Nonappropriated Funds: Opportunities to Improve DOD's Concessions Committee
Released: 1998-04-30T00:00:00

Letter

Background

The Concessions Committee succeeded the Pentagon Post Restaurant Council, which was established in 1942 by the Secretary of the War Department. The Council managed the cafeterias and allied operations, including a drugstore, newsstand, and shoe shine and repair shop. The Committee was created and operates pursuant to the Secretary of Defense’s statutory authority under 10 U.S.C. 133 and is responsible for providing for the administration, operation, and control of services deemed essential to the health, welfare, and morale of employees and for the convenience of the government. The Committee is a nonappropriated fund instrumentality serving civilian and military employees in the Pentagon and the Navy Annex.

Specifically, the Committee issues contracts to others for the provision of all food services, 331 vending machines, and 33 activities providing retail goods and personal services. (See app. I for a listing of activities.) During fiscal year 1997, these activities generated sales of approximately $30 million, resulting in nearly $3.3 million in revenues for the Committee. The Committee uses its revenues to provide funding to six civilian MWR funds benefiting military and civilian employees working in the Pentagon and the Navy Annex after paying its operational costs. The MWR funds use the contributions from the Committee to pay administrative and operating expenses and to subsidize welfare and recreation activities, including discount tickets to sporting and cultural events and group events.

The Director of Administration and Management, Office of the Secretary of Defense, is responsible for overseeing the Committee’s operations. The Committee has eight members, including representatives from each of the military services and the Office of the Secretary of Defense (see app. II). The Committee employs four full-time staff, paid from nonappropriated funds, including a business manager who is responsible for day-to-day operations. The current manager, who had extensive experience with the Army and Air Force Exchange Service, has been employed in his current capacity for more than 10 years.

Financial Data Reflect a Profitable Operation

The Concessions Committee does not receive appropriated funds. It generates its revenues, about $3.3 million for fiscal year 1997, primarily by charging concessionaires and others a fee for operating in the Pentagon or the Navy Annex.

Although the Committee does not directly receive any appropriated funds, it (1) received equipment, with a net book value of $349,997, in 1992 and 1996, when it assumed certain operations previously performed by appropriated activities and (2) has the benefit of a board of directors and legal counsel whose salaries are paid for by appropriated activities—a practice that is consistent with other DOD nonappropriated fund instrumentalities. Serving as a committee member is a collateral duty for all of these personnel.

Between fiscal year 1994 and 1997, the Committee used, on average, over 76 percent of its revenues to pay its expenses, including general and administrative costs, and operating expenses associated with the food service and other concessionaire operations. The remaining funds were available for funding future operations, capital expenditures, and contributions to civilian MWR funds. The Committee prepares annual financial statements that detail its revenues and expenses and that are audited by an independent public accounting firm.

Independent Financial Statement Audits Performed

The Committee received unqualified opinions on its fiscal year 1997 and 1996 financial statements based on audits performed by the independent public accounting firm. Our review of the audit reports and supporting workpapers did not identify any instances where the audits appeared to deviate from generally accepted government auditing standards. The independent public accounting firm, which specializes in nonappropriated fund MWR audits, has audited the Committee’s financial statements for the past 50 years. The partner-in-charge of the audits since 1993 could not recall any significant reportable problems identified during work at the Committee.

Findings or recommended operational improvements identified during the audits that do not affect the reliability of financial statements are generally communicated through management letters. On February 16, 1998, the independent public accounting firm issued a management letter to the Committee resulting from its fiscal year 1997 audit. The accounting firm recommended that, for internal control purposes, more than one person be involved in processing cash receipts from temporary concessionaires,the food service inventory process be moved closer to year end, and a new general ledger account be created to report bad debt expense. The Committee Chairman told us he agreed with the recommendations and asked the business manager to provide information on implementation plans. No management letter was issued for fiscal year 1996.

Committee’s Operations Generate Revenue and Net Income

The Committee’s revenues have averaged $2.8 million a year since 1994 while its expenses have averaged $2.1 million. From fiscal year 1994 to 1997, the Committee declared MWR contributions ranging from $500,000 to $625,000. MWR contributions, as a percentage of net income during the same period, ranged from a high of 102 percent in fiscal year 1994 to a low of 77 percent in fiscal year 1997. Earnings that were not used to pay expenses or MWR contributions were retained by the DOD Concessions Committee for future use in purchasing new equipment, funding renovations, and paying operating expenses. Table 1 documents concessionaire sales and the Committee’s revenues, expenses, net income, MWR contributions declared, and MWR contributions declared as a percentage of net income.

Revenues Are Primarily From Concessionaire Contracts

All of the Committee’s revenues result from fees it charges concessionaires for operating in the Pentagon and the Navy Annex. The Committee does not engage in resale activities. Rather, the Committee competitively solicits proposals, seeking a fee arrangement that is based on the type of activity—a percentage of sales and/or a flat fee that is based on space occupied. Following its review of the competitive proposals, it makes a tentative selection that is submitted to the Director of Administration and Management, Office of the Secretary of Defense, for final approval. Once approved, the fee arrangement becomes part of the contractual agreement between the Committee and the concessionaire. During fiscal year 1997, concessionaire activities accounted for over $3.1 million of the Committee’s total $3.3 million in revenues. Interest earnings accounted for most of the remaining revenue.

Most Expenses Directly Relate to Concessionaire Activity

The Committee’s major expenses involve food service concessions expenses, such as depreciation and equipment repair and maintenance; other concessions expenses, such as space rent, parking lot costs, and vending commission expenses; and administrative and general expenses, such as salaries and benefits. During fiscal year 1997, expenses totaled about $2.5 million (76 percent of total revenue), of which $2.1 million represented concessionaire expenses and $0.4 million represented administrative and general expenses.

Reporting and Oversight Requirements Differ From Other Nonappropriated Fund Instrumentalities

In its June 16, 1997, report, the National Security Committee, House of Representatives, expressed concern that the Concessions Committee was operating without adequate congressional oversight and coordination. Although the Committee’s operations are reviewed by a high level official within the Office of the Secretary of Defense, the Committee is not subject to the reporting and oversight requirements of other nonappropriated fund instrumentalities. Information on the financial activities of the other nonappropriated fund instrumentalities is reviewed centrally within the Office of the Secretary of Defense and submitted to the Congress through the military services.

Other nonappropriated fund instrumentalities are required to submit financial data to the Office of the Assistant Secretary of Defense for Force Management and Policy, which uses this information to perform statistical comparative analyses and to monitor the performance indicators. These instrumentalities also submit information through the heads of their military components that is consolidated into reports to the Congress. For example, the Army and Air Force Exchange Service prepares an annual report summarizing its resale and concessions activities in the United States and overseas.

The Committee’s operations are overseen by the Director, Administration and Management, Office of the Secretary of Defense. The Director’s responsibilities include approving the minutes of all Committee meetings and all contracts and other transactions that exceed $2,500. The Director is the final decisionmaker for all business activities. Reports of the Committee’s activities and plans are not submitted to any other offices within the Office of the Secretary of Defense or included in any external reports. Similarly, the Committee’s financial statements are not submitted to any other office or consolidated into external financial reports.

Operating Procedures Are Not Specified

The Committee’s current operating guidance does not specify the procedures by which the Committee is to exercise its authority or the types of goods and services that can be offered by concessionaires. In the absence of specific operating procedures, the Committee has elected to follow Army regulations applicable to nonappropriated fund instrumentalities. While the Committee has chosen to follow these regulations, it is not required to do so and therefore cannot be held accountable for deviations.

The Committee derives its operating authority from a DOD directive. This directive authorizes the Committee to “operate directly or through an independent contractor restaurants, cafeterias, snack bars, and dining rooms in the Pentagon Building.” It also authorizes the Committee to provide commercial type concessions. The directive does not specify the procedures by which the Committee is to plan, organize, direct, and control day-to-day operations, nor does it provide specific guidance on the types of goods and services that can be offered through its concessionaires.

In the absence of required operating procedures, and based on directions provided by the Deputy Chief of Staff of the War Department in 1942, the Committee has historically followed the Army Regulations 215 Series—Nonappropriated Fund Instrumentalities—Morale, Welfare, and Recreation with its subsections that prescribe procedures for day-to-day operations involving personnel practices, contracting, and accounting and reporting. The purpose of these regulations is to establish policies and procedures governing Army MWR activities and nonappropriated fund instrumentalities to include those for which the Army has been designated executive agent.

The June 16, 1997, report on the National Defense Authorization Act for Fiscal Year 1998, by the Committee on National Security, House of Representatives, also expressed concern that the Concessions Committee may not be operating in consonance with congressional resale policy. Our work indicates that the Committee is not required to follow DOD regulations governing resale policy. The Concessions Committee’s legal counsel told us that the Committee is not a resale activity because it operates through concessionaires and does not engage in direct sales. Although the Committee is not required to so, the business manager told us that the Committee has elected to follow DOD Directive 1330.9 (Dec. 15, 1986), which establishes uniform policies for operating armed services exchanges. This regulation lists the authorized types of goods and services that can be offered for resale by the military exchanges.

No Written Policy for Calculating MWR Contributions

There is no written policy or long-term operating budget to guide the Committee’s members in deciding annual contributions to MWR funds, and we found no documentation discussing how decisions were reached. Over the past 4 fiscal years, the Committee has contributed fewer dollars as a percentage of its income to the MWR funds, while significantly increasing the amount retained as reserves. The Committee Chairman told us the members’ decisions were guided by the need to fund planned capital improvements and maintain stable MWR contributions during the Pentagon renovation. However, without proper long-term operating budgets, the extent to which such reserves are necessary is not clear. If the Committee’s need for reserves are overstated, additional resources could be made available to MWR funds.

Annually, the Committee decides how much of the year’s net income will be distributed to MWR activities and how much will be reserved for future needs. According to the Committee Chairman, this decision is based on a number of factors, including known capital expenditure requirements and the needs of the MWR funds. Once the Committee decides on the division of its net income, it requests approval from the Director, Administration and Management, Office of the Secretary of Defense. The approved MWR contribution is stated in the Committee’s minutes, but there is no discussion supporting how the members arrived at this decision.

As of September 30, 1997, the Committee had a total of $3.2 million in cash reserves—$1.3 million that was not designated for a specific purpose but would be available for payments of future operating expenses and MWR contributions and $1.9 million for the repair, maintenance, and replacement of equipment. Although the Committee does not have a long-term operating budget for estimating its future operating cash reserve needs, it does have a capital expenditure program budget, which estimates it will need $3 million through fiscal year 2002 and another $1.6 million beyond that date to fund equipment and related expenditures.

Despite the current balances in its reserves, the Committee is concerned about its ability to fund planned capital improvements and maintain stable MWR contributions during the planned 10-year renovation of the Pentagon. As a result, the Committee withheld and placed in reserve $50,000 of declared MWR contributions in both fiscal years 1997 and 1996. The Committee did this to enable it to have extra funds available to supplement MWR contributions in future years when reductions in income are anticipated. Specifically, the Committee anticipates income will decrease during the renovation of the Pentagon because 20 percent of the Pentagon staff will be temporarily relocated to office space outside of the building.

Because of the uncertainties related to the renovation, the Committee Chairman has asked the business manager to reassess the capital expenditure program budget. At our suggestion, the business manager agreed to request its independent public accountant’s assistance in preparing a 5-year operating budget that would identify the minimum level of cash reserves needed to cover normal operations. These analyses should be documented and should be used in future decisions regarding reserve amounts and MWR contributions.

Conclusions

The Committee provides significant contributions to six MWR funds. Its financial operations have been audited, and our review disclosed no instances where the independent public accounting firm did not comply in all material respects with generally accepted government auditing standards. However, there are opportunities to improve the Committee’s oversight and operations because the Committee is not subject to the same reporting requirements as other nonappropriated fund instrumentalities and the Congress does not receive information on its activities. Also, the absence of specified operating procedures, including guidance on the types of goods and services that can be offered, represents a weakness in management controls. Although the amount available for MWR contributions is directly linked to the Committee’s decisions to retain earnings for reserves and equipment, there is no written policy to guide its members in making these decisions, and we could find no documentation supporting how the decisions were reached. Furthermore, the Committee does not have a long-term operating budget for use in making these decisions.

Recommendations

We recommend that the Secretary of Defense (1) require the Committee to comply with the same reporting requirements of other nonappropriated fund instrumentalities, thereby ensuring that the Congress has the opportunity to review the Committee’s activities; (2) specify operating regulations to be followed by the Committee in its day-to-day operations, including guidance on the types of goods and services that can be offered; and (3) require the Committee to develop a policy and a long-term operating budget to guide members in making MWR contributions and cash reserve decisions and to document in its minutes the rationale for those decisions.

Agency Comments and Our Evaluation

We received written comments on a draft of this report from DOD (see app. III.) DOD described actions it plans to take in reference to our recommendations. Specifically, it will modify the DOD issuance governing the operations of the Concessions Committee to (1) require the Committee to comply with the same reporting requirements of other nonappropriated fund instrumentalities and (2) specify operating regulations to be followed by the Committee in its day-to-day operations, including guidance on the types of goods and services that can be offered. Once complete, these actions will satisfy the intent of our first two recommendations.

It also will modify the issuance governing the Committee’s operations to make explicit its commitment to contribute all proceeds not required for the Committee’s operations to MWR activities. When complete, this action would partially address, but not satisfy, the intent of our recommendation. We believe that the Committee also needs to develop a long-term operating budget for use in making and documenting its decisions regarding retained earnings and MWR contributions. We have revised the third recommendation in the final report to clearly reflect our intent.

Scope and Methodology

Our objectives were to assess the Concessions Committee’s (1) financial operations and audited statements; (2) management and oversight procedures; and (3) MWR contributions.

To assess the Committee’s financial operations, we interviewed its business manager, operating accountant, and independent public accountant. We reviewed the financial audit reports and their work papers, unaudited monthly financial reports, and corresponding year-end Committee meeting minutes for fiscal years 1996 and 1997. In addition, we compared the Committee’s expected cash reserves to its budgeted capital expenditures and projected MWR contributions through 2002.

To assess the Committee’s operations and management processes, we interviewed the Committee’s business manager and officials from military exchanges and other Defense nonappropriated fund instrumentalities. We used flowchart methods to trace and document the Concessions Committee’s management procedures, participated in a tour of activities, and obtained and reviewed military exchanges’ and other nonappropriated fund instrumentalities’ regulations. We used this information to compare the Committee’s management structure and operations with those of the military exchanges and other Defense nonappropriated fund instrumentalities’ operations.

To assess the Committee’s MWR contributions, we documented the amounts provided for the past 4 fiscal years and interviewed the Committee’s business manager to discuss the rationale for those decisions. We also interviewed officials from military exchanges and other Defense nonappropriated fund instrumentalities to discuss their respective MWR distribution and retained earnings policies. We compared these policies to that of the Concessions Committee.

Our work was conducted at the Pentagon; Army and Air Force Exchange Service Headquarters, Dallas, Texas; the Navy Exchange Service Command’s Washington office; and the Committee’s independent public accounting firm. Our work was also conducted from September 1997 to March 1998 in accordance with generally accepted government auditing standards.

We are sending copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force; the Chairman of the Concessions Committee; and the Director, Office of Management and Budget. We will make copies available to others upon request.

Please contact me at (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV.

List of Types of Concessions Activities

Committee Activities at the Navy Annex Chateau’s Annex Ladies Store DeFluri’s Card and Gift Shop Market Place (Periodic Rover)

List of Concessions Committee Members

1. Chairman Deputy Chief Financial Officer, Office of the Secretary of Defense (DOD) Comptroller 2. Representative for Director of Administration and Management, Office of the Secretary of Defense Deputy Director, Real Estate and Facilities Directorate, Washington Headquarters Services, Office of the Secretary of Defense 3. Army member Office of the Secretary of the Army, Administrative Assistant 4. Army member Chief, Executive Actions Division Management Directorate, Office of the Chief of Staff of the Army 5. Navy member Assistant for Administration, Office of Under Secretary of Navy 6. Marine Corps member Secretary of the General Staff, Headquarters United States Marine Corps 7. Air Force member Secretary of the Air Force, Administrative Assistant 8. Air Force member Vice Commander Headquarters 11th Support Wing (Air Force District of Washington)

Legal advisor Senior Counsel, Office of General Counsel, Washington Headquarters Services (nonvoting member)

Business manager (nonvoting member)

Comments From the Department of Defense

Major Contributors to This Report

National Security and International Affairs Division, Washington, D.C.

Accounting and Information Management Division, Washington, D.C.

Office of the General Counsel

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