The Acting Under Secretary of Defense (Comptroller) provided written comments, which are discussed in the “Agency Comments” section and reprinted in appendix I.

	Stabilized Rates Should Allow Recovery of Costs Over the Long Term

The concept of a stabilized rate is a viable method to use for pricing goods and services sold to FMS customers. Omission of these costs resulted in estimated underbillings of more than $40.5 million since fiscal year 1992. With the exception of retirement benefit costs for civilian employees, which is discussed below, we found that all of the key cost elements to recover full cost from FMS customers are now included in the stabilized price. Civilian Pension and Postretirement Health Benefit Costs Were Not Included in Supply Prices

The costs not charged by the WCF supply activities, which were responsible for about $1.5 billion (75 percent) of the WCFs annual sales to FMS customers, consisted of a portion of the government’s share of the full cost for pension and postretirement health benefit costs for civilian personnel who worked on FMS cases. In discussing this matter with DOD Comptroller officials, they acknowledged that civilian retirement benefits were a cost to the government which should be included in the stabilized rate and charged to FMS customers. They told us they are planning to revise their policy so that this cost will be included in the prices charged FMS customers beginning no later than fiscal year 1998. Also, we have issued numerous reports over the years that have (1) identified tens of millions of dollars of undercharges related to the costs for goods and services provided to FMS customers and (2) recommended that DOD retroactively collect the underbillings. Conclusions

DOD’s stabilized rate policy, if applied properly, should allow WCF activities to recover the full cost of their operations over the long term. Defense’s Planned Implementation of the $77 Billion Defense Business Operations Fund (GAO/T-AFMD-91-5, April 30, 1991).
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) use of stabilized rates for charging foreign military sales (FMS) customers for goods and services sold through DOD's Defense Business Operations Fund (DBOF), focusing on whether: (1) there is a dollar difference in pricing goods and services at full cost compared to the stabilized rate; and (2) DOD's current practice of billing foreign customers at the stabilized rate is consistent with the full cost requirements of the Arms Export Control Act of 1976.

What GAO Found

GAO noted that: (1) DOD's stabilized rate generally is designed to recover full costs from DOD and FMS customers over the long term; (2) the concept of applying the stabilized rate is a viable method to recover the cost of goods and services from these customers; (3) GAO's analysis of cost elements in the stabilized rates showed that generally, the stabilized rate included the cost elements necessary to recover full cost; (4) however, GAO did identify two cost elements--pension and postretirement health benefits--related to retirement benefit costs of civilian personnel working on FMS cases, that were not included in the stabilized rates; (5) GAO estimates that Working Capital Fund (WCF) supply activities undercharged FMS customers at least $40.5 million during fiscal years (FY) 1992 through 1996 and will undercharge millions more in FY 1997; (5) GAO discussed this matter with DOD officials and they agreed that not all civilian retirement benefit labor costs were included in the rates that activities were charging FMS customers; and (6) they now plan to revise their policy to require that this cost be included in the prices charged FMS customers.