this report) must be submitted by the military services to the Director  for Revolving Funds, Office of the Under Secretary of Defense  (Comptroller), separate from the budget documents. The Navy generally  submits the request for waivers at the end of the fiscal year. Office of the  Under Secretary of Defense (Comptroller) officials told us that they review  requests for waivers to the carryover policy on a case-by-case basis.  Depending on the request, they may ask for additional information to  evaluate the request.
section_title: FRC Actual Adjusted Carryover Was over the Allowable Amount for 10 of the Past 11 Fiscal Years Because Orders Exceeded Work Performed by More Than Expected
paragraphs: Our analysis of the FRC reports shows that FRC actual adjusted  carryover exceeded its allowable carryover amount each year from fiscal  year 2004 through fiscal year 2013 because orders exceeded work  performed by more than expected. The amounts of carryover that  exceeded the allowable amounts for that period ranged from less than $1  million in fiscal year 2005 to $121 million in fiscal year 2011. In fiscal year  2014, the FRCs’ actual adjusted carryover amount was under the  allowable amount for the first time in 11 years because the FRCs  received a new waiver that reduced the actual adjusted carryover amount  below the allowable amount. However, the Navy did not consistently or  comprehensively present waiver information that affected the FRCs’  actual adjusted carryover in the Navy Working Capital Fund budget  submissions to Congress.
subsections: section_title: FRCs’ Actual Adjusted Carryover Consistently Exceeded Allowable Amounts from Fiscal Years 2004 through 2013
paragraphs: Table 2 shows the FRCs’ actual adjusted carryover, allowable carryover,  and the amount over (or under) the allowable carryover at the end of  fiscal years 2004 through 2014.
Actual adjusted carryover exceeded the allowable amount for 10 of the 11  fiscal years because the FRCs’ total carryover (not adjusted for waivers)  increased gradually from the end of fiscal year 2004 through the end of  fiscal year 2013, as shown in figure 1. This occurred because new orders  received from customers generally met or exceeded the FRCs’ work  performed (revenue) for most of that period. As a result, the dollar amount  of carryover and the number of months of carryover increased.
Our analysis of total carryover (without adjustments) shows that the Navy  FRCs’ total carryover gradually increased from $602 million in fiscal year  2004 to $1,008 million in fiscal year 2014—a $406 million increase. Total  carryover increased because the accumulated dollar amount of new  orders accepted by the FRCs exceeded the accumulated dollar amount of  work performed by $406 million from the end of fiscal year 2004 through  fiscal year 2014. For fiscal years 2006, 2007, and 2011, new orders  exceeded revenue by $396 million and accounted for 98 percent of the  $406 million. As a result, carryover steadily increased from 3.3 months of  work at the end of fiscal year 2004 to 6.2 months of work at the end of  fiscal year 2014. Carryover reached a high point of 6.6 months of work for  fiscal year 2013. The number of months of carryover represents the  length of time required by the FRCs to work off the year-end carryover  amount before they run out of work and would need new orders from  customers to continue their operations. Different shops (such as aircraft,  engines, and components) would run out of work at different times during  the fiscal year depending on the amount of carryover for the individual  shops.
Navy headquarters and FRC officials stated that carryover exceeded  allowable amounts because orders received from customers exceeded  work performed by more than expected. Navy headquarters officials told  us that budgeting for new orders was affected by the anticipated  supplemental appropriations for overseas contingency operations. Navy  headquarters officials said that they did not include overseas contingency  operations orders in the budget because of the uncertainty related to the  amount of overseas contingency operations funds the Navy would receive  in the supplemental appropriations for depot maintenance work. Navy  headquarters and FRC officials and the budget documentation we  reviewed provided three reasons why new orders exceeded revenue by a  cumulative $406 million from the end of fiscal year 2004 through fiscal  year 2014.
For fiscal years 2006 and 2007, the FRCs received an increase in  orders from their customers in support of the Global War on  Terrorism.  In fiscal year 2011, the FRCs received a significantly greater amount  of orders to repair crash-damaged aircraft compared to prior years.  The workload was unplanned, and the aircraft required nonstandard  repairs, which necessitated both a long lead time obtaining parts and  engineering assistance for developing repair solutions on the aircraft,  which delayed work on the orders.
The FRCs began receiving an increased number of orders for the  repair of high flight hour F/A-18 Hornet aircraft in fiscal year 2011  because the F/A-18 Hornets experienced significant material  degradation as a result of the aircraft exceeding their design life.  Similar to crash-damaged aircraft, repairs on high flight hour F/A-18  Hornet aircraft required nonstandard repairs, which necessitated long  lead time for parts and engineering assistance for developing repair  solutions. Increased carryover that resulted from the receipt of orders  for the repair of crash-damaged and high flight hour aircraft is  discussed more fully later in the report.
section_title: Navy Did Not Consistently or Comprehensively Present Waiver Information That Affected Actual Adjusted Carryover in the Budget
paragraphs: Waivers to the carryover policy affect the actual adjusted carryover  calculation and may affect whether the adjusted actual carryover is over  or under the allowable amount. Our analysis of the carryover information  found that the FRCs complied with the DOD Financial Management  Regulation for calculating the allowable and actual adjusted carryover  amounts. Further, the Navy and the Office of the Under Secretary of  Defense (Comptroller) followed procedures for requesting and approving  waivers as contained in the DOD Financial Management Regulation.  However, the FRCs did not identify and report consistent or complete  waiver information for inclusion in the Navy Working Capital Fund budget  submission to Congress.
The FRCs develop their budget estimates, which are reviewed by Naval  Air Systems Command and Navy headquarters. These budget estimates  are then included in the Navy Working Capital Fund budget submission to  Congress. Each budget provides information for 3 fiscal years. For  example, the fiscal year 2014 budget contains information on (1) the fiscal  year 2014 budget, (2) the fiscal year 2013 revised budget, and (3) the  fiscal year 2012 actual information. Our analysis of Navy Working Capital  Fund budgets shows that the Navy inconsistently reported waiver  information and omitted certain waiver information. Specifically, the Navy  (1) presented a purpose for waivers to the carryover policy in one fiscal  year budget, but did not present the purpose for waivers in other fiscal  year budgets, and (2) did not report the dollar amount of each approved  waiver in any of the budgets we reviewed. Without the consistent and  complete reporting of waiver information, the congressional defense  committees did not have complete information for making budget  decisions. The following are two examples in which FRC carryover waiver  information was presented inconsistently or incompletely in the Navy  Working Capital Fund budgets.
In the FRC section of the fiscal year 2014 Navy Working Capital Fund  budget, which included the fiscal year 2012 actual carryover  information, the FRCs adjusted the fiscal year 2012 actual carryover  information for two approved carryover waivers totaling $132 million.  The approved waivers were for crash-damaged aircraft ($94 million)  and for orders received in the fourth quarter of the fiscal year from  another military service ($38 million). The fiscal year 2014 budget  provided the purpose for the first waiver but not the second. Further,  the FRCs did not provide the dollar amount for each waiver in their  fiscal year 2014 budget.  In the FRC section of the fiscal year 2016 Navy Working Capital Fund  budget, which included the fiscal year 2014 actual carryover  information, the FRCs adjusted the fiscal year 2014 actual carryover  information for three approved carryover waivers totaling $168 million.  The approved waivers were for (1) crash-damaged aircraft ($81  million), (2) orders received in the fourth quarter of the fiscal year from  other military services ($28 million), and (3) high flight hour F/A-18  Hornet aircraft ($59 million). The purpose for the first two carryover  waivers was included in prior fiscal year budgets, but the third waiver  was included for the first time in the fiscal year 2016 budget. Without  the new fiscal year 2014 waiver for high flight hour F/A-18 Hornet  aircraft, the FRCs’ actual carryover amount would have exceeded the  allowable amount for fiscal year 2014 by about $32 million instead of  being reported at $27 million under the allowable amount in the FRC  2016 budget. The Navy did not present the purpose or the amount of  each waiver in the FRC section of the fiscal year 2016 Navy Working  Capital Fund budget. Without this detailed waiver information, DOD  decision makers and congressional defense committees would have  difficulty determining the impact new waivers had on the carryover  amount either being over or under the allowable amount.
The Navy did not consistently or completely present FRC carryover  information associated with waivers in the FRC section of the Navy  Working Capital Fund budgets because, according to Navy officials, the  Financial Management Regulation describing the type of waiver  information to be included in the annual working capital fund budgets is  not specific. Specifically, the Financial Management Regulation does not  require the military services to identify the dollar amount and purpose of  each waiver in the budget. Complete information on waivers is critical  because a new waiver can affect whether the actual adjusted carryover is  over or under the allowable amount, as it did for fiscal year 2014. Internal  control standards state that policies, procedures, techniques, and  mechanisms are needed to enforce management’s directives. These  processes should provide reasonable assurance that relevant, reliable,  and timely information is communicated in financial reports, including  reports on budget execution, financial statements, and other reports for  internal and external use. The processes for calculating and reporting  carryover information in the annual FRC budgets are examples of such  controls. When carryover information related to approved waivers is not  presented consistently or completely in an agency’s budgets, federal  policymakers and program managers may not have the information  needed for decision making, increasing the risk that actions taken to  better achieve the agency’s missions will be ineffective.
section_title: FRC Actual Carryover Information Generally Exceeded Budget Estimates Because the FRCs Underestimated New Orders
paragraphs: The FRCs budgeted the carryover amount to be under the allowable  amount in 10 out of the 11 fiscal years we reviewed. In fiscal year 2004,  the budgeted amount was greater than the allowable amount by $40  million. In 10 of the 11 years, the actual carryover information was greater  than the budgeted carryover information by a low of $30 million in fiscal  year 2010 to a high of $285 million in fiscal year 2007. According to Navy  officials, these differences can be attributed to uncertainty in overseas  contingency operations orders or changing customer requirements after  budget preparations. Although the Navy has efforts ongoing to address  these two issues in the future, we found that the Navy’s guidance does  not require trend analysis. Such analysis could help ensure more  accurate estimates. Reliable budget estimates on carryover are critical  because decision makers use this information when reviewing the FRCs’  budgets. Table 3 summarizes the dollar amounts of actual adjusted and  budgeted adjusted FRC carryover that were over or under the allowable  dollar amounts and the differences, as shown in FRC budgets for fiscal  years 2004 through 2014.
From fiscal years 2004 through 2014, the FRCs budgeted to receive  about $21.8 billion in new orders, but they actually received about $22.5  billion in new orders, as shown in table 4. As a result, the FRCs’ budgets  underestimated new orders received from customers by a cumulative  total of $671 million over the 11-year period we reviewed. Because more  orders were received than expected, this affected the amount of work to  be performed and, in turn, the amount of work that would carry over at the  end of the fiscal year. Notably, for the 6 consecutive fiscal years from  fiscal year 2007 through fiscal year 2012, actual new orders exceeded  budgeted new orders each year, for a cumulative total of over $1.6 billion.  For the other 5 fiscal years, budgeted new orders exceeded actual new  orders. Table 4 compares the dollar amounts of FRC actual and budgeted  new orders and the difference between these amounts for fiscal years  2004 through 2014.
Navy officials acknowledged that the FRCs had difficulty accurately  budgeting for new orders, as shown above. The officials stated that the  FRCs develop their budgets based on information from customers. The  officials also stated that the budgeted new order amounts are based on  the amounts of appropriated funds included in the customers’ budgets  that are expected to be used for orders placed with the FRCs. Because  customers’ budgets are prepared about 2 years before the execution of  actual work, customer requirements may change from the time they  prepare their budgets to the time the orders are placed with the FRCs.  Differences between budgeted and actual new orders for specific fiscal  years, as shown in table 4 are discussed below.
For fiscal years 2004 through 2006, Navy officials stated that actual  new orders were less than budgeted new orders because of lower  customer demand for components.
For fiscal years 2007 through 2012, Navy officials stated that the  FRCs underestimated the amount of new orders because workload  for overseas contingency operations was not included in the budgeted  amounts. This occurred because the Navy was uncertain of the  amount of funds the FRCs would receive in the supplemental  appropriations for depot maintenance work.
For fiscal years 2013 and 2014, Navy officials stated that actual  customer orders were below budgeted amounts because of the  uncertainties associated with the implementation of the Budget  Control Act of 2011. In addition, officials stated that the Navy FRCs’  primary customers experienced a fiscal year 2013 reduction in  operation and maintenance funds because of excess carryover,  resulting in the FRCs receiving fewer orders.
To address these concerns about budgeting for orders, Navy officials  stated that beginning with the fiscal year 2015 FRC budget, budgeted  order amounts for overseas contingency operations were included in the  budgeted amounts. Further, the Navy officials acknowledged that  improved communication between the FRCs and their customers is  needed to better ensure that budgeted orders are in line with customer  demand. The officials stated that the FRCs are working with their  customers so that the FRCs receive more reliable new order information  to include in their future budgets. According to the officials, the  combination of these two actions should help reduce the difference  between budgeted and actual new orders in the future.
Although these two actions could help to improve future budgeted  carryover information, we found that Naval Air Systems Command budget  guidance does not require the FRCs to develop trend data on actual  orders that could be used in developing budget estimates. Analyzing  trends in budgeted to actual carryover data could be useful in assessing  the reliability of budgeted data and developing more reliable budget  estimates, but we found that the Naval Air Systems Command budget  guidance does not require such analysis. Navy officials agreed that the  guidance does not require the FRCs to develop trend data on actual  orders. If the FRCs compared budgeted and actual orders for individual  customers and identified variances, they could identify individual  customers that consistently underestimate budgeted orders. The FRCs  could then discuss the reliability of the estimates with these customers  and make adjustments as necessary. Internal control standards state that  managers need to compare actual performance to planned or expected  results and analyze significant differences. By conducting such trend  analysis, the FRCs could ensure that budgeted carryover data they  provide to decision makers are more accurate and reliable.
section_title: Four Key Drivers Led to Carryover at the End of Fiscal Years 2013 and 2014, and the Navy Has Actions Under Way to Address Some of Them
paragraphs: Our analysis of 60 orders (and related amendments) with the largest  amounts of carryover for fiscal years 2013 and 2014 (the most recent  data available) identified four key drivers for carryover. These were (1)  work that was scheduled to begin in the fourth quarter of the fiscal year  that carried over into the next fiscal year, (2) orders for work on high flight  hour F/A-18 Hornet aircraft, (3) orders for work on crash-damaged  aircraft, and (4) orders involving parts shortages that delayed the  performance of work. The Navy has actions under way to address  carryover associated with the high flight hour F/A-18 Hornet aircraft and  parts shortages. Actions to address the first driver are not necessary  because fourth quarter orders are part of the normal business process,  and any actions to address the third driver, crash-damaged aircraft, are  limited because of the unique and unpredictable nature of the volume of  and damage to aircraft and need for repairs.
subsections: section_title: Work on Orders Began in the Fourth Quarter of the Fiscal Year Resulting in Work Carrying Over into the Next Fiscal Year
paragraphs: Our analysis of 60 orders (and related amendments) for fiscal years 2013  and 2014 determined that 33 orders involved work that was scheduled to  begin in the fourth quarter of the fiscal year and carry over into the next  fiscal year. As discussed earlier in the report, some carryover is to be  expected and is appropriate at the end of the fiscal year in order for the  FRCs to operate efficiently and effectively. Without sufficient carryover,  FRC officials stated that the FRCs could not (1) ensure that enough  funded work would be available to continue operations into the next fiscal  year and (2) retain the appropriate number of personnel with sufficient  skill sets to perform depot maintenance work. Adequate carryover is  particularly important when DOD operates under a continuing resolution,  which results in FRC customers not receiving their full-year appropriations  at the beginning of the fiscal year. This, in turn, may cause the FRCs to  operate for several months into the next fiscal year relying mostly on  funded work from prior year orders to continue operations because of the  limitations on the amount of new orders customers may place with the  FRCs at the beginning of the fiscal year in light of budget uncertainties.  Carryover provides the FRCs the continuity of funded workload necessary  to maintain operations from one year to the next. The following example  shows how work started in the last quarter of the fiscal year results in  work carrying over into the following fiscal year.
In July 2013, FRC Southeast accepted an order totaling $26.5 million to  repair 160 engine modules for the F414 engine, which is used in the F/A- 18 Super Hornet. The order was amended in August 2013 to increase  quantities to 197 engine modules and increase funding to $32.4 million.  According to FRC Southeast officials, the work on an engine module  should take from 16 to 67 days, depending on which engine module is  being repaired. Because of the number of engine modules to be repaired  and the repair time necessary per module, FRC Southeast did not have  sufficient time to complete the work on this order in fiscal year 2013 and  thus carried over $28.3 million of the $32.4 million into fiscal year 2014.  All work was completed on this order in May 2014.
section_title: Work on High Flight Hour F/A-18 Hornet Aircraft Contributed to Carryover
paragraphs: Our analysis of 60 orders (and related amendments) for fiscal years 2013  and 2014 determined that work on high flight hour F/A-18 Hornet aircraft  contributed to carryover on 9 orders. One of the primary workloads at  FRC Southwest and FRC Southeast is the F/A-18 Hornet. The first  aircraft was manufactured in the late 1970s and became operational in  the early 1980s. As an aircraft ages, it incurs additional inspections and  structural repairs when required. One of those additional inspections  occurs when an aircraft reaches 8,000 flight hours. The high flight hour  aircraft inspections and repairs contributed to carryover because (1)  structural repairs generally require more time to complete than  nonstructural repairs and (2) work on the high flight hour aircraft delayed  work on other F/A-18 aircraft because there were not enough FRC  engineers and artisans, support equipment, and facilities. Figures 2 and 3  are photographs of work on high flight hour F/A-18 Hornet aircraft being  performed at an FRC.
When the FRCs receive high flight hour F/A-18 Hornet aircraft for  inspection and, if necessary, for structural repairs, the FRCs perform a  detailed inspection of the aircraft to identify structural weaknesses, such  as metal fatigue and cracks in the aircraft, and determine what needs to  be repaired. Next, the FRCs prepare a request for engineering  information to obtain engineering support to develop repair solutions for  the damaged areas of the aircraft. Structural repairs needed to fix the  aircraft are nonstandard repairs that must be designed and approved by  FRC engineers. According to FRC engineers and engineering information  documents we reviewed, it may take as long as a year or more for an  engineer to determine and document the step-by-step instructions  needed to repair the aircraft. During this time, the FRCs order the  required parts from the DOD supply system to repair the aircraft. If the  parts are not in DOD’s supply system, the FRCs either manufacture them  or order them from a contractor. The length of time to determine what  needs to be repaired, design a repair solution, and obtain or manufacture  the parts needed to make the repairs contributed to carryover on the  orders. The following two examples describe work performed on high  flight hour F/A-18 Hornet aircraft that contributed to carryover.
In October 2012, FRC Southwest accepted an order totaling $1.8  million to perform inspections and repairs on 5 high flight hour F/A-18  Hornet aircraft. This order was amended 14 times in fiscal year 2013  to increase the number of aircraft to 21 and increase funding to $8.0  million. FRC Southwest did not complete work on any aircraft on this  order in fiscal year 2013 because FRC Southwest was already  working on other high flight hour aircraft from prior year orders. As a  result, FRC Southwest carried over $6.3 million on this order into  fiscal year 2014. In fiscal year 2014, the order was amended twice,  the number of aircraft was reduced from 21 aircraft to 20 aircraft, and  the funding was reduced to $7.6 million. The work completion date  was extended into fiscal year 2015. As of the end of fiscal year 2014,  FRC Southwest carried over $3.7 million on this order into fiscal year  2015 and still needed to complete work on 18 of the 20 high flight  hour aircraft.
FRC Southwest officials informed us that orders for high flight hour  work from prior fiscal years delayed work on the fiscal year 2013 high  flight hour order. For example, 15 high flight hour F/A-18 Hornet  aircraft on fiscal years 2011 and 2012 orders required replacement of  two structural components in the back section of the aircraft. To  design the supporting step-by-step instructions for the removal and  replacement of the structural components, 18 months and 5,100 work  hours of nonrecurring engineering was required. The actual  replacement of the structural components on each aircraft by FRC  Southwest machinists, sheet metal workers, electricians, and  mechanics required approximately 2,500 labor hours to complete.  During the replacement procedure, the F/A-18 Hornets were placed in  holding fixtures to stabilize the aircraft. Replacement of the structural  components took about 16 to 18 weeks. FRC Southwest only had a  limited number of personnel, holding fixtures, and available facilities  (floor space) that could be used for this type of work. This delayed  work on the fiscal year 2013 high flight hour order and work on other  F/A-18 orders at FRC Southwest in fiscal years 2013 and 2014.
In fiscal year 2013, FRC Southeast accepted an order totaling $17  million with amendments to perform modifications to 14 F/A-18 Hornet  aircraft. FRC Southeast did not complete work on any aircraft from  this order in fiscal year 2013 because of the number of high flight hour  aircraft already in process for repair. Because of engineering issues  related to the high flight hour aircraft, FRC Southeast carried over  $16.9 million on this order into fiscal year 2014.
According to FRC Southeast officials and our review of order  documentation, 6 of the 14 F/A-18 Hornet aircraft on this order are  high flight hour aircraft. According to FRC Southeast officials, the  major constraint in the repair process is the limited number of  engineers FRC Southeast has to perform the tasks associated with  repairing high flight hour aircraft. This limits the number of all F/A-18  Hornet aircraft—including non-high flight hour aircraft—that can be  worked on and completed in a timely manner. Non-high flight hour  aircraft are affected since these aircraft cannot move through the  process because of the time spent working on high flight hour aircraft.  This decrease in production has led to an increase in the number of  aircraft in process at the end of the fiscal year and contributed to  carryover. Because of the engineering constraint associated with high  flight hour aircraft, FRC Southeast was only able to complete work on  1 F/A-18 Hornet aircraft on this fiscal year 2013 order and carried over  $16.1 million on this order into fiscal year 2015.
To show the magnitude of carryover associated with the F/A-18 Hornet  program, we obtained and analyzed carryover associated with that  program for fiscal years 2011 through 2014. Table 5 provides information  on the dollar amounts of carryover and the number of months of carryover  for work on the F/A-18 Hornet at FRC Southeast and FRC Southwest.
As shown in table 5, the total months of carryover for F/A-18 Hornet  aircraft work increased from 15 months to 25 months from fiscal year  2011 to fiscal year 2014. Because of the large dollar amount and number  of months of carryover associated with F/A-18 Hornet aircraft, we  obtained and analyzed production documentation for all F/A-18 Hornet  aircraft and high flight hour F/A-18 Hornet aircraft from fiscal years 2010  through 2014. Table 6 provides information on the number of high flight  hour and total F/A-18 Hornet aircraft for FRC Southeast and Southwest  that were (1) accepted for repair, (2) in process at fiscal year-end, and (3)  completed at the end of the fiscal year for fiscal years 2010 through 2014.
As shown in table 6, our analysis identified the following information  related to the F/A-18 Hornet workload.
The number of high flight hour F/A-18 Hornet aircraft accepted for  repair was more than the number of high flight hour F/A-18 Hornet  aircraft completed in each of the 5 fiscal years. As a result, the  number of high flight hour F/A-18 Hornet aircraft in process steadily  increased from 14 at the end of fiscal year 2010 to 92 at the end of  fiscal year 2014.
The number of total F/A-18 Hornet aircraft accepted for repair was  more than the number of F/A-18 Hornet aircraft completed each year,  except for fiscal year 2014. As a result, the number of total F/A-18  Hornet aircraft in process increased from 84 at the end of fiscal year  2010 to 190 at the end of fiscal year 2013 and then slightly decreased  to 184 at the end of fiscal year 2014. According to FRC Southwest  officials, the reason for the improvement in fiscal year 2014 was that  FRC Southwest focused on completing non-high flight hour aircraft  during the last part of the fiscal year.
FRC officials acknowledged that they need to increase production for the  F/A-18 Hornet aircraft and have taken the following actions to do so. First,  FRC Southeast has implemented and FRC Southwest was in the process  of implementing critical chain project management. A central tenet of  critical chain project management is to limit work in process on the F/A-18  Hornet aircraft to the capacity of whatever constraints may be in place.  FRC Southeast identified a lack of engineers as the constraint and 17 to  20 as the optimum number of aircraft to be worked on at one time. As a  result, FRC Southeast stopped work on several aircraft and placed these  aircraft in a work-stop (frozen) category to enable production and  engineering to focus on the 17 to 20 aircraft. FRC Southeast officials  informed us that to increase production, it hired 20 engineers in fiscal  year 2014 and plans to hire 15 engineers and 20 to 25 artisans in fiscal  year 2015. Similarly, FRC Southwest identified a lack of artisans and  engineers as the constraint and 43 as the optimum number of aircraft to  be worked on at one time. FRC Southwest officials informed us that it  hired 5 engineers and 29 artisans in fiscal year 2014 and plans to hire 28  engineers and 66 artisans in fiscal year 2015. In addition, FRC Southwest  is renovating a hangar to provide additional work space for the work flow  of the F/A-18 Hornet.
Furthermore, the Navy is developing a comprehensive service life  extension program for the F/A-18 Hornet to extend its useful life beyond  8,000 flight hours. Modifications to the aircraft resulting from the service  life extension program are expected to extend the airworthiness of F/A-18  Hornet aircraft to 10,000 flight hours. According to Navy officials,  engineering for the F/A-18 Hornet service life extension program is  expected to be completed in 2017, and final modifications to the aircraft  are expected to be ready for implementation in 2019.
section_title: Repair of Crash-Damaged Aircraft Contributed to Carryover
paragraphs: Our analysis of 60 orders (and related amendments) for fiscal years 2013  and 2014 determined that 10 orders involved crash-damaged aircraft. For  crash-damaged aircraft, the requirements to repair the aircraft are largely  unknown prior to inspection, and the repair solutions are based on the  damage and therefore unique to each aircraft. Our discussions with Navy  FRC officials and a review of supporting documentation found that in  fiscal years 2013 and 2014, the Navy FRCs had $82.8 million for 27  aircraft and $81.1 million for 32 aircraft, respectively, in carryover on  orders to repair crash-damaged aircraft. These crash-damaged aircraft  incurred damage from incidents that included midair collisions, fire/heat  damage, combat damage, accidents causing wing and fuselage cracks,  and arresting/landing gear mishaps. Figures 4 and 5 are photographs of  collision or fire damage on F/A-18 Super Hornet aircraft.
When crash-damaged aircraft arrive at the FRCs for repair, the FRCs  inspect the aircraft for damage and determine what needs to be repaired.  Similar to when repairs are identified on high flight hour F/A-18 Hornet  aircraft, the FRCs require engineering support to develop repair solutions  for the damaged areas of the aircraft. As engineering develops the repair  solutions, the FRCs order the required parts from the DOD supply  system, or if the parts are not in DOD’s supply system, the FRCs  manufacture the parts or order them from a contractor. In some cases,  the FRCs manufacture parts based on the unique damage to the aircraft  and the parts needed to repair the damage. Once the repair solutions are  determined and parts are obtained, the FRCs can repair the aircraft. The  entire process can take 2 or more years to complete, depending on what  needs to be repaired on the aircraft. The following are two carryover  examples of crash-damaged aircraft orders on the F/A-18 Super Hornets  at FRC Southwest.
In August 2011, FRC Southwest accepted an order totaling $24  million to repair damage on one F/A-18 Hornet aircraft and two F/A-18  Super Hornet aircraft. This order was amended four times from  January 2013 through January 2014 to decrease the funding to $22.0  million, remove the F/A-18 Hornet aircraft, and extend the work  completion date into fiscal year 2015 for the two F/A-18 Super Hornet  aircraft. Because of delays in receiving the parts to repair the aircraft  and to complete the engineering services needed to determine the  individual tasks to repair the aircraft, FRC Southwest carried over  $21.7 million on this $22.0 million order into fiscal year 2014.
One of the F/A-18 Super Hornet aircraft experienced a landing gear  brake fire causing substantial damage to its center fuselage, main  landing gear, and right inner wing panel and was awaiting wing skins  from the manufacturer. No repair parts were available from an  alternate source, and FRC Southwest has no capability to  manufacture the parts. The other F/A-18 Super Hornet aircraft  experienced an engine fire causing substantial damage and rendering  the aircraft unable to fly. This aircraft was being analyzed by FRC  Southwest to determine what needed to be repaired and to develop a  repair solution. Furthermore, for both of these aircraft, engineering  and logistics support will be needed to research and identify the parts  needed to accomplish the repairs to the structure of the aircraft.  Finally, repairs on the aircraft are expected to be further delayed  because FRC Southwest does not have a sufficient number of  qualified artisans to perform the work on the aircraft and available  floor space to begin the repairs. Consequently, as of the end of fiscal  year 2014, the carryover was $21.5 million on this $22 million order  initially accepted in August 2011.
In July 2011, FRC Southwest accepted an order totaling $18.7 million  to perform special rework on one F/A-18 Super Hornet aircraft that  was involved in a midair collision with another Navy aircraft. This  order was amended five times from July 2011 through January 2014  to increase the funding to $20.8 million and to extend the work  completion date into fiscal year 2015. This aircraft had substantial  damage to its airframe, wings, and flight control surfaces, rendering  the aircraft unable to fly. As a result, this aircraft is being used as a  prototype for a replacement of the center fuselage section on an F/A- 18 Super Hornet. In order for FRC Southwest to make this repair it will  need (1) a Super Hornet alignment fixture that holds the aircraft during  the repair process and (2) engineering and logistics support services  to research and identify the parts needed to accomplish the repairs to  the structure of the aircraft. Consequently, as of the end of fiscal year  2014—more than 3 years after the order was accepted—carryover  was $18.2 million on this $20.8 million order.
section_title: Parts Needed to Perform Work Were Not Readily Available and Contributed to Carryover
paragraphs: Our analysis of 60 FRC orders (and related amendments) for fiscal years  2013 and 2014 determined that parts shortages contributed to carryover  on 12 orders. Parts were not available to perform the work because the  DOD supply system did not maintain sufficient parts in the right mix to  meet demand because of inaccurate forecasts of parts needed to perform  the work. Without the DOD supply system maintaining the right mix and  sufficient quantities of spare parts, the FRCs cannot complete their  funded workload timely and efficiently. In order to obtain parts from the  DOD supply system, the FRCs order them through the Defense Logistics  Agency (DLA). However, if DLA is unable to provide the parts, the FRCs  may use other methods to obtain the parts, such as obtaining parts from  other assets (e.g., aircraft or engines), manufacturing the parts, or  obtaining the parts through use of their local procurement authority. If the  FRCs manufacture the parts, they must have the raw material to perform  the work and obtain the specifications of the parts to be made. While  these methods allow work to continue, obtaining the needed parts this  way is inefficient.
Most of the parts shortages that we identified were for component work  performed at FRC East, which is largely responsible for repairing  components used on end items in military equipment, such as the H-53  helicopter. Our analysis of FRC East orders for fiscal years 2013 and  2014 determined that FRC East had problems obtaining parts to repair  components used on the H-53 helicopter and on various engines.  Specifically, work at FRC East was discontinued on 845 and 1,074  components at the end of fiscal years 2013 and 2014, respectively. In  these instances, the items were packed in storage boxes or containers  and sent to a warehouse until the needed parts were obtained. Once  parts were obtained, the items were sent back to the production area for  repair. According to FRC East officials and our analysis of FRC East parts  shortage data, the average length of time that an item was maintained in  the warehouse because work was discontinued because of lack of parts  was 147 days and 148 days in fiscal years 2013 and 2014, respectively.  Table 7 shows the aging schedule of the items for which work was  discontinued because of lack of parts at FRC East as of September 2014.
The following example illustrates how parts shortages contributed to  carryover. In fiscal year 2013, FRC East accepted an order with  amendments totaling $84.4 million to repair 4,087 components for the H- 53 helicopter. FRC East began work on the components in October 2012.  According to officials and our review of FRC East production data, work  was not completed on 641 components at the end of fiscal year 2013  because FRC East could not obtain parts to perform the work. Some of  the parts that FRC East could not obtain were spur gears, sleeve  assemblies, and piston assemblies. Because of these parts shortages,  work was delayed, and FRC East carried over $35.9 million into fiscal  year 2014. During fiscal year 2014, FRC East continued work on the  order, but it did not complete the work on 197 components by the end of  the fiscal year because it still could not obtain the parts needed to perform  the work. Because of these parts shortages, FRC East carried over $10.5  million on this fiscal year 2013 order into fiscal year 2015.
To address these parts shortages and their effect on carryover, the FRCs  have taken action to improve their parts management process.  Specifically, the FRCs, in collaboration with DLA, implemented the  Inventory Management and Stock Positioning system. This inventory  system integrates DLA and Navy supply systems to allow for increased  visibility of inventory items by both the FRCs and DLA and streamlines  direct material ordering to DLA to provide parts to the FRCs when  needed. The Inventory Management and Stock Positioning system was  implemented at FRC Southwest in June 2013, FRC Southeast in October  2013, and FRC East in April 2014. It is too soon to determine whether  carryover associated with parts shortages will be reduced as a result of  the recent implementation of this system because it can take up to 18  months or more to obtain long lead time inventory items.
According to FRC and DLA officials, the key information required under  the Inventory Management and Stock Positioning system is the gross  demand plan, which provides eight quarters of data on the parts needed  at the FRCs. The new system is intended to improve forecasting of parts  needed to perform work. In order for the gross demand plan to accurately  forecast demand for parts, the bill of materials (parts needed to repair end  items) and replacement factors need to be accurate. FRC officials stated  that they perform validations of parts requirements against the bill of  materials and verifications of replacement factors to ensure the gross  demand plan is accurate. To maintain the accuracy of the gross demand  plan, the FRCs validate the bill of materials and replacement factors on a  continuing basis.
section_title: Conclusions
paragraphs: Our review found that for the period from fiscal year 2004 through fiscal  year 2014, the FRCs’ adjusted carryover was over the allowable amount  in all years but fiscal year 2014. Further, we found that during this period,  the Navy did not consistently or comprehensively identify the purpose and  amount for waivers in its budgets to Congress. This occurred because the  DOD Financial Management Regulation did not include specific  requirements for the waiver information to be included in the budgets  submitted to Congress. Without consistent and complete reporting of  waiver information, policymakers do not have complete information for  making informed budget decisions. Furthermore, budget estimates were  generally less than actual carryover because the FRCs underestimated  new orders to be received from customers. While the Navy has taken  action to include all orders, including orders funded for overseas  contingency operations in its budgets, its budget guidance does not  require the FRCs to develop trend data on actual orders that could be  used in developing more reliable budget estimates. Reliable carryover  information is essential for Congress and DOD to effectively perform their  oversight responsibilities, including reviewing and making well-informed  decisions on the FRCs’ budget.
section_title: Recommendations for Executive Action
paragraphs: We are making three recommendations to the Secretary of Defense to  improve budgeting for carryover.
We recommend that the Secretary of Defense direct the Under Secretary  of Defense (Comptroller) to clarify existing guidance in the DOD Financial  Management Regulation to require that the purpose and amount of each  carryover waiver be included in the military services’ future annual budget  submissions to Congress.
We recommend that the Secretary of Defense direct the Secretary of the  Navy to direct the FRCs to provide the purpose and amount of all  approved carryover waivers that will be included in future annual budget  submissions to Congress.
We recommend that the Secretary of Defense direct the Secretary of the  Navy to direct Naval Air Systems Command to augment its budget  guidance to include an analysis of trend data on actual order information  that affects carryover and adjust budget estimates as necessary.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOD for comment. In its written  comments, which are reprinted in appendix II, DOD concurred with the  three recommendations and cited actions planned or under way to  address them. Specifically, in response to our recommendations related  to including the purpose and amount of each carryover waiver in the  military services’ future annual budget submissions to Congress, DOD  commented that it has added a clarifying statement to a draft revision of  the DOD Financial Management Regulation that will be effective for the  fiscal year 2017 President’s budget and subsequent budgets. In addition,  DOD stated that the Office of the Under Secretary of Defense  (Comptroller) will ensure that the purpose and amount of each approved  carryover waiver will be included in all future annual budget submissions  to Congress. In response to our recommendation relating to analyzing  trend data on actual order information that affects carryover and adjusting  budget estimates as necessary, DOD stated that the Office of the Under  Secretary of Defense (Comptroller) will evaluate whether an analysis of  trend data on actual year-end order information that affects carryover was  included as a factor for the fiscal year 2017 President’s budget. DOD  stated that as part of its review process, the Office of the Under Secretary  of Defense (Comptroller) will hold discussions with the Navy to ascertain  how prior year trends were incorporated into the carryover estimates,  including an evaluation of deviations between actual and budgeted  carryover for fiscal year 2015.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretary of the Navy, and the  Under Secretary of Defense (Comptroller). In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-9869 or khana@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors to this report are listed in appendix  III.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the extent to which the Navy Fleet Readiness Centers’  (FRC) actual carryover differed from the allowable amounts from fiscal  years 2004 through 2014 and the reasons for any differences, we  obtained and analyzed FRC reports and Navy Working Capital Fund  budget estimates submitted to Congress that contained information on  actual carryover and the allowable amount of carryover for fiscal years  2004 through 2014. We analyzed carryover since fiscal year 2004  because prior to fiscal year 2004, the Department of Defense (DOD) had  a different policy for determining the allowable amount of carryover. We  met with responsible officials from Navy headquarters and the FRCs to  determine the reasons for variances between actual carryover and the  allowable amount. Further, we identified and analyzed any adjustments  made by the Navy that increased the allowable carryover amounts or  reduced the amount of carryover. We reviewed DOD’s guidance for  waivers to the carryover policy and discussed any waivers with officials  from the Office of the Under Secretary of Defense (Comptroller), Navy  headquarters, and the FRCs to obtain explanations for the waivers.
To determine the extent to which the Navy FRCs’ reported budget  information on carryover differed from reported actual information on  carryover from fiscal years 2004 through 2014 and the reasons for any  differences, we obtained and analyzed FRC reports and Navy Working  Capital Fund budget estimates submitted to Congress that contained  information on budgeted and actual new orders, revenue, and carryover  data for fiscal years 2004 through 2014. We analyzed carryover since  fiscal year 2004 because prior to fiscal year 2004, DOD had a different  policy for determining the allowable amount of carryover. We met with  responsible officials from Navy headquarters and the FRCs to determine  the reasons for variances between budgeted and actual new order,  revenue, and carryover amounts. We also met with these officials to  discuss actions the Navy was taking to improve budgeting and  management of carryover, including reducing carryover amounts.
To determine the key drivers for orders with large carryover balances for  fiscal years 2013 and 2014 and the actions, if any, the Navy’s FRCs are  taking or planning to take to reduce carryover, we met with responsible  officials from Navy headquarters and FRCs to identify contributing factors  that led to carryover. We focused on fiscal year 2013 and 2014 carryover  balances to identify current issues contributing to carryover. We also  performed walk-throughs of the three FRCs’ depot maintenance  operations to observe the work being performed and discussed with  officials the causes for workload carrying over from one fiscal year to the  next. Further, to corroborate the information provided by FRC officials, we  obtained and analyzed 60 orders (30 orders each for fiscal years 2013  and 2014) that had the largest dollar amounts of carryover. Carryover  amounts associated with these orders represented 38 percent and 33  percent of the FRCs total carryover for fiscal years 2013 and 2014,  respectively. We reviewed the orders and amendments for each of the  orders and discussed the information in these documents with the three  FRCs to determine the causes for the carryover. We summarized and  categorized the results. We also discussed and obtained documentation  on the actions the FRCs are taking to better manage and reduce  carryover.
We obtained the financial and logistical data in this report from official  budget documents and the Defense Industrial Financial Management  System used by the FRCs. 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  Navy officials knowledgeable about the carryover data, (3) reviewed GAO  reports on depot maintenance activities, and (4) reviewed customer  orders submitted to the FRCs 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 Office of the Under Secretary of Defense (Comptroller) and the  Office of the Assistant Secretary of the Navy (Financial Management and  Comptroller), Washington, D.C.; Naval Air Systems Command and  Commander FRCs at Naval Air Station Patuxent River, Maryland; FRC  East at Marine Corps Air Station, Cherry Point, North Carolina; FRC  Southeast at Naval Air Station, Jacksonville, Florida; and FRC Southwest  at Naval Air Station North Island, San Diego, California.
We conducted this performance audit from June 2014 to June 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Greg Pugnetti (Assistant  Director), Steve Donahue, Keith McDaniel, and Hal Santarelli made key  contributions to this report.