Segment 2 Of 2 Previous Hearing Segment(1)
SPEAKERS CONTENTS INSERTS Tables
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OPERATION AND MAINTENANCE FINANCIAL MANAGEMENT PRACTICES
House of Representatives,
Committee on National Security,
Military Readiness Subcommittee,
Washington, DC, Tuesday, July 22, 1997.
The subcommittee met, pursuant to notice, at 2:03 p.m., in room 2212, Rayburn Office Building, Hon. Herbert H. Bateman (chairman of the subcommittee) presiding.
OPENING STATEMENT OF HON. HERBERT H. BATEMAN, A REPRESENTATIVE FROM VIRGINIA, CHAIRMAN, MILITARY READINESS SUBCOMMITTEE
Mr. BATEMAN. The subcommittee will come to order.
This afternoon, the Subcommittee on Military Readiness will be hearing from representatives from the Department of Defense on their accounting practices for the management of funds within the operation and maintenance accounts. I believe this hearing is timely for several reasons.
First, the subcommittee continuous to be frustrated with the practice by the Department of Defense of using the O&M or readiness accounts as a readily available checkbook to solve many of their funding problems.
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Second, the practice of advance billing used by the Department to head off insolvency in the working capital funds appears to be a never ending process in spite of assurances to the contrary by those in charge of managing these funds. Both of these issues will be before the conference committee on the fiscal year 1998 national defense authorization bill, a conference that will begin in the very near future.
For the past several years, and particularly the last 2 years, Congress has repeatedly provided money over and above the administration's budget request in key O&M accounts in recognition of underfunding in these critical accounts. Each year, the military services continue to come before the committee and tell us they are adequately funded. And yet, as we have learned from several readiness hearings and investigations, the military services continue to have significant problems managing the funds in the key readiness and training accounts. The O&M accounts are the only ones in the Department that have little if any restriction on the movement of funds within or out of their original appropriations. Congress has very little oversight over the movement of funds which it believes are necessary for the readiness of our military forces.
The Department of Defense has used the various individual accounts within the O&M appropriations as ready reserves for funding shortfalls elsewhere. It is a common practice for the services to transfer money from a training account or depot maintenance to an account such as base operations or real property maintenance. This has frequently been required because some accounts have historically been underfunded, and thus require an infusion of funds before the new fiscal year. I fully recognize the need by the operational commander to utilize his operating funds in the most responsible manner. However, the movement of these funds due to unforeseen circumstances, or new contingencies, has an impact on the readiness of the forces. What is needed, I believe, is truth in budgeting, and discipline in the execution of the budget.
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So that Congress may better understand this problem and fully exercise it's constitutional mandated oversight responsibilities, the House approved a provision in this year's national defense authorization bill that requires the Secretary of Defense to notify the Congress prior to reallocating any O&M funds above an aggregated amount of $10 million within or out of the O&M subaccounts. This provision gives flexibility to the military services to transfer amounts below the $10 million threshold without prior notification.
However, once the threshold of $10 million has been met, any movement of additional funds means the services must follow the procedures currently used when transferring funds between appropriations. Each year the working capital funded activities of the departments, such as maintenance depots and research and development activities, must take extraordinary money management measures and resort to accounting practices which ultimately cannot be sustained, and which will only lead to greater funding problems in the future.
One such accounting practice we will learn more about today is a practice known as advance billing. This accounting practice allows the military service to bill and collect funds in advance for work or service to be accomplished sometime in the future. The generated funds are then used to conduct operations which would otherwise be underfunded. Normally the working capital fund rates and workload plans established by the military departments should generate sufficient cash to cover the routine operation.
It's my understanding that the practice of advance billing should be viewed by the services as a last resort to address unforeseen disruptions in work schedules. This committee has repeatedly been assured by senior officials within the Defense Department that advance billing will not be required in the future. Yet the practice continues, and in fact, the committee was just recently notified of Navy and Air Force advance billing in the hundreds of millions of dollars. I understand that the Army has not yet needed to resort to this practice, but I am told that they are soon to follow. I believe this practice is a death spiral that could one day break the system. We must find a workable solution to this problem.
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The committee believes that the pervasive use of advance billing by the various military departments may indicate that working capital fund rates and workload assumptions contained in recent budgets are unrealistic. I'm personally concerned that these activities will continue to be insufficiently funded in the future DOD budgets. As defense budgets will be constrained in the foreseeable future, it's unrealistic to expect the Congress to continue to bail out the military for their failure to adequately perform their stewardship of the funds Congress provided in their appropriations.
I'm also concerned by the level of oversight exercised by the Department of Defense over the formulation of the individual military departments' budget requests. We are very fortunate to have two panels today that will be able to help us understand where we are with regard to advance billing, and transfers within the operations and maintenance appropriations.
The first panel includes Mr. Jack L. Brock, Jr., Director, Defense Information and Financial Management Systems of the General Accounting Office; and Mrs. Sharon A. Cekala, Associate Director, Military Operations and Capabilities Issues, National Security and International Affairs Division of the General Accounting Office.
Our second panel is composed of representatives of the Department of Defense, including the Honorable Alice C. Maroni, Principal Deputy Under Secretary of Defense, (Comptroller); the Honorable Helen T. McCoy, Assistant Secretary of the Army for Financial Management and Comptroller; the Honorable D.P. Christie, Assistant Secretary of the Navy, Financial Management and Comptroller; and the Honorable Robert F. Hale, Assistant Secretary of the Air Force, Financial Management and Comptroller.
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Before we hear from our panel, I would now like to recognize the Honorable Norman Sisisky, the ranking Democrat on the Readiness Subcommittee for any statements he would like to make.
STATEMENT OF HON. NORMAN SISISKY, A REPRESENTATIVE FROM VIRGINIA, RANKING MEMBER, MILITARY READINESS SUBCOMMITTEE
Mr. SISISKY. Thank you, Mr. Chairman. I join with Chairman Bateman to welcome you to this Readiness Subcommittee hearing today.
I believe my interest in improving how the Department manages its finances is well known. As one who has spent a lot of time in the business world, I understand the importance of ensuring the use of disciplined business practices, and especially the need for sound financial management. I think we all agree that the way the Department conducts its business has significant impact on force readiness, both today and tomorrow.
I am concerned about the long-term implications of the inability of the Department to manage in a more business-like manner, both cash collections and discretionary disbursements. I do not believe that we have a good handle, either at the DOD level, or at the service level, on what we are doing with the money. The advance billing problem is just one manifestation of this lack of knowledge. Last year, Dr. Hamry and the Navy people had some interesting discussions about Navy advance billing with Chairman Bateman and I.
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Also, in September 1996, the Department informed the committee leadership that it was making every effort to increase cash collections and limit discretionary spending. Further, that as existing advances are liquidated, additional advances will be required to sustain adequate cash levels until corrected in the fiscal year 1998 budget.
That information would suggest that we here in Congress would begin to see a divergence from the practice of advance billing, or at least the downward trend line in the frequency and the amount of new advance billings. But that is not what we're seeing, and that really bothers me. I do not see the results of internal DOD actions to ensure liquidity of the funds without advance billing. As a matter of fact, unless something drastic happens, I believe that the cash problem will continue until fiscal year 1999, and beyond. It bothers me that the Department will have to increase prices to recoup losses and generate cash, and I know what that means regarding the future cost of doing maintenance on ships. I look forward to hearing not only assessment regarding the problem, but also what the Department intends to do about it.
Now, the routine migration of funds within the O&M accounts is a practice we simply cannot afford. We cannot continue to accept it as a result of the Department's response to the uncertain environment. We have used O&M funds as a cash cow for too long; and over the years, the Congress has continuously attempted to reduce the backlogs in depot maintenance and in real property maintenance by adding to the budget requests. And each year we have seen the money used for something else and not replaced.
The national security environment is changing in ways none of us anticipated even a few years ago. And I really accept the fact that the department faces a dynamic threat environment, and that the budget submission is based on the best estimate of the situation at the time of submission. I also understand the need for management flexibility. But enough is enough. We can no longer stand idly by while resources are mismanaged in the name of flexibility and uncertainty. Maybe it is time for us to look at O&M budgeting in the same manner that we look at MILCON budgeting. I would be interested in hearing our witnesses address their perceptions of the long-term implications of continuing the current practice and their recommendations regarding what we should do about it.
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I would also like to hear how the Department intends to monitor proposed changes in DOD financial management, policies, practices, and procedure, to ensure that the changes are implemented, and that they have the desired effect.
I thank all of you for coming today, and what you say here hopefully will help us understand more about how we can assist the Department in getting the best national security that we can for the dollars available.
I thank you, Mr. Chairman.
Mr. BATEMAN. Thank you, Mr. Sisisky, and now it's my pleasure to welcome and to express our thanks to our first panel.
Mr. Jack L. Brock, and Ms. Sharon Cekala, from the General Accounting Office. And it's my understanding, Mr. Brock, that you will proceed first.
STATEMENTS OF JACK L. BROCK, DIRECTOR, DEFENSE INFORMATION AND FINANCIAL MANAGEMENT SYSTEMS, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY GREG PUGNETTI, ASSISTANT DIRECTOR, DEFENSE INFORMATION AND FINANCIAL MANAGEMENT SYSTEMS, GENERAL ACCOUNTING OFFICE; AND SHARON CEKALA, ASSOCIATE DIRECTOR, MILITARY OPERATIONS AND CAPABILITIES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY CAROLE COFFEY, SENIOR EVALUATOR, GENERAL ACCOUNTING OFFICE
Mr. BROCK. Yes, sir. Thank you very much.
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I appreciate being invited here today. I would like to introduce Greg Pugnetti. He's the Assistant Director in my group, and is a real expert on the working capital fund.
With your permission, I would like to summarize my statement.
Mr. BATEMAN. The full statement will be made a part of the record, and you may proceed with your summary.
Mr. BROCK. Thank you very much.
I'm here today to talk primarily about cash advances, and I would agree with the remarks that you gentlemen made that prolonged practice of cash advances is really indicative of poor cash management. Periodically, I think we can see the need for cash advances if you have a short-term need, or if you have a cyclical downturn that you're going to work your way out of, but, I think, over the past 4 or 5 years, we've seen that this is systemic, that it continues; and we believe that it will likely continue. And that right now, several of the funds are really living on the edge. And without cash advances, they would be in a zero cash balance; and then of course, in that case, violate the Antideficiency Act.
Before I get a little bit further into that, I would like to give you just a brief background, if I may. When DBOF was established in 1991; and unfortunately, I may interchange DBOF and working capital funds, but at this time, I am talking about DBOF.
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When DBOF was established in 1991, the concept was real simple, that when you established prices for goods and services, it would allow each DBOF area to break even over time. That's to say that within any one year, they might make a profit, they might make a loss, but over time, they would break even. And the thought was that by recognizing the full cost to provide goods and services, it would provide additional pressure on the functional areas to improve operations, and eventually drive prices down, and allow more funding to be applied to more important needs, primarily supporting the war fighter.
Over the years, we've had a number of concerns about the inefficiencies of some of the DBOF activities that we've looked at. For this subcommittee, we've done reports on TRANSCOM. Last spring we released a report to this subcommittee on naval ordnance facilities. And in both of those reports, we talked about the inefficiencies in operations that are really the culprit behind increased prices.
But today, I'd like to spend more time on just talking about the cash management aspects. In order to break even, your revenue minus your expenses has to equal zero over time. And when you break this apart a little bit, the revenue is equal to the price times the individual work unit.
So, therefore, to break even, your price has to be established as a factor of your expected workload, and your expected costs. And if these factors aren't reasonable, then a gain or a loss is incurred. It needs to be either distributed the next year if it's a gain, or recovered if it's a loss in the following years.
At the same time, while you're doing that, even though you want to break even, you need to sustain sufficient cash to pay your day-to-day operating costs. And typically for most funds, that's 7 to 10 days. And again, if you go negative, you violate the Antideficiency Act, which is a serious violation.
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Over time, since 1991, the working capital funds have really not achieved a break-even status. As noted in our written statement, we expect them to have a negative $1.7 billion accumulated operating result loss at the end of this fiscal year. These accumulated losses over time have, in turn, put pressures on cash balances; and the working capital funds we've noted in several reports have had a continuing problem with cash management.
Collectively, the four funds require between $2.3 and $3.4 billion in cash to operate. As of March, the working capital fund—and I think that's indicated on our charts up there—has almost $2 billion in cash. This is below the minimum required, and usually when you're below the minimum, it's an indicator of the need for future advance billings. It's almost always a good predictor of the need for advance billing. Without advance billings, both the Navy and the Air Force would have had negative cash—would now have negative cash balances, and again would be in violation of the Antideficiency Act.
And when you're short on cash, there are only a few things that you can do. You can raise prices. You can reduce costs. You can get an appropriation to tide you over. You can defer paying bills for awhile. You can do a better job of collecting receivables.
However, the easiest and most expedient route has been advance billing. And the funds have all been—the funds have been advance billing since 1993.
In July 1994, the comptroller stopped advance billings, except for the Navy shipyards, and for the R&D activities. However, in 1995, when cash management was turned over to the services, advance billing was necessary to avoid going negative, and it has continued. In the calendar year 1996, Navy advanced $1.7 billion, and the Air Force advanced billed $1.2 billion. This year-to-date, Navy has advance billed $400 million, and the Air Force just under $700 million.
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You look at the charts that we have displayed over there—and I think they are reproduced in an easier to read scale at the back of the statement—you can see that since February 1995, when the charts start, the services have liquidated about $4.2 billion in advance billing.
In other words, in February 1995, they had a balance of $5.2 billion; and in May 1997, they have an advance of $1 billion. And I kind of expect this to rise. I think they will likely increase, the balance will likely increase. We don't know the net effect yet of almost $925 million that have been advanced billed by the Air Force and the Navy in June and July. So that will have some impact on that picture.
Again, if you look at the charts, you can see that the Army has done a very good job of liquidating most of its balance. That Navy's balance would be negative for almost the entire period without advance billing, and that the Air Force was doing pretty well until December 1996 when it began advance billing to avoid the negative cash balance.
When we look ahead for the rest of 1997, and look into fiscal year 1998, we believe there's going to be continued pressure to advance bill.
Right now, as both the Army and Navy may have to advance bill later this year because their reported cash balances are below the recommended minimum balances. And as I noted earlier, if you're below the recommended minimum, it's a pretty good predictor that you'll have to advance bill.
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For 1998, at this committee's request, we examined five areas for their price establishment for fiscal year 1998. We looked at Army depot maintenance, Air Force depot maintenance, Navy shipyards, Navy ordnance, and Navy R&D. Of those five, we believe that only Navy R&D appeared to have established a reasonable price based on its current workload projections, and on achieving a zero AOR—that's Accumulated Operating Result—at the end of the fiscal year.
The other four areas, we are projecting negative AOR of $300 million, and we believe that this will in turn likely further increase pressure for advance billing sometime during fiscal year 1998.
In conclusion, Mr. Chairman, I would just like to repeat that I think the cash advances are a reasonable mechanism to get cash on an occasional basis when there's an emergency need, but if you see it repeated, then that means that you're not doing a good job on your cash management, that you're living on the edge. It's sort of like having your own personal checkbook, and you're continually hitting that protection, the overdraft protection, and it's a very tenuous position.
The only real way I think to affect this long term is to do a better job of matching prices with the expected expenses, and we recognize that this is difficult. Typically, the activities establish prices about 21 months in advance of when they go into effect. This is hard to do. We think better long-term solutions are reducing costs and improving efficiencies. But mostly just to get a realistic handle on what you've got, how much it's going to cost you, and the price that you have to establish.
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Without that, I think advance billing could be a permanent fixture.
That concludes my summary, Mr. Chairman.
[The prepared statement of Mr. Brock can be found in the appendix on page 51.]
Mr. BATEMAN. Thank you very much, Mr. Brock.
I think it probably would be more helpful to the committee if we could then—if we could now address questions to you, and then we'll return for the testimony with reference to the O&M funding issues.
The Army apparently has been doing a better job in the context of what we're discussing than the sister services in the Navy and the Air Force. Are there any things that you can point to systemically as the explanation for why the Army has relatively done better, that the other services might learn to emulate?
Mr. BROCK. Well, first of all, we are anxiously awaiting you to ask that question to the Army, as well.
I guess there are a couple of factors. First of all, the Army is a smaller fund. And I think as a result, it's probably a little easier to manage.
And second, we think that they've done a better job consistently over time of establishing prices, and establishing workloads, projected workloads, that have been reasonably accurate. The other two services have not done as good a job in that area.
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Mr. BATEMAN. Does that indicate that perhaps there ought to be some subcompartmentalization of the Navy and the Air Force funds in order that they might become each one smaller and, therefore, easier to get their hands on and to deal with?
Mr. BROCK. I think that's an idea that's worth looking at. We've really not considered it, and I would be hesitant to say that's an idea we would support until we could look at the ramifications of that.
As it turns out, each of the business areas within the Navy, though, do report their operations, and as individual areas within the Navy's working capital fund, those areas can be better managed and prices better established.
Mr. BATEMAN. Well, to this point, I take it, there's been no scrutiny on operation by operation by operation as to where the superior or inferior estimating of prices and volumes of work are being accomplished.
Mr. BROCK. Well, you can do it by business area, and I think there has been some scrutiny. GAO has done some scrutiny, for example, when we did the five areas for you. So it's possible. We think that the services did not do as good a job as they should have done in scrutinizing their own business areas. And we're also hopeful, though, that the DOD plan for improving working capital fund operations that's due out in September will address that issue.
Mr. BATEMAN. Well, we live in hope of that also.
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If you could quantify the problem that leads to this phenomenon of advance billing, does it appear to be primarily a matter of underestimating costs, or is it a matter of overestimating the volume of work to be done, or is it a combination of both?
Mr. BROCK. I think it's a combination of both. But there are couple of other factors. I think even though it's a combination of both, that workload in our analysis has been a larger factor than costs.
Second, within Navy, for example, when they've shut down a couple of depots, that's also presented a certain amount of uncertainty in establishing their prices, and I think it has led to some of the difficulty they've had in setting a price that would recover cost.
Mr. BATEMAN. Presumably in the downsizing and closing of Navy maintenance depots, you're doing so in order to effectuate economies. Did they overestimate the economies that would come from the downsizing?
Mr. BROCK. I don't think they did a good job of estimating the effects. Hopefully in later years, as they are in a more stabilized position, you'll see better estimates. And you know in turn, this presents something—I think Dr. Hamre referred to it a couple of years ago, or last year, as a death spiral. That is, the prices continue to increase and there's increased pressure on the services to look elsewhere for the business, which, in turn, lowers the workload that goes into the working capital fund operation, which then, in turn, leads to a loss, which then, in turn, leads to a higher price.
Mr. BATEMAN. Well, that's one of the things that I wanted to ask you about. Because I'm not sure I fully understand this phenomenon of the services, because the rates have been driven up, opting to have their work done elsewhere. Do we need something that says, By golly, the budget submissions and the pricing structure have all been predicated upon a given volume of work; and, therefore, you must get that work done where the budget contemplated it would be done.
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Mr. BROCK. I think that's one option. The thing—to get back to the original concept of the DBOF, is that if you fairly and clearly establish an accurate price, it forces you to look—it should force you to look at your business operations. Is this something that I want to pay for, that I can afford to pay for? If not, what can we do about it. And I don't think that's happening to the extent that it should be. And by having prices that aren't accurate, it creates an area of uncertainty, and the operational units that are relying on a working capital fund activity to do maintenance or to provide supplies, or whatever, I think this uncertainty then rolls all the way down to create inequities in supply or readiness or other capabilities as well. And that if you don't have the discipline in place to say this is the price, like it or not, this is what we think the price is going to be, it's very, very, difficult for the operating units to then plan accordingly. And I think the people that are involved in setting the prices really need to pay extra care to that.
And we've seen numerous examples when we were looking at the five cases where the activity itself would establish a price. There would be someone higher up the chain who would say, well, we don't think that's going to be a tolerable price, let's lower it. And in fact the price was lowered, and so you're going into the activity full well knowing that your price isn't going to generate the kind of revenue you need to break even. And so that means that the next year you'll have to raise the price to recover losses. You may have to have a surcharge to help generate additional cash, and then the cycle continues.
So we've heard when we go to operating units, a lot of the fault of this is, ''Well, if it weren't for DBOF, we'd be doing real well.''
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But I think that because of DBOF, or because of the working capital fund, is you have a better opportunity of seeing what's not working well and what needs to be fixed.
Mr. BATEMAN. Well, this phenomena of cost per unit going up because volume of work is being diverted somewhere else, where is this work being diverted to?
Mr. BROCK. We found that in some cases, it's diverted outside of the Department. In some cases when we did our Navy ordnance work, we found that some work was diverted to other nonworking capital fund DOD activities that effectively had an unfair advantage, competitive advantage, because they were not charging the full price for the work being done. And sometimes the work is just deferred. It's not done at all.
Mr. BATEMAN. Mr. Sisisky.
Mr. SISISKY. You talked to the chairman just now about the workload and other factors. At one time, another factor was the accounting. Am I correct? The DFAS was so late in reporting to DBOF they didn't know whether they made a profit or not in an individual thing, am I correct in that?
Mr. BROCK. Yes. I'm going to ask Mr. Pugnetti to elaborate on that.
Mr. PUGNETTI. The DFAS reports on the individual operations come out about a month after the end of the month. So right now, we're still waiting for June's numbers. They should be out in about a month.
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Mr. SISISKY. General accounting procedures in business is like the third working day of the month.
Mr. PUGNETTI. Well, the way the Department of Defense, the way their accounting systems operate, and to tie everything together, both the collections and the disbursements, as well as the revenue and expenses, to make sure all the links are made in those systems, they get estimates at the beginning of the month, and then the final numbers come out at the end.
So right now near the end of July, we'll be getting the final June numbers for their operations.
Mr. SISISKY. Is that an improvement over what it was?
Mr. PUGNETTI. That is basically about the same as it is has been for the last 20 years or longer.
Mr. SISISKY. That's interesting. I met the person who is managing it in my office—I forget the gentleman's name—and I was assured that they were doing a lot better.
Mr. PUGNETTI. DOD has recognized that they have systems problems, and they recognize that they need more timely information on cash, and that they are looking into that. But those systems are still down the road.
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Mr. SISISKY. Well, cash is pretty elementary in this, if you talk about advance billing, is it not?
Mr. PUGNETTI. It's the heart of it.
Mr. SISISKY. But we're not getting at the heart is what I'm——
Mr. BROCK. Well, there's an additional problem. In addition to the timing, DOD has a relatively poor cost accounting system, so you have an accuracy problem as well. The balances that we've reported in our report are the Treasury balances that we get.
Again, it's my understanding, and DOD is obviously in a better position than I am, but I understand that part of their plan is to generate some sort of on-line system that would be able to give you a more current balance on a day-to-day basis.
Mr. SISISKY. When is that plan?
Mr. BROCK. The plan is due out in September, I think it's scheduled.
Mr. BATEMAN. Is that a part of the plan or the report we requested to them to come up with——
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Mr. BROCK. Yes, sir, this was part of your mandate.
Mr. SISISKY. If you remember, Mr. Chairman, I almost put an amendment in this year to do away with DFAS. I just couldn't found out what to replace it with, to be very honest with you. I couldn't—but, you know, the promise was—and I believe they are doing it, Dr. Hamre assured me, and—that they were doing better. But that's the key to the whole thing as far as I'm concerned, in cash management, is to get the proper report back.
Mr. BROCK. Yes, if you don't know what your daily balance is, it's difficult to see what is happening.
Mr. BATEMAN. That obviously is useful information, and to have it in a more real-time is also very desirable. But let's assume you've got the information, but the information still reflects that the cash balance is in fact inadequate, that having the information hasn't solved the problems, only helps you measure the problem.
Mr. SISISKY. It may be, but you have to have the information in order to try to solve the problem.
Mr. BATEMAN. Oh, yes. I'm not disagreeing that the information ought to be there.
Mr. SISISKY. How does that figure the profit—better than that, who audits DBOF?
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Mr. BROCK. The inspector general.
Mr. SISISKY. How often does he audit it?
Mr. BROCK. I believe it's a yearly audit, but I'm not absolutely sure on that. And it's my understanding——
Mr. SISISKY. I'll ask Ms. Maroni the question when she comes up. What always worried me was last year or year before last—time passes by so fast—that the Navy, it was reported to us that the Navy was short $4.7 billion, the Navy, and they were in my office, said $1 billion. Didn't deny the $1 billion. And 1 week later, they found $700 million, and then it was $4 billion.
Somebody, you know, I can't—how do they grasp a hold on that to find out what the true figures are? That's what really bothers me.
Mr. BROCK. Well, they have trouble—first of all, they don't have a good cost accounting system. And second, I believe—Mr. Pugnetti is telling me that their audit reports always have a disclaimer. They cannot state with authority that these numbers are in fact accurate. So they put a disclaimer on it.
Mr. SISISKY. The inspector general puts a disclaimer on it?
Mr. BROCK. Yes.
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Mr. SISISKY. I'll pass, Mr. Chairman.
Mr. BATEMAN. Mr. Pickett.
Mr. PICKETT. Thank you, Mr. Chairman. I think we all begin to believe we see a replay of what we heard several years before when we get into trying to find out what's happening in the DBOF. Can you tell me who it is that gets billed, and what do they get billed for when you make the advance billing? I'd like to know if it's uniform across all of the activities that are within the fund.
Mr. BROCK. Again, I'm going to ask Mr. Pugnetti to answer that question.
Mr. PUGNETTI. Basically, when there's an advance billing, the order has already come in from the customer to the working capital fund. In the past, it's typically been the depot maintenance business area. In the Air Force, it's been the depot maintenance business areas. In the Navy, in the R&D business area in the Navy. So if it would be like the shipyards and the Navy aviation depots in the Navy, as well as R&D. But those business areas have traditionally been the ones where advance billing has occurred.
Mr. PICKETT. Well is any of the cash that's collected from the depot advance billing used for any other purpose?
Mr. PUGNETTI. It will then go into the overall—in the case of Navy, into the Navy working capital fund overall pot; and then that cash will be used for paying any bills that come in, which could be for those Navy business areas, or other Navy business areas.
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Mr. PICKETT. So this is a nice way to have a reprogramming internally without having to go through Congress and getting it approved, isn't it?
Mr. PUGNETTI. Except that they have to—the service, the working capital fund still has to perform that work in which they perform the order on. So they still have to either overhaul that ship, or repair the aircraft. So, I mean, there is an obligation and a contractual agreement between the customer and the working capital for them to do that work.
Mr. PICKETT. But the cash itself can be used for purposes other than paying the shipyard workers and, for example, it's an advance billing for ship repair work, that cash could be used for repairing aircraft, or——
Mr. BROCK. That's correct, although there is an obligation, you know, to pay your—the current expenses that would be incurred with doing the shipyard work, or whatever. The real problem with the advance billing though is that you receive the money for work that you have not done. So that in the next period when you're doing it, you have to not only recover for the work that you're currently doing, but then recover enough to work down your advance billing amount. And that again adds at some point increased pressure on prices. So next year, you're going to be seeing a large increase in prices, plus a large surcharge attached, in order to try to bring down the accumulated operating loss down to zero.
Mr. PICKETT. This reminds me of the situation we used to have with builders building houses where they would be entitled to so many—they call them ''draws,'' opportunities to be paid toward the completion of the house. And frequently, they would start house No. 1, they would get to the end, hadn't finished it, so they would make a draw on house No. 2 where no work had been done to finish house No. 1, and that's kind of where we are with this process. We keep on this kind of shell sort of a game, and then finally the builder would end up facing his creditors in bankruptcy court, because it just didn't work.
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I know that this case, with the government ultimately footing the bill, money is going to show up from someplace, and nobody wants to be accused of violating the Antideficiency Act. So they would make certain that that income and outgo get matched up at some point. But it just seems to be that it is conducted without any established principles that are consistently and uniformly adhered to. It's almost like a catch as catch can sort of deal. You've got the people responsible for setting the prices obviously being outranked by the people who pay the bills, so the people that pay the bills tell the people that set the prices, lower your prices, and the prices get lowered, and that creates a problem—it just pushes the problem off into the future.
Mr. BROCK. Right. The only consistency that we've seen is as the balance goes down, the advance billings start. It's almost like the service, the working capital funds effectively use this as a line of credit. The advantage they would have over Mr. Sisisky when he was talking about being a businessman is that if he had a line of credit, he would have to pay interest on it. This is effectively an interest-free loan. There's obvious concern within the working capital funds to avoid doing this. But they have clearly been unable to break out of the cycle. Even though they have worked down the balances over the past 3 years.
Mr. PICKETT. Well, from a policy standpoint, isn't there a lot of misinformation resulting from this kind of an activity, the working capital fund where money is appropriate for a particular purpose; and we, I guess the Congress, presumes that it's spent for that purpose, but it may or may not be spent for the purpose for which it was appropriated.
Mr. BROCK. Well, in this case, unless the Congress appropriates funds like they did for Navy last year—or was that year before—last year, there are no appropriated funds. These are essentially revolving funds, and as they work as a business, no appropriated funds—the appropriated funds in this question would be channeled through the operating units that would buy the services from the working capital fund activities. The working capital fund activities themselves rarely get appropriated funds
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Mr. PICKETT. I understand that. But the money that is collected from the customer for repairs that haven't been made is money that has been appropriated.
Mr. BROCK. That's correct. Unless they've been billing another working capital fund activity, which occurs.
Mr. PICKETT. And it may or may not be used for the specific purpose for which—those dollars may or may not be used for the specific purpose for which they were appropriated.
Mr. BROCK. That possibility exists, but we've never examined it.
Mr. PICKETT. Does anyone have the authority to take money out of the working capital funds and do something else with it? For example, to build a capital improvement?
Mr. BROCK. No; they do not.
Mr. PICKETT. It can only be used to pay expenses of the——
Mr. BROCK. That are associated with that working capital fund.
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Mr. SISISKY. Will the gentleman yield? Has it ever been used for anything other than that?
Mr. BROCK. I'm not aware of any instance. Now, occasionally, if there's a surplus, then they will next year return that surplus.
Mr. SISISKY. It would be interesting to find out. I think it was, but—go ahead. Thank you.
Mr. PICKETT. Mr. Chairman, it seems to me, that there's got to be some more realistic way and some better way to handle these kinds of projects than the way—or these kinds of activities than the way that they are being handled now. In some cases, the facilities are funded to do work and for operational reasons they may not be able to schedule the work to come into the facility to be performed; on a ship, for example, or in the case of the Army, some type of equipment the Army finds necessary to be using and cannot discontinue the operational requirement to come in and get it repaired.
So, we have huge losses that may occur in those instances where you're paying the cost of operation of a facility, repair facility, but nothing there to work on.
I don't see that the working capital fund approach has helped us identify bad business practices, has lowered the cost of getting these repairs done, or has improved the efficiency of these activities. I see none of these things taking place. And I thought that that was the whole reason why this was initiated, the working capital concept, was initiated to begin with.
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Mr. BROCK. You're exactly right, Mr. Pickett. That's why it was initiated. And the activities that we've looked at, as I mentioned earlier in my statement, we have not seen improvements in productivity that we would have expected. As I mentioned, I think the window is there to begin to ask the questions as to why are your prices higher than expected; why didn't you get the workload you expected; why were your expenses more or less than you expected? And those are the kinds of questions that need to be asked and specifically answered to really get to the bottom of what's going on.
And if the answer is, as we have an idle work force that we don't have enough work for, what can you do to move the work force to a more productive area?
If the answer is, our prices are just way out of line with the competition, well then, those are additional clues.
Or, if the answer is, we have inefficient overhead structure, we have too much management, or some other structural or infrastructural problems, let's get rid of it. But for the most part, we don't see enough of that type of analysis being done, and so, you know, and we're doing this as well right now, we're coming in at the tail end when we're saying, ''OK, the problems have already occurred, we've got a low cash balance, and we're going to have to advance bill to avoid antideficiency.''
But I think the questions are there to be answered and addressed as to why you're in this situation.
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Mr. PICKETT. Is the authority and responsibility to manage these funds lodged in the particular service department?
Mr. BROCK. Yes, sir.
Mr. PICKETT. Is the authority, or the rank of the person that is charged with the responsibility, adequate for them to execute the responsibility that they have?
Mr. BROCK. I believe so.
Mr. PICKETT. Well, how does it occur, then, that if price would be set, as you mentioned earlier in your testimony today, a price may be set that is believed by the manager of the fund to be appropriate, and then because of complaints from customers, the price is changed arbitrarily, apparently, without any basis in fact for making that change.
Mr. BROCK. Right. I think in the example I gave you, the price was set by someone higher in the working capital fund chain who thought that the price would be unacceptable. I don't believe in this case it was a customer complaint, it was set within the chain.
Did you find out? Do we know why that occurred, specifically?
Mr. PUGNETTI. Essentially that the price was too high and they wouldn't be able to buy——
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Mr. PICKETT. Wait a minute, who decided it was too high?
Mr. PUGNETTI. Within the working capital chain, setting of the budgets estimates.
Mr. PICKETT. Well, just tell me, and I'll end my questioning; I know you all want to go on to something else, but the person who established the price to begin with, did that person base his or her decision on factual data to support and justify the price that was established?.
Mr. PUGNETTI. When they set the prices, they are estimating the amount of work that they will do, which is usually about 15 to 21 months in advance, they are estimating their costs, and then they are trying to set a price that will cover their costs. And when you look at those assumptions, it is very easy to have different opinions on the amount of work that will show up under 18 to 21 months in advance. The people begin questioning the assumptions that were made. And based on the questioning of the assumptions, the prices were lowered.
Mr. PICKETT. Well, were they lowered by the person that's in charge, or what's going on here? Are they just sort of batting the ball back and forth? Or is there somebody that has authority to set the price and it sticks?
Mr. BROCK. I will—let me——
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Mr. PICKETT. Is it a policy problem——
Mr. BROCK. If I may, sir, I'll give you the specific example we identified. That there was in the Army's industrial operations command, the command proposed a fiscal year 1998 sales price of $107 per direct labor hour, which would have been a 19-percent increase over the fiscal year 1997 price. The Army Materiel Command reduced this price by a little over $10 an hour in an effort to hold down prices and reduce the cost of depot operations. And so they created a situation where the revenues are going to be less than expected, and they would need to reduce costs by $68 million in order to offset the decrease in revenue.
However, the Army didn't really have any good ideas about how they were going to reduce costs. So, in this instance, we think they are going to come up with, at least, a $68 million loss because of someone's desire to lower prices without a corresponding idea about lowering cost.
Mr. PICKETT. Could I just ask one final question? Many of these working capital funds have inventory components to them.
Mr. BROCK. Yes, sir.
Mr. PICKETT. And beginning in about 1990, we have reduced inventories very significantly in the military. In many cases, the articles were used up, and they were not replaced. So, there should have been a cash runoff of converting the inventory into cash.
Mr. BROCK. In effect, I believe that happened to a large extent during Desert Storm/Desert Shield, and, in fact, the—at that time the DBOF activities had a large amount of cash, and the Defense Authorization Act of that year then transferred much of that cash out of DBOF. So, at that time, there was a cash cow so to speak, and, in effect, the cow was milked.
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Mr. PICKETT. So, you're saying that there is no inventory runoff taking place now in any of the services?
Mr. BROCK. There could be, but we don't see that as extensive. We haven't looked at each individual area. So, I would be hesitant to say that could be occurring, but we're not aware of it.
Mr. PICKETT. Thank you, Mr. Chairman.
Mr. BATEMAN. Let me get back into this for a moment, if I may. In October 1991, we centralized all of these business operating accounts, is that correct?
Mr. BROCK. Yes, sir.
Mr. BATEMAN. And then in February 1995, we decided that wasn't a good idea, we decentralized?
Mr. BROCK. Yes, sir.
Mr. BATEMAN. Did things get better than they had been before we centralized in 1991, and have they gotten better or worse since we then decentralized again after February 1995?
Mr. BROCK. I think—well, first of all, we were very supportive of centralized cash management. I think GAO issued several reports that were very supportive. We agree with DOD's analysis that if you had a centralized cash management fund that you could lower the amount of overall cash that you need, and then could, in fact, manage the Department with less cash; you would have more money available for other activities.
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Unfortunately, it didn't work out as well as expected, and I think the Department had trouble really following or having visibility over what individual services were doing, so, they decentralized in order to improve the accountability over the individual funds.
And I think that, to some degree, has worked. It's made the problems and the issues associated with those more visible. Advance billing is still a problem, but I think it's easier to pinpoint now where it's occurring, and I think it's easier to begin to get a handle on why it's occurring. But it has not, obviously not, eliminated the need for advance billing.
In terms of where they were, and where they are now, there has been, as we noted, some reduction in the advance billing balance. I don't know if you can attribute any of that to the decentralization, but perhaps you can. It certainly made both Congress and the Department more aware of what's going on within each individual fund.
Mr. BATEMAN. Mr. Rodriguez.
Mr. RODRIGUEZ. Thank you, Mr. Chairman.
Let me ask you, you just talked about the movement from centralization to decentralization. And you mentioned the difficulty in the fact that some—the way it was handled differently. Is there an effort in terms of trying to maybe have uniform accounting principles that you can begin—is there a difficulty in counting apples and apples when you go from one department to the another?
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Mr. BROCK. Well, even though they decentralized cash management, they did maintain central control over policies, rules, and procedures. So those are pretty uniform.
Mr. RODRIGUEZ. Those are standardized.
Mr. BROCK. Yes.
Mr. RODRIGUEZ. So, you can be able to jump from one to the other and more or less figure out that the same things are occurring——
Mr. BROCK. Yes.
Mr. RODRIGUEZ [continuing]. Where it's being expended.
Mr. BROCK. Right. And one of the things that even though we have problems with DOD's cost accounting and their ability to put together numbers, we do think that the whole working capital fund activity has done a good job of identifying the cost elements that need to be included in their rate.
Mr. RODRIGUEZ. I'm having—in all honesty, I'm real naive about this whole thing. I don't know anything about it. I just know that when business operates, they usually, in order to start off, they need some starting capital. You either borrow it, or you have a slush fund to start off. I know with the school district, it was understood they needed 15 percent before they opened the school. And the money flowed very awkwardly in some areas.
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How does the money flow to the agency? Does it come in a lump form, or does it come in payments through the year?
Mr. BROCK. Well, the initial DBOF in 1991 was—it's initial funding, they rolled up nine industrial and stock funds what were revolving funds, and they started off with a cash pool of about——
Mr. PUGNETTI. Six and one-half billion dollars.
Mr. BROCK [continuing]. Six and one-half billion dollars.
Mr. RODRIGUEZ. What percentage of that, of the total, was it a $70 billion total——
Mr. BROCK. That was it—it was about a $70 billion—$60 to $70 billion a year operation.
Mr. RODRIGUEZ. So that means about less than 10 percent starting——
Mr. BROCK. Yes. Something like that. Of the gross revenues.
Mr. RODRIGUEZ. Is that based—go ahead, you're—I stopped you, go ahead.
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Mr. BROCK. Well, since that time, their inflow and outflow is generated by the sales of goods and services. They either repair things or sell stock items, or whatever. And again, that's supposed to break even, and while maintaining a certain level of cash, collectively, around $2 to $3 billion. So, by establishing prices, they generate enough revenue; they should be able to maintain that cash balance more or less, throughout the course of the year.
So, they receive their revenue during the year, and if they run short as they've been running short, then they might advance bill to get an influx of cash. Occasionally, on, I think, one occasion, maybe two occasions, the Navy has received an appropriation to pump up the account as well.
Mr. RODRIGUEZ. Let me ask you, and again, I don't know the business in all honesty, but I know for certain areas, schools, for example, require almost—the first 3 months they purchase everything for the next 3 months, or 6 months, in terms of either food items, school supplies. Does the industry follow a principle where they need—you mentioned supplies, is there—is that sufficient to start off? Is that flow——
Mr. BROCK. Yes; we think so. They need to maintain 7 to 10 days' worth of cash, and——
Mr. RODRIGUEZ. Seven to ten days?
Mr. BROCK. Yes.
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Mr. RODRIGUEZ. You're talking about 10 days—$70 billion? Is that appropriate?
Mr. BROCK. It seems to have worked. But they are below that level right now. And we've never really looked at the exact amount of cash they need, but we have through our trend analysis noted that they're below that. They most likely will have to advance bill. And each of the working capital funds is really composed of a lot of different kinds of businesses. I mean they fix airplanes, they sell pencils, they do accounting, they provide telecommunications services. So, each of these business areas really has different cycles of when it needs cash. The things they all have in common are paying salaries, funding, paying rent, and overhead costs of that. Supplies and inventory management might be more cyclical, depending on the business area.
Mr. RODRIGUEZ. Seven to ten days. That's pretty harsh when you look at it. And I don't know—and again, I don't know the business that well.
Mr. BROCK. Well, in addition to that, they have a capital cash requirement, which runs——
Mr. PUGNETTI. It's 4 to 6 months. The whole cash requirement is between $2.5 and $3.5 billion. Then they will each month, as they do work, they will bill their customers either once or twice a month that will replenish the cash that they use in conducting their normal operations, which would be paying the salaries of their employees, buying materials, paying contractors for work to be done.
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Mr. RODRIGUEZ. And so that has to be done in advance—and that's—and I want you to define what advance payment is. Because, if I want something to be done, most people want you to pay them in order for it to get done.
Mr. BROCK. Yes; it's like you're going out to—if you're a contractor, and you're going to someone you're doing business with, say, ''I need some money. I told you I would repair your car in 3 or 4 months. Will you pay me for that right now, and then when your car needs fixing, I'll fix it.''
And that's just done on a more massive scale across the variety of different business areas.
Mr. RODRIGUEZ. And the other side of the coin is that if I'm going to eat and have to buy the parts for your car, and having to eat that for 6 months before I see the first check——
Mr. BROCK. Well, that's why they need to maintain the cash balance so they can absorb costs like that on a day-to-day basis.
Mr. RODRIGUEZ. I'm still, you know, in all honesty, having difficulty with that. The other thing is that at the end, whatever cash flows, it has to be turned back in?
Mr. BROCK. Well, no. They try to maintain—first of all, it's a given that they need a certain cash balance, the 7 to 10 days, plus a large—another amount for capital purchases. Over the course of years, they are supposed to break even. Make no more than they take in. And obviously, in any one year, it's difficult to hit it right on.
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So you would expect over time to see the line sloping like that (shown on chart). So, if you make too much money one year, you return it the next year, either with a negative surcharge, or you lower prices. If you don't make enough money, then you need to raise your prices, or tack on a positive surcharge in order to generate the cash that you need.
If you're way off on these estimates, and you simply don't have enough money in, that's when you run into these cash shortages. And then the easiest mechanism in order to generate short-term cash is in the advance billing.
Mr. RODRIGUEZ. And we operate on the annual basis in terms of—with the exception of the money that's stays over in terms of carryover?
Mr. BROCK. Yes; that's correct
Mr. RODRIGUEZ. Have you made recommendations in terms of—in writing as to what needs to take from your perspectives?
Mr. BROCK. Yes. We believe that, as I mentioned earlier, that the things that need to be done are further up the line, that you really need to do a much more careful job of establishing prices, estimating the workload that you get, making the operations more efficient. Those are really the things that drive prices. And those are the things that if you don't do a good job of, then you have to advance bill.
I think it's very difficult just dealing with advance billing and fixing the problem, only attacking it from that angle, that it doesn't necessarily address the systemic problems that cause you to have to advance bill to begin with.
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Mr. RODRIGUEZ. So your recommendation is—one more time?
Mr. BROCK. Establish more accurate prices by making sure that your workload estimates are more accurate, that your cost estimates are accurate, and making—and then making your operations more efficient so that you'll have costs that are driven down rather than increased. But those would be the principle recommendations that we would make.
Mr. RODRIGUEZ. Thank you.
Mr. BATEMAN. Next, Mr. McKeon, do you have questions?
Mr. Ortiz.
Mr. ORTIZ. Thank you, Mr. Chairman. I have a question for Mr. Brock. And I don't know whether you're familiar with what's going on at Corpus Christi where they riffed some people who took advantage of the $25,000 separation that they offered.
All of a sudden, they came back and they said, ''Oh, we're sorry, we paid you the $25,000 separating you from service; you're gone, but you know what, we need you back, because we conducted a study, and we've got a bigger workload than what we anticipated.''
Now, what role could advance billing have had in the current situation in the Corpus Christi Army Depot?
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Mr. BROCK. Unfortunately, I have heard that. But I don't know the causes or what led to it. If you'd like, we could respond to that.
Mr. ORTIZ. I would like you to, at your convenience, if you could respond to that, my question, because it created a serious problem there where people had sold their home, had moved out, and all of a sudden, ''You got to come back.''
So, I think that advance billing could play a very important role.
[The information referred to can be found in the appendix beginning on page 87.]
You mentioned something about the material command reducing the prices?
Mr. BROCK. Yes.
Mr. ORTIZ. Why did they do that? I mean——
Mr. BROCK. It was our understanding—in fact, Greg, I'll have Mr. Pugnetti answer that.
Mr. PUGNETTI. Basically, from what we understand from when the price was initially set, when it was changed, they wanted to keep the price under $100 per hour. The initial price came in at $107, but they wanted to keep the price under that. It was changed down to about $97 or $98 an hour. Essentially, they would be able, then, to purchase more programs, have more things fixed with the lower price.
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Mr. ORTIZ. Even though they were going to lose $7?
Mr. PUGNETTI. Right. So essentially, you can afford more program in doing that, but in the end, if you cannot cut your costs in the working capital fund, you end up taking a loss.
Mr. ORTIZ. I've just got another question for Ms. Cekala, and—you're not on this panel?
Mr. BATEMAN. She has not testified yet.
Mr. ORTIZ. Oh, I'm sorry.
Mr. BATEMAN. She's going to testify on the shuffling around of funds within the O&M account.
Mr. ORTIZ. OK, I'll save that question for later on. I saw all of you sitting, and I came late. I'm sorry.
Mr. BATEMAN. Mr. Taylor.
Mr. TAYLOR. No questions.
Mr. BATEMAN. Mrs. Fowler.
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Mrs. FOWLER. Thank you, Mr. Chairman. I hope I don't repeat, and I want to understand, and so we're just now questioning Mr. Brock about this testimony on the advance billing. And as Mr. Brock probably knows, I have a Navy depot in my district and am very concerned about maintaining the health of the depot system, as I think we all care about keeping our services prepared. And I get very concerned with what happens with advance billing, and then the result on our depot system.
I know projection for fiscal year 1998 is in the Navy depot system, there are 500 engines that are going to be backlogged, and 200 airframes backlogged, and a lot of that is because of what happens to advanced billing. They get the money, and then they spend it somewhere else, then we don't have the money to do the work we need to do, and at some point in time, you're not going to have planes flying because the engines aren't done.
So, I am concerned about what's been happening with that, and I think I share Mr. Sisisky's concerns. I would just as soon do away with DBOF and set up a whole new system. But that's heresy to some.
But what's your projection as to how we can help remedy this situation that's happening with our depots through this advance billing?
Mr. BROCK. GAO has done lot of work on depot maintenance. And, in fact, I believe a lot of work for this subcommittee——
Mrs. FOWLER. I know you have. We've quoted your studies extensively in some of our hearings.
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Mr. BROCK. And I don't want to say that I'm completely familiar with all that work, but I think our main point in the depots is that many of them operate inefficiently. And in doing so, by operating inefficiently, they, in fact, generate opportunities for raising prices. And if—when—our angle, as accountants in looking at that, that if you were, in fact, are having increased costs, and those aren't reflected in an increased price, our reduction of costs, then you're going to lose money. And if you lose money and you don't recover it soon, you're going to run out of money. And then if you run out of money, you have to advance bill. And we believe that's how the whole cycle starts.
Mrs. FOWLER. And I understand part of what you've said is that one of the problems they've got with these—the depot systems is overestimation of work loads.
Mr. BROCK. Yes.
Mrs. FOWLER. And so, when you've got this depot workload projection that varies so much over the course of each year, then that affects performance and losses, and could you comment on that, and what's driven these workload changes, you know, because some of this, the depots don't have any control over, really.
Mr. BROCK. Well, we did issue a report earlier this year to the subcommittee on Navy ordnance, and we found that over years, they consistently overestimated the workload that would be coming in.
And so, the questions that we were asking—and I don't think we always got satisfactory answers—well, if you're overestimated one year, that's fine; you overestimate a second year, OK; a third year and a fourth year, we begin to see a pattern here of being really overly optimistic on the work load that's coming in.
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Now, part of that problem is, I think, they were relying too much on the estimates that were being provided by the fleet.
''This is the workload we expect to turn in.''
They rely on that estimate. They bill their prices up based on that estimate, and then the work doesn't come in. We found they really weren't doing enough checking with fleets and challenging the estimates, and they weren't learning from the past. Each year was sort of a new experience.
Mrs. FOWLER. Well, could part of that problem be also that they aren't getting enough money to do the work. I mean, when I look at naval aviation, and you've got 500 engines that are going to be backlogged, it isn't that there isn't workload, it's just that they aren't allocating the money to do the workload. And so you've got a real problem, not only for this year, but the out years.
You haven't seen that as being a problem, the services aren't allocating the funds to go to where they should go?
Mr. BROCK. Yes; I think that's a problem. We haven't really specifically looked into it, but when the services are in fact, preparing their workload, this is also eating into their budget requirements that they are establishing as well. And if they are not getting those, then that should be then reflected back to the depot operation so that they can adjust their workload accordingly.
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Mrs. FOWLER. And eventually close down if they don't get the workload. And we have no one to do it.
Well, I would be interested if you all continue to take a look at this, because I am concerned at what's going to happen with this whole depot system if they are forced into inefficiencies in some ways because—I have a system, a depot that's very efficient. It did a lot of changes several years ago. But there's a limit to how efficient you can be if you're not getting the workload that you're supposed to get or the money to do the work. You're geting penalized at both ends, and it causes some problems for you.
Mr. BROCK. Yes. Well, we have an ongoing request from the subcommittee to continue the work. Last year, as I mentioned, we did the Navy ordnance facility. Next year we'll be looking at another working capital fund activity. And then I believe that our mandate continues that we continue to look at the prices that are estimated each year, and examine whether or not those are set on a reasonable basis.
Mrs. FOWLER. Well, we appreciate the good work you've been doing, because it has been a tremendous help to those of us who are trying to keep a healthy, viable, depot system. Because we rely on the good objective work that the GAO does, and we appreciate what you're doing on it. Thank you.
Mr. BROCK. Thank you.
Mr. BATEMAN. Mr. Brock, I expect we'll be calling on you further.
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Mr. Taylor. Any questions?
Mr. TAYLOR. I'll pass, Mr. Chairman.
Mr. BATEMAN. Mr. Sisisky.
Mr. SISISKY. Just to follow up on what Mr. Rodriguez said, that he didn't quite understand it. I want to assure Mr. Rodriguez that very few people in this country understand what's happening. You get into this, it's very difficult—Ms. Maroni will explain it to very simply, I promise you, as she explained it to me 20 times, and I still don't understand it.
And I would also like the correct him on the word ''slush fund.'' In the vernacular we use in Washington now, it's ''contingency fund.'' That's the word we use. [Laughter.]
But coming back just for a moment, you talked about efficient and not efficient. How in a category do you measure if you have one depot that's very efficient, and for political reasons then another depot was kept that's inefficient, does the efficient depot get charged the same?
Mr. BROCK. Yes; it can.
Mr. SISISKY. Then therein lies the problem.
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Mr. BROCK. Yes.
Mr. SISISKY. Unfortunately, we run government—you can't run it like a business, because there are political decisions that are made that really tie your hands—and believe me I could name them, but I don't want to get people upset. We just had one as a matter of fact. I might mention that because I mentioned it on the floor, of where that happened. So it is not——
Mr. BROCK. We saw that in our NOC operations where there were real differences between the different Navy ordnance facilities in terms of hourly, direct labor costs, and that could be a factor. And a lot of those differences were legitimate because an area—one area would have a very much higher cost of living, the prevailing wages would be higher, whatever. Sometimes it could be attributed to one depot might have a lot of excess capacity and would pay much higher overhead rates as a result of that, or have been built inefficiently. I think in some cases, we may have seen maybe in our NOC works some examples of where there were facilities being kept on because of legitimate concerns about availability during a wartime crisis. And perhaps some of those should be funded by direct appropriation rather than being rolled into the working capital fund operations.
Mr. BATEMAN. Well, Mr. Brock, again, we thank you, and do not be surprised if you are receiving further inquiries from the committee as we continue to wrestle with this very, very, vexing problem.
And with that, I think we had best now turn to Ms. Cekala.
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Thank you so much, Ms. Cekala, we're pleased to hear from you now.
Ms. CEKALA. I certainly do appreciate the invitation, as Mr. Brock did, to discuss our work on budgeting for O&M activities.
With me is Carole Coffey, senior evaluator with GAO, who has done a lot of work on many of the reports on which my testimony is based. And if it would be OK, I will summarize our statement, and I'm sure you'll include the full statement in the record.
Mr. BATEMAN. It will be included.
Ms. CEKALA. As you know, about one-third of DOD's fiscal year 1998 budget, or almost $94 billion is for O&M activities. Whatever is ultimately appropriated with that money, the services will be using those funds for a variety of day-to-day activities, many of which are activities that are supported by the working capital funds that Mr. Brock has just been talking about.
Services do, in fact, use those O&M funds that they will be appropriated to pay the organizations for the goods and services they receive. And our work that Ms. Coffey and I and others in GAO have worked on has really shown a pattern much that you've described in your opening statements about budget estimates that are different from the amounts that are ultimately obligated for various O&M activities. And we recognized as you do that budget estimates are just that; they are estimates. They are not always going to be right on the money, because things change over time.
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The current budget that you are considering has been a long time in the making, and as time goes by, estimates can be, and are, improved as more information becomes available, and we just get better at putting together estimates.
But our analysis at a very high macro type of level shows that certain O&M activities show a pattern of estimates being consistently more than what the services ultimately obligate. And a couple of examples would probably be helpful here.
The Army use of operating tempo funds, or op-tempo funds, for other O&M activities is something that we have repeatedly pointed out in our O&M budget reviews on an annual basis. The Army requests O&M funds at a level to operate its combat vehicles typically at 800 miles per vehicle per year. However, since 1992, the Army has consistently trained at a reduced level. In 1996, it was at a level of 642 miles per vehicle per year.
Similarly, the services have obligated about a $ 1/2 billion less for depot maintenance in fiscal years 1993 and 1994. And this is a bit dated report that I'm talking about, but it is an indication that the services are obligating less for depot maintenance than they have budgeted, and we have seen that pattern continue.
We saw that Congress had designated about $950 million for Army depot maintenance in 1996, but the Army obligated only about 80 percent of that amount.
Similarly, the Army has acknowledged that for 1997, it will obligate about $91 million less than it received for depot maintenance.
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Now, those were very specific accounts that we had looked at and very particular projects that we undertook. In another effort that we were involved in, we found similar examples when we looked at groups of O&M activities. For example, the Army obligated less for each of the years 1993, 1994, and 1995, for its combat units, about $900 million less than the $12 billion that it budgeted for the 3-year period.
In contrast, the Army obligated more for each of those fiscal years for its infrastructure and management activities.
The Air Force, on the other hand, obligated about $700 million more for its combat units than the $15 billion that it budgeted for that 3-year period, 1993, 1994, 1995.
In still other cases, the amounts that the services budgeted were not consistently more or consistently less than what they obligated, but there were wide variations between the budgeted and the obligated amount.
For example, during the recent review that we reported out on defense infrastructure and demolition activities, we found that for the years, fiscal years 1987 through 1996, that 10-year period, the Army budgeted more than it obligated for real property maintenance for 5 of those 10 years. We found that the greatest variance that occurred was in fiscal year 1993 when the Army obligated more than it requested by about 38 percent.
Now, these patterns seem to indicate to us, and I'm sure to others, that the services have a great deal of discretion and flexibility as to how they obligate the O&M fund. We recognize, and I'm sure that as many of you have mentioned in some of your statements and your questions, you recognize the need for flexibility as well. But Congress has imposed some limits on that flexibility, which provide you with increased oversight and visibility over the obligation of those O&M funds.
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As you know, the O&M budget presented four very broad categories known as budget activities, and each activity is further broken into activity groups and subactivity. For several years, including fiscal year 1997, various congressional committee reports provided that if a service moves more than $20 million from one budget activity to another—that is, from operating forces to mobilization—then the move is to normal reprogramming procedures by which you would—you, the Congress—would receive some notification of those intended moves.
Similarly, if a service were to move $20 million from certain readiness to related subactivity groups within a budget activity like operating forces, a specific example would be if the Army were to move money from combat units to depot maintenance within the operating force of budget activity, then the service would be required to provide prior notification to various congressional defense committees, including your own.
Now, for fiscal year 1998, the House version of the defense authorization bill, as you mentioned earlier, containing a provision which as we read it, significantly broadens the notification and reporting requirements for the movement of funds between any, not just specific readiness related subactivity account.
I will wrap up by just saying that we recognize and we know that the amounts obligated by the services are rarely, if ever, going to agree with the amounts budgeted. There are a lot of reasons for those differences. Collectively, those reasons comprise and make up a need for reprogramming as a normal common tool in order to responsibly manage financial management that still has some flexibility.
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But we also recognize that there is a need for visibility and a fuller understanding of the variations between the budgeted amounts, and the actual obligations and recurring patterns among those variations probably go a long way in enhancing and facilitating budget decision making.
And I'll stop there so we can get to the questions.
[The prepared statement of Ms. Cekala can be found in the appendix on page 70.]
Mr. BATEMAN. Thank you very much.
The first question I have is whether or not there's any indication that somewhere in the DOD structure someone is gaming the system to overestimate on accounts where the accounts can't be—or underestimate on accounts where you can't do the transfers without reprogramming from activity to activity; whereas they are using a different rule of thumb or estimates or guesstimates to come up with readiness items that are within the subactivity area where they have almost unbridled discretion to move money around any way they see fit?
Ms. CEKALA. Gaming the system, I wouldn't want to say, of course. When you look at the variations, there certainly is a pattern based on the limited amount of work that we did over all periods of time. Three years isn't necessarily something that one would call a valid trend, but there are consistencies in what we see in terms of those accounts being budgeted for something more than what they ultimately will obligate.
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I think in all fairness in terms of how we looked at those accounts, we weren't looking behind what the variances were or why there were those changes. We did see those variations. It's very normal, I would think, in an environment and arena of constrained resources that services are attempting to budget, or they are higher priority accounts on the readiness related accounts. But in all honesty, you can't budget for 100 percent of your needs for all the accounts in light of those constrained resources. So they find that they have needs to move those dollars elsewhere as the budget year goes by.
Mr. BATEMAN. Well, certainly, I don't, and I don't think anyone on the subcommittee, wants to deny reasonable flexibility to our military managers to do the things which have to be done. And we understand, anything the magnitude of what they're doing, budget estimates and projections can't be precisely correct. And if they are not precisely correct, then in something as large as the O&M budget, it adds up to real dollars.
But by the same token, we don't want to be in a position where we basically have no capability for exercising any oversight over how money is spent when the Department of Defense comes to us with a budget proposal, and ultimately, we act upon it, and by and large have tried to act upon it in ways consistent with their presentation, and then find that the money is being used in entirely different ways.
It seems to me—I want you to check me on the correctness of this—that we have instances where things which were contemplated budgetarily in the grand picture, or the macro picture presented to us, that would be expended for readiness end up getting spent for real property maintenance, or for some other completely different function. While by the same token, we have instances where moneys that were contemplated to have been used for real property management get diverted into things for training. There apparently is no pattern to any of this.
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Ms. CEKALA. Well, in many ways, we did see patterns with certainly moving training money out to other unreadiness, nonreadiness, related——
Mr. BATEMAN. Training you find is more often than not the victim of the movement of the money, not the beneficiary of the money.
Ms. CEKALA. The op-tempo accounts and also the depot maintenance accounts in terms of what we looked at were common bill payers for some of those other activities in terms of funds being moved for those other activities.
Mr. BATEMAN. Were the other activities particularly, or in the main, related to unforeseen contingencies and deployments?
Ms. CEKALA. No.
Mr. BATEMAN. No?
Ms. CEKALA. No.
Mr. BATEMAN. Well, describe this phenomena for me, things that got diverted from op-tempo readiness kind of activities to things of lesser priority.
Ms. CEKALA. Do you have some specific examples that you would like to offer?
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Ms. COFFEY. Well, we repeatedly saw money that appeared to go from the operating forces account for divisions, for example, in the Army. Although you can't trace the money and take a dollar and track the dollar from one account to the other, we did see that operating forces were under obligated, and base operations, communications, things of that nature, were always over obligated vis-a-vis their budget estimate.
But there's not—you can't track it dollar for dollar. And so it's impossible to say that this dollar from op-tempo moved to that base operations bill account.
Ms. CEKALA. And that's true, because we were looking at a very macro level in terms of comparing total obligations versus what was budgeted. So you can't really track those dollars specifically in terms of what they were—training money came out of this account this day, and as spent on real property maintenance for this other account on day five. You can't make that comparison.
Mr. BATEMAN. At the end of the day, the end of the month, the end of the year, you ought to be able to determine whether or not the budget as presented and approved for readiness accounts, for training, did or did not get expended for that purpose.
You mentioned Army vehicle miles, and the premise of the budget is that they would be funded on the basis of 800 miles per year, but the execution was 600 and something. Is that your—purely a budgetary phenomenon that the 800 didn't get done because money was diverted to do other things rather than the training that was contemplated on the level of 800 miles a year?
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Ms. COFFEY. There are other reasons why the tanks and the training isn't at 800 miles a year, and not all are fund related. There are instances, for example, in Europe where there is no capability to drive the 800 miles. Some of the scenarios that are built in the the trim model which developed the 800 mile are no longer accurate. And so the model that they used to develop 800 mile isn't accurate. So it's not all funding, no, sir.
Mr. BATEMAN. Mr. Sisisky.
Mr. SISISKY. I pass right now.
Mr. BATEMAN. Mr. Ortiz—excuse me, Mr. Pickett. And then I'll come back to Mr. Ortiz.
Mr. PICKETT. Thank you, Mr. Chairman. This kind of goes back a little bit to what was disturbing me with the working capital funds; this ability to take money that was intended or appropriated for one purpose, and having it shift over and, in fact, be used to carry out some other kind of activity.
In regard to that, I'm sitting here thinking that we go through the process each year of establishing a budget, and I suppose it gets printed up in infinite detail, and goes out to all the departments, but I've never seen any comparison printed up showing what was actually done in comparison to what we budgeted to be done. Maybe that's a shortcoming on our part. Is any such document ever made up to where the money is actually spent compared to how it's been appropriated?
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Ms. CEKALA. That was the analysis that we had done, because we don't see that happening and being reported. And that's something that might be of interest in terms of us, GAO, doing that sort of analysis on a more routine basis for you, or it could be a part of the actual budget—either part of the budget presentation or even a piece of information or—that the services could provide in terms of showing that analysis. We see the current year budget presented to you, you see just a reflection of the obligations for the prior year. You don't see a comparison of those obligations to what was originally budgeted, and that would be a good clue in terms of looking at the variances and even over time seeing whether those variances are indeed over or under the budgeted amounts on a consistent basis that would provide some clues and some opportunities to ask some questions to see what sorts of problems are behind those.
Mr. PICKETT. Well, a business concern currently operates on that basis; if they continually are comparing their actual operating data with which they have projected in their budget, they end up at the end of the year with an annual comparison.
I would think, Mr. Chairman, that might be very desirable for the Congress to begin getting something along this line, not in too much detail, but at least to some extent to find out if money is being used for the purpose for which it's being appropriated.
Ms. CEKALA. And it may be that somebody on the second panel would be able to point out something that they have done or that they typically do, but we weren't aware of any sort of analysis like that, and that's why for those couple of projects that really form the basis of this testimony, we did that analysis on our own.
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Mr. BATEMAN. Well, if I could interject here as chairman of the subcommittee, at a point in time following this hearing both with GAO as well as with the comptroller and anyone else in the senior levels of the Department of Defense, I would like to have some discussions about the manner in which future budgets are presented in order that we will have a better feel for whether or not the budgets, as we've approved them in the prior year, were executed in the manner in which the budgetary requests and approval was ultimately consummated.
There's a great deal of anguish apparently in the Department of Defense about the $10 million aggregate transfer notice—notification, and that's our effort to try and come to grips with a problem which I think is very, very, real. If they can convince us that it is truly unrealistic, then we're willing to pursue other avenues, but the problem must be dealt with. And so we would certainly—you would not be surprised if we call upon you for some guidance or at least some suggestions as to things that we can do in terms of our scrutiny of future budgets to try and make sure that we are in a position to conduct the kind of oversight that Congress reasonably is required to exercise, but at the same time, not doing so in a manner which is totally disruptive or which becomes subject to some criticism that we're micromanaging the movement of funds and activities in some egregious manner.
Mr. Pickett, you have——
Mr. PICKETT. I just want to observe that I don't think any of us, as you have observed already, Mr. Chairman, want to do anything to inhibit the operational people from being able to carry out their responsibilities in a way that they think is prudent and reasonable. I just—that concludes my remarks.
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Mr. BATEMAN. Mr. Ortiz.
Mr. ORTIZ. Yes. If I wanted depots to fail—and let me tell you exactly what some of the complaints that I have heard. Where they siphon off money from O&M accounts, and they put a bunch of money into training, and then they say that they cannot be competitive because the money is not there to buy the parts or to hire the workers. But they send them to training schools that are not needed. This is some of the complaints that I get.
Do you see a trend such as this?
Ms. CEKALA. We don't see money going out of depot maintenance into training at the macro level. And as I said, we really can't track where those dollars go once they are leaving depot maintenance. We looked at a very high level comparing the obligations to the budgeted amount. So I really couldn't say. I would be sympathetic to the comments that you're hearing.
Mr. ORTIZ. This is at the local depot, and they said—it's a certain group of people who are always training, training that is not needed, but is thousands and thousands of dollars. And I'm not aware, because I haven't asked the higher ups, but this is by talking to some of the employees.
Ms. CEKALA. But that is a decision that's being made at the local level——
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Mr. ORTIZ. Yes, yes.
Now, another question that I have is what has your research found in the way of depot maintenance, these funds diverted to Bosnian operations, especially in the Army. Have you found any of these funds have been restored for depot maintenance? We approve a supplemental because $140 to $160 million was siphoned off from all the depots for the Bosnian operation. Now, we have passed a supplemental. Have you seen any of these funds restored to the depot system?
Ms. CEKALA. We haven't done—I wouldn't be able to speak to that at all. That's something we might be able—we could find an answer out for you, but I am not in a position to tell you. I apologize.
Mr. ORTIZ. Thank you; maybe later on.
Ms. CEKALA. I apologize, I just don't have that information.
Mr. ORTIZ. Thank you.
Mr. BATEMAN. Mrs. Fowler.
Mrs. FOWLER. Thank you, Mr. Chairman. This might have already been asked, but I just want to comment to it, sort of a followup to what I was telling Mr. Brock earlier, and it was in your report also, Ms. Cekala, that again we go back to the dollars that the depots are not getting to do the work, and as evidenced in your report, services often get them, and then they don't obligate them for depot maintenance, though. I was very interested in the amounts, really millions, that they take and move into other things such as continuous operations of base ops, or real estate maintenance, instead of going to the depots.
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So we've got a compounded problem here. On the one hand, sometimes not enough dollars being obligated; but in the case of if you do get the dollars obligated, they aren't even taking those and putting them to the activities to which they were supposed to be. And I was interested in your reports that the Army says right up front, ''We're not going to know.'' But almost $100 million of it, which affects I think what Mr. Ortiz is talking about in the Army depots and others.
So I'm pleased that your report at least is showing so that hopefully we can on this subcommittee come up with some ways to help ensure that once these dollars are obligated, they go to what they are supposed to be in. If they need dollars for other activities, let's work out another way rather than take them from the depots.
Thank you for the work you've done on it.
Mr. BATEMAN. Mr. Rodriguez.
Mr. Taylor.
Well, we thank you very much, all of you, from the General Accounting Office, and stay tuned, we will probably be wanting to visit with you as we try to come to grips with both of these problems. We are appreciative of your testimony.
Our next witness is the Principal Deputy Under Secretary of Defense, Comptroller, the Honorable Alice C. Maroni, and we're delighted to have you and your colleagues with us. And you may proceed. I understand you may be under some time constraints with an engagement that you have to honor.
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Ms. MARONI. Yes, sir; thank you very much.
Mr. BATEMAN. We'll do our very best to——
Mr. SISISKY. I'm supposed to be there, too, but I'm not going.
Mr. BATEMAN. You may proceed, Madam Secretary.
STATEMENT OF ALICE C. MARONI, PRINCIPAL DEPUTY UNDER SECRETARY OF DEFENSE (COMPTROLLER)
Ms. MARONI. Thank you very much, Mr. Chairman, members of the committee. I appreciate the opportunity to appear before you today to discuss some critical financial issues facing the Department, and I have a statement that I would like to submit to the record. But before I begin, I want to thank this committee personally for the support that you have provided to supporting the readiness of our forces. Your support has been key to helping us maintain the high levels of readiness that we have experienced today.
As you know, readiness is critically linked to resource management, and resource management is a continuing challenge to balance the demands of our military forces with the constraints of the budget. The operation and maintenance account really is the bread and butter of the daily operations of the military. It represents about 37 percent of the total defense budgets. Unlike investment, which is centrally managed by program managers who have a specific program focus over a period of years, O&M funds are used for a myriad of activities necessary for the day-to-day operations.
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For example, repairing a leaky roof on barracks, fixing an airplane engine in a flight line, paying vendors for supplies and services, trying to forecast 2 years in advance with pinpoint accuracy what commanders may need in the daily maintenance and operations of say a battalion or squadron is an extremely difficult proposition. It's somewhat like trying to forecast the budget for our families well down the road 2 years in advance. It's not easy to estimate precisely how much you need for food, utilities, housing, maintenance, in particular, education for our kids; and we use the very best judgment we can when we build an estimate of the operation and maintenance costs.
We then empower our field commanders to make day-to-day decisions when the time comes similar to the way we think about other resources in our homes.
Day-to-day decisionmaking is the key to the O&M structure, and that's the focus of my comments today. The key to the military's success is recognizing where those decisions should be made.
We strongly believe that the field commanders must have the ability to respond for emergent situations and unanticipated changes in operations. This means giving commanders all over the world the authority to make real-time resource decisions. This has implications for both of the issues that you've asked to talk about today, that is the O&M reprogramming issue, which is the one I would like to start with, as well as the advance billing issue.
The O&M account differs substantially from other defense budget accounts, such as procurement and R&D, because it funds a wide range of daily operations of the Department. It truly represents the backbone of our readiness. And the demands that we place on our Armed Forces are immense. We ask a lot of our military leaders, and their ability to respond to immediate needs of the forces is really crucial to their ability to carry out the mission.
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As we provide the best weapons for our forces on the battlefield, we also need to provide commanders with financial tools to allow them to manage and adjust the fact-of-life changes. Our budget is developed with our best estimates. It's a financial plan, a plan that is built on certain assumptions and expectations. But in the highly complex environment in which the military operates, of course, requirements and schedules change. Vendor prices increase, emergent conditions such as evacuations and rapid deployments arise, natural disasters such as floods, fires, occur, and of course, equipment sometimes fails. And when these kinds of changes occur, the budget has to be adjusted. Our ability to respond in a timely manner to these fact-of-life realities and to reallocate resources to these day-to-day operations is essential to meeting the mission requirements.
Limitations on moving funds from one O&M subaccount to another during execution will severely hamper the field commander's ability to carry out the mission. Under the proposed language, prior approval reprogramming procedures would actually need to be followed when shifting funds from one subactivity account to another, anytime the aggregate amount for that year exceeds $10 million. This action effectively makes the O&M subactivity a separate appropriation for fund allocation purposes.
The services don't manage O&M centrally. So, under the proposed legislation, no authority to transfer O&M funds at any level would be granted to the field commander. In effect, every funding action, whether in support of a routine requirement, or a time-sensitive critical demand, would need to be checked. That is, headquarters would need to continuously monitor what each field commander is doing so that the total effect of all funding moves could be summed, and the decision made as to whether a prior approval reprogramming which requires field operations would conceivably come so a screeching halt, and decisions would now be made in Washington.
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It won't surprise you if I tell you that we are all now hearing from field commanders, including CINC's, who are looking at this dramatic increase in the O&M fences, and are reacting with examples on how they feel this would seriously jeopardize their ability to meet their missions.
We in the Department can appreciate the committee's intent to add discipline to the match between budgeting and execution. Imposing limitations of this variety is a very extreme measure. It would mean a huge increase in the prior approval reprogrammings for critical but small dollar value shifts of funds. The O&M mission which provides for the readiness of our forces and maintains the quality of life for the troops in many ways is too fluid to accommodate the restriction that has been proposed, and I would urge you not to adopt it.
I fear that the use of the O&M account is inappropriately viewed as undisciplined. Actually, if you look at the 1997 budget for O&M, it's about $93 billion, about 73 percent of that pays for fixed and relatively fixed expenses—things like civilian pay, environmental costs, utilities and rents at bases, drug interdiction, mobilization, and contingencies, there are a lot of things. I know that you know many of these things. Only about 27 percent or about $25 billion of the total is somewhat discretionary. That is to say, these are the funds that we use to buy the operating tempo of our ships and planes, tanks, as well as depot maintenance, force support, and transportation.
These are high priority activities. They are also the programs with variable or controllable costs that can be adjusted in the short term for emergent requirements. So when an emergency arrives, a field commander really does have no other place to go to fund a real live mission need.
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I recognize that there may be additional information that you need. You have gotten my attention. I vow to work with you and the members of the committee to meet your priorities, and I think we need to remember that the onus is on all of us to keep in mind the commanders in the field. We are, after all, holding them accountable. They can't do their jobs if they have all the responsibility and no authority to fix the problems that they confront. We must protect their ability to get the job done. But I know that we all share that priority and we need to work together on this.
Before I close, what I wanted to do is just touch briefly on advance billing, and let my colleagues cover that more extensively. What O&M reprogramming is to the field operating commander advance billing really is to the support activity commander. With workload and personnel reductions averaging about 30 percent in the Department's supported infrastructure, the challenges that face the support activity commander in this complex environment have been tremendous. One of the tools we have had to use to meet these challenges, and to maintain uninterrupted services to our operating forces, is the advance billing of customer orders.
I think it's important to remember that advance billing is an accounting practice where the timing of the collection of the money is changed, not the performance of the actual work. An advance billing in no way alters the amount that was actually appropriated by Congress. During normal operations, customer funds are collected through periodic payments as the work is performed. Under advance billing, the customer funds are collected prior to the work being completed. The obligation of the funds is unaffected. Advance billing doesn't change when the customers provide their orders. It doesn't buy more programs or add items not approved in the budget. It does not change the work schedules or the type of services that are provided to the customers, who are the operating forces.
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The use of advance billing, which we avoid whenever possible, is a tool that bridges a gap. We use it when the support activities costs or disbursements exceed the planned projection. Support active commanders use advance billing to avoid delaying repairs, shutting down operations, or degrading readiness.
The outstanding billing advances are in fact being liquidated, however slowly. The 1998 budget includes actions in particular by the Navy and the Air Force to preclude the need for further advance billings as soon as it's practical to do. These actions include cash surcharges in the form of rate increases that will build these cash levels.
The budget of course also provides the funds to the customer to pay these increased rates.
With that, what I'd like to do is turn to my colleagues for their views, starting with the Navy. I'd like to make one last plea before I relinquish my time, and that would be to urge your support for the omnibus reprogramming which is currently pending before this committee. I recognize that we are, most of us, focused on the 1998 Defense authorization and appropriation bills at this time, and it takes a lot of—has a lot of demands on your time now, but I would just urge that we maintain equal focus on the omnibus at this time because of the time-sensitive actions that it contains. And I know your support is coming. I would urge your request.
But with that, that would conclude my remarks, and I would like to turn to Debbie Christie, and then I would join my colleagues in answering questions.
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[The prepared statement of Ms. Maroni can be found in the appendix on page 79.]
Mr. BATEMAN. Does your schedule permit you to do that?
Ms. MARONI. I hope.
Mr. BATEMAN. Very good.
Secretary Christie.
STATEMENT OF D.P. CHRISTIE, ASSISTANT SECRETARY OF THE NAVY (FINANCIAL MANAGEMENT AND COMPTROLLER)
Secretary CHRISTIE. Mr. Chairman, Representative Sisisky, I'm pleased to be here today to talk about these very important issues, because the Department of the Navy has done the lion's share of advance billing. It's fallen to me to talk predominantly about that in my remarks.
To understand how we got in this mess is perhaps not too strong a word to use here, I think you have to go back to 1992 and 1993 right after DBOF was founded. I was not involved at that time, but I understand that people believed that a single entity would need to hold less cash than a series of independent funds that preceded DBOF needed; and also as you alluded to, that the sale of inventory as we reduced without replacement would also generate cash.
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Unfortunately, we seem to have overestimated the extent to which—to borrow that analogy—the cash cow could be milked. And so you find that, for example, the fiscal year 1993 budget included the transfer of $5.5 billion of cash to the operating accounts, whereas we entered fiscal year 1993 with only $4 billion in cash. And if you look at cash patterns, by the time we got to about May, collectively, DBOF was down to about $1 million in cash, which is not nearly enough to operate what was then I think about a $70 billion enterprise.
And so my colleagues, in OSD who were managing cash at the time really didn't have any choice but advance billing to fix a problem of that magnitude.
If you want to put that in business terms, this new corporation paid dividends to its stockholders well in advance of its retained earnings. And so it had to tap its short-term line of credit in order to meet its payroll. There we are. Those are Department of the Navy alone data. But it's the same sort of pattern.
It was particularly, for us, a problem because we did want to advance bill orders that liquidate relatively slowly, and therefore, provide cash. We sort of make the length of the loan longer. And so OSD chose to advance bill depot maintenance and R&D. We had the largest depot maintenance account, and the only R&D business area.
And so the lion's share of advance billings really fell to the Department of the Navy. The first advance billings I think were a little over $6 billion total, and we did, as you can see on that chart, almost $4 billion of that $6 billion.
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This particular chart here, as I say is for the Navy. You can see the very large spike in advance billings which is the light blue area. The other line there shows what our cash position would have been without the advances. And as the earlier witness said, we would definitely have been in the red without those advances.
Advance billing has been necessary ever since in order to keep an adequate pad of cash. We've talked, and earlier witnesses have talked, about two of the factors that affected that. One is our difficulty during an era of downsizing of predicting costs. And the second one was putting pressure on our activities to make efficiencies in economies to become more efficient businesses.
Both of those, however, we do try every year to adapt to, and to cover any losses that we have in our rates. For me, looking back in history, what our failure was, was we failed to recognize that what we needed was not simply to break even on current operations, we actually needed to make a profit, because we have some loans to pay off. And if we were ever going to pay those loans off, we were going to have to make a profit in order to do that.
And so we had not been doing that all along. Despite that, the rates actually, in the total advances, had been coming down, as you can see there, which I think is quite remarkable given that we weren't consciously doing something about it.
At least in the Department of the Navy, we did start to do something about that last summer. We were planning in formulating our fiscal year 1998–1999 budget to put about a billion dollars into our 1998 and 1999 rates specifically to raise the cash we needed to pay off those loans, and get a healthy cash corpus.
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The Congress accelerated this process for us by putting half a billion dollars into our 1997 rates. We have a half a billion dollars in our 1998 rates; and right now I have about $150 million in 1999, a number that we will be reexamining before we actually submit the 1999 budget to you.
So I think we actually have a recovery plan, which will get us back to a healthy position, will allow us to pay off advances, and get on. But before then, we still need advance billing authority, and we need a fair amount of flexibility there, and I think this chart will help me explain why.
Can you hear me if I stand over here by the easel?
This is our experience this year and where we think we're going to be next year. You can see again the light blue is prior advances, and will liquidate out, and then from here on, we're projecting, so we changed the color.
This is a projection that says what would happen if we didn't do any more advance billing. And the green line is the projection we made last January, you can see the 1998 rates begin to kick in here and build cash.
This has been our actual experience to date. My problem is this area right here where I'm under $350 million in cash. That may seem like a great deal of money, but we spend almost $75 million a day. So that's only about 5 days of cash, total, to operate on. And because of the difficulties in projecting exactly when bills are going to get paid, we can easily have a $100 million swing at the end of any given month in the amount of cash we have.
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So I'm really very nervous living down in this level. I wouldn't want to be down in that level. And you can see for example when May came in a little low, we did a little advance billing to bump the cash levels up.
What we're trying to do right now is monitor cash on a monthly basis. It's been alluded to the fact that we generally find out 3 to 4 weeks after the end of a month where we are. But I have a little leeway in there. So I look at the cash projection and I say, oop, how is it, do I think I need to bump a little bit more.
And we'll do modest advances within our $1 billion limit as we need to cover these next several months to try and make sure that we don't run out of cash. We've talked about the problems that they would cause, to avoid violating the Antideficiency Act, we'll have to stop spending money until we could get a reprogramming action. That would obviously be very difficult on the workers in our facilities as well as the fleets whose readiness might suffer if the work didn't get done.
But as you can see on the chart, if the budget goes as we project it to, sometimes during 1998 as those higher rates begin to kick in, we should see cash build. I should be able to stop doing any new advances, pay off the old ones, and sometime in fiscal year 1999, I think we would be in a good operating position.
I would be happy to answer questions later on on any of the details about this, but that's short of what I had prepared to say.
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I'd like to add my remarks to Ms. Maroni's on hoping that you'll be able to consider the omnibus reprogramming quickly, and also to her concern about what we would have to do if we had to actually implement the kinds of reprogramming limits on the O&M account. I would not welcome having to take the authority away from commanders in the field, but in order to ensure that the limits weren't breached, we would have to raise that authority up to a much higher level within both the Navy and the Marine Corps.
In the best of circumstances, that would slow budget execution down. But I think it would probably also detract from people's ability to actually accomplish their mission.
Thank you.
Mr. BATEMAN. Thank you.
Secretary McCoy.
STATEMENT OF HELEN T. McCOY, ASSISTANT SECRETARY OF THE ARMY (FINANCIAL MANAGEMENT AND COMPTROLLER)
Secretary MCCOY. Mr. Chairman, members of the subcommittee, before I begin, I would like to thank you for the support you've already provided the Army. When crises occur at home or anywhere in the world, the citizens of this country expect the Army to respond immediately, professionally, and decisively. With this subcommittee's help, we've been able to do just that. And with your continued support for our appropriations' requests, and for the omnibus, we intend to continue that manner of performance.
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I'd like to say that I agree with Ms. Christie and her general comments about it in feeling it is a tool. And although the Army has not recently used this tool, should circumstances arise, we could need it as a temporary means to preclude incurring an antideficiency violation. We need to maintain full authority to advance bill when necessary.
I'll now turn to the subject of the restriction on reallocation of funds within the operation and maintenance appropriation. We are gravely concerned with the language that proposes to further restrict operation and maintenance reallocation at the subactivity group level.
Currently, this ability to move funds between the O&M subactivity groups affords us a necessary capability to respond to unforeseen events with speed and decisiveness. First of all, we submit our budget requests over a year before we begin to execute. It is important to remember the environment in which we formulate and execute our budgets. The Army prepares the fiscal 1996 budget requests in the summer of 1994. That budget estimate was adjusted by the Office of the Secretary of Defense and was adjusted further by the Congress as part of the normal process of providing appropriations to the service.
Second, unexpected missions occurred during the year of budget execution. The Army receives new missions in response to events both foreign and domestic. These missions could not have been anticipated and addressed either in our budget requests or as part of the review process.
But third, and most important, the Army must respond. The American people expect the Army to respond. They expect professional decisive action whether at home or abroad. And the emergent missions require resources for mission accomplishments, whether fighting forest fires, or providing relief after floods and hurricanes in communities all across the Nation.
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We entrust our commanders with accomplishing these refined missions with the resources we have provided. We hold them responsible. Our commanders must be able to make real-time decisions by realigning funds to maximize the effective use of the total resources available to them. Currently, commanders are entrusted to maintain readiness, and when duty calls, to respond.
But enacting the language in section 312 would effectively eliminate the commander's capability to respond in time-sensitive situations. Let me illustrate this point.
The magnificent relief provided by the soldiers of the 10th Mountain Division to the people of south Florida after Hurricane Andrew in the late summer of 1992 is an example of the responsiveness expected of the Army. To respond to a situation such as a hurricane, the Army unit that receives the mission would draw on funds earmarked for their unit operations, and for their practical support to units. But if the emergency occurs late in the fiscal year, it is very likely that those subactivity group accounts will be nearly depleted. In order to provide immediate funding for the community support mission, the unit would contact their major command who would then contact headquarters Department of the Army to request reallocation of funds from other accounts. Under current rules, within hours, approval would be given and the funds would be in the proper accounts.
However, under the proposed limitations on every subactivity group account, it is quite possible that the support to the local community would be put on hold until the request could be processed through OSD, OMB, and the congressional committee. This situation could apply in virtually any mission where the Army is called on to assist with disaster relief to the community.
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Another example involves equipment maintenance after a severe storm strikes an Army post. There are three levels of tactical equipment maintenance performed within an Army corps: unit, general support, and direct support. Each one of these levels is authorized to perform only certain types of tactical maintenance on a given item of equipment. And these three levels are each funded within a different subactivity group.
Delays in maintenance and equipment availability are reflected in downgraded readiness status until the necessary repairs are complete. In fiscal 1994, Apache helicopters from the 3d Corps Aviation Brigade located at Fort Hood, TX, were severely damaged by a storm. Priority, direct support repairs needed to be performed. If sufficient funding was not available in the subactivity group that finances direct support repairs, any delay in repairing the damaged equipment would have degraded readiness levels at Fort Hood. We were able to quickly realign funding from other subactivity groups and provide funds to meet the urgent need for direct support tactical maintenance. Under the current rules, headquarters and the major command can react immediately to a situation and take corrective action with minimal readiness impact.
Environmental violations occur at any time. Our installations spend precious resources on environmental experts, position themselves to avoid and minimize these types of occurrences because of their expense. The need to respond in some instances is immediate, and funds must be moved between subactivities to accomplish the mission.
While notice of violations from State, local, and Federal inspection visits can generate new requirements, others can occur from mishaps during normal operations.
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One such mishap occurred in August of 1995. A 10,000-gallon jet tanker, fuel tanker, was prepositioned at a remote landing zone for refueling operations in support of flight training. Training aircraft traveling at 90 knots per hour require a large remote training area to ensure separation from other student aircraft and safe operations. To maximize the students' training time, the Army contracts for fuel tankers to be prepositioned at remote landing zones for refueling operations.
During the preoperations safety check, the driver of a truck noticed a critical valve on his tanker was not operational, and all of the fuel in his tanker had spilled on the ground in the landing zone. The truck driver immediately notified his supervisor, and the appropriate safety and environmental experts were notified. An on-the-scene assessment was made, and over a 3-week period, the cleanup operation was completed. The installation was required to reallocate funds between subactivities to meet the urgent need to pay this unexpected bill.
In a perfect world, there would be no need to reallocate our funding to accommodate emergencies or previously unknown requirements. We could execute exactly as we budget. But unfortunately, we don't have a perfect world, and reality dictates we adjust our budget plans to maintain readiness.
The proposed limitations would severely limit our ability to maintain required readiness levels and perform our assigned missions.
As a final point, with the submission of the fiscal 1998 President's budget, the operation and maintenance Army [OMA], Appropriation and Budget Act, appropriation for budget activity one, contains a new management structure. The purpose of this new structure is to provide a more concise view of Army programs to the Congress through OMB and OSD. Prior to the restructure, OMA budget activity one contained 2 activity groups and 10 subactivity groups.
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In addition, the activity groups and subactivity groups contained very nondescriptive titles and definitions categorizing programs into large general groupings. The new structure contains 3 activity groups, and 13 subactivity groups, with more descriptive titles and definitions providing greater clarity.
For instance, prior to this restructuring, optempo was disbursed and mixed within four subactivity groups that included other costs as well. With the new structure, Army optempo is only captured under activity group one-one, land forces.
We adjusted the O&M structure to be more responsive to the concerns of the Congress. Adding further restrictions before allowing us to actually work with this new structure is at best premature. We believe a better course of action is to give the new structure an opportunity to succeed. I urge the committee to support the field commanders in whom we have placed special trust, confidence, and the responsibility to manage and meet emergency response missions.
The reallocation restriction will unnecessarily hinder commanders from performing their missions. We recognize your concerns, and we take seriously those concerns. We recognize your concern regarding our responsibility to execute a program in accordance with the direction you have provided to us. I respectfully request, however, that no new reallocation restrictions be added to the operation and maintenance appropriations.
I ask that you allow our new budget activity one structure a chance to provide the improved execution visibility that was intended.
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We're more than willing to work with the committee, and with the your staff, to even put in place more instruments to better enhance visibility.
Again, I thank you for the support you have provided the Army in the past, and I appreciate the opportunity to address the subcommittee today.
Mr. BATEMAN. Thank you, Secretary McCoy. And now we would be pleased to hear from Secretary Hale.
STATEMENT OF ROBERT F. HALE, ASSISTANT SECRETARY OF THE AIR FORCE (FINANCIAL MANAGEMENT AND COMPTROLLER)
Secretary HALE. Thank you, Mr. Chairman. Again, I appreciate the opportunity to be here. I will comment briefly on both of these topics, advance billing and O&M migration from the perspective of the Air Force.
First to advance billing, as you've heard, it changes the timing of revenues; it doesn't change what you appropriate; it doesn't change when we do depot maintenance; it doesn't affect readiness. But it's sustained use over a long period of time suggests we have financial problems, so we want very much to avoid it, and I can assure you we use it only as a last resort.
We have advance billed three times since February 1995 when we regained cash management authority, and every one of those times, we were under $200 million in cash, and in imminent danger of violating the antideficiency laws.
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We have an active plan in place in the Air Force in an attempt to improve the financial health of our working capital funds, and that's what we need to do, improve their financial health, and that will avoid advance billing.
That plan starts with performance plans. We're trying to get our commanders to focus more on the financial side of our working capital funds as well as the operational side. They now sign or have written performance plans between each air logistic center commander and the commander of the Air Force Materiel Command. Those plans have quantitative indications of financial and operational performance. The results are reviewed monthly and compared to actual performance monthly by mid-level personnel, and quarterly by senior personnel. I'm involved in that quarterly review, and have briefed both the Secretary of the Air Force and the Chief.
We have just put this system into place this year. These performance plans, and I've got to tell you, haven't achieved all of the desired improvements in performance. But I think we do have the attention of our field commanders in terms of focusing on finances as well as operational performance.
We're also working to cut costs, and that is a key. For example, in our wholesale supply area of our working capital fund this year, we restricted new purchases of spare parts; and we restricted the kinds of parts that are repaired to try to be sure they meet immediate customer needs so that they will be sold and gain revenue for the working capital fund. And our new AFMC commander, George Babbitt, is very much committed to wide-ranging cost reduction, and that is a key.
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And finally, we realize we've got to raise the rates that we charge our customers in order to meet all of our required costs, and provide those customers funds to pay those higher rates. And we're doing that. In the budget that is before you now, we have a 19-percent increase in the rates for our wholesale supply activity, a 12-percent increase in the rates for our depot, organic depot activity; and the money is in the customers' funds to pay those higher rates. I would expect some further rate increases in the fiscal 1999 budget.
All these changes, performance plans, cutting costs, raising rates, are designed to improve financial health and avoid advance billing. But we need that tool as a fall back. We live in a world where we budget 2 to 3 years in advance. A contingency operation can take an aircraft out of a depot overnight, and suddenly the depot has the cost but none of the revenues, and we face turbulence as we go through various base closure activities. I can't guarantee that cash won't fall below these performance plans, even though we hope not to advance bill again beyond fiscal year 1997. And faced with a cash crisis, and unless I have quick access to advance billing, the only thing I could do to avoid violating antideficiency laws would be some drastic action, such as closing down the depots, or supply areas, or a no-notice rate increase of an emergency reprogramming. That's going to adversely affect readiness. I don't think any of us want that. So I would join my colleagues in urging that we not limit, not restrict, advance billing.
Let me turn now to O&M migration. The Air Force does migrate some O&M funds during the execution year. They tend to be small as a percentage of the budget, usually in the tens or hundreds, low hundreds of millions in a budget of about $20 billion.
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In the last couple of years, they have frequently been out of areas directly related to operational readiness, like depot-level maintenance, or depot-level reparables, and into areas like base operating support, or real property maintenance, that are directly related to quality of life, I would urge you to keep in mind, and so support readiness.
This year we're seeing just the opposite trend. We are migrating funds into areas directly related to operational readiness, like depot repairs. Because requirements change quickly, because I'm putting together a budget 2 to 3 years before it's executed, I need the latitude, or my field commanders, really, need the latitude to make these changes. And I think the ability for them to make these changes would be jeopardized by the reprogramming limits that are in the House authorization bill. About 97 percent of all the Air Force O&M budget is executed by our field commanders. I have 60 of these subactivities, and 87 active major—major active bases. I'm going to have to allocate all those 60, or most of them, to those 87 bases, and literally, I'm going to have to monitor thousands of base level subactivity groups. Whenever that threshold of $10 million is breached, I'm going to have to stop all transfers until we get a reprogramming staff on the basis, through the major commands, the headquarters, OSD, OMB, and the Congress. It won't be a quick process. And sometimes we need this speed.
You've heard Helen give some examples. Let me give a couple of the examples that we've gotten from our field commanders of the problems they foresee if you impose these limitations.
What's going to happen, for example, when we need to reprogram $54 million quickly into these depot-level reparable aircraft parts in order to sustain readiness. This happened in our Pacific command this year. And I think if they hadn't been able to do it quickly, it would have degraded their readiness. What will happen when we have, for example, back-to-back hurricanes like those that hit Florida in 1995, and we immediately had to move funds in order to meet critical human and mission needs. We won't be able to do it quickly if we have these restrictions in place.
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What will happen, for example, when a Delta rocket blows up on the pad as it did recently, and we immediately had to internally realign money to sustain critically needed space launch capability. We wouldn't be able to do it with these limitations in place.
That problem, and others like it, caused Gen. Hal Estes, who is the CINC, and also the commander of Air Force Base Command, to write the Air Force Chief of Staff on June 27 of this year; and in that letter, General Estes states that the enactment of the House reprogramming limitations would, ''seriously impact our ability to accomplish the mission.''
I can assure you, and I join my colleagues in saying, ''You have our attention.'' We will try our best to put together budgets that minimize migration of O&M. I can't get rid of all of it. I think I just am not that good. And we will be sure that you and everybody in the Congress have all the information that you need with regard to O&M, but we can't rob our field commanders of the authority they need to accomplish transfers in a timely fashion.
So I join my colleagues here and our field commanders in urging you to drop these limitations on reprogramming that are in the House bill.
Mr. Chairman, we may differ on a few specific topics. I want to end, though, by thanking you and this subcommittee for your support for national defense overall. We appreciate your concern for, and your support of, our overall program; and I will end up with the same plea you've heard several times, that we need your help to get this omnibus reprogramming quickly. It's got $450 million for the Air Force. If I don't get it soon—and it moves money into flying hours and flying operations, this is a migration into areas directly related to readiness—if I don't get it soon, preferably before the August congressional recess, I'm going to be talking about shutting down some flying hours.
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Again, that concludes my statement. And I would be glad to join my colleagues in answering questions.
Mr. BATEMAN. Thank you, all of you, for being here. And I, and I'm sure the committee, are appreciative of the fact that we do seem to have your attention on this migration of O&M money. We are persuaded that there is a problem. We're looking for a reasoned solution to it, one that is workable, one that will not cripple operations, but we need a solution.
Secretary McCoy made reference to a different budget submission on the part of the Army, and their budget activity one structure. I don't know as I'm going to be able to understand how that differs from prior budget submissions, but it would be helpful if you could send us a memorandum on how that differs, and how you think it addresses the problem in a way that would be constructive.
And I would invite Secretary Maroni, if you would let us have any ideas that you have, that you think would be constructive and workable in terms of dealing with the problem.
I have an overriding question about this advance billing thing, and that's the nervousness that units, operational units, get advance billed to have something done, and then they pay the bill, are there any instances of work then thereafter doesn't get done?
Secretary CHRISTIE. Not that I'm aware of. Not unless the order gets canceled. We have an obligation to them to do the work once they've placed an order.
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Mr. BATEMAN. I understand very clearly the obligation, if they prepaid you for it, you're obligated. But is the obligation discharged?
Secretary CHRISTIE. To my knowledge, it always is. I've never had anybody cite to me an example of work that didn't get done unless an order was specifically rescinded by the activity that originally placed it.
Mr. BATEMAN. Does that happen that the order gets rescinded?
Secretary CHRISTIE. Not to my knowledge. It has never been brought up to me as being a big thing to have happen.
Mr. SISISKY. Excuse me, if the fleet repair budget is used, they can't do it; am I incorrect on that?
Secretary CHRISTIE. No, no. The order will get placed out of the fleet repair budget, and then we will draw the cash in advance. It is—frankly, it's like having a revolving line of credit and drawing a short-term loan. But then we do their work, and we frankly have been paying for that work by borrowing money from somebody else. So we've got this sort of constantly revolving line of credit, which is what we need—the cash surcharge to raise the cash to finally liquidate that debt, frankly.
Secretary HALE. But I want to emphasize, it doesn't change what you appropriate. It doesn't change the work that gets done. This is a timing transaction that by and large is invisible to the field. I am not aware of concerns by any of our field commanders. Most of them probably don't know it's happening. It's DFAS in our headquarters that's——
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Mr. SISISKY. Well, they know it's happening when you raise the rates.
Secretary HALE. Absolutely. That's different. And you know, advance billing is a symptom of financial problems, and we ought to—and what we have to do is address the underlying problems. And that is, we need to cut our costs, and in some cases, we're going to need to raise rates, and they will notice that. And we need to get our managers to focus on the financial side, which hasn't always occurred; and I think we, as I said in my oral statement, are trying to do that in an active plan in the Air Force, and I think the other services are, too.
Mr. BATEMAN. Well, one of the things that bothers me is that we have gone through a consolidation of DBOF, and now we've decentralized DBOF, but we are still hearing that estimates of the cost of work for budgetary purposes are inaccurate and understated. We are hearing that the estimates of the amount of work, the quantity of work to be done, are being overstated.
Who exercises oversight within the Department of Defense to see that we're doing a more realistic job of submitting budgets that are soundly and properly founded on an accurate measure of cost, and an accurate measure of quantity of work, and hopefully, on efforts to constrain the cost of getting the work done?
Ms. MARONI. Mr. Chairman, everyone at this table has a responsibility for the integrity of the budget that's presented to you. Rate setting, establishment of workload, those estimates, this isn't a precise business as I know you know. This starts well in advance of the year of execution in the services where they do an enormous amount of work to come up with these estimates. By the time the four of us are talking about the estimates that are before us, a lot of work has gone on. We sometimes disagree about productivity incentives that may be part of a plan. We do after all have to ''incentivise'' people in the system, and one can disagree about what a rate ought to be. Everyone here has an obligation to think seriously about the rates, and we have. I would argue there have been honest mistakes made, and—how can I say—during the year of execution, changes in assumption and expectations that just were not fulfilled.
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Does anybody here want to add something?
Secretary MCCOY. I think one comment, you mentioned centralizing, then decentralizing. We only centralized and then decentralized one aspect of this, and that was the cash management. Responsibility for the day-to-day operations, for the actual management of the operations that are funded by these accounts, has always been with the services. Yes, our estimates are not always what they should be, and you've heard a list of reasons as to why.
But I think there's another contributor, if you will, to all of this, and that is all of the changes that the Department is undergoing. We've undertaken changing all or practically all of our business practices. We're changing our financial systems. We're changing all of our functional processes. And what happens quite often, we're finding in the Army, is that when you're going through and making estimates about the impact of these changes, quite often there is an impact that you don't recognize, or don't quantify accurately, that comes back later and bites you. And I'm afraid we have a lot of bite.
Mr. SISISKY. You say you do a lot of changes; Ms. McCoy, are you really changing the financial management of the services, good accounting practices, when the inspector general can't verify? I mean, somebody—who was it—they couldn't verify. You haven't done anything unless you can verify a statement, as far as I'm concerned. You know, and that's—I think all of the—I may be wrong—I think all of the services have a different accounting system, do they not?
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Secretary MCCOY. This isn't just changing the financial management. The changes in our operations also impact this. The changes in the way we do business, the way we repair things, where we repair them. For example, the Army has instituted something called ''integrated sustainment maintenance.'' That's maintenance on a regional basis, as opposed to sending things to the depot. That has an impact on the depot's workload.
We have some logistic systems that have been changed that are changing the way people should be ordering materials, but unfortunately, we tend to wait and see the impact before we actually change. So all of these operational changes also have an effect on what happens in the financial management side.
Secretary HALE. We are making significant efforts to try to improve our accounting systems. They are lousy. They were lousy 3 years ago, they are better now, but they still aren't auditable, and won't be, unfortunately——
Mr. SISISKY. I'll tell you a funny story. Fifteen years ago——
Secretary HALE. You heard the same thing?
Mr. SISISKY. Mr. Boucher, I met with him on the fifth floor of the Cannon Building. There were five of them.
He says, ''I've got a 15-year term, and I promise you, I know it's going to be tough, but I'm going to get the accounting systems straight.''
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Well, 15 years have passed by, and the accounting system is still not straight. So—and I think he's retired now. I'm not sure.
Secretary HALE. I hear you. I'm dealing almost monthly right now on the accounting systems and our depot system. I hear you. And I sense some of the frustration. I've been in the job 3 years, and haven't seen as much progress as I would like to see. But we are about to actually take the Navy's system——
Mr. SISISKY. I told Dr. White if he wants to privatize, maybe there's where he needs to privatize. That and the legal arm of the Government. But you know, it's amazing, all of you are very disturbed—I wouldn't call it overreaction, on this reprogramming. And that was really the reason we did that. We could have written a better thing, and we may yet, as a matter of fact. There are corrections that we can do to the thing. But I think we've got your attention, and the chairman is going to get a little more attention shortly on that from a report of really what's happening. I've budgeted before, and I know how you have to do that. But, you know, it can be corrected, by the way. Even the $10 million, there's a few things that you can do that you can waive. And I wasn't joking when I talk about the military construction thing, I know nobody wants to hear that, the document would be so large, and the subactivity, but this may be one of the areas. I've got somebody looking at it now, an accounting firm, pro bono—so you know how well that's going to do—but, you know, there's always—to do—and not to punish any—God knows, we don't want to punish anybody in particular when it relates to hurricanes—you brought up a good thing, because God knows anybody could get that.
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But let me get back to DBOF—excuse me, the working capital fund—what can you tell the subcommittee about—let me put it this way, I understand the results are going to be ready about September 30 of this year, am I correct?
Ms. MARONI. Yes, sir; we've had a group working the last, I would say, 7 or 8 months, looking at all of the things you put on our plate as well as a number of things that we thought needed to be looked at. We added to the list, and we should have a report to you in September.
Mr. SISISKY. Are you willing to share some insights on some of the things that you may be——
Ms. MARONI. I think I would hesitate to——
Mr. SISISKY. I figured you would say that.
Ms. MARONI. Right.
Mr. SISISKY. You heard me mention DFAS. I wasn't joking about that, either.
Ms. MARONI. No; I appreciate that. And I think that an enormous amount has happened since the establishment of DFAS. We have been able to focus on the problems that were there all along. I mean, these are not new problems for the Department.
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We have improvements in our systems that are coming slowly, and that I think will make an enormous amount of difference. We are reducing the number of accounting systems. I think you will see some change.
All of this painful, expensive, and desperately needed, and we agree with you.
Secretary HALE. Could I give you two specific examples where I think we are making some modest progress.
We have something called a 1307 report, which is the ''Do you make money or not?'' It's the net operating results. We now have it in the Air Force by our air logistic centers. Prior to that, it was only Air Force wide, which really wasn't very useful. Obviously you got to get it out to the commander if you're going to try to hold that individual responsible. That was done partly with DFAS's help.
Also with their help, we got data on the sales in our wholesale supply activities. Our commanders had no idea of how much they were making in sales. We got essentially a special kind of work-around to get them that information. Took a few months longer than we had hoped, but it is now in place. This is not revolution. But it is tangible data that our field commanders are now crying for, because we're demanding that they conform to these performance plans. So I think there's modest progress.
Mr. BATEMAN. Ms. Christie, did you——
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Secretary CHRISTIE. I was just going to say, we all complain about DFAS a lot, but in fact, in areas where they have completed a project, we are seeing costs come down. Civilian payroll, for example, was an area where I think the Department had 11, 12—some huge number of systems. We're almost down to 1 now. And the cost of the payroll account is way down from the previous cases. By the end of this calendar year, most Navy general funds are going to be on one single accounting system. Costs are way down.
So it does happen. It has been painfully slow. We all wish it had happened faster.
Mr. SISISKY. Internally, on DBOF, I asked a question before and he couldn't answer, about if one depot is very efficient for many reasons, another one isn't, who gets credit for the profit, and what do you do with the profit that that one depot makes? Do you share that with the other ones, or do you share any part of it—in other words, with the fleet. Let's use the Navy.
Secretary CHRISTIE. In the long run, I hope to be able to have enough cash that I can let each business area, at least, manage itself. Right now with this very small cash position, I couldn't possibly let each business area manage. So I have to share to the extent that someone is making money, and someone else is losing money right now, I've got to share those to minimize the extent to which we have to do this advance billing.
But I think one of the real benefits of changing from defense business operating fund to working capital fund is to get us back to remembering what it is we're really about here. We do want these people to operate in as business like a way as they can within mission constraints. But there are a lot of things we do that are not the way you would run a business, because our primary reason is our mission——
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Mr. SISISKY. I said right up front, there's political considerations would keep places open that shouldn't be open.
Secretary CHRISTIE. Well, it's not just that. I mean, we stabilize rates, for example, in order to protect the customers' buying ability, and then if we make losses, we recover them in the next available budget that we can affect. That's a thing—business wouldn't be able to do that.
So we do a lot of things. Because we have decided that we need certain facilities for their mission support characteristics, we force workload at them. We are trying to keep these people from migration of workload elsewhere.
Mr. SISISKY. How much is the Navy short now in the account?
Secretary CHRISTIE. Right now, I think—I'm not sure I have the data—short in what sense? In the sense——
Mr. SISISKY. How much money do you owe DBOF?
Secretary CHRISTIE. We have about $600 million or $700 million in advance billings that we need to pay back, and then I need to raise about another couple of hundred million in cash to get myself into a healthy level.
Mr. SISISKY. The $4.7 billion was not a real figure, was it?
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Secretary CHRISTIE. It certainly wasn't for the Navy. I'm not sure what the $4.7 billion was for. I've forgotten.
Mr. SISISKY. It was for the Navy.
Secretary CHRISTIE. At what point in time?
Mr. SISISKY. I don't know exactly, you were in the office——
Secretary CHRISTIE. I'm sorry, I don't remember that particular number. I'll have to look. But we have come down quite a lot in the last several years. When cash was broken up, for example, we had $2.2 billion in outstanding advance billing liabilities. We're obviously now down around $600 or $700 million. So we've paid off quite a bit of this, and the half billion dollars that we got in the 1997 budget helped quite a bit.
Mr. SISISKY. Well, Ms. Maroni, I asked the question before, I'll ask it again, you've heard me ask it many times, have we ever used DBOF for any other item? In other words, contingency fund—I won't call it a slush fund—have we used it anything for environmental, ''BRAC'' programs——
Ms. MARONI. The money in the fund doesn't come out of the fund——
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Mr. SISISKY. I understand that.
Ms. MARONI [continuing]. Except if you take it out by Congress. But the money within the fund is used to operate the——
Mr. SISISKY. So the only money that came out of DBOF was money that Congress took out, is that correct?
Ms. MARONI. That's my understanding.
Mr. BATEMAN. Mr. Pickett.
Mr. PICKETT. Thank you, Mr. Chairman. First of all, Secretary Maroni, let me say that I agree with you that we should act promptly on your reprogramming request, and I hope this committee will get its part of the job done very quickly.
Ms. MARONI. Thank you very much
Mr. PICKETT. Although, the one good thing about advance billing is that it discourages migration, because it's unlikely that one of your customers is going to want to pay to have work done twice. So if they pay you in advance, it's pretty certain they're going to show up at the door to try to get the work done. But beyond that, I don't think that the advance billing practice is quite as benign as we talk about it here, and I don't think it's something that we should do, and I still believe that it frustrates the budget process. And I'll use some of your own remarks here when you—in your written statement, you comment that ''other influences have also contributed to the need for advance billing.''
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You go on to say, ''Such as congressionally directed re- programmings.''
And here's one that causes my ears to perk up, ''And unrealized efficiencies from base closures.''
So you're covering some of these items with money obviously from the working capital fund.
Ms. MARONI. I think what's meant there is that to the extent that costs have increased, we have a shortfall, and we need to advance bill. The question of unrealized failed assumptions in the program is a natural consequence of day-to-day operations and political decisions, I'm sure. There's no question that when the cash doesn't come into the fund as planned, advance billing is the natural consequence.
Mr. PICKETT. Well, that's the very point. It's a tool. It's something that's not actually been intended as a way to circumvent the budget process, but—and I don't mean that word in a pejorative sense that you're doing something wrong, but then again, you say ''the realities of maintaining planned training levels, and meeting the commitments of worldwide deployment operations, have necessitated the occurrence of advance billing.''
So it's something that's being used in a very profound way to——
Ms. MARONI. An example of that would be a ship that you had thought would come in for availability in a depot, and is not available because it's on a deployment that relates to a contingency. It's that kind of real world example.
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Does somebody else have another one to offer?
Secretary CHRISTIE. I can't think of one, but I do want to say, there are very strict rules about what costs can be paid out of BRAC closure moneys, and what ones belong to the activity, and a particular point in time where that funding responsibility transfers. And we've been trying to adhere very carefully to those rules. But it is a facet of human nature that as soon as activities—people know that their activity is going to close, they sometimes quit. Sometimes it's the very people you would like to keep around who will go take a new job faster. So pinning those exact costs down has also been somewhat difficult. And we did find that we had unanticipatedly large losses at our closing yards, and the Congress did give us a direct appropriation to cover those losses for which we're very grateful. Because that would have made advance billing even worse
Mr. PICKETT. In the absence of advance billing, you would be up here with a whole lot more reprogramming——
Secretary CHRISTIE. We would; Yes.
Mr. PICKETT [continuing]. And supplemental appropriation requests. I understand that. Nobody likes to go through that. It's like going to the dentist.
Secretary CHRISTIE. Well, and it's also a matter of timing. With as small a cash as I have, you know, I have to make a decision really when I find out my cash position in the middle of a month, before the end of that month, in order to get the advance billing done. So sometimes I have only about the week or two to make the decision and execute the advance, which is really not enough time to contemplate a reprogramming action.
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Mr. PICKETT. This goes a little bit beyond the issue today, talking about advance billing and the migration of working—of O&M funds from different activities. But when a budget leaves the Congress and it gets signed by the President, we have certain amounts in there that are going to be spent at the Secretary level. But in fact, many, many, more dollars get spent at the Secretary level than is reflected in the budget because of, like DBOF, where you assess the services; and DFAS, where you assess the services; and logistics operations, where you assess the services. And these moneys are taken out of the service budgets and brought up and administered and spent actually at the secretary level.
And that's an issue, Mr. Chairman, that I think bears attention, in addition to some of our concerns——
Mr. SISISKY. Have they confessed to that yet?
Secretary CHRISTIE. No. For example, the fleet commanders control the operating funds that buy ship depot maintenance, and certainly that buy all of the steaming days.
Mr. PICKETT. I'm not talking about ship depot maintenance. I'm talking about the money that the Secretary level uses to operate the DFAS operation. That's a Secretary level operation——
Secretary CHRISTIE. Oh, you mean Secretary of Defense level. I was thinking the Secretary of Navy. OK; yes.
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Mr. PICKETT. I'm sorry; yes. Secretary of Defense level.
Mr. BATEMAN. Well, I think that is a very fertile topic for another day, but I'm inclined to say at this point in view of commitments in my office, and I think some pressures on our witnesses, that I should declare that all time has now expired. I thank all of the witnesses for their presentation today, and to very sincerely communicate how pleased we would be to have your suggestion as to how we can better deal with these problems, and the way in which you feel that we have at our first effort, and attention getting undertaken to do so.
Ms. MARONI. Thank you, Mr. Chairman. Thank you very much.
Mr. BATEMAN. We'll allow members who may have further questions to submit them for the record.
[Whereupon, at 4:42 p.m., the subcommittee was adjourned.]
[The questions and answers can be found in the appendix beginning on page 87.]
"The Official Committee record contains additional material here."
QUESTIONS SUBMITTED BY MR. BATEMAN
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Current Budget/Appropriations Structure
Mr. BATEMAN. Does the current budget process/appropriations structure give the services too much flexibility?
Mr. BROCK. We recognize that the services need some flexibility because budgeting is an art, not a science. Budgets must be built in advance, and unplanned events inevitably occur. The services need to respond quickly to changing needs. To be fair, the work we have testified on today did not address the issue of flexibility—it merely identified variances between budgeted and obligated amounts. We did not analyze the causes of these variances. To a large extent how much flexibility is desirable is dependent on the visibility and oversight your committee and the appropriations committee desires. Over the years, Congressional committees have imposed certain reprogramming procedures and certainly have the prerogative to do more.
Mr. BATEMAN. Should DOD and the services present their budgets in the grouping of budget program element codes that GAO used in its June 1996 report? What is the advantage that those groupings provide which the current budget structure does not? Does it present a truer picture of what the services really need? Why did GAO use those groupings?
Mr. BROCK. Our reason for categorizing the O&M obligations by the accounts shown in our report was not to suggest that the budget structure should be revamped. Instead, we were trying to display the obligations in a form that would help decisionmakers distinguish between obligations directly related to mission activities as opposed to infrastructure activities. The current structure does not always provide such delineations. The most significant difference between our groupings and the services is that we grouped like items together regardless of where they can be found in the budget. For example, in the Army 3 of the 4 budget activities have 1 or more program element codes for management activities. We grouped all of these together under one management heading to get a total picture on how much of the Army's O&M funds were being used for management of headquarters activities. We found a similar situation in the Air Force.
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Mr. BATEMAN. Should Congress change the current budget structure?
Mr. BROCK. Whether or not the budget structure should be changed depends on the information Congress feels it needs to make its budget authorization and appropriations decisions. One modification to the budget presentation would be to have the services provide budgeted, appropriated, and actual data for each subactivity group for the prior fiscal year instead of just data on actual obligations as they do now.
Variations Between Budgeted and Obligated Amounts
Mr. BATEMAN. In your June 1996 report, you showed that the estimated needs reflected in the Army's and the Air Force's budget requests for groups of O&M activities for fiscal years 1993–95 were often greater than the amounts they obligated for those activities. What about the Navy? How widespread is this practice? Why does it happen?
Mr. BROCK. We did not include the Navy in our review because, at the headquarters level, it does not maintain the level of budget request and obligation data we need for our analysis.
We only looked at Army and Air Force O&M requests and obligations for FY 93 through FY 95 and therefore are limited in the conclusions we can draw. We compared the budget request to the obligations for activities and found that it was not unusual for some activities to be overestimated repeatedly while others were underestimated repeatedly. For example, we found that for fiscal years 1993, 1994, and 1995 the Army obligated less for combat forces and support of the forces than it requested. We also found that the Air Force obligated less for training and recruiting activities during fiscal years 1993, 1994, and 1995 than it requested. In the base support activity we found that both the Army and the Air Force requested less than was obligated in all three fiscal years included in our review. Base support activities includes activities such as base communications, maintenance and repair, environmental activities, and minor construction. These accounts are traditionally considered infrastructure accounts.
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As you know, the budget estimating process is not an exact science. One would rarely expect there to be complete agreement between amounts requested in the budget and actual obligations. An estimate is just that—it is an estimate. Variances can occur for a variety of reasons:
—timing differences between the time the budgets are prepared, presented to Congress, and acted upon.
—methodology that is based on outdated assumptions (e.g. the Army model used for OPTEMPO funding)
—unplanned for, non-recurring needs, for example, contingency operations like Bosnia.
Mr. BATEMAN. Why do the services appear to underfund Real Property Maintenance (RPM) and Base Operations (BASOPS)?
Mr. BROCK. Because the services recognize the constraints on resources they do not request funds to meet 100% of the requirements for base support and real property maintenance. When needs arise the services shift money to these accounts.
Mr. BATEMAN. If the Army is obligating more than it requests for RPM, why do backlogs of RPM continue to grow?
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Mr. BROCK. The services may not be obligating RPM funds for their highest RPM priorities. Base commanders have flexibility in obligating RPM funds. If a base commander chooses to landscape visiting officers' quarters instead of repairing a leaking roof, that is his or her prerogative. The roof may continue to be a problem for years until it eventually needs to be replaced. By that time, the cost of the repair will significantly increase.
Mr. BATEMAN. Is the Army continuing to divert funds from Depot Maintenance? Why?
Mr. BROCK. The Army estimates that it will obligate about $91 million less for Depot Maintenance in FY 97 than it received. There are a number of reasons why the services obligated less than appropriated and yet maintain a depot maintenance backlog. One reason is inefficiencies in the DOD supply system which result in the lack of required parts. One study showed that the lack of parts resulted in as much as 12 percent of an annual negotiated program not being completed. Along the same line we also found that inadequate consumable parts was the primary cause for repair delays at the Corpus Christi Army Depot. Also, changes in operational requirements can some times result in an under executed program. When equipment that was scheduled to go to depot maintenance is needed for an operation, maintenance is delayed and it is not always possible to move a backlogged item into the maintenance pipeline.
Mr. BATEMAN. Operating Tempo (OPTEMPO): Are the services currently doing anything to meet the 800-mile standard? Army officials have reported that improvements are underway. Is the Army continuing to divert funds from OPTEMPO to other activities?
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Mr. BROCK. The Army is in the process of revamping its system of budgeting and tracking OPTEMPO. One improvement is the institution of a special code to track OPTEMPO obligations during the year. This will improve visibility over OPTEMPO and make it easier for the Congress to have visibility over OPTEMPO if they desire.
According to data collected for our annual budget scrub the Army underexecuted its FY 95 OPTEMPO plan by about 9 percent and underexecuted its FY 96 program as well. We found that Army Forces Command drove 13 percent less than its planned OPTEMPO program, US Army Forces in Korea also averaged about 15 percent less miles than it planned and Army Forces in Europe averaged about 41 percent less miles.
Mr. BATEMAN. DOD devolved the cash management responsibility and the related Antideficiency Act limitation to the DOD components in February 1995. In your testimony, you state that GAO agrees with DOD on its decision to devolve the cash management responsibility to the DOD components. Why does GAO agree with this decision?
Mr. BROCK. The decentralization makes each individual DOD component directly accountable for its respective cash balance as well as their decisions that impact cash including any violation of the Antideficiency Act. When cash management was centralized, DOD did not have reports that showed the cash balance for the individual components. The reports only provided information on (1) DBOF's overall cash balance and (2) collection and disbursement date for each of the DOD components. With the decentralization of cash management, the Treasury provides DOD with a cash balance for each of the DOD components.
Mr. BATEMAN. Are there any other benefits?
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Mr. BROCK. There are three other benefits. First, each DOD component now has an incentive to more accurately price the goods and services that its working capital fund charges customers since inaccurate prices could lead to not having enough cash to cover day-to-day operating expenses. Second, the management of cash is closer to where cash decisions are made—the business area and the activity level. Third, OSD and the DOD components have started working more as a team to resolve cash problems. Under the centralization of cash, there was less incentive for the DOD components to respond to cash problems since OSD was responsible for cash and there was only one cash balance.
Mr. BATEMAN. In your testimony, you mention that the working capital funds have been advance billing customers to ensure that their cash balances remain positive. In fact, the Navy and Air Force advance billed customers about $3 billion during calendar year 1996 to ensure positive cash balances. Further, the Navy and Air Force have continued to advance bill customers in 1997. Does GAO have a position on advance billing?
Mr. BROCK. GAO believes that advance billing customers is a stopgap measure and that it does not resolve the problem. Advance billing is essentially mortgaging the future because the bills will have to be eventually paid.
Mr. BATEMAN. Since 1993, DBOF has experienced a cash problem. Is this new with DBOF or did the old stock and industrial funds also have cash problems?
Mr. BROCK. The revolving fund cash problems are not new. These problems existed with the old stock and industrial funds. DBOF highlighted these problems because of the merger of the nine old revolving funds into one large $75 billion revolving fund. Some examples of cash problems with the old stock and industrial funds follow.
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—Beginning in 1985, the Navy began to use passthroughs and transfers to deal with prior year losses. From 1989 through 1991, the Navy industrial funds received passthroughs totaling $1.6 billion to help recoup losses from prior years.
—In fiscal year 1991, the Navy industrial fund advance billed customers about $870 million to ensure that its cash balance would remain positive.
—From 1985 through 1989, the Navy stock fund refunded customers about $3.4 billion because is had excessive amounts of cash.
Mr. BATEMAN. In your testimony, you have several charts on the cash balances and what the cash balances would be if the services did not advance bill their customers. These charts provide information from February 1995 through May 1997. Why do the charts begin at February 1995 and not prior to this point in time?
Mr. BROCK. Before February 1995, the Treasury Department only provided one cash balance for the entire DBOF. Only with the decentralization of cash in February 1995, did Treasury provide separate cash balances for the DOD components.
Mr. BATEMAN. Could you please summarize the information on these charts.
Mr. BROCK. The figures in the charts show the following:
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(1) the three services have liquidated $4.2 billion of outstanding advance billings from February 1995 through May 1997;
(2) as of May 1997, the outstanding advance billing balance was $1 billion;
(3) the Army has liquidated almost all of its outstanding advance billing balance;
(4) the Navy's cash balance would be negative for most of the time period from February 1995 through May 1997 if it had not advance billed customers; and
(5) the Air Force liquidated most of its outstanding advance billing balance until it needed to advance bill customers over a billion in December 1996 and about $640 million in June 1997 to ensure that its cash balance would remain positive.
Mr. BATEMAN. The services have been advance billing customers since 1993. The services have worked off about $4.2 billion since February 1995. However, according to your statement, the outstanding balance as of May was about $1 billion. What will it take for the working capital funds to eliminate their outstanding advance billing balances.
Mr. BROCK. DOD is taking some actions to help reduce the outstanding balances. First, the FY 98 prices include $1.7 billion to recover prior year losses. Second, the FY 98 prices include a $650 million to generate cash. If DOD's assumptions are correct, this $2.35 billion will go a long way to reduce the outstanding advance billing balances.
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However, our past work has shown that DOD's assumptions are usually very optimistic. For example, while DOD plans to have a zero accumulated operating loss at the end of FY 98, our work on the FY 98 prices for 5 business areas show that 4 of these business areas will have losses totaling over $300 million at the end of FY 98.
Mr. BATEMAN. GAO has continuously reported and testified on the challenges and problems that have confronted DOD in its management of DBOF. One area of continuing concern has been DOD's management of DBOF's cash. In your testimony given today, you again address the problem of managing cash as it relates to the recently created Defense working capital funds. What military service or Defense agency is having the most problems with managing its working capital fund's cash, and in your opinion, what are the reasons for such problems?
Mr. BROCK. First let me provide you the cash information as of May 1997.
The overall cash balance without advance billing is well below the $2.3 billion minimum amount. In fact, the Navy and the Air Force have outstanding advance billing liabilities that exceed their cash balances.
From a historical perspective, the Navy has had the most severe cash shortage problem which is evidenced by its cash balance being negative for most of the past two years if it had not advance billed customers. Navy's problems occur because (1) it appears that the Navy underpriced its goods and services and (2) the Navy's operations has gone through a lot of turmoil in the last several years—3 of the 6 Naval Aviation depots were closed and 4 of the 8 shipyards were closed.
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Mr. BATEMAN. In your testimony you state that the working capital funds have not yet accomplished their goal of operating on a break-even basis and DOD is estimating that they will have an accumulated operating loss of $1.7 billion at the end of fiscal year 1997. How does this compare to previous years balances and is the situation improving or not?
Mr. BROCK. Based on our analysis of previous years financial information, the situation in the four working capital funds is not improving and the estimated loss in fiscal year 1997 of $1.7 billion would make it the largest of the four year period. For example, from fiscal years 1994 through 1996 all business areas have fiscal year ending accumulated operating loss balances of $1 billion, $620 million, and $202 million, respectively.
Decentralized Cash Management
Mr. BATEMAN. Aside from your statement that decentralized cash management was done to better align accountability and responsibility for managing cash, were there any other reasons for decentralizing the management of cash? For example, did you find that the DoD components were taking advantage of a single cash balance—that is, spending the money generated by others to cover cash shortages resulting from mismanagement?
Ms. MARONI. The action to decentralize cash management was taken to provide activity group managers additional control of their operations since cash management is an integral part of operational management. This passed the management of cash to the lowest practical level of management where pressure can be applied to influence the level of costs being incurred on a day-to-day basis. The decentralization of cash management to the DoD Components also included accountability for any violations of the anti-deficiency act that may occur as a result of cash transactions.
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When there is a single cash manager, the dynamics of the day-to-day management of cash is different than if there are several cash managers. In general, cash managers (as well as all other managers) tend to maximize their position within the constraints of the system that exists. Further, as time passed it became increasingly evident that it had been a mistake to centralize cash at the OSD level. Separation of the responsibility for cash management from the authority to incur expenses proved to be unworkable. The OSD did not, and never intended to, directly manage these activities. The decentralization of cash management back to the Components that managed the activities (while retaining OSD oversight) was an important step in improving the financial operations of the Fund.
Mr. BATEMAN. Has the management of cash improved since cash was decentralized? If so, could you please provide some examples?
Ms. MARONI. Yes, the decentralization of cash management has produced significant improvements in the available cash balance and in the cash management process. The chart below reflects the improvement in the available cash and the decrease in the advance billing liability since the decentralization of cash management. The chart reflects total cash with advance billings subtracted in order to show a true cash position. Although our intention has been to eliminate, except in unique circumstances, advance billing as a means of generating cash that goal has not yet been achieved.
Although advance billing liabilities have reduced $2.5 billion during this period and net cash position has improved $1.5 billion, there still remains much work to be done.
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Increased management attention is now placed on both operational results and cash management. There is now a team of people from each Service and Agency that works cash management issues on a regular basis and reports progress at the senior levels within the Components. In addition to reporting execution status to OSD, the Army Vice-Chief of Staff and the Assistant Secretary of the Army (Financial Management and Comptroller) receive briefings on cash management issues. In the Navy, the Vice-Chief of Naval Operations and the Assistant Secretary of the Navy (Financial Management and Comptroller) have received briefings on the results of quarterly execution reviews and cash plans. In the Air Force, the Chief of Staff and the Assistant Secretary of the Air Force (Financial Management and Comptroller) receive briefings on execution results and they have personally emphasized the need for field commanders at these activities to achieve the financial goals established. This extra emphasis on cash should translate into both better financial management and cost savings in the future.
Advance Billing
Mr. BATEMAN. What is the current, total amount of the working capital funds' outstanding advance billing of customers? What is the breakdown of this amount by DoD component?
Ms. MARONI. The table below reflects the balances in advance billings by component as of June 30, 1997 as reported on official accounting reports:
Mr. BATEMAN. Its been more than 2 years since cash management was returned to the DoD components, and the funds still have to advance bill customers in order to avoid negative cash balances—why do the working capital funds have to continually advance bill customers in order to keep the funds' cash balances positive?
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Ms. MARONI. The Department agrees with the Congress that advance billing should only be utilized in extreme circumstances and should not be part of normal operations of the Working Capital Funds. The cash shortfalls over the past several years have been more the product of declining workload as a result of BRAC and force structure reductions then mismanagement. Each budget submission has displayed projected cash levels based on costs and workload estimates reflected in both the customer and Working Capital Fund budgets. However, when projected workload did not materialize cash levels declined, causing the need to advance bill to maintain solvency.
The Army is still experiencing cash problems from reduced workloads and downsizing in its Supply, Ordnance and Depot Maintenance activities. In Navy, with the conclusion of the major BRAC actions their workload should now stabilize, and once the programmed cash surcharges have been collected the Navy should not require advance billing to maintain solvency. The Air Force is now struggling with the same BRAC concerns that the Army and Navy have already experienced. Consequently, the Air Force cash position may fluctuate until the planned BRAC and privatization initiatives are completed.
Other factors have also contributed to the loss of planned revenues. During FY 1995 a Navy request to reprogram $535 million from an aircraft procurement project into its Working Capital Fund was reduced to only $78 million by the Congress, dropping planned revenue by $457 million. During FY 1996 and FY 1997, the Department requested in the budget Operation and Maintenance funds as passthroughs to help finance Working Capital Fund losses for both the Navy and Air Force. These requests were either denied or reduced by Congress leaving $295 million uncollected, which would have helped replenish the cash balance.
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Although many factors ultimately contributed to cash shortfalls since FY 1995, the Department remains committed to eliminating advance billing as a routine cash generation tool.
Mr. BATEMAN. Does DoD expect the services will have to advance bill customers during the remainder of fiscal year 1997? If so, what is the expected amount and what DoD component business area will be doing it?
Ms. MARONI. Yes, we anticipate that the Navy will need to advance bill an additional $360 million in August 1997. Navy advance billings decline by approximately $250 million per month as the work is actually performed. The Navy cash balance (including advance billings) is $421 million as of the end of June 1997. If current advance billings are liquidated at the normal rate, Navy would have a negative cash position by fiscal year end without new advance billings. However, their total advance billing liability will not exceed the $1 billion ceiling set by Congress for FY 1997, at any time.
The Army has experienced some unforeseen cash problems this fiscal year, which have resulted in unusually low cash balances. At the current time, no decision to advance bill has been made and the Army is taking all available steps to avoid any advance billings in FY 1997. However, reported operating results in July and August will be the determining factor as to whether some advance billings will be needed. The Air Force is not planning to incur any new advance billings for the remainder of FY 1997.
Mr. BATEMAN. Based on GAO's testimony, DoD plans to include a surcharge in the working capital fund prices for fiscal years 1998 and 1999 to generate cash. Does DoD expect this generation of cash to eliminate the need to advance bill customers? If not, what is DoD doing to eliminate the routine practice of the working capital fund advance billing its customers?
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Ms. MARONI. In FY 1998 and FY 1999, the Navy and the Air Force have included specific factors in their stabilized billing rates to replenish cash. Navy is reflecting $500 million in FY 1998 and $150 million in FY 1999, with the Air Force reflecting a cash generating factor of $150 million in each year. Congress also helped to curtail the need for new advance billings, by requiring the Navy to reprogram $511 million during FY 1997 from various procurement programs. This action has been accomplished with a commensurate increase in the Working Capital Fund cash level. When these cash surcharges have been collected by the end of FY 1999, the Department hopes to discontinue the use of advance billings as a routine procedure for the generation of cash.
Mr. BATEMAN. When does DOD expect the services will be able to eliminate their advance billing balances?
Ms. MARONI. Unless new advance billings become necessary, the current advance billing balances will be eliminated by the end of FY 1999.
Elimination of DBOF
Mr. BATEMAN. Is it not true that the four working capital funds will continue to operate the same way they did under DBOF?
Ms. MARONI. Yes, the operations are continuing as before, but a major study is ongoing to see what changes would result in improvements. The Services had always managed their portion of the DBOF independently. The establishment of separate working capital funds will not change this management responsibility. Nevertheless, we are taking this opportunity to review the previous policies of the DBOF and will recommend any changes that are beneficial. We expect to complete the review effort in September and will forward the report to the Congress as directed by the National Defense Authorization Act for FY 1997.
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Mr. BATEMAN. Is it also not true that the four working capital funds inherited DBOF's operational and financial reporting problems?
Ms. MARONI. Yes, that is true. The establishment of the Working Capital Funds does not improve any existing operational or financial problems. The separate working capital funds only clarify the organizational and command channels that already existed in the DBOF. The managers of the funds are addressing operational problems and financial changes are being pursued as accounting system upgrades are implemented.
Mr. BATEMAN. If these statements are true, then what makes DoD think that by merely making a name change that the working capital funds will operate any better than they did when they were called DBOF?
Ms. MARONI. The name was changed to correct the erroneous impression that DBOF activities reported to an OSD organization and were not managed or controlled by the Services. The establishment of the separate working capital funds correctly identifies the organization responsible for the management of each of the funds. The customer/provider relationship is now much clearer. This correction of perceptions is an immediate improvement in the understanding of the management of the working capital funds. This increases accountability and helps focus management efforts on improving operations and reducing costs.
DBOF Lost $1.7 Billion
Mr. BATEMAN. If DBOF is supposed to recover its costs and operate on a breakeven basis, why is DBOF always losing money?
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Ms. MARONI. Working Capital Funds recover their cost by setting their rates to breakeven in the budget period. The working capital fund rates are stabilized and are not changed after the budget is submitted. This stabilization protects customers buying power and enables them to accomplish their planned program. However, since these rates are set to recover the budgeted cost of operations, the funds must absorb any net cost changes during the year. These cost changes create the gains or losses that must be recovered in the future. While small gains or losses during a fiscal year are normal, outside factors have generated most of the projected $1.7 billion in losses for FY 1997.
Approximately $700 million of this amount is driven by increased fuel costs. The actual costs are significantly higher than budgeted when the rates were set in February 1996. The cost of fuel is driven by worldwide supply and demand factors, and the projection in the budget did not anticipate the magnitude of the increase that occurred.
The Air Force loss of $195 million in depot maintenance is the result of the denial of the appropriated funds the Air Force requested to offset this loss in their budget for FY 1997. The loss occurred in previous years by a combination of base closings, declining workload, and workload shifts. The Air Force did not want their customers to incur increased rates for these one-time losses and requested an appropriation passthrough to offset this loss. Since these funds were not approved, the loss will not be recovered in FY 1997, as anticipated, but will be recovered in FY 1998.
The Defense Reutilization and Marketing Service (DRMS) is expected to lose approximately $165 million. DRMS has been losing revenue due to increased utilization of material by the Services and declines in hazardous waste disposal. Both these trends are good for the overall Department, but will cause losses in DRMS until costs can be aligned to this lower level of workload.
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As noted above, most of these losses are not the result of poor management at the working capital fund activities, but rather the result of outside influences which management cannot directly control. The remaining losses result from a variety of causes including, in some instances, overly optimistic productivity or workload estimates for FY 1996 and FY 1997.
Mr. BATEMAN. When can Congress expect the working capital funds to improve its operations to the point of breaking even?
Ms. MARONI. The current budget request is structured to reach zero accumulated operating results, the break even point, at the end of FY 1998 and to maintain this position in FY 1999. Rates have been established to recover all the operating losses discussed above. Additionally, the Services and Defense Agencies continue to pursue cost savings and downsizing needed to reduce costs and to match staffing with projected workload. Personnel reductions of approximately 36,000 are reflected in the budget for workload, overhead, and infrastructure decreases in FY 1996–FY 1999.
GAO REVIEW OF FY 1998 PRICES
Mr. BATEMAN. Does DoD have a plan to correct these recurring problems of setting prices?
Ms. MARONI. Revolving fund rates are finalized at the end of the formal DoD budget review. However, the workload base for the budget is developed from 18 months or more in advance of execution. During the budget reviews, every attempt is made to match revised workload and funding to ensure that sponsors have sufficient funds to support the revolving fund workload. The Office of the Under Secretary of Defense (Comptroller) monitors execution of the budget through various reviews during the fiscal year. Components are given the opportunity to explain variances from budget plans and recommend corrective actions to minimize gains or losses. As noted in the answer above, costs outside the control of the business area commanders often contribute to the losses.
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As noted above in response to another question, the Department is nearing completion of a major study on working capital funds. That study has included an extensive review of current rate setting practices. It is anticipated that the final study report will recommend a number of policy changes and new procedures that should improve price setting and cash management in the Funds. The study is planned for completion by September and will be submitted to the Congress prior to September 30, 1997.
Mr. BATEMAN. What corrective actions is DoD taking to eliminate these problems?
Ms. MARONI. As noted above, the department is in the process of completing an extensive review of Defense Working Capital Funds policies and practices. The initiatives from this study should provide tools to better manage the Funds and provide some needed flexibility to adjust for changes in operations. Areas covered in the study include all items directed by the Congress and a wide variety of issues covering the following general topic areas: (1) Cash Management policies and practices, (2) Prices, Surcharges, and Requirements, (3) Stabilized Rates, (4) Accounting Practices and Systems, and (Interservicing Proposals and Issues). Recommendations resulting from the study that are approved will be implemented as soon as possible.
Mr. BATEMAN. What timetable does DoD have for the actions to be completed?
Ms. MARONI. The Study of the Defense Working Capital Funds is scheduled for completion soon. We will report to the Congress on the recommendations and decisions made by September 30, 1997. Time permitting, those items that do not require congressional approval will be incorporated into the FY 1999 President's budget. Policy changes or new practices not dependent on the annual budget submission or congressional approval will be implemented by October 1, 1997. Should other recommendations require congressional approval, the Department will need to wait for congressional action on the report. Consequently, those items will be implemented no sooner than fiscal year 2000.
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Mr. BATEMAN. According to the GAO testimony, the Navy was making progress toward liquidating its outstanding advance billing balance until it again started advance billing customers $1.7 billion dollars in calendar year 1996 and $400 million through June 1997. Why is the Navy having to advance bill its customers so much?
Secretary CHRISTIE. The DON did not reinitiate advance billing in 1997; advance billing has been ongoing at DON DBOF activities since May of 1993. Nevertheless, the total amount of advances outstanding has declined from $3.8B in May 1993, to $2.2B when cash was distributed to the Military Departments in December 1995, to $760M in June 1997. Recent advances are not a reversal of the overall downward trend. Cash can be depleted by operating losses or by the transfer of cash out of the Fund to other accounts. By DOD policy, operating losses are recovered in future years' rates. DON has consistently set its DBOF/NWCF rates to recover all operating losses in accordance with DOD policy. However, in the FY 1992 and FY 1993 budgets, DOD and Congress included cash transfers from DBOF to various DOD operating and investment accounts which ended up being more than DBOF could afford to give up and still meet its day-to-day cash requirements. Therefore, the procedure of advance billing was begun to ensure the DBOF would remain solvent. The majority of the advance billings were executed at Navy DBOF activities (vice Army and Air Force activities) because of the type of orders OSD chose to advance bill. Since DBOF/NWCF rates are set to cover all costs (plus operating losses), but not specifically to generate cash, the DON did not actually start to recover from these excess cash transfers until the Congress directed a cash surcharge in the FY 1997 Appropriations Act. Thus advance billing has been necessary to maintain solvency.
Mr. BATEMAN. Does the Navy expect to advance bill customers during the remainder of fiscal year 1997? If it becomes necessary, how much does the Navy estimate it will have to advance bill for the remainder of fiscal year 1997?
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Secretary CHRISTIE. DOD's objective is to have 7 to 10 days of cash at the end of each fiscal year. The projection of cash that we made in January of this year, showed that, without additional advance billing in FY 1997, we would have as few as 2 to 3 days of cash for most of the last half of calendar year 1997. We advance billed in June when cash fell below our projection, and I think it likely that we will have to execute additional modest advance billings this year and next year.
Mr. BATEMAN. It is my understanding that the Navy planned to eliminate its outstanding advance billing balance by the end of fiscal year 1999. Does the Navy still plan to eliminate the advance billing balance by the end of fiscal year 1999? Has the Navy revised its estimated elimination date for the advance billing balance, and, if so, what is the new date?
Secretary CHRISTIE. In addition to the transfer of $512M from DON investment accounts to NWCF cash that Congress directed in FY 1997, our FY 1998 NWCF rates include a cash surcharge of $500M and we tentatively have a cash surcharge of $150M in FY 1999 rates. If all goes as planned and FY 1998 workload materializes in execution as it is budgeted in the FY 1998 President's Budget, then we should be able to stop making additional advances late in FY 1998 and liquidate all outstanding advances during FY 1999. We have not projected a specific month for either event.
Mr. BATEMAN. The Navy's cash balance as of May 1997 was about $154 million. According to the GAO testimony, the cash needed by the Navy to maintain a 7 to 10 day supply of cash is about $625 million to $900 million to cover operating costs and 4 to 6 months of capital asset disbursements. What are the reasons the Navy's cash balance has dropped to such a low level?
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Secretary CHRISTIE. We entered FY 1997 with an outstanding advance billing balance of just under $1B. Our FY 1997 rates were based on the DOD policy of setting rates to cover operating costs. They were not set higher than costs to provide adequate cash to pay off these ''loans'' as well. The transfer of $512M from DON investment accounts to NWCF cash that Congress directed in FY 1997 only partially paid down our advance billing balance. The remainder is planned to be covered in FY 1998 and FY 1999 because we now are considering cash requirements, in addition to operating costs, in setting NWCF rates.
Mr. BATEMAN. Why did the Navy only advance bill customers about $230 million in June 1997 when this amount is added to the May cash balance of $154 million would total only $380 million which is well below the minimum of $625 million cash level required?
Secretary CHRISTIE. Four considerations enter our decision of how much to advance bill. First, in FY 1997, there is a legal ceiling of $1B in outstanding advances. The $230M we advance billed in June brought outstanding advances to about $750M. We have structured our advance billings throughout this fiscal year to remain under the Congressional limit of $1B. Second, an advance billing is, in effect, a short-term, no-interest loan from the customer, which must be repaid when the work is completed. To minimize the frequency with which we have to advance bill, we try to advance bill work that takes a relatively long time to complete. This further limits the amount available for advance billing at any one time. Third, uncertainty in how fast advances will liquidate suggests that we should not bill right up to the legal limit. Fourth, we are trying to minimize reliance on advance billings (advance billing only enough to remain solvent) until cash is increased from rates in FY 1998. Considering all these factors, we make a judgment each month of how much we will advance bill.
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Mr. BATEMAN. In addition to advance billing, what other measures is the Navy taking to improve its cash balance position?
Secretary CHRISTIE. In addition to the transfer of $512M from DON investment accounts to NWCF cash that Congress directed in FY 1997, our FY 1998 rates include a cash surcharge of $500M and we have a tentative cash surcharge of $150M in FY 1999 rates. To boost cash temporarily until these rates take effect, we have instructed NWCF activity managers to defer discretionary expenditures. We also are taking steps to speed collections, keep accounts receivable low, and improve the timeliness of accounting transaction processing.
Mr. BATEMAN. According to the DOD annual cash plan for fiscal year 1997, it is estimated that the Navy will disburse about $1.4 billion more than it collects from customers. To offset most of the cash drain during fiscal year 1997, the Navy plans to increase prices during fiscal year 1998 to recoup losses and generate cash. Does the Navy's plan to include a surcharge in the working capital fund prices for fiscal years 1998 and 1999 mean that the Navy expects to eliminate the need to advance bill customers?
Secretary CHRISTIE. Our FY 1998 rates include a cash surcharge of $500M and we have a tentative cash surcharge of $150M in FY 1999 rates. If everything goes as planned and FY 1998 workload materializes in execution as it is budgeted in the FY 1998 President's Budget, then we should be able to stop making additional advances late in FY 1998 and liquidate all outstanding advances during FY 1999.
Mr. BATEMAN. Is the estimated $1.4 billion cash drain still the current estimate or does the Navy have an updated estimate? Have the Navy prices for fiscal year 1998 been adjusted to reflect any adjustments to the net disbursement estimate for fiscal year 1997?
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Secretary CHRISTIE. Based on our mid-year review of NWCF activity performance, we still expect to disburse more than we collect in FY 1997. FY 1998 rates have not been adjusted for any change in disbursements because the FY 1998 President's budget was already before Congress by the time we completed the review. We are reassessing our FY 1999 rates this summer and fall and will adjust the FY 1999 cash surcharge if necessary.
Mr. BATEMAN. In fiscal year 1996 the congress made about $595 million of Navy Operations and Maintenance appropriations available to the Navy working capital fund for the liquidation of prior year accumulated operating losses. Despite this assistance from the Congress the Navy still continues to have a cash shortage problem and report large losses from its operations. Why does the Navy's cash balance continue to be at such a low level? What did the Navy do with the $595 million and what help did it provide to the Navy?
Secretary CHRISTIE. In FY 1996, we requested $695M and Congress appropriated $595M specifically to cover losses (beyond the control of NWCF managers) at closing shipyards and Naval Aviation Depots (NADEPS). This avoided the need to raise the rates of remaining shipyards and NADEPS (an equal amount) to recover those losses. The full amount appropriated was transferred to these activities and included in their FY 1996 operating results, thereby recovering the previous years' losses and the resultant cash drain. It was not sized, nor intended, to liquidate our outstanding advance billings and raise an adequate cash balance.
Mr. BATEMAN. Does the Navy need additional appropriations from the Congress and, if so, how much funding is needed?
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Secretary CHRISTIE. Cash can be increased either by an appropriation for that purpose (sometimes called a passthrough) or through working capital fund rates. An appropriation has the advantages of assuring that working capital fund cash will increase by the intended amount and of providing the increase at the beginning of a fiscal year. Cash raised through working capital fund rates is a lot more uncertain in both amount and timing because it depends on the actual amount of customer orders executed during the year and is collected throughout the year as work is ordered and billed. Additionally, when rates increase (because they include a cash surcharge) customers are more likely not to purchase the level of services originally budgeted and therefore, the amount of cash generated may be less than originally intended. We are raising cash through increased rates based on our understanding of Congress' preference.
Mr. BATEMAN. What actions is the Navy taking to improve its cash shortage problem, reduce its operating losses, and accomplish the working capital fund goal of breaking even?
Secretary CHRISTIE. Our FY 1998 rates include a cash surcharge of $500M and we have a tentative cash surcharge of $150M in FY 1999 rates. If everything goes according to plan and FY 1998 workload materializes in execution as it is budgeted, then we should be able to stop making additional advances late in FY 1998 and liquidate all outstanding advances during FY 1999. For FY 1999 and future years, the DON will request rates that it believes are adequate to cover operating costs and provide adequate cash without the need for advance billing. The operating performance of NWCF activities has been improving as closure and downsizing actions are completed. The DON has established a NWCF Executive Committee to oversee NWCF operations. NWCF activity operating performance is reviewed quarterly by the Vice Chief of Naval Operations and the NWCF Executive Committee. If adverse trends are detected during execution corrective actions are directed and improvement in operating performance monitored. Additionally, we are working with our customers to stabilize workload at many of our NWCF activities in order to ensure the workforce is fully employed and work can be accomplished in the most cost-effective manner.
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Advance Bill
Mr. BATEMAN. Why is the Air Force having to advance bill its customers so much?
Secretary HALE. When cash management was decentralized from DOD Comptroller in Feb 1995, the initial cash distribution to the Air Force was inadequate to cover FY 95 projected cash requirements and the Air Force was immediately required to advance bill Depot Maintenance customer orders.
The Air Force advance billed Depot Maintenance orders on hand during December 1996 and June 1997 in order to maintain cash liquidity in the Air Force Working Capital fund. The cash shortfall was driven by the following factors:
Unprogrammed operating losses in Supply Management in FY 96 and in Depot Maintenance during FY 97, and
Loss of the passthrough requested in the AF, O&M FY 97 budget.
Mr. BATEMAN. Does the Air Force expect to advance bill customers during the remainder of fiscal year 1997 and if so, how much?
Secretary HALE. The Air Force does not currently plan to advance bill again this fiscal year based on current outlay projections. Advance billing would be used as a last resort if declining balances threaten the Working Capital Fund liquidity.
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Mr. BATEMAN. Does the Air Force still plan to eliminate the advance billing balance by the end of fiscal year 1998?
Secretary HALE. Based on historical tracks of past advance billings and current estimates, and assuming no further advance billings, we expect to work off the vast majority of the advance billing balance (approximately $900M as of the end of June) by the end of fiscal year 1998. We do expect a small amount (approximately $35M) to be eliminated in fiscal year 1999. This is due to workloads which have long lead times to complete, such as software maintenance and commodity modifications.
Mr. BATEMAN. Has the Air Force revised its estimated elimination date for the advance billing balance, and, what is the new date?
Secretary HALE. The Air Force updated the estimate after the June advance billing. Based on historical tracks of past advance billings and current workload estimates, we expect to work off the vast majority of the advance billing balance (approximately $900M) by the end of fiscal year 1998. We do expect a small amount (approximately $35M) to be worked off by the end of fiscal year 1999. This is due to workloads which have long lead times to complete, such as software maintenance and commodity modifications.
Mr. BATEMAN. What are the reason the Air Force's cash balance has dropped to such a low level, thus resulting in the need to advance bill customers in June 1997?
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Secretary HALE. Cash balances are lower than projected due to several factors:
Faster than expected liquidation of unearned revenue tied to previous advance billing;
Pricing errors in the Supply Management Activity Group; and
Poor execution performance in the Depot Maintenance Activity Group:
Low productivity in closing centers;
Production slowdowns related to engine parts shortages; and
Unexpected contract operating losses.
Mr. BATEMAN. In addition to advance billing, what other measures is the Air Force taking to improve its cash balance position?
Secretary HALE. The FY 98/99 President's Budget includes cash factors in Supply Management and Depot Maintenance rates totaling $150M in each year to correct for undercapitalization and unexpected cash outlays. We have put more emphasis on full cost recovery, analyzing our rates to be sure we have identified and will recover all operating costs. The FY 99 Amended Budget will be revised to cover all costs as well as recover anticipated FY 97 and FY 98 losses.
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The Air Force institutionalized performance contracts with Air Force Material Command designed to improve the functional and financial health of our working capital funds through increased management attention on cost control. Cost control and manager accountability are important elements of these performance contracts. Business activity is thoroughly reviewed by business managers and senior management levels each month against cost and operating results targets. Causes for poor performance are being identified and corrective actions implemented. We expect that this business practice improvement will help us improve Working Capital Fund operating performance and avoid future advance billing.
Mr. BATEMAN. Does the Air Force's plan to include a surcharge in the working capital fund prices of fiscal years 1998 and 1999 mean that the Air Force expects the elimination of the need to advance bill customers?
Secretary HALE. Yes. The cash surcharge in FY 98 and FY 99 were designed to build cash to minimum operating levels and eliminate future need to advance bill. The Air Force uses advance billing only as a last resort if we are at risk of falling into a negative cash position as a result of unexpected operating losses and unanticipated cash outlays.
Mr. BATEMAN. Is the estimated $155M cash drain still the current estimate or does the Air Force have an updated estimate?
Secretary HALE. Our average disbursements are about $150M a month. Average collections, though they vary, are generally expected to cover these disbursements.
Mr. BATEMAN. Have the Air Force prices for fiscal year 1998 been adjusted to reflect any adjustments to the net disbursement estimate for fiscal year 1997?
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Secretary HALE. The FY 98/99 President's Budget includes a cash factor to help rebuild the Air Force cash corpus to a minimum operating level. Under stabilized rates policy, our FY 98 prices are locked at the level assumed in the FY98 PB. We are reviewing projected FY 98 cash and operating results given the unexpected FY 97 losses; the cash factors in FY 98 rates should provide sufficient collections to meet net disbursements at current workload and cost projections (barring any unexpected losses or changes in customer requirements). Unanticipated FY 97 losses will be recovered in FY 99 prices.
QUESTIONS SUBMITTED BY MR. ORTIZ
Mr. ORTIZ. What role could advanced billing have had in the current situation in the Corpus Christi Army depot.
Mr. BROCK. At this time, we are not aware of any direct link that advanced billing could have had on the workload projections used to support proposed workforce reductions at the Corpus Christi Army Depot. However, following the July 22, 1997 Subcommittee hearing, the Chairman requested that we review a number of actions and issues relating the proposed Corpus Christi workforce reductions. Specifically we plan to (1) analyze the support for proposed fiscal year 1998 and 1999 staffing reductions, (2) compare depot maintenance funding authorizations to executed program spending, and (3) evaluate the accuracy and completeness of depot maintenance workload forecasting. In performing this work we will also determine whether advance billing practices could affect funded depot maintenance workload requirements. We have had several discussions with Congressman Oritz's staff since the hearing and have provided preliminary information on the situation at Corpus Christi. As our review progresses we will provide status briefings to interested members and their staffs.
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Mr. ORTIZ. In light of the supplemental appropriation approved earlier this year, what plans does the Defense Department have to restore to depot maintenance accounts funds that were diverted to Bosnia operations?
Ms. MARONI. While the supplemental appropriation did provide resources to fund operations in Bosnia, it did not fund all of the requirements. As such, resources originally identified for depot maintenance and other programs that were diverted to fund the mission critical contingency related operations might not be restored. The Services are evaluating their resource capabilities and will restore funds to depot maintenance consistent with their overall readiness priorities.
The Office of the Assistant Secretary of the Army (Financial Management and Comptroller) did not cooperate in providing a timely response to questions submitted for the record.