1). Since November 2012, the rate has been set at 3.5 percent. The FMS Administrative Account Balance Has Grown Steadily Due in Part to Insufficient Management Controls and Should Be Adequate to Pay for Additional Expenditures through 2024

The administrative account balance grew steadily over the last decade  due in part to the insufficient controls DSCA has in place to manage the  account balance. Although DSCA has set a minimum desired level for the  account and a process for regular monitoring, it has not completed timely  comprehensive reviews of the administrative fee rate. As a result,  DSCA’s monitoring and rate review practices are limited in their ability to  prevent excessive growth in the account balance. 4). As a result of this study, DSCA decided to increase the  fee rate from 2.5 to 3.8 percent. Setting an upper bound could help DSCA determine when the  balance is excessive and an out-of-cycle comprehensive review of the fee  rate might be warranted. GAO Modeling Indicates the Administrative Account Balance Could Likely Be Used to Pay for Additional Expenses, Such As Those Excluded by Statute

In addition, our modeling demonstrates that administrative funds are  sufficient to cover a higher amount of expenditures for the work the U.S.  government performs for the benefit of its foreign partners, and could be  used in place of the other appropriated funds used to support some of the  associated expenses today. In particular, according to a House  report and DOD testimony, to avoid raising the administrative fee at a  time when annual sales were low and the account was insolvent,  Congress, at DOD’s request, amended the act in 1989 to exclude from  the administrative fee certain expenses associated with military personnel  who work on the FMS program as well as the estimated costs of  unfunded civilian retirement and other benefits. The  account balances for fiscal years 2016 and 2017 overstate available CAS  funds due to a systems issue and limited related oversight. Since fiscal  year 2014, DSCA has created some controls to help better manage this  account; however, DSCA does not plan to conduct timely comprehensive  reviews of the CAS fee rate, has inconsistently implemented internal  guidance related to calculating the minimum desired level for the account,  and has not established a method to calculate an upper bound of a target  range for the account, thus allowing the account to continue to grow. The CAS Account Balance Grew Substantially between Fiscal Years 2007 and 2015; the Fiscal Years 2016 and 2017 Account Balances Overstate Available Funds

The CAS account balance grew every fiscal year, from $69 million at the  beginning of 2007 to $981 million at the end of 2015, or 1,329 percent  over the period (see fig. More frequent comprehensive reviews  would provide timely in-depth information to decision makers to ensure  that the CAS fee rate is set appropriately. Although DSCA  has followed this best practice and set a safety level, or minimum desired  balance for the CAS account, DSCA has not established a method to  calculate an upper bound of a target range for the CAS account balance,  which would help officials identify when the account balance becomes  excessive. However, DSCA has not performed comprehensive reviews of the  administrative fee rate at least every five years, consistent with DSCA  policy, and has not set an upper bound that would provide a target range  for the account. Matter for Congressional Consideration

Congress should consider redefining what can be considered an  allowable expense to be charged from the administrative account. Appendix I: Objectives, Scope, and Methodology

The Defense Security Cooperation Agency (DSCA) manages fees  collected on transfers of defense articles and services to foreign countries  that occur through the Foreign Military Sales (FMS) program. This report  examines (1) the balance maintained in the administrative account in  fiscal years 2007 to 2017, the controls used to manage it, and the extent  to which the Department of Defense (DOD) has the ability to pay for FMS  administrative expenses under different scenarios; and (2) the balance  maintained in the contract administration services (CAS) account in fiscal  years 2007 to 2017 and the controls used to manage it. We also interviewed DOD officials.
Why GAO Did This Study

The FMS program is one of the primary ways the U.S. government supports its foreign partners, by providing them with defense equipment and services. The program charges FMS customers overhead fees to cover the U.S. government's operating costs. They include the administrative fee for costs such as civilian employee salaries and facilities, and the CAS fee for the cost of contract quality assurance, management, and audits. In 1989, Congress excluded from administrative expenses certain costs associated with military personnel who work on the FMS program as well as unfunded civilian retirement and other benefits. As of May 2018, the administrative fee rate is 3.5 percent, and the CAS fee rate is 1.2 percent.
House Report 114-537 and Senate Report 114-255 included provisions that GAO review DSCA's collection and management of these fees. This report examines, for fiscal years 2007 to 2017, the balance of and controls over (1) the administrative account and (2) the CAS account. GAO analyzed Department of Defense (DOD) data and documents, modeled projections for the administrative account, and interviewed DOD officials.

What GAO Found

The Foreign Military Sales (FMS) administrative account balance grew by over 950 percent from fiscal years 2007 to 2017—from $391 million to $4.1 billion—due in part to insufficient management controls, including the lack of timely rate reviews. The Defense Security Cooperation Agency (DSCA) has some controls to manage the account balance. For example, DSCA has established a method for calculating a minimum desired balance to ensure it has sufficient funds to complete FMS cases despite uncertain future sales. At the end of fiscal year 2017, the account balance was $2.7 billion above this minimum. DSCA, however, has completed rate reviews less frequently than directed by its policy. Moreover, DSCA has not adopted the best practice of setting an upper bound for the account that would, along with the minimum level, provide a target range for the account balance. By not performing timely rate reviews or setting an upper bound, DSCA has limited its ability to prevent excessive balance growth. GAO modeling indicates that, even with a planned fee rate reduction to 3.2 percent, the account balance would likely remain above its minimum level through fiscal year 2024, including if annual expenditures increased by 15 percent more than expected. As such, the account has the potential to pay for additional expenses. These could include expenses first excluded by statute in 1989 at a time when the account balance was negative and which have since been paid from other appropriated funds. DOD told GAO it is willing to revisit these exclusions.
The FMS contract administration services (CAS) account grew from fiscal years 2007 to 2015 from $69 million to $981 million, due in part to insufficient management controls, including not setting an upper bound. The balances for fiscal years 2016 and 2017 overstated the amount of funds available due to a systems issue and limited related oversight. Since 2014, DSCA has implemented some controls for the CAS account, such as regular reviews of the account balance, but weaknesses remain. In particular, DSCA does not plan to follow its internal guidance to conduct the next CAS fee rate review within 5 years. DSCA also has inconsistently calculated the desired minimum level for the account. Finally, DSCA has not set an upper bound for the account to help officials follow internal guidance that directs them to determine when the balance is excessive and a fee rate reduction should be considered. As a result, DSCA is limited in its ability to make timely, appropriate decisions on the fee rate.

What GAO Recommends

Congress should consider redefining what it considers an allowable expense to be charged from the administrative account. GAO is making six recommendations to help DSCA improve its controls over both accounts, including completing more timely reviews and establishing a desired range for balance levels. DOD generally concurred.