Defense Logistics: DOD Needs to Improve Budget Estimates and Accuracy of Forecasts for Airlift Services
Released: 2018-09-04T00:00:00

Letter

Background

Working Capital Funds

DOD uses working capital funds to focus management’s attention on the total costs of carrying out critical business operations and encourage DOD support organizations to provide quality goods and services at the lowest cost. The ability of working capital funds to operate on a break- even basis depends on accurately projecting workload, estimating costs, and setting rates to recover the full costs of producing goods and services. Generally, customers use appropriated funds to finance orders placed with working capital funds.

DOD sets the rates charged for goods and services during the budget preparation process, which generally occurs approximately 18 months before the rates go into effect. To develop rates, working capital fund managers review projected costs such as labor and materials, as well as projected customer requirements. The rates are intended to remain fixed during the fiscal year in accordance with DOD policy. DOD’s stabilized price policy serves to protect customers from unforeseen inflationary increases and other cost uncertainties and better assures customers that they will not have to reduce programs to pay for potentially higher-than- anticipated prices. Because working capital fund managers base rates charged on assumptions formulated in advance of rates going into effect, some variance is expected between projected and actual costs and revenues.

Transportation Working Capital Fund

The TWCF is dedicated to TRANSCOM’s mission to provide air, land, and sea transportation for DOD in times of peace and war, with a primary focus on wartime readiness. Specifically, TWCF is used to provide air transportation and services for passengers or cargo in support of DOD operations or along established routes. The TWCF is also used to finance Air Force and joint training requirements. Examples of joint capabilities supported by the TWCF are depicted in figure 2.

The TWCF uses rates for airlift services that do not cover the full cost of airlift operations. The military services may choose between TRANSCOM and commercial service providers along established routes. Thus, fund managers set rates for some airlift services to remain competitive with commercial airlift carriers, which historically, do not result in revenue sufficient to cover the full cost of airlift operations. DOD must maintain airlift capacity and must remain ready and available to support mobilization for war and contingencies. Providing an incentive for customers to use DOD airlift capacity helps TRANSCOM maintain military airlift capabilities not available from commercial providers.

TWCF cash balances are managed as a component of the Air Force Working Capital Fund. Although the TWCF is managed on a day-to-day basis by TRANSCOM, it is part of the Air Force Working Capital Fund for cash management purposes. The relationship of the TWCF to the Air Force Working Capital Fund provides a cash management benefit. According to Air Force officials, retaining the TWCF within the Air Force Working Capital Fund for cash management purposes provides flexibility while minimizing the need for additional funding. According to month-end cash balance data, the TWCF has been able to operate using cash available in the Air Force Working Capital Fund when no funds were available in the TWCF. For example, the TWCF month-end cash balance was negative fifteen times during fiscal years 2007-2017, but there was sufficient cash in the Air Force Working Capital Fund to allow the TWCF to continue to operate and execute its missions. For more information on the cash balances of the Air Force Working Capital Fund and the TWCF see appendix II.

Roles and Responsibilities for Managing the Transportation Working Capital Fund

Multiple DOD organizations have roles in managing various aspects of the TWCF:

The Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer is generally responsible for coordinating DOD budget preparation, issuing guidance, issuing working capital fund annual financial reports, and overseeing the implementation of working capital funds across DOD. The Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer is also responsible for approving rates developed for the budget process and charged to the military services.

The Air Force assumed responsibility for TWCF cash management in fiscal year 1998 and the TWCF cash balance is included in the Air Force Working Capital Fund cash balance. The Air Force is also responsible for developing Operations and Maintenance budget requests that include requests for funds to pay TRANSCOM for airlift services financed through the TWCF and the ARA. The Assistant Secretary of the Air Force (Financial Management and Comptroller) is responsible for directing and managing all comptroller, programming, and financial management functions, activities, and operations of the Air Force.

TRANSCOM is responsible for the day-to-day financial management of the TWCF and has financial reporting responsibility for the TWCF, including setting rates for airlift services. TRANSCOM is also responsible for providing defense components with transportation services to meet national security needs; providing guidance for forecasting; and providing guidance for the standardization of rates, regulations, operational policies, and procedures.

Air Mobility Command is a major Air Force command and is responsible to TRANSCOM for providing airlift services paid for by the TWCF. To fulfill its responsibility for providing airlift services to defense components, TRANSCOM and Air Mobility Command use a combination of military and commercial aircraft.

Billions of Dollars Were Requested, Allotted, and Expended for the Airlift Readiness Account for Fiscal Years 2007-2017, and Annual Amounts Varied

The Air Force requested, allotted, and expended billions of dollars for ARA for fiscal years 2007 through 2017. These amounts varied annually, in some cases, by hundreds of millions of dollars. Our analysis of Air Force and TRANSCOM budget and financial information showed that for fiscal years 2007 through 2017, the Air Force requested $2.8 billion from Congress for ARA requirements, as part of its annual Operations and Maintenance appropriation. The Air Force allotted $2.8 billion (i.e., directed the use of the appropriated funds) and expended $2.4 billion of the ARA appropriated funds). During this period, the total allotted amount was about $400 million dollars more than the expended amount. According to Air Force officials, this $400 million was used to pay for other Air Force readiness priorities. ARA amounts requested, allotted, and expended for fiscal years 2007 through 2017 are shown in figure 3.

In five fiscal years (2008-2009, 2013-2014, and 2017) the Air Force allotted less than the amount ultimately expended for the ARA. In these fiscal years, Air Force officials stated that they used available Operations and Maintenance appropriations to support the ARA. For example, in fiscal year 2013, the Air Force requested and allotted less than a million dollars for the ARA. However, the Air Force expended $294 million for the ARA in fiscal year 2013. According to Air Force officials, the Air Force used Air Force Operation and Maintenance mobilization funding to provide the ARA funds to the TWCF to cover this gap.

Furthermore, in five fiscal years (2010-2012 and 2015-2016) the Air Force did not expend the total amounts allotted for the ARA, because the allotments exceeded ARA funding needs. According to Air Force officials, they expended amounts initially allotted for ARA requirements to support other readiness priorities, such as training and sustainment requirements. For additional information related to TWCF costs and revenues for airlift services see appendix III.

Based on our analysis and interviews with Air Force and TRANSCOM officials, we determined that the Air Force’s ARA budget request, the ARA amount allotted, and the amount expended by the Air Force can vary for a number of reasons. For example,

Workload variations occurred due to changes in the global security environment, natural disasters, and force structure changes: For example, in fiscal year 2010, airlift services workload increased 8 percent over the previous year’s level and 39 percent over budgeted levels as a result of force structure changes in Iraq and Afghanistan. This occurred because during fiscal year 2010 the number of U.S. armed forces personnel in Iraq declined by about 81,000, and the number of U.S. armed forces personnel in Afghanistan increased by about 34,000. These changes required additional airlift services, and resulted in more revenue than was originally estimated for the TWCF. The TWCF also received additional funding from the military services to offset increased fuel costs. As a result, TRANSCOM did not issue a bill for the ARA for fiscal year 2010, and the Air Force used the $262 million allotted for ARA requirements for other readiness priorities.

ARA budget requests and subsequent expenditures in the fiscal year of availability may be affected by other revenue sources: From fiscal years 2007 through 2017, the TWCF received $6.5 billion from other revenue sources, such as amounts from cash recovery charges, fuel supplement charges, and cash transfers from the Air Force. For example, cash recovery charges were paid by the military services, including the Air Force, using Overseas Contingency Operations funding to cover cash shortages in the TWCF in the early part of the Global War on Terrorism. TRANSCOM charged its customers cash recovery charges in fiscal years 2007 through 2014, with the exception of 2010.

ARA expenditures in the fiscal year of availability may be more or less than budgeted: For example, in fiscal year 2015, TRANSCOM did not receive revenue from other sources, resulting in the Air Force expending $404 million dollars more from its Operations and Maintenance funds than requested to cover the ARA bill for that fiscal year. On the other hand, in the fiscal year 2016 Air Force Operations and Maintenance budget request, the Air Force requested $657 million for the ARA, and subsequently allotted $406 million to the ARA—about $251 million less than requested. This occurred because the cost of fuel declined in fiscal year 2016, and TRANSCOM did not bill the Air Force for the full amount allotted for ARA by the Air Force. As a result, the Air Force contributed $122 million of the $406 million to the TWCF and used the remaining available amount for other readiness priorities. DOD and its components have considerable flexibility in using Operation and Maintenance funds and can redesignate funds appropriated among activity and subactivity groups in various ways.

Since Fiscal Year 2010, Air Force Budget Requests Have Omitted Complete Airlift Readiness Account Information and Have Not Been Informed by Estimates

Air Force Budget Requests Include Some Information on the Airlift Readiness Account but Omit Details Provided In Budget Requests Prior to Fiscal Year 2010

Air Force budget requests include some information on the ARA but omit details provided in budget requests prior to fiscal year 2010. Air Force budget officials stated the ARA budget information that was included for fiscal years 2007 through 2009 was changed for the fiscal year 2010 budget request as part of a DOD initiative to reduce the overall number of budget line items. For fiscal years 2007 through 2009 Air Force Operations and Maintenance budget requests, the amounts requested by the Air Force for the ARA were explicitly stated in the budget justification documents as part of a separate subactivity group line item. For fiscal years 2010 through 2017, the ARA amount was bundled with funding requests for other training requirements in the Air Force Operations and Maintenance budget justification documents, thus omitting specific details with respect to the ARA. Specifically, Air Force budget justification materials included the amount the ARA changed from one fiscal year to the next, but did not include the total ARA amount.

In the annual President’s budget request submission, DOD requests specific amounts for Operations and Maintenance activities and includes information about (1) amounts for the next fiscal year for which estimates are submitted, (2) revisions to the amounts for the fiscal year in progress, and (3) reports on the actual amounts allotted to a particular activity or subactivity for the last completed fiscal year. The Standards for Internal Control in the Federal Government state that management should communicate the necessary quality information (internally and externally).

According to Air Force budget officials there is no requirement from the Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer to separately identify the ARA amount and related details in the Air Force Operations and Maintenance annual budget requests. Nevertheless, officials from the Air Force and the Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer agreed that it would be helpful to include additional information in the budget, because of DOD and congressional interest. Without establishing specific requirements to present detailed ARA information in the annual Air Force Operations and Maintenance budget request, DOD and congressional decision-makers do not have sufficient information to make informed decisions about the level of funding necessary to cover airlift costs not recovered by the rates charged by TRANSCOM.

U.S. Transportation Command Has Not Provided Airlift Readiness Account Estimates in Time to Inform Air Force Budget Requests

TRANSCOM has not provided ARA estimates in time to inform Air Force budget requests. Air Force officials stated that they need to have TRANSCOM’s estimates by mid-June to be able to conduct analysis to strengthen confidence in the ARA budget request and obtain senior leadership approval. The Air Force submits its Operations and Maintenance annual budget request to DOD in early July. However, TRANSCOM was not providing its ARA estimate until August. As a result, Air Force officials stated they have been developing their own ARA estimate based on historical average trends because they have not received information from TRANSCOM on time. TRANSCOM and Air Force officials agree that TRANSCOM—as the provider of transportation services—is in the best position to understand transportation workload demands.

The Standards for Internal Control in the Federal Government state that management should use quality information that is appropriate, current, complete, accurate, accessible, and provided on a timely basis to achieve the entity’s objectives. Furthermore, management should use quality information to make informed decisions and evaluate the entity’s performance in achieving key objectives and addressing risks and should design control activities, such as policies, procedures, techniques, and mechanisms as needed to enforce management’s directives.

In October 2017, Air Force and TRANSCOM officials told us they were working on a memorandum of understanding to improve the timing and communication of budgetary information from TRANSCOM to support the Air Force ARA budget request. Officials stated that the memorandum of understanding is expected to be completed by the end of fiscal year 2018. However, in May 2018, the draft memorandum that the Air Force provided for our review consisted of a 2-page template with a list of potential topics, and no substantive details regarding formalizing processes. Without developing sufficient detail on the formal processes and subsequently finalizing the memorandum of understanding, the Air Force and TRANSCOM will not be able to reasonably assure that the timing and communication of budgetary information from TRANSCOM are sufficient to support the Air Force Operations and Maintenance ARA annual budget request.

TRANSCOM Has a Rate-Setting Process for Airlift Services, but Producing Accurate Workload Forecasts Is Challenging

TRANSCOM has a rate-setting process for airlift services, but producing accurate workload forecasts is challenging. Our analysis of TRANSCOM data showed that the airlift forecasting process produced increasingly inaccurate projections of actual workload. Producing accurate forecasts is challenging because TRANSCOM has not fully implemented: (1) an effective process to gather workload projections from customers, (2) forecasting goals and metrics and the review of its performance, and (3) an action plan to improve workload forecasts.

U.S. Transportation Command Has a Rate- Setting Process for Airlift Services

TRANSCOM has a rate-setting process for airlift services that is generally established to be competitive with commercial airlift services, according to DOD guidance. Specifically, TRANSCOM operates five categories of airlift services, and according to documents and TRANSCOM officials the rate-setting process for each category is as follows:

Channel Cargo rates apply to military air cargo along established routes. The rates for this category generally cover about 65 percent of the cost to provide airlift cargo services, and do not vary based on the type of aircraft used. Rates are benchmarked against commercial prices based on the weight of cargo using the following step-by-step process. Initially, International Heavyweight Air Tender price data from the prior year are checked for commercial rates on various routes. If no data are available for some routes, data from the closest country are used to develop average country-to-country rates or a weighted average when there is more than one country-to-country combination. Once rates are developed they are adjusted based on budget exhibits. The TRANSCOM Operations and Plans directorate is responsible for Channel Cargo forecasts to inform rate-setting for this category of service.

Channel Passenger rates apply when military and civilian passengers are flying on established routes. The rates are benchmarked against commercial prices, recover about 85 percent of costs, and do not vary based on the type of aircraft used. Channel passenger rate-setting guidance also uses a step-by-step process. General Services Administration city pairs are checked for comparable prices. If no General Services Administration rate is found, the Defense Travel System is checked. If the Defense Travel System does not have a rate, online travel websites are checked. If the online travel sites do not have a rate, then a prior standard rate per mile for that route is adjusted based on budget exhibits. The TRANSCOM Strategic Plans, Policy, and Logistics directorate is responsible for channel passenger forecasts to inform rate-setting.

Special Assignment Airlift Missions/Contingency rates apply for the use of full-plane charters performing and providing exclusive services for specific users. Rates are generally determined by the type of aircraft and those rates recover about 91 percent of costs for military aircraft and 100 percent of costs for commercial aircraft. Flight hour rates for military aircraft, flight length (miles), and capacity used for commercial aircraft are considered in the rate determinations. The TRANSCOM Operations and Plans Directorate is responsible for Special Assignment Airlift Missions/Contingency workload forecasts to inform rate-setting for this category of service.

Joint Exercise Transportation Program rates apply to airlift services in support of realistic operational joint training. Rates are generally set in the same manner as the rates for the Special Assignment Airlift Missions/Contingency category, except that the TRANSCOM Operations and Plans Directorate is responsible for workload forecasting for the Joint Exercise Transportation Program.

Training rates apply to those activities used to conduct programmed flying training, which generally includes a required number of sorties, flying hours, and aircrew training to support readiness. Rates are set to recover 100 percent of the recorded costs because the Air Force is the sole customer for these missions, according to TRANSCOM and Air Force officials. Training rates are generally based on the type of aircraft, and the cost per flight hour. According to TRANSCOM officials, the Air Mobility Command Air, Space and Information Operations Directorate is responsible for the flying hour model that determines requirements for this category of airlift services.

Producing Accurate Workload Forecasts Is Challenging, and TRANSCOM Improvement Efforts Have Not Been Sustained

TRANSCOM produces a forecast of its airlift workload to inform the development of the ARA budget request. According to TRANSCOM’s guidance, workload forecasts are to be developed using future demand derived from a combination of statistical methods and necessary adjustments for expected operational conditions. The basic principles used for workload forecasting are generally the same for all five categories of airlift services. According to TRANSCOM officials, forecasting methods are applied with some variation. This practice is allowed under the forecasting instruction, depending on the category, and which TRANSCOM or Air Mobility Command entity is responsible for developing the forecast. For example, forecasts for the Joint Exercise Transportation Program and Training are affected more by requirements to support readiness and funding constraints. On the other hand, the basic forecasting process for Channel Cargo, Channel Passenger, and Special Assignment Airlift Missions/Contingency are affected by the transportation needs of the military services and combatant commands and generally based on historical workload.

Based on our analysis, workload forecasts have been increasingly inaccurate for fiscal years 2007 through 2017. Specifically, we found that forecast inaccuracy (i.e., the variance between the forecast and the actual workload amounts aggregated across all five workload categories) averaged about 25 percent and was trending upward in absolute value for fiscal years 2007 through 2017, as shown in figure 4.

In addition to the aggregate workload forecast being increasingly inaccurate, the accuracy of the workload forecasts across each of the five categories varies from year to year. For example, In fiscal year 2008, channel cargo actual workload was about 17 percent lower than the forecast, and Special Assignment Airlift Missions/Contingency actual workload was about 12 percent higher than the forecast; and In fiscal year 2016 Special Assignment Airlift Missions/Contingency actual workload was about 116 percent higher than the forecast and the Joint Exercise Transportation Program actual workload was about 45 percent lower than forecasts.

For fiscal years 2007 through 2017, the workload categories with the largest absolute forecast inaccuracy include Special Assignment Airlift Missions/Contingency, Channel Cargo, and the Joint Exercise Transportation Program. Two of these categories (Special Assignment Airlift Missions/Contingency and Channel Cargo) also have the largest share of airlift services. However, all five workload categories had forecast inaccuracy of more than 15 percent in at least three of the eleven years we reviewed. The variance of forecasted workload from actual workload by airlift service category is presented in figure 5 below.

Based on our analysis and discussions with TRANSCOM officials, TRANSCOM has not taken sustained actions to improve forecasting accuracy. Specifically, we found that TRANSCOM has not fully implemented (1) an effective process to collect projected airlift workload information from its customers (i.e., military services) to inform its forecasts, (2) metrics and goals for measuring and reviewing forecast accuracy, and (3) an action plan to improve workload forecasting. Specifically,

TRANSCOM has not implemented an effective process for collecting projected airlift workload information: TRANSCOM officials told us they use historic workload data to establish a baseline, and perform statistical analysis to estimate averages and trends according to their instructions. Next, forecasters use information from the military services and combatant commands that may affect each category of workload, if available, and adjust workload estimates as needed.

However, according to TRANSCOM officials, personnel conducting forecasts have limited visibility over factors that may influence forecasts, such as demand for transportation services, due to the lack of information obtained from their customers (i.e., the military services and Combatant Commands). Attempts to collect information from the military services and combatant commands have been made on an ad hoc basis. For example, in April 2016 TRANSCOM’s Commander solicited information from the military services’ senior leadership regarding their future transportation requirements, including airlift needs. The message emphasized the importance of forecasting to inform budget requests and management decisions to improve operational efficiency. However, according to TRANSCOM officials, the Air Force—who is TRANSCOM’s largest customer for airlift services—was the only military service that provided the requested information in response to the TRANSCOM’s Commander’s one-time request. According to TRANSCOM officials, the other military services have not provided the requested information for workload projections because the services do not understand how they would benefit from providing the information and TRANSCOM’s terminology and processes are not familiar to the services. As a result, TRANSCOM’s ad hoc approach has not obtained quality information from its customers to use in forecasting workload.

Standards for Internal Control in the Federal Government state that management should use quality information that is appropriate, current, complete, accurate, accessible, and provided on a timely basis to achieve the entity’s objectives. Furthermore, we found other defense organizations have provided a mechanism for customers to routinely communicate projected workload information. For example, the Defense Logistics Agency and their customers work together to evaluate historical demand data for spare parts and tailor forecast plans for those spare parts based on projected future usage. To this end, communications with customers are expected to be consistent and to use terminology shared in common with customers. Options are presented in a manner that is readily understood by customers in a format determined by customers’ needs to encourage the most efficient and effective solutions available.

TRANSCOM no longer uses forecast accuracy metrics and has not established forecast accuracy goals: In 2012, TRANSCOM developed a forecasting process, and according to officials started providing forecast performance metric briefings to TRANSCOM senior leadership on a quarterly basis in fiscal year 2014. TRANSCOM’s overall forecast accuracy improved slightly in 2015. However, according to TRANSCOM officials, these forecast briefings were canceled after the first quarter of fiscal year 2016 because they were viewed as minimally useful for budgeting, and were not used to position airlift capacity to meet operational needs. In addition, TRANSCOM officials stated that they no longer measure forecast performance. We found that overall forecast inaccuracy was higher for fiscal years 2016 and 2017 than any other year we reviewed, as indicated above in figure 4.

However, TRANSCOM’s January 2015 forecasting instruction requires forecast accuracy metrics to be developed to support management decisions and forecast variance from actual workload to be reviewed. Furthermore, the Standards for Internal Control in the Federal Government state that management should define objectives in specific and measurable terms to enable the design of internal control for related risks, establish activities to monitor performance measures and indicators, and assess performance against plans, goals, and objectives set by the entity.

TRANSCOM does not have a corrective action plan for improving workload forecasts: TRANSCOM officials acknowledge that workload forecasting needs improvement, and told us that TRANSCOM does not have an action plan to improve its forecasting processes to inform budgetary and operational decisions. In October 2013, TRANSCOM considered, but did not adopt, a process designed to help ensure senior management has visibility over issues, including forecasting, known as Sales and Operations Planning (S&OP). We reported that the Army implemented this process in 2013 after Army officials concluded that they could leverage commercial best practices to improve logistics performance (see sidebar). We discussed the S&OP process with TRANSCOM officials, and they told us that the possibility of adapting the process to military logistics was not readily accepted at TRANSCOM because of organizational resistance to change. Initial organizational resistance to change was also experienced by the Army, as discussed in our prior report. However, according to the Army, the benefits of implementing S&OP resulted in a 50 percent reduction in forecast error, and a decision was made to deploy the S&OP process for use across all Army depots and arsenals by the end of fiscal year 2018. Adopting a corrective action plan, or approach such as S&OP can help TRANSCOM focus and improve planning efforts resulting in improved and more accurate workload forecasting.

Furthermore, according to TRANSCOM’s January 2015 forecasting instruction, opportunities to improve forecasts should be assessed. Additionally, Standards for Internal Control in the Federal Government state that management should complete and document corrective actions to remediate internal control deficiencies on a timely basis to achieve established objectives. Our prior work has also shown that organizations benefit from corrective action plans for improvement.

TRANSCOM officials told us that producing accurate workload forecasts is challenging, and we agree that there are some inherent difficulties in accurately forecasting airlift workload on an annual basis. However, our prior work on aviation forecasting has noted that forecasting is inherently uncertain, but managing the risk related to that uncertainty is essential to making informed decisions. Improved forecasting by addressing the weaknesses identified could allow for more effective financial planning and enable more efficient airlift operations. For example, TRANSCOM estimated needing an ARA amount of $772 million for fiscal year 2016. However, according to our analysis of TRANSCOM financial records, the TWCF did not require support from ARA funds because actual revenue from airlift services exceeded its costs by $148 million in fiscal year 2016.

Inaccurate forecasts can lead to unreliable budget requests and hinder effective and efficient operational planning necessary to provide customers with the service they need. For example, according to a 2017 Air Force Audit Agency report, flying channel passenger flights at 85 percent of capacity may result in estimated savings of about $30 million over a 6-year period. Our past work also shows that underutilization of cargo airlift capacity is a longstanding issue. Improving forecast accuracy would help TRANSCOM manage airlift services more efficiently, make better use of budgetary resources to maximize airlift capacity more effectively, and result in an ARA budget estimate that is more accurate. In response to our findings and discussions, TRANSCOM officials stated they plan to begin reviewing TRANSCOM’s workload forecasting process and determine a path ahead in June 2018. However, the outcome and timeframes for this review are uncertain. Furthermore, TRANSCOM leadership still must approve and fully implement changes to forecasting processes, metrics, and goals.

Unless TRANSCOM fully implements an effective process to obtain projected workload requirements from its customers on a routine basis, uses forecast accuracy metrics and establishes goals, and develops an action plan, airlift workload forecasting will not improve. We acknowledge that eliminating volatility entirely in the ARA budget request is unlikely given that there will be unexpected and unpredictable workload adjustments due to changes in the global security environment or natural disasters. We also understand improving workload forecasts through the use of goals, metrics, and an action plan for improvement will not eliminate the inherent volatility associated with the ARA budget request amount. However, these improvements would allow TRANSCOM to better manage the inherent risks associated with the accuracy of forecasts and improve ARA estimates used to inform future Air Force Operations and Maintenance budget requests.

Conclusions

Each year DOD spends billions of dollars on airlift services flying personnel and cargo worldwide. The clarity of budget estimates and the accuracy of forecasts for airlift services are essential for Congress and DOD to make informed decisions. Accordingly, Congress would benefit from detailed ARA information in its budget requests, and this information would be improved by TRANSCOM providing timely information on the annual ARA estimate to the Air Force. Additionally, TRANSCOM continues to face challenges in forecasting its workload, which is a key factor in estimating the ARA. Until TRANSCOM establishes a process to collect projected workload information from its customers, uses forecast accuracy metrics and goals to monitor its performance, and implements a corrective action plan, forecast accuracy and ARA estimates are not likely to improve.

Recommendations for Executive Action

We are making a total of five recommendations to DOD.

The Secretary of Defense should ensure that the Undersecretary of Defense (Comptroller)/Chief Financial Officer establishes requirements to present details related to the ARA in the annual Air Force Operations and Maintenance budget request including (1) amounts for the next fiscal year for which estimates are submitted, (2) revisions to the amounts for the fiscal year in progress, and (3) the actual amounts allotted for the last completed fiscal year. (Recommendation 1)

The Secretary of Defense should ensure that the Secretary of the Air Force and the Commander, U.S. Transportation Command, in collaboration, develop sufficient detail on the formal processes and finalize their memorandum of understanding to improve the timing and communication of budgetary information to support the Air Force Operations and Maintenance Airlift Readiness Account annual budget request. (Recommendation 2)

The Secretary of Defense should ensure that the Commander, U.S. Transportation Command, fully implements a process to obtain projected airlift workload from the military services and Combatant Commanders on a routine basis to improve the accuracy of its workload forecasts. (Recommendation 3)

The Secretary of Defense should ensure that the Commander, U.S. Transportation Command, uses forecast performance metrics and establishes forecast accuracy goals for the airlift workload. (Recommendation 4)

The Secretary of Defense should ensure that the Commander, U.S. Transportation Command, develops a corrective action plan to improve the accuracy of its workload forecasting. (Recommendation 5)

Agency Comments

We provided a draft of this report to DOD for review and comment. In written comments, which are reprinted in appendix IV, DOD concurred with our recommendations and stated that it plans to take specific actions in response to our recommendations. DOD also provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to appropriate congressional committees. 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 Diana Maurer at (202) 512-9627 or maurerd@gao.gov, or Asif Khan at (202) 512-9869, or khana@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made key contributions to this report are listed in appendix V.

Appendix I: Scope and Methodology

To determine the extent to which ARA funds were requested, allotted, and expended by the Air Force from fiscal years 2007 through 2017, we analyzed Air Force budget request documents and underlying support documentation. We also analyzed information from the Air Force’s Automated Budget Interactive Data Environment Systems to determine the appropriated amounts allotted for ARA activities. Furthermore, we analyzed summary-level documents detailing expenditures from the Air Force and TRANSCOM for fiscal years 2007 through 2017 to establish trends. Moreover, we reviewed TRANSCOM’s procedures and supporting documentation for billing the Air Force for payment of the ARA. Lastly, we interviewed DOD, Air Force and TRANSCOM officials to gain an understanding of general reasons variances from year to year occurred or between the requested and expended amounts.

To determine the extent to which the Air Force provided ARA information in its budget request to Congress and informed its request with information from TRANSCOM, we analyzed Air Force Operations and Maintenance budget justification documents to determine the type of ARA information (i.e., total budget request amount, changes from year to year, and other information) provided in the fiscal years 2007 through 2017 President budget submissions. To understand the differences, if any, between the ARA information provided from year to year, we interviewed Air Force budget officials to obtain an explanation for changes in the reported information. In addition, we analyzed Air Force Operations and Maintenance budget justification documents, and Transportation Working Capital Fund budget documents to determine if the ARA was based on available information. We also discussed with Air Force and TRANSCOM officials future plans to change their procedures and the information considered in the development of the ARA estimate. Further, we compared the Air Force and TRANSCOM processes and procedures against Standards for Internal Controls in the Federal Government, specifically standards regarding internal and external reporting and mechanisms to enforce management directives.

To determine the extent to which TRANSCOM has implemented a process to set rates for airlift services and use workload forecasts to estimate the annual ARA funding request, we analyzed the processes TRANSCOM used to set rates it charges customers in various airlift workload categories for fiscal years 2007 through 2017. We also reviewed forecasting procedures and analyzed supporting documents provided by TRANSCOM; interviewed TRANSCOM officials to gain an understanding of how they implement these rate setting and forecasting procedures; and analyzed forecast and actual workload data provided by TRANSCOM for the same timeframe. We compared TRANSCOM’s processes against rate-setting and forecasting guidance and reviewed whether TRANSCOM used quality information to establish workload projections, established any performance measures and goals for forecasting its workload, and developed any efforts to improve its forecasting of workload. In addition, we interviewed TRANSCOM and Air Mobility Command officials and reviewed supporting documentation to gain an understanding of challenges that exist to producing accurate workload forecasts, and the relationship with the rate-setting and budgeting process.

We obtained revenue, cost, workload, and ARA data in this report from budget documents, accounting reports, and Air Force and TRANSCOM records for fiscal years 2007 through 2017. We assessed the reliability of the data by (1) interviewing Air Force and TRANSCOM officials to gain an understanding of the processes used to produce the cash, revenue, cost, workload and ARA data; (2) reviewing prior work to determine if there were reported concerns with TRANSCOM’s data; (3) comparing cash balances, revenue, costs and workload data provided by TRANSCOM to the same data presented in the Air Force Working Capital Fund budgets for fiscal years 2007 through 2017; and (4) comparing ARA data to Air Force and TRANSCOM supporting documentation, or to Air Force Operations and Maintenance budget execution reports to support ARA reported amounts for fiscal years 2007 through 2017. On the basis of these procedures, we have concluded that these data were sufficiently reliable for the purposes of this report.

To address all of our objectives, we conducted a site visit to U.S. Transportation Command Headquarters and Air Mobility Command at Scott Air Force Base, Illinois, and interviewed officials with the Office of the Undersecretary of Defense (Comptroller)/Chief Financial Officer, the Assistant Secretary of the Air Force (Financial Management and Comptroller), the U.S. Transportation Command, and the Air Mobility Command.

We conducted this performance audit from August 2017 through September 2018 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.

Appendix II: Air Force Working Capital Fund and Transportation Working Capital Fund Monthly Cash Balances for Fiscal Years 2007-2017

The Air Force Working Capital Fund maintained a positive monthly cash balance throughout fiscal years 2007 through 2017. The Transportation Working Capital Fund (TWCF) is a part of the Air Force Working Capital Fund for cash management purposes. DOD working capital funds are authorized to charge amounts necessary to recover the full costs of goods and services provided. However, the TWCF is authorized to establish airlift customer rates to be competitive with commercial air carriers. Due to mobilization requirements, the resulting revenue does not always cover the full costs of airlift operations provided through the TWCF. To the extent customer revenue is insufficient to support the costs of maintaining airlift capability the Air Force shall provide appropriated funds. The Air Force Working Capital Fund and TWCF monthly cash balances are depicted in figure 6 below.

Appendix III: Transportation Working Capital Fund Costs and Revenues for Airlift Services

Total costs for airlift services for fiscal years 2007 through 2017 were less than revenue collected for airlift services. Revenue came from rates charged to customers for services performed (workload related revenue), the Airlift Readiness Account (ARA), and other revenue sources. For seven of the eleven years we reviewed, revenues exceeded costs, and for four of the eleven years, costs exceeded revenue. For the eleven year period we reviewed, workload related revenue ($73 billion) was not sufficient to pay for the full costs of airlift services. The remaining revenue included $2 billion from the ARA and $7 billion from other revenue sources.

Appendix IV: Comments from the Department of Defense

Appendix V: GAO Contacts and Staff Acknowledgments

GAO Contacts

Diana Maurer, (202) 512-9627 or maurerd@gao.gov, or Asif A. Khan, at (202) 512-9869, or khana@gao.gov.

Staff Acknowledgments

In addition to the contacts named above, John Bumgarner (Assistant Director), Doris Yanger (Assistant Director), John E. “Jet” Trubey (Analyst In Charge), Pedro Almoguera, John Craig, Jason Kirwan, Amie Lesser, Felicia Lopez, Keith McDaniel, Clarice Ransom, and Mike Silver made key contributions to this report.