The Navy’s delinquency rate was slightly lower than the Army’s, which is the highest delinquency rate in the federal government. Cumulative Navy charge-offs since the inception of the Bank of America travel card program in November 1998 were nearly $16.6 million. As discussed in further details in the following sections of this report, weaknesses in the Navy’s overall control environment and a lack of front-end controls over travel card issuance and use exacerbated the Navy’s delinquency problems. Without proper management control, demographics such as the age and pay rates of Navy personnel also contributed to delinquencies and charge-offs. These problems have led to contract modifications with Bank of America that resulted in the Navy, the federal government, and the taxpayers losing millions of dollars in rebates, higher fees, and substantial resources spent pursuing and collecting on past due accounts. DOD and the Navy have taken a number of positive actions to address the Navy’s high delinquency and charge-off rates, and results from the first half of fiscal year 2002 showed a significant drop in charged-off accounts. Most of this reduction could be attributed to a salary and military retirement offset program, which began in November 2001. DOD and the Navy also encouraged cardholders to voluntarily use the split disbursement payment process (split disbursements) to direct that a portion or all of their reimbursements be sent directly to the bank for payment of their travel card bills. The Navy also increased management attention and focus on the delinquency issue. However, except for split disbursements, the Navy’s actions primarily address the symptoms of delinquency and charge-offs after they had already occurred. Control weaknesses remain in the front- end management of the travel card program, such as issuing the cards and overseeing the proper use of the cards. Over the last 2 years, the Navy’s delinquency rate fluctuated from 10 to 18 percent and on average was 5.6 percentage points higher than other non- Army DOD components and 6 percentage points higher than non-DOD federal civilian agencies. As of March 31, 2002, over 8,000 Navy cardholders had collectively $6 million in delinquent debt. As discussed below, the nature of the Navy’s mission, which requires personnel in certain Navy commands to travel often for training and preparation for deployment, contributes, at least in part, to the Navy’s high delinquency rate. Figure 1 compares delinquency rates among the Navy, Army, other DOD, and the 23 largest civilian agencies. Since Bank of America took over the DOD travel card contract on November 30, 1998, Bank of America has charged off over 13,800 Navy travel card accounts with nearly $16.6 million of bad debt. Table 1 provides a comparison of cumulative charge-offs, recoveries, 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 2, the Navy’s delinquency and charge-off problems are primarily associated with low- and midlevel enlisted military personnel grades E-1 to E-6, with relatively low incomes and little experience in handling personal finances. Available data indicate that military personnel grades E-1 (seaman recruit in the Navy or private in the Marine Corps) to E-6 (petty officer first class in the Navy or staff sergeant in the Marine Corps) account for about 78 percent of all Navy military personnel. These enlisted military personnel have basic pay levels ranging from $12,000 to $27,000. These individuals were responsible for 40 percent of the total outstanding Navy travel card balances as of September 30, 2001. Figure 3 compares the delinquency rates by military rank and civilian personnel to the Navy’s average delinquency rate as of September 30, 2001. As shown, the delinquency rates were as high as 34 percent for E-1 to E-3 military personnel and 20 percent for E-4 to E-6 military personnel, compared to the Navy’s overall delinquency rate of 12 percent. These rates were markedly higher than the rates for officers, which ranged from a low of 1 percent for O-7 to O-10 (admirals in the Navy or generals in the Marine Corps) to a higher 8 percent for O-1 to O-3 (ensign to lieutenant in the Navy or second lieutenant to captain in the Marine Corps). These rates were also substantially higher than that of Navy civilians, which at 5 percent was comparable with the federal civilian agencies rate shown in figure 1. The delinquency rate of military personnel E-4 to E-6 in particular had an important negative impact on the Navy’s delinquency rate. Specifically, these are petty officers in the Navy and corporals to staff sergeants in the Marine Corps. Pay levels for these personnel, excluding supplements such as housing, ranged from approximately $18,000 to $27,000. These individuals also traveled often. As shown by Bank of America data, personnel E-4 to E-6 accounted for 36 percent of the total Navy outstanding balance, which was higher than the outstanding balance of all other military and civilian personnel. This combination of high outstanding balance and high delinquency rate largely explained the high Navy delinquency rate. As shown in figure 4, charged-off amounts for military personnel grades E-1 to E-6 during fiscal year 2001 totaled more than $3.6 million. This represented 72 percent of the almost $5 million in total Navy charge-offs during fiscal year 2001. According to Navy representatives, these individuals often had little experience handling personal resources. Although their basic pay rates are supplemented with housing and food allowances, the low salaries may not permit payment of excessive personal charges on travel cards. If these individuals get into financial difficulty, they have fewer resources at their disposal to pay their travel card balances in full every month. Also, if cardholders in these lower grade levels do not receive their travel card reimbursements promptly because of either delays in filing their vouchers or voucher processing, they may lack the financial resources to make timely payments on their travel card accounts. In addition, as discussed later in this report, the Navy did not exempt personnel with poor credit histories from required use of travel cards. Consequently, these low- and midlevel enlisted military personnel are often issued travel cards even though some may already be in serious financial trouble and, therefore, may not have been appropriate credit risks. Lack of adequate training and the failure to adequately monitor travel card use may also have exacerbated the delinquency rates for these individuals. Navy delinquency rates also varied widely across commands. Table 2 shows the outstanding balance and delinquency rates of major Navy commands as of March 31, 2002. As shown, the delinquency rates as of March 31, 2002, ranged from 22 percent for the Naval Reserve Force to as low as 2 percent for four commands, including the Naval Air Systems Command. Table 2 also shows that high credit card activity was not necessarily associated with high delinquency rates. In fact, some Navy commands with high credit card activity also had low delinquency rates. The six major commands with the highest delinquency rates—ranging from 22 to 12 percent—as of March 31, 2002, were the Naval Reserve Force, the U.S. Atlantic Fleet, the U.S. Pacific Fleet, U.S. Marine Corps Forces Pacific, U.S. Marine Corps Forces Atlantic, and Marine Forces Reserve. Navy officials expressed the belief that demographics and logistics were important contributing factors to these high delinquency rates. According to Navy officials, Atlantic and Pacific fleet personnel, as well as Marine Corps Forces Atlantic and Pacific, travel frequently for training and preparation for deployment. Because they are always on the move, these individuals might not be filing vouchers and making payments in a timely manner. In addition, fleet personnel often consist of low- and midlevel recruits, demographics which, as discussed previously, are a contributing factor to the high delinquency rate. Navy officials attributed the delinquency problems with the reserve forces to logistics of a different kind. Reserve forces are spread throughout the country and report to duty only once a month. Reservists typically fill out their vouchers when they return home and then mail them to the processing centers, sometimes weeks after the training. According to Navy officials, the high delinquency rates in the reserve forces could be attributed partly to the fact that some had not received travel reimbursement by the time their bills became delinquent. In contrast, some commands, such as Naval Sea Systems Command and Naval Air Systems Command, had large numbers of travel card accounts and high travel card activity, yet low delinquency rates. According to Navy officials, this is because personnel in these commands are typically civilians, are older and more mature, and therefore are better at managing their finances. These demographic factors, coupled with the fact that these sites typically have full-time APCs and a better control environment, may explain why their delinquency rates are lower than the Navy average, and sometimes even lower than the average rate for federal civilian agencies. The case study sites we audited followed the pattern described above. For example, at Camp Lejeune, a principal training location for Marine air and ground forces, over one-half of the cardholders are enlisted personnel. Representative of the Navy’s higher delinquency rate, Camp Lejeune’s quarterly rates over the 18 months ending March 31, 2002, averaged over 15 percent. As of March 31, 2002, the delinquency rate at this site was nearly 10 percent. In contrast, at Puget Sound Naval Shipyard, where the mission is to repair and modernize Navy ships, civilian personnel earning more than $38,000 a year made up 84 percent of total government travel cardholders and accounted for 86 percent of total fiscal year 2001 travel card transactions.