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. 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. Navy headquarters and FRC officials stated that carryover exceeded  allowable amounts because orders received from customers exceeded  work performed by more than expected. 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. Further,  the FRCs did not provide the dollar amount for each waiver in their  fiscal year 2014 budget. 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. Navy officials agreed that the  guidance does not require the FRCs to develop trend data on actual  orders. Work on Orders Began in the Fourth Quarter of the Fiscal Year Resulting in Work Carrying Over into the Next Fiscal Year

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. 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 consistent and complete reporting of  waiver information, policymakers do not have complete information for  making informed budget decisions. Appendix I: Scope and Methodology

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. 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. 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.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

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.