The Military Services Did Not Follow DOD Policy in Calculating Carryover

The military services have not consistently implemented DOD’s 2002  revised policy in calculating carryover. Instead, the military services used  different methodologies for calculating the reported actual and the  allowable amount of carryover since DOD changed its carryover policy in  December 2002. Specifically, (1) the military services did not consistently  calculate the allowable amount of carryover that was reported in their  fiscal year 2004, 2005, and 2006 budgets because they used different tables  (both provided by DOD) that contained different outlay rates for the same  appropriation; (2) the Air Force did not follow DOD’s regulation on  calculating carryover, which affected the amount of allowable carryover  and actual carryover by tens of millions of dollars and whether the actual  amount of carryover exceeded the allowable amount as reported in the  fiscal year 2004, 2005, and 2006 budgets; and (3) the Army depot  maintenance and ordnance activity groups’ actual carryover was  understated in fiscal years 2002 and 2003 because carryover associated  with prior year orders was not included in the carryover calculation as  required. As a result, year-end carryover data provided to  decision makers who review and use these data for budgeting—Office of  the Under Secretary of Defense (Comptroller) and congressional decision  makers—are erroneous and not comparable across the three military  services. Navy Generally Followed DOD’s Carryover Policy but Better Disclosure Is Needed for Reporting on Research and Development Activity Group’s Carryover

In analyzing the Navy’s actual carryover figures for the naval shipyards,  aviation depots, and research and development activity groups shown in  the fiscal year 2004, 2005, 2006, and 2007 budgets to Congress, we found  that the Navy generally followed DOD’s policy on calculating the actual  amount of carryover as well as the allowable amount of carryover. While the budgets show that the Navy research and development activity  group did not exceed the ceiling for any of the 4 years, the budgets no  longer provide information that shows if any of the five subactivity groups  individually exceeded the carryover ceiling, as the Navy budgets did prior  to the change in the carryover policy in December 2002. Carryover Increased Due to Military Services Placing Orders Late in the Fiscal Year

Carryover is greatly affected by orders accepted late in the fiscal year that  generally cannot be completed, and in some cases cannot even be started,  prior to the end of the fiscal year. These reasons included (1) funds  provided to customers late in the fiscal year to finance existing  requirements, (2) new work requirements identified at year end,   (3) problems encountered in processing orders, and (4) work scheduled at  year end. Further, our analysis showed that 39 of the 68 orders—over half  of the orders reviewed—were not complete at the end of the next fiscal  year, generating a second year of carryover. In addition to increasing  carryover amounts, orders accepted by working capital fund activities late  in the fiscal year, in which these activities do not perform the work until  well into the next fiscal year or even subsequent years, may not (1) be the  most effective use of DOD resources at that time and (2) have complied  with all of the order acceptance provisions cited in the DOD Financial  Management Regulation. Reasons Customer Orders Are Placed Late in the Fiscal Year

As shown in figure 1, our review of 68 fiscal year-end orders for 2003 and  2004 identified four key factors contributing to orders generally being  issued by customers late in the fiscal year and being accepted by the  working capital fund activities during the last month of the fiscal year. Therefore, $277,898 carried over into  fiscal year 2006. To determine if customers were submitting orders to working capital fund  activities late in the fiscal year and, if so, the effect that this practice has  had on carryover, we obtained data on orders accepted by working capital  fund activities in September 2003 and September 2004.
Why GAO Did This Study

According to the Department of Defense's (DOD) fiscal year 2006 budget estimates, working capital fund activity groups (depot maintenance, ordnance, and research and development) will have about $6.3 billion of funded work that will be carried over from fiscal year 2006 into fiscal year 2007. The congressional defense committees recognize that these activity groups need some carryover to ensure smooth work flow from one fiscal year to the next. However, the committees have previously raised concern that the amount of carryover may be more than is needed. GAO was asked to determine (1) if the military services' carryover calculations were in compliance with DOD's new carryover policy and (2) if customers were submitting orders to working capital fund activities late in the fiscal year and, if so, the effect this practice has had on carryover.

What GAO Found

The military services have not consistently implemented DOD's revised policy in calculating carryover. Instead, the military services used different methodologies for calculating the reported actual amount of carryover and the allowable amount of carryover since DOD changed its carryover policy in December 2002. The military services did not consistently calculate the allowable amount of carryover that was reported in their fiscal year 2004, 2005, and 2006 budgets because they used different outlay rates for the same appropriation. The Air Force did not follow DOD's regulation on calculating carryover for its depot maintenance activity group, which affected the amount of allowable carryover and actual carryover by tens of millions of dollars and whether the actual carryover exceeded the allowable amount as reported in the fiscal year 2004, 2005, and 2006 budgets. The Army depot maintenance and ordnance activity groups' actual carryover was understated in fiscal years 2002 and 2003 because carryover associated with prior year orders was not included. While the Navy generally followed DOD's policy for calculating carryover, the Navy consolidated the reporting of carryover information for research and development activities. The Navy budgets no longer provide information to show if any of the five research and development subactivity groups individually exceeded the carryover ceiling as the Navy budgets did prior to the change in the carryover policy. As a result, carryover data provided to decision makers who review and use the data for budgeting are erroneous and not comparable across the three military services. For example, the Air Force reported to Congress that the actual fiscal year 2002 carryover for depot maintenance was $87 million less than the ceiling. If the Air Force followed DOD's policy, GAO's calculations show its carryover would have exceeded the ceiling by $216 million. Carryover is greatly affected by orders accepted by working capital fund activities late in the fiscal year that generally cannot be completed by fiscal year end, and in some cases cannot even be started prior to the end of the fiscal year. GAO's analysis of 68 fiscal year-end orders identified four key factors contributing to orders generally being issued by customers late in the fiscal year and being accepted by the working capital fund activities during the last month of the fiscal year. These reasons included (1) funds provided to the customer late in the fiscal year to finance existing requirements, (2) new work requirements identified at year end, (3) problems encountered in processing orders, and (4) work scheduled at year end. GAO's analysis showed that over half of the orders reviewed were not completed at the end of the next fiscal year, generating a second year of carryover on the same order. As a result, some orders may not have been the most effective use of DOD resources at that time and may not have complied with all of the order acceptance provisions cited in the DOD Financial Management Regulation.