Air Force travel card delinquency rates and amounts charged off were substantially lower than non-Air Force DOD components, and delinquencies were about 1 percent higher than non-DOD federal civilian agencies. Cumulative Air Force charge-offs since the inception of the travel card program with Bank of America in November 1998 are approximately $11.6 million, the lowest of the three services. Our analysis of available data showed that the travel cardholder’s rank and pay rate are strong predictors of delinquency problems. We found that the Air Force’s delinquency and charge-off problems are primarily associated with low and mid-level enlisted military employees. As discussed in following sections of this report, improvements in the Air Force’s overall control environment improved Air Force delinquency rates, but DOD’s overall high delinquency and default rates resulted in contentious relations with Bank of America. The bank threatened to end its participation in the program, but eventually agreed to contract modifications that included increased fees. Past delinquencies and charge-offs have cost the Air Force, the federal government, and the taxpayers thousands of dollars in lost rebates, and substantial resources spent pursuing and collecting on past due accounts. We also estimate that contract modifications will cost the Air Force millions of dollars in the future due to higher fees. The Air Force has taken a number of positive actions to address its delinquency and charge-off rates, and data for the first half of fiscal year 2002 show a significant drop in charged-off accounts. For example, this reduction is, in part, attributable to a salary and military retirement offset program—similar to garnishment—which was initiated in November 2001. Other Air Force actions included encouraging the use of the split disbursement payment process, in which the Defense Finance and Accounting Service (DFAS) sends a portion of the traveler’s reimbursement directly to the bank rather than the cardholder, and increased management attention and focus on the delinquency issue. However, except for split disbursements, Air Force actions primarily address the symptoms or back- end result of delinquency and charge-offs after they have already occurred. As noted in the following sections of this report, additional emphasis on front-end management of the travel card program, such as more selective procedures for issuing the cards and overseeing the proper use of the cards, could further improve the Air Force travel card program. As of March 31, 2002, approximately 8,000 Air Force cardholders had over $5 million in delinquent debt. Over the last 2 years, Air Force delinquency rates fluctuated from 5 to 11 percent and on average were about 5 percentage points less than the Army’s and the Navy’s and 1 percentage point higher than non-DOD federal civilian agencies. The Air Force has set a goal of no more than a 4 percent delinquency rate. As discussed later, greater emphasis on commander responsibility and accountability, contributed, at least in part, to lower Air Force delinquency rates. Figure 1 compares delinquency rates among the Air Force, Non-Air Force DOD, and the 23 largest civilian agencies. In addition, as shown in figure 2, Air Force travel card delinquency rates for the eight quarters ending March 31, 2002, were significantly less than Army and Navy travel card delinquency rates. Further analysis revealed that Air Force travel card delinquency rates have decreased from 16.9 percent as of December 31, 1999 to 6.0 percent as of March 31, 2002. Table 1 shows the decrease in Air Force delinquency rates since December 1999, as well as the cyclical nature of Air Force travel card delinquency rates. Since the inception of the travel charge card task order between DOD and Bank of America on November 30, 1998, Bank of America has charged off about 9,000 Air Force travel card accounts with nearly $11.6 million of bad debt. While not an excellent track record, it is lower than the Army’s approximate 23,000 charged-off accounts valued at nearly $34 million and Navy’s approximate 13,800 charged-off accounts valued at nearly $16.6 million. Task order modifications during fiscal year 2001 allowed Bank of America to institute a salary offset provision against DOD military personnel whose travel card accounts were previously charged off or were more than 120 days past due. Table 2 provides a comparison of cumulative charge-offs and delinquencies by military service as of March 31, 2002. Our analysis showed a correlation between certain demographic factors and high delinquency and charge-off rates. Available data showed that the travel cardholder’s rank or grade (and associated pay) is a strong predictor of delinquency problems. As shown in Figure 3, Air Force delinquency and charge-off problems are primarily associated with low- and midlevel enlisted military personnel in grades E-1 (airman) to E-6 (technical sergeant), with relatively low incomes and little experience in handling personal finances. Appendix IV presents information on military and civilian grades and pay rates. Available data indicate that military personnel grades E-1 to E-6 account for about 69 percent of all Air Force military personnel. These enlisted military personnel have basic pay levels ranging from $11,500 to $27,600. These individuals were responsible for 41 percent of the total outstanding Air Force travel card balances as of September 30, 2001. Figure 4 compares the delinquency rates by military grade and civilian personnel to the average Air Force delinquency rate as of September 30, 2001. As shown, the delinquency rates were as high as 15.7 percent for E-1 to E-3 and 9.9 percent for E-4 to E-6, compared to the Air Force overall delinquency rate of 6.2 percent. These rates were markedly higher than the rates for officers, which was 2.4 percent. These rates were also substantially higher than that of Air Force civilians, which at 3.6 percent was 1.4 percentage points lower than the federal civilian agencies rate shown in figure 1. The delinquency rate for military personnel in grades E-4 to E-6 in particular had an important negative impact on the Air Force’s delinquency rate. Specifically, these are senior airmen to technical sergeants in the Air Force. Pay levels for these personnel, excluding supplements such as housing, range from $18,600 to $27,600. As shown by Bank of America data, personnel in grades E-4 to E-6 accounted for 37 percent of the total Air Force outstanding balance. High delinquency rates for the E-1 through E-6 grades combined with their extensive use of the travel card have a significant impact on the Air Force wide delinquency rate. Figure 5 shows Air Force fiscal year 2001 charge-offs. Charge-off amounts of about $2.6 million for military personnel in grades E-1 through E-6 accounted for 79 percent of the $3.3 million in total Air Force charge-offs in fiscal year 2001. An Air Force travel card program official told us that a major factor of the service’s travel card delinquencies relates to first-term enlisted personnel. An Air Force member can normally attain the E-4 grade within 3-1/2 years in his or her first term. According to Air Force data, over half of the personnel in grades E-1 to E-6 are in grades E-4 and below. The official commented that if the members are not committed to an Air Force career and plan to serve only one tour, temptation exists to misuse the card before they separate from the Air Force. In addition, as discussed below, the Air Force did not exempt personnel with poor credit histories from required use of travel cards. Consequently, these low and mid-level enlisted military personnel are often issued travel cards even though they may already be in serious financial trouble and, therefore, may not have been appropriate credit risks. As shown in table 3, five Air Force major commands accounted for about 63 percent of the Air Force travel card delinquencies as of March 31, 2002. Air Force National Guard and Air Force Reserve Command officials attributed their high delinquent balances to the recent activation of guard and reserve forces, the associated increase in travel card use, and inadequate employee training on travel voucher preparation. In addition, the officials explained that National Guard and Reserve forces that report to duty intermittently may not become aware of problems with travel voucher accuracy and late submission of payment vouchers until they report for their next duty assignment—several days to a month after a problem has occurred. Further, the officials told us that many of their members have not been trained on proper travel voucher preparation procedures, and controls over travel card use and payment of travel card bills are weak. One reserve official cited the lack of specific guidance for disciplinary action in DOD’s Financial Management Regulation as a contributing factor. According to Air Force officials, the Air Combat Command, Air Force Materiel Command, and Air Mobility Command have all experienced significant increases in travel and deployments since September 11, 2001. Our audit work showed instances in which extended travel and back-to- back deployments resulted in delays in travel voucher preparation and submission. To reduce delinquencies associated with late payment of travel card bills by deployed units, the Air Force has emphasized the use of the split disbursement payment process and interim travel vouchers. Delinquencies and charge-offs within DOD have resulted in increased costs to the Air Force and the other services. In fiscal year 2001, DOD entered into an agreement with Bank of America to adjust the terms of its travel card contract. DOD agreed to increased fees and a change in rebate calculation. These changes cost the Air Force about $350,000 in lost rebates on individually billed accounts and centrally billed accounts in fiscal year 2001, and could cost an estimated $1.6 million in increased ATM fees annually. Other costs are real but not easily measurable, such as the increased administrative burden to the Air Force to identify and address delinquent accounts.