According to an  OUSD(C) official, the methodology developed in 2017 resulted in budget  rates that were more closely aligned with market rates than in previous  years, making revision of the 2017 budget rates unnecessary. Specifically, this official stated that DOD revised its budget rates during  fiscal years 2014 through 2016 to decrease the expected gains that would  have otherwise resulted during these fiscal years from a substantial  increase in the strength of the U.S. Dollar relative to other foreign  currencies from the time the budget rates were set as compared with  more favorable rates available once the fiscal year began. Therefore, DOD did not  revise its foreign currency budget rates during fiscal year 2017. DOD Has Taken Some Steps to Reduce Costs, but Has Not Fully Explored Additional Opportunities to Achieve Savings When Selecting Foreign Currency Rates

DOD has taken some steps to reduce costs in selecting foreign currency  rates to liquidate its obligations through disbursements. Dollars, and DOD has not determined whether opportunities  exist to achieve additional efficiencies when making disbursements. More  specifically, the Army estimated between $8 million and $10 million in  annual savings by transitioning from a 5-day to a 3-day advanced rate  when selecting foreign currency rates. Absent a review of the rates the services are using in  making disbursements and whether cost savings could be achieved by  more consistently selecting the most cost-effective foreign currency rates  available for use at disbursement, DOD is at risk for paying more to  convert U.S. Dollars for overseas expenditures than would otherwise be  required. However, DOD maintained the account balance at $970 million by  transferring approximately $495.3 million in unobligated balances into the  account. As a result, although an exact amount is unknown, DOD  may be maintaining balances in the FCFD account that are hundreds of  millions of dollars higher than needed to cover any losses it has  experienced, and these funds may have been more efficiently used in  supporting other defense activities or returned to Treasury after the  account is canceled by law. Conclusions

Congress provides DOD with a significant amount of funding each year to  purchase goods and services overseas and to pay service-members  stationed abroad. The Army has estimated  potential cost savings that would result from more consistently selecting a  more cost-effective foreign currency rate for making disbursements to  liquidate its overseas O&M obligations. Further, while  DOD has used the FCFD account to cover losses that resulted from  foreign currency fluctuations, it has not managed the FCFD account  balance by basing the transfers of unobligated balances into the FCFD  account on an analysis of realized and projected losses. Appendix I: Scope and Methodology

To describe the Department of Defense’s (DOD) revised foreign currency  budget rates since 2009 and the relationship between the revised budget  rates and DOD’s projected Operation and Maintenance (O&M) and  Military Personnel (MILPERS) funding needs, we reviewed DOD’s foreign  currency budget rates for the period of fiscal years 2009 through 2017,  and we identified any years during which DOD revised the initial budget  rates. To evaluate the extent to which DOD has taken steps to reduce costs in  selecting foreign currency rates at which to make disbursements and  determine whether opportunities exist to gain additional savings, we  reviewed accounting standards and any guidelines that exist regarding  disbursements and calculations of foreign currency gains and losses,  such as DOD’s Financial Management Regulation 7000.14-R, which calls  for the use of prevailing foreign currency rates to make disbursements. To assess the extent to which DOD has effectively managed the Foreign  Currency Fluctuations, Defense (FCFD) account to cover losses, and  maintained quality information to manage these funds, we analyzed DOD  data for fiscal years 2009 through 2016 on foreign currency gains and  losses reported by each of the services as reported in their Foreign  Currency Fluctuation, Defense (O&M) and (MILPERS) reports;  movements of funds between the FCFD account and the services’ O&M  and MILPERS accounts; and the end-of-year FCFD account balances.
Why GAO Did This Study

DOD requested about $60 billion for fiscal years 2009 - 2017 to purchase goods and services overseas and reimburse service-members for costs incurred while stationed abroad. DOD uses foreign currency exchange rates to budget and pay (that is, disburse amounts) for these expenses. It also manages the FCFD account to mitigate a loss in buying power that results from foreign currency rate changes.
GAO was asked to examine DOD's processes to budget for and manage foreign currency fluctuations. This report (1) describes DOD's revision of its foreign currency budget rates since 2009 and the relationship between the revised rates and projected O&M and MILPERS funding needs; (2) evaluates the extent to which DOD has taken steps to reduce costs in selecting foreign currency rates to disburse funds to liquidate O&M obligations, and determined whether opportunities exist to gain additional savings; and (3) assesses the extent to which DOD has effectively managed the FCFD account balance. GAO analyzed data on foreign currency rates, DOD financial management regulations, a non-generalizable sample of foreign currency disbursement data, and FCFD account balances.

What GAO Found

The Department of Defense (DOD) revised its foreign currency exchange rates (“budget rates”) during fiscal years 2014 through 2016 for each of the nine foreign currencies it uses to develop its Operation and Maintenance (O&M) and Military Personnel (MILPERS) budget request. These revisions decreased DOD's projected O&M and MILPERS funding needs. DOD's revision of the budget rates during these years also decreased the expected gains (that is, buying power) that would have resulted from an increase in the strength of the U.S. Dollar relative to other foreign currencies. DOD did not revise its budget rates in fiscal years 2009 through 2013. For fiscal year 2017, DOD changed its methodology for producing budget rates, resulting in rates that were more closely aligned with market rates. According to officials, that change made it unnecessary to revise the budget rates during the fiscal year.
DOD has taken some steps to reduce costs in selecting foreign currency rates used to pay (that is, disburse amounts) for goods and services, but DOD has not fully determined whether opportunities exist to achieve additional savings. The Army has estimated potential savings of up to $10 million annually by using a foreign currency rate available 3 days in advance of paying for goods or services rather than a more costly rate available up to 5 days in advance. The Army has converted to the use of a 3-day advanced rate. GAO's analysis suggests that DOD could achieve cost savings if the services reviewed and consistently selected the most cost-effective foreign currency rates when paying for their goods and services. Absent a review, DOD is at risk for paying more than it would otherwise be required to conduct its transactions.
DOD used the Foreign Currency Fluctuations, Defense (FCFD) account to cover losses (that is, less buying power) due to unfavorable foreign currency fluctuations in 6 of the 8 years GAO reviewed. Since 2012, DOD has maintained the FCFD account balance at the statutory limit of $970 million, largely by transferring unobligated balances before they are cancelled from certain DOD accounts into the FCFD. However, DOD has not identified the appropriate FCFD account balance needed to maintain program operations by routinely analyzing projected losses and basing any transfers into the account on those expected losses. Thus, DOD may be maintaining balances that are hundreds of millions of dollars higher than needed, and that could have been used for other purposes or returned to the Treasury Department (see figure).

What GAO Recommends

GAO is making four recommendations, including that DOD review opportunities to achieve cost savings by more consistently selecting the most cost-effective foreign currency rates used for the payment of goods and services, and analyze projected losses to manage the FCFD account balance. DOD generally concurred with the recommendations.