DOD Does Not Have a Sound Analytical Basis for Its 3-Month Carryover Standard

DOD has a 3-month carryover standard for all but one working capital fund activity group, but Office of the Under Secretary of Defense (Comptroller) and military service officials could not provide, and we could not identify, any analytical basis for this standard. They informed us that the 3-month standard (1) was based on management judgment and that 3 months (one-fourth of the fiscal year) should be enough time to ensure a smooth flow of work during the transition from one fiscal year to the next, (2) had been in effect for many years, and (3) was reviewed during a 1996 DOD carryover study when DOD representatives visited various working capital fund activities to solicit the opinions of managers regarding the carryover standard and reviewed data substantiating those opinions. Because the Army and Navy are reducing the amount of carryover but not the amount of revenue, the number of months of carryover they are reporting is understated. Inaccurate Budget Estimates Further Complicate Review of Carryover Levels

Further complicating the congressional budget review of carryover is that some activity groups have underestimated their budgeted year-end carryover year after year, thereby providing decisionmakers misleading carryover information and resulting in more funding being provided than was intended. If the standard had been reduced to 60 days or 75 days, projected customer order levels would have been about $1.6 billion or $1.0 billion less, respectively, than the amount budgeted. To determine whether applying the carryover authority to not more than a 30-day quantity of work would be sufficient to ensure uninterrupted operations at the working capital fund activities early in a fiscal year and what the impact on these activities would be if the carryover policy were reduced from 3 months to 30 days, we calculated what the potential financial impact on customer orders would have been if a 30, 60, 75, or 90- day carryover standard had been in effect for fiscal year 2001. This appendix discusses the different methods the services used to determine compliance with DOD’s 3-month carryover standard.
Why GAO Did This Study

This report examines the working capital fund activities for the Department of Defense (DOD). GAO (1) identifies potential changes in current management processes or policies that, if made, would result in a more efficient operation and (2) evaluates various aspects of the DOD policy that allow Defense Working Capital Fund activities to carry over a 3-month level of work from one fiscal year to the next.

What GAO Found

GAO found that DOD lacks a sound analytical basis for its current 3-month carryover standard. DOD established a 3-month carryover standard for most working capital fund activity groups, although it has not done the analysis necessary to support the 3-month standard. Without a validation process, neither DOD nor congressional decisionmakers can be sure that the 3-month standard is providing activity groups with reasonable amounts of carryover to ensure a smooth transition from one fiscal year to the next or whether the carryover is excessive. In addition, carryover information currently reported under the 3-month standard is not comparable between services and is misleading to DOD and congressional decisionmakers. Specifically, results can differ markedly because the military services use different methods to calculate the number of months of carryover. Further complicating the congressional budget review of carryovers is that some activity groups have underestimated their budgeted carryover year after year, thereby providing decisionmakers with misleading year-end carryover information and resulting in more funding being provided than was intended. GAO also reviewed the potential financial impact of reducing the amount of fiscal year-end carryover permitted by DOD policy. GAO's analysis showed that if a 30-day, 60-day or 75-day carryover policy had been in effect during the fiscal year 2001 budget review process, the amount of budgeted customer orders could have been reduced by about $2.9 billion, $1.6 billion, or $1.0 billion, respectively.