oversight

FAA Needs To Improve Oversight and Enhance Transparency in Its Franchise Fund

Published by the Department of Transportation, Office of Inspector General on 2019-12-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                FAA Needs To Improve Oversight
                  and Enhance Transparency in
                       Its Franchise Fund




Report No. FI2020012
December 11, 2019
FAA Needs To Improve Oversight and Enhance Transparency in
Its Franchise Fund
Mandated by the FAA Reauthorization Act of 2018

Federal Aviation Administration | FI2020012 | December 11, 2019




What We Looked At
The Federal Aviation Administration (FAA) Administrative Services Franchise Fund is a Government-
run, fee-for-service organization that aims to foster competition, increase efficiency, and reduce costs
across the Federal Government. The Fund has six service organizations and reported $480 million in
annual revenues in 2018. As required by the FAA Reauthorization Act of 2018, our office initiated an
audit to assess FAA’s management and oversight of the Fund’s operations and activities. Specifically,
we looked at the Fund’s history, intended purpose, and objectives; conformance to generally accepted
accounting principles; and conformance to Federal policies and other guidelines.

What We Found
The Fund’s six service organizations serve multiple types of customers; by law, they are required to
receive payment in advance. While the Fund’s annual revenues reflect increases in its services and
customers, we found weaknesses in its internal controls. For example, the Fund does not track
inventory age; as such, we could not determine if the inventory value, reported to be $656 million in
2018, had been overstated. Fund officials also do not conduct adequate oversight of the financial
operations. For example, we found $2.6 million in unexpended funds that should have been returned
to customers; we project the total unreturned amount to be $26 million of $338 million in
unexpended funds. In addition, if they are not paid in advance, some service organizations use
operating reserves to pay for the costs of providing services, contrary to law. Most of them do not
fully comply with requirements for capital reserve plans—increasing the risk that funds could be
mismanaged. Still, FAA is changing the Fund’s governance structure, which might allow it to measure
whether the Fund is receiving adequate oversight and stability. However, FAA could do more to
address customer concerns regarding transparency and to avoid the risk of improperly obligating
funds. Enhancing financial-related internal controls is key to ensuring the Franchise Fund functions as
Congress intended.

Our Recommendations
We made 13 recommendations to help FAA strengthen its management and oversight of the
Franchise Fund. FAA fully concurred with recommendations 3 through 13, but did not concur with
recommendations 1 and 2. We have asked the Agency to reconsider its position.

All OIG audit reports are available on our website at www.oig.dot.gov.
For inquiries about this report, please contact our Office of Government and Public Affairs at (202) 366-8751.
Contents
     Memorandum                                                                 1

     Background                                                                  4

     Results in Brief                                                            7

     FAA’s Franchise Fund Lacks Audited Financial Statements and Has Internal
        Control Weaknesses                                                       8

     FAA Is Changing Its Governance of the Franchise Fund but Can Do More
        To Address Customer Concerns                                            21

     Conclusion                                                                 25

     Recommendations                                                            26

     Agency Comments and OIG Response                                           28

     Actions Required                                                           29

     Exhibit A. Scope and Methodology                                           30

     Exhibit B. Organizations Visited or Contacted                              33

     Exhibit C. List of Acronyms                                                34

     Exhibit D. Service Organizations Profits (Losses) from Operations,
        FY 2014–FY 2018 (Dollars in Thousands)                                  35

     Exhibit E. Major Contributors to This Report                               37

     Appendix. Agency Comments                                                  38




FI2020012
           U.S. DEPARTMENT OF TRANSPORTATION
           OFFICE OF INSPECTOR GENERAL




Memorandum
Date:             December 11, 2019

Subject:          ACTION: FAA Needs To Improve Oversight and Enhance Transparency in Its
                  Franchise Fund | Report No. FI2020012

From:             Louis C. King
                  Assistant Inspector General for Financial and Information Technology Audits

To:               Federal Aviation Administrator


                  The Federal Aviation Administration (FAA) Administrative Services Franchise Fund
                  (Franchise Fund or Fund) was authorized under the Department of Transportation
                  (DOT) and Related Agencies Appropriations Act of 1997 1 to foster competition,
                  increase efficiency, and reduce costs across the Federal Government. The
                  Government Accountability Office (GAO) defines franchise funds as Government-
                  run, fee-for-service organizations that provide a portfolio of services, including
                  contracting services, to other Federal agencies. FAA’s Franchise Fund is
                  composed of six service organizations, 2 through which it provides products and
                  services to customers on a fee-for-service basis. In 2018, the Franchise Fund
                  reported annual revenues of approximately $480 million and $1.1 billion in total
                  assets.

                  The FAA Reauthorization Act of 2018 3 required our office to initiate an audit of
                  FAA’s Franchise Fund. In accordance with that mandate, our audit objectives were
                  to assess FAA’s management and oversight of the Franchise Fund’s operations
                  and activities. Specifically, we:

                       1. Reviewed the history, intended purpose, and objectives of the Fund; for
                          details, see the Background section of this report.

                       2. Assessed, to a limited extent, the Fund’s conformance to generally
                          accepted accounting principles and certain financial matters related to
                          inventory records, profits and losses, and unexpended balances. However,


1 Pub. L. 104-205, 110 Stat. 2958 (September 30, 1996).
2 Enterprise Services Center, International Training, Federal Leadership Training, Logistics Center, Flight Program
Operations, and Acquisition Services. A Corporation Services component also supports the Franchise Fund.
3 Pub. L. 115-254, signed by the President on October 5, 2018.




FI2020012                                                                                                             1
                          we did not perform a financial statement audit in conformance with
                          generally accepted Government auditing standards, and, accordingly, are
                          not expressing an opinion on the Fund’s financial statements.

                      3. Assessed FAA’s governance and oversight of the Franchise Fund,
                         including the use of performance metrics, and the Fund’s conformance to
                         Federal policies, best practices, and other guidance related to revolving
                         funds. 4

                 Our audit was not the first examination of the FAA Franchise Fund. In a May 2016
                 report, 5 GAO reviewed the franchise fund operations at FAA and the Department
                 of the Treasury (Treasury)—based on their roles as Federal shared service
                 organizations and their use of unexpended balances. GAO found that FAA gave
                 pricing and performance information to existing customers but not potential
                 ones and lacked processes for managing the Fund’s operating reserves. GAO
                 recommended that FAA make the Franchise Fund’s pricing information, strategic
                 goals, and performance metrics publicly available, and develop an operating
                 reserve policy. FAA addressed all of the recommendations and GAO closed them
                 in March 2018.

                 We conducted our work in accordance with generally accepted Government
                 auditing standards for program audits. Our methodology included reviewing
                 applicable guidance; the Fund’s customer history; its internal, unaudited financial
                 statements; and FAA’s performance and accountability reports. We also met with
                 key officials such as the members of the Franchise Fund Management Council. To
                 verify self-reported profits, losses, revenues, and expenses for fiscal years 2014 to
                 2018, we used Delphi, DOT’s official accounting system. To evaluate unobligated
                 balances for the same period, we performed a 5-year trend analysis of the
                 Franchise Fund’s balance with Treasury, 6 and tested a statistical sample from
                 fiscal year 2018—specifically, 82 unfilled customer orders valued at $177 million
                 from a universe of 1,161 orders valued at $338 million. Details of our scope and
                 methodology, and locations visited or contacted are included in exhibits A and B,
                 respectively.

                 We appreciate the courtesies and cooperation of Department of Transportation
                 representatives during this audit. If you have any questions concerning this
                 report, please call me at (202) 366-1407 or Kevin Dorsey, Program Director, at
                 (202) 366-1518.



4 A revolving fund uses revenue earned from its business operations to finance those same operations. Government
Accountability Office (GAO), Principles of Federal Appropriations Law, volume 3 (GAO-08-978SP), September 2008.
5 GAO, Revolving Funds: Additional Pricing and Performance Information for FAA and Treasury Funds Could Enhance

Agency Decisions on Shared Services (GAO-16-477), May 2016.
6 The Treasury Department maintains the Franchise Fund’s unexpended funds—the obligated funds plus the

unobligated balance.


FI2020012                                                                                                          2
            cc:   The Secretary
                  DOT Audit Liaison, M-1
                  FAA Audit Liaison, AAE-100




FI2020012                                      3
Background
                     The DOT Appropriations Act of 1997 7 established the FAA Franchise Fund to
                     ensure that funds for capitalizing and operating administrative services would be
                     available without fiscal year limitation. In addition, Congress intended the Fund to
                     provide support services and entrepreneurial assistance that could be offered
                     more advantageously on a shared basis. In general, franchise funds do not
                     receive an annual appropriation from Congress. Instead they may receive any of
                     the following: reimbursements and advances from Federal accounts, as well as
                     fees collected for the sales of Governmental products and services.

                     We reviewed all six of the FAA service organizations, which provide Franchise
                     Fund services to multiple customers (see table 1 on page 6).



                Purpose, History, and Objectives of the
                Franchise Fund
                     The law allows the FAA Administrator to determine which administrative services
                     the Fund can perform more advantageously for its customers on a centralized or
                     shared basis. Customers include programs managed by FAA’s own lines of
                     business, other DOT components, non-DOT agencies, and international
                     government entities. Designed to be revolving and self-sustaining, 8 the Fund
                     reduces and recovers costs by:

                          •   Providing support services—including accounting, travel, information
                              technology, logistics and material management, aircraft maintenance,
                              international and management training, etc.—to other entities on a fee-
                              for-service basis;

                          •   Establishing entrepreneurial, self-sustaining, and cost-reimbursable
                              business activities and reducing the redundancy of multiple offices
                              performing similar functions;

                          •   Giving managers more flexibility through the use of revolving funds that
                              operate on a no-year basis.

                     The act states that FAA’s service organizations cannot provide products or
                     services to Franchise Fund customers unless they receive payment in advance.


7   Pub. L. 104-205, 110 Stat. 2958 (September 30, 1996).
8   Pub. L. 104-205 requires the Franchise Fund to recover all of its costs.


FI2020012                                                                                                4
                  At its launch in 1997, the Franchise Fund comprised two service organizations,
                  and by 1998 it had three service organizations 9 and two primary customers—FAA
                  and the rest of DOT’s components. By 1998, its annual revenues totaled
                  approximately $21 million. In the years that followed, the Franchise Fund grew in
                  size, customer base, and budget. By 2018, the Franchise Fund had expanded to its
                  current six service organizations, 10 and its annual revenues of approximately
                  $480 million reflected significant increases in both services and customers.

                  According to the FAA Franchise Fund Program Manager, the Franchise Fund
                  operates under the same objectives listed in guidance drafted by the U.S. Chief
                  Financial Officers Council: 11 to offer better services at lower costs and drive less
                  effective activities out of business, with the goal of making the Federal
                  Government efficient and fiscally responsible. FAA’s Franchise Fund Management
                  Council provides governance and oversight of the fund.



             Six FAA Organizations Provide Franchise
             Fund Services to Internal and External
             Customers
                  FAA relies on six service organizations to provide Franchise Fund services to
                  customers on a fee-for-service basis (see table 1).




9 In1998, the FAA Franchise Fund included the Enterprise Services Center, International Training, and FAA Learning &
Leadership Institute.
10 Between fiscal years 2001 and 2011, the FAA Franchise Fund added three more service organizations: the Logistics

Center, Aircraft Maintenance and Engineering (now Flight Program Operations), and Acquisition Services.
11 U.S. Chief Financial Officers Council, “Draft implementation guidance for a Federal Franchise Fund pilot program,”

June 1996. The council’s members are chief financial officers and other financial officials in the largest Federal
agencies.


FI2020012                                                                                                           5
Table 1. FAA Organizations That Provide Services for the Franchise Fund
   Service                Joined
                                     Services Provided                   Primary Customers
   Organization           in FY

   Enterprise             1997       Financial and information           Internal: DOT components, including FAA
   Services Center                   services: travel, accounting,       External: non-DOT agencies (e.g.;
   (ESC)                             printing, multimedia,               Departments of Agriculture, Commerce,
                                     information technology.             Education)
   International          1997       Aerospace training to the           Internal: FAA
   Training                          international community:            External: international entities (e.g.; Canada,
   Division—FAA                      technical training for              South Korea, Mexico, Nigeria, and Thailand)
   Academy (ITD)                     international aviation officials;
                                     training assessments and
                                     consultations.
   FAA Learning           1998       FAA management-focused              Internal: FAA
   & Leadership                      training in leadership skills
   Institute (FLLI)                  and workforce development.
   FAA Logistics          2001       National Airspace System            Internal: FAA
   Center (AML)                      (NAS) maintenance, supplies,        External: non-DOT agencies (e.g.; U.S.
                                     and repairs; supply chain           Customs and Border Protection, Department
                                     management; logistics               of Defense)
                                     support services.
   Flight Program         2001       Maintenance services and            Internal: FAA
   Operations /                      avionics support for FAA            External: non-DOT agencies (e.g.;
   Aircraft                          Flight Program aircraft.            Department of Justice)
   Maintenance &
   Engineering
   (FPO)
   Acquisition            2010       Provides administrative             Internal: FAA
   Services (AAQ)                    support to Franchise Fund
                                     service organizations for
                                     contract awards.

Source: OIG analysis based on FAA data

                      In addition, FAA’s Mike Monroney Aeronautical Center’s (MMAC) Office of
                      Financial Services (referred to as Corporate Services) monitors the Fund’s
                      organizational performance and financial position; provides monthly performance
                      reviews; and issues quarterly reports to the Fund’s Director and Management
                      Council.




FI2020012                                                                                                                  6
Results in Brief
                  The Franchise Fund lacks audited financial statements and
                  has internal control weaknesses.

                  While the Franchise Fund is not required to have audited financial statements,
                  independent reviews of FAA’s financial statements for fiscal years 2018 and 2017
                  identified weaknesses in the Fund’s inventory controls at FAA’s Logistics Center
                  (AML). We found that AML does not have a detailed aging report for tracking the
                  age of its inventory, which might include items that are 30 or more years old.
                  Without a detailed aging report, we cannot determine if FAA is overstating the
                  Fund’s inventory value, reported to be $656 million in 2018. Moreover, the
                  Franchise Fund has operated at a loss in recent years—approximately $7.9 million
                  in fiscal year 2018 and $9.4 million in fiscal year 2017 (although these amounts
                  are much smaller than the $71 million and $69 million reported by the Franchise
                  Fund). In part, this is because two of its biggest service organizations reported
                  losses during this period, and they have not been able to recover all their costs,
                  as the DOT Appropriations Act of 1997 requires. In addition, FAA does not
                  enforce DOT’s financial completion requirements. Specifically, Fund officials do
                  not conduct adequate oversight of unexpended balances or unfilled customer
                  orders. For example, we found 26 items representing $2.6 million in unexpended
                  funds that had not been returned to customer. Based on this, we project that
                  $26 million of $338 million have not been returned. 12 We also identified eight
                  agreements, totaling $16.3 million, that were invalid; as a result, we project that
                  $39 million in customer agreements were invalid or incomplete. 13 Furthermore,
                  when some service organizations do not receive advance payment from
                  customers, they use operating reserves to pay for the costs of providing services.
                  In addition, most service organizations do not fully comply with FAA and
                  Franchise Fund requirements for capital reserve plans—increasing the risk that
                  funds could be mismanaged.

                  FAA is changing its governance of the Franchise Fund but
                  can do more to address customer concerns.

                  The Fund is governed by a Management Council, whose voting members were
                  reduced in number from 11 to 5 in June 2019 when the Agency approved a new
                  Franchise Fund Charter and reorganized the Council’s oversight role. The revised
                  charter states that one of the primary purposes of the Council is to give the Fund
                  a strategic vision and list the expected outcomes for the portfolio of services it

12 Our $26 million projection has a precision of +/-$16.6 million or 4.9 percent of the universe amount at the
90-percent confidence level, which means our 90-percent confidence limits ranged from $9.4 million to $42.6 million.
13 Our $39 million projection has a precision of +/-$19.8 million or 5.8 percent of the universe amount at the

90-percent confidence level, which means our 90-percent confidence limits ranged from $18.9 million to
$58.5 million.


FI2020012                                                                                                          7
            provides to customers. It is too soon to assess the overall impact of the
            reorganization; however, these changes may provide FAA with an opportunity to
            enhance its governance and oversight. Until the Council develops a plan that
            defines its vision and expected outcomes for services provided to customers, it
            may not be able to measure whether it is providing adequate oversight and
            stability for the large and complex Franchise Fund. We also found that while the
            Fund’s service organizations track performance metrics, not all are publicly
            available. In addition, one service organization accepted expiring year-end funds
            from an internal organization, its customer, without sufficient documentation that
            there was a legitimate, bona fide need. Thus, the service organizations run the risk
            of improperly obligating funds. As FAA expands its oversight of the Franchise
            Fund, enhancing financial-related internal controls will be key to ensuring the
            Fund continues to function in the way that Congress intended.

            We are making recommendations to help FAA improve its oversight of the
            Franchise Fund.




FAA’s Franchise Fund Lacks Audited Financial
Statements and Has Internal Control Weaknesses
            While the Franchise Fund is not required to have audited financial statements,
            recent audits of FAA’s financial statements identified a significant deficiency in
            the Fund’s inventory controls, which we reviewed during our audit. The FAA
            Reauthorization Act of 2018 required us to assess the degree to which FAA’s
            policies and controls for the Franchise Fund conform to generally accepted
            accounting principles (GAAP). The act also required us to provide (1) an
            assessment of the Fund’s revenue, expenses, and profits or losses; (2) a
            breakdown of the revenue collected from services provided to FAA, DOT, other
            Federal entities, and non-Federal entities; (3) the number of employees, including
            full-time equivalents (FTE), and contractors, the associated personnel costs, and
            the extent to which such costs are covered by Federal appropriations or Franchise
            Fund revenues; and (4) overhead rates. In addition, we evaluated the status of the
            Fund’s unexpended balances—past and present. While we did not reach overall
            conclusions on the Fund’s financial state, we did note multiple instances where it
            did not conform to Federal policies or have appropriate control practices.




FI2020012                                                                                     8
             The Franchise Fund Is Not Required To
             Have Audited Financial Statements
                  The Fund is not required to have, and we did not perform, an audit of its financial
                  statements. Consequently, we cannot express an opinion about whether its
                  statements are fairly presented in accordance with GAAP. Until the Fund can
                  regularly present audited financial statements, it will be unable to report to
                  Congress and the public about its progress in establishing transparency, internal
                  controls, and compliance with laws and regulations.

                  KPMG LLP, an independent public accountant, audited FAA’s financial statements
                  for fiscal years 2018 and 2017 under OIG’s oversight. 14 However, KPMG’s audit
                  was not designed to express, and it did not express, an opinion on the Fund’s
                  financial statements for those fiscal years or to report on the Fund’s internal
                  controls over financial reporting or compliance with laws and regulations.
                  Consequently, KPMG’s work cannot be used to draw conclusions about the
                  Fund’s financial statements.

                  KPMG Found Inventory Control Weaknesses

                  The Fund owns 99 percent of FAA’s total inventory, representing a total value of
                  $656 million—approximately 2 percent of FAA’s $34.6 billion in assets and
                  59 percent of the Franchise Fund’s $1.1 billion in assets. Consequently,
                  weaknesses in inventory controls are likely to have a significant impact on the
                  Franchise Fund.

                  In the independent review of FAA’s financial statements for fiscal years 2018 and
                  2017, KPMG identified a significant deficiency 15 in the Agency’s controls for
                  reviewing inventory. Specifically, KPMG found that FAA’s controls were not
                  properly designed and implemented to ensure the accuracy of the inventory data
                  (including labor hours, routing, and final condition codes). As a result, KPMG
                  stated, FAA’s inventory items and related expenses may be inaccurate, increasing
                  the risk that misstatements will be recorded in the general ledger. 16 In September
                  2019, FAA informed OIG that KPMG is currently evaluating the effectiveness of
                  their corrective actions.


14 See Quality Control Review of the Independent Auditor’s Report on the Federal Aviation Administration’s Audited
Consolidated Financial Statements for Fiscal Years 2018 and 2017 (OIG Report Number QC2019009), November 14,
2018. OIG reports are available on our website: https://www.oig.dot.gov/.
15 A deficiency in internal controls exists when management or employees are unable to prevent, or detect and

correct, misstatements on a timely basis. A material weakness is a deficiency that likely will not be mitigated in a
timely manner. A significant deficiency is less severe than a material weakness, yet important enough to merit
attention by those charged with governance.
16 Of KPMG’s five recommendations, two addressed the issues with inventory. All of the KPMG recommendations

remain open.


FI2020012                                                                                                              9
             The Franchise Fund Does Not Assess
             Inventory Age or Maintain Complete
             Inventory Records
                  During our audit, we found that AML did not maintain detailed reports that
                  tracked inventory age while items are in the Logistics Center. While AML officials
                  acknowledged the inventory items could be 30 years old or older, they stated
                  that an aged inventory report would not add significant value to their current
                  processes or be worth the cost required to implement it. FAA officials added that
                  availability rather than age was the primary criteria for AML inventory stock levels,
                  and that they currently have four processes for handling excess inventory.17 They
                  also stated that producing the information would be extremely difficult because
                  AML’s systems were not designed to respond to such requests.

                  However, lack of knowledge about inventory age can cause an organization to
                  store excess, obsolete, and unserviceable items. Such unnecessary storage might
                  have contributed to a $485,000 increase in AML’s operation and maintenance
                  costs—from $1.13 million in fiscal year 2017 to $1.61 million in fiscal year 2018.
                  Moreover, FAA’s Inventory Management Guide states that proper inventory
                  accountability requires the Agency’s components to maintain detailed records,
                  whether the items are produced or acquired. Without a detailed report, Franchise
                  Fund warehouse managers, inventory supervisors, and auditors cannot determine
                  if the age of the items is causing an overstatement of the inventory value,
                  reported as $656 million as of September 30, 2018, or an increase in operation
                  and maintenance costs due to storage fees.

                  In its financial statements, FAA reported it had inventory excess18 of $27 million in
                  fiscal year 2017 and $6.9 million in fiscal year 2018. To verify the existence or
                  proper disposition of these items, we visited an FAA warehouse that stores and
                  disposes excess items from MMAC in Oklahoma City. There, we learned that
                  items transferred to excess inventory no longer belong to the Franchise Fund.
                  Still, we confirmed that the tracking system used by this warehouse was
                  inaccurate, and many items listed as “onsite” either had been sold or could not




17 The four processes are: (1) Inspection of Assets by a Quality Assurance Specialist, (2) Customer Service Action to
return assets that did not meet expectations, (3) Unused Material, which is visually inspected or tested by technical
personnel, and (4) Decommission Plans from Program Offices.
18 The “excess” process refers to the removal of assets from the AML inventory that are no longer required to meet

FAA’s mission to support the National Aviation System.


FI2020012                                                                                                               10
                  be found on the warehouse floor. Thus, this issue warrants the attention of those
                  charged with governance. 19



             FAA’s Franchise Fund Financial
             Presentation Is Misleading
                  The law 20 requires the Fund to recover all of its costs from the revenue it earns for
                  its goods and services. We determined that the Fund’s reported losses of
                  $71 million and $69 million for fiscal years 2018 and 2017, respectively, were
                  grossly overstated. This is due to the Franchise Fund’s accounting practices for
                  recording the overhead related to the use of FAA’s resources (e.g., MMAC facility
                  support, FAA support, and Office of Personnel Management [OPM] costs). The
                  Fund treats overhead expenses as imputed costs,21 which are reflected on the
                  Statement of Net Cost, 22 but offsets this amount with an imputed financing
                  source, 23 which is reported on a separate statement. Because the Statement of
                  Net Cost includes only overhead costs and not the financing source, it reflects an
                  excessive net cost of operations. For example, in 2018, the $71 million loss the
                  Fund reported in the PAR appears to have been overstated by at least $60 million
                  (85 percent). Such overstatements can cause confusion about the Fund’s ability to
                  recover its costs and reach its goal: to break even. According to the Federal
                  Accounting Standards Advisory Board (FASAB), Federal financial reports should
                  help users evaluate (1) the costs of the reporting entity and the manner in which
                  the entity’s efforts and accomplishments have been financed, and (2) the costs of
                  providing the specific programs and activities and the composition of, and
                  changes in, these costs. 24

                  Based on our review of the Franchise Fund’s unaudited financial statements, the
                  Fund operated with a loss of approximately $7.9 million in fiscal year 2018 and
                  $9.4 million in fiscal year 2017. Five service organizations and Corporate Services
                  reported losses in 2018, while four reported losses in 2017 (see exhibit D). These
                  losses occurred primarily in two service organizations: AML had a net loss of
                  $8.1 million in fiscal year 2017, and the Enterprise Services Center (ESC) had a net

19 GAO’s Government Auditing Standards 9.31 requires auditors to communicate any deficiencies in internal controls
that are not significant to the audit objectives but warrant the attention of those charged with governance. See GAO,
Government Auditing Standards 2018 Revision, (GAO-18-568G), July 17, 2018.
20 Pub. L. 104-205 (September 1996).

21 Imputed costs are incurred by one Federal agency on behalf of another. For example, FAA pays the Franchise

Fund’s facility and security costs, and OPM pays pensions and other retirement benefits.
22 This statement presents the net cost of the Government’s operations, including those related to funds from

dedicated collections. Costs and earned revenues are categorized on this statement.
23 Imputed financing sources are amounts equal to costs that are incurred by the reporting entity but financed by

another entity. In this case, the Franchise Fund incurred the cost, but considers FAA to have financed it.
24 Federal Accounting Standards Advisory Board, Statement of Federal Financial Accounting Concepts 1: Objectives of

Federal Financial Reporting, September 1993.


FI2020012                                                                                                          11
                 loss of $6.1 million in fiscal year 2018. While revolving funds are not created to
                 generate profits, they are expected to break even over the long term.
                 Consequently, the Fund cannot continue this loss trend indefinitely.

                 We reviewed the Franchise Fund’s financial statements for the 2 years in question
                 to determine the reason for the losses. AML’s $8.1 million deficit was due mainly
                 to losses in inventory equipment. ESC’s $6.1 million loss was largely because of
                 costs to operate and maintain equipment, and non-labor service costs.

                 We also examined each service organization’s revenues, expenses, profits, and
                 losses between fiscal year 2014 and fiscal year 2018 as documented in the
                 Franchise Fund’s unaudited internal financial statements. For all 5 years, we
                 compared revenue data provided by Franchise Fund officials, which totaled
                 approximately $2.2 billion, to Delphi and the internal financial statements. This
                 limited testing did not reveal any additional anomalies in the data we reviewed.



             Costs Recorded as Imputed Costs in
             Franchise Fund Financial Statements Are
             Paid by Multiple Direct Appropriations
                 In fiscal year 2017, the Franchise Fund reported about $60 million in imputed
                 costs. 25 Imputed costs paid by FAA were for overhead costs such as managerial
                 services, facilities, and security services. These overhead costs totaled about
                 $62 million in 2017, approximately $52 million from FAA’s imputed costs and
                 about $10 million collected in overhead fees from non-DOT and non-Department
                 of Defense (DoD) customers. While the Fund bills external customers for these
                 costs (based on an allocation) and passes the payments it collects to FAA, it does
                 not directly pay FAA for the remaining costs (see figure 1). FAA officials stated
                 that it would be inefficient, unnecessarily complicated, and potentially expensive
                 for the Franchise Fund to recover these costs through user fees and then
                 reimburse FAA for the same amounts. Furthermore, the officials said, the
                 Franchise Fund does not charge FAA the user fees it charges non-DOT and non-
                 DoD customers because the Agency pays the imputed costs. Otherwise, the Fund
                 would likely start charging FAA user fees to offset its expenses and increase its
                 annual revenue. The Fund does not bill for these costs, so it appears that they are
                 paid by FAA’s appropriations.

                 Indeed, we confirmed that FAA pays for building space and other overhead
                 expenses via appropriations. However, we do not agree that the Agency’s
                 allocation of these costs represents an imputed cost to the Fund. FAA’s argument


25Approximately $52 million of this was imputed costs paid by FAA and about $8 million was paid by OPM for
accrued pension and post-retirement benefit expenses for current employees, on FAA’s behalf.


FI2020012                                                                                                    12
            that billing it for user fees is inefficient assumes the Agency would have to
            significantly change its practices to better account for overhead. While the two
            entities—FAA and the Franchise Fund—do not exchange funds for overhead, in
            substance, FAA is clearly reimbursed. Specifically, the Franchise Fund does not
            charge FAA user fees, and in return, FAA pays for the Fund’s space and security,
            etc. In this way, the Fund meets its cost-recovery requirements, but this is not
            reflected on the Statement of Net Costs. Until the FAA and the Franchise Fund
            revise their accounting practices, the Statement of Net Cost will continue to
            mislead users into believing the Fund’s losses are up to 10 times greater than
            they are (based on unaudited numbers).

            Figure 1. Allocation of Overhead Costs in FY 2017




            Source: OIG analysis



        FAA Service Organizations Have a Variety
        of Methodologies for Determining
        Overhead Rates
            The Franchise Fund charges multiple types of overhead fees, which vary from
            customer to customer, as needed. Non-DOT and non-DoD customers are


FI2020012                                                                                  13
                  charged a fee to cover FAA Headquarters overhead, and individual service
                  organizations charge an overhead cost for each service a customer purchases.
                  Customers outside FAA are also charged an MMAC overhead fee. Overhead fees
                  do not directly lead to the generation of profits; instead these fees are added to
                  ensure services are performed at rates that will fully return all operational
                  expenses, as required by law. 26

                  FAA’s Financial Manual includes steps that all FAA service organizations can
                  consider when recovering overhead costs. We reviewed the fiscal year 2018
                  internal overhead rates for the six Franchise Fund service organizations and the
                  FAA Headquarters overhead rate, which is 7 percent for non-DOT customers. We
                  reviewed the manual and documentation identifying the methodology and
                  calculations the Agency used to determine the rates. We did not assess the
                  adequacy of overhead cost models for FAA and the service organizations
                  included in the manual.

                  We also reviewed MMAC overhead rates, which are charged to non-FAA
                  customers to cover the Fund’s general and administrative costs. We did not
                  assess the adequacy of overhead cost models the manual provides for MMAC.

                  According to the manual, 27 FAA’s Office of Financial Management reviews
                  overhead or indirect cost 28 rates annually, using financial data from FAA’s cost
                  accounting system. When necessary, rates are updated and applied to new
                  agreements produced for the rest of that calendar year.



              FAA Is the Primary Source of Franchise
              Fund Revenue
                  According to Agency officials, between fiscal years 2013 and 2018, FAA was the
                  source of most of the Franchise Fund’s revenue, which averaged about
                  $290 million annually. Non-DOT entities provided the second-highest amount of
                  revenue, approximately $140 million in fiscal year 2018. DOT components
                  provided the smallest amount, expending about $51 million in fiscal year 2018
                  (see figure 2).




26 Pub. L. 104-205 requires the Franchise Fund to recover all of its costs.
27 FAA Financial Manual, vol. 4, chapter 6 (January 2017).
28 Indirect costs are incurred in the course of business operations but are not attributable to a specific product or

service (e.g., utilities, administrative salaries, etc.).


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                  Figure 2. Franchise Fund Revenues, FY 2013–FY 2018 (Dollars in
                  Millions)
                                                                                                       Total
            500



            400



            300
                                                                                                       FAA


            200

                                                                                                      Non-DOT
            100

                                                                                                      DOT
             0
              2013                 2014             2015              2016             2017   2018


                  Note: Roughly 1 percent of the Fund’s non-DOT customers are non-Federal
                  entities.

                  Source: OIG analysis based on FAA and Franchise Fund data



        According to FAA, the Franchise Fund’s
        Direct Personnel Costs Are Covered by Its
        Revenues
                  According to FAA officials, Franchise Fund personnel are compensated with
                  money earned by the Fund and not with Federal appropriations. Each service
                  organization tracks its own employees and contractors, assigning them a unique
                  number that identifies their funding source during payroll execution. We
                  performed limited testing to corroborate the Agency’s statement by comparing
                  the labor costs FAA reported on its internal financial statements to the revenue
                  accounting strings and other supporting documentation in the Delphi database.
                  We found no exceptions.

                  The Franchise Fund included approximately 1,618 FTEs and 676 contractors in
                  fiscal year 2017, and approximately 1,516 FTEs and 650 contractors in fiscal year
                  2018 (see table 2). The Franchise Fund Management Council instructs service
                  organizations to fill resource needs with contractors rather than FTEs when
                  appropriate, which allows them to make adjustments as needed in response to



FI2020012                                                                                         15
                    customer demand. On the Franchise Fund’s fiscal year 2018 financial statements,
                    FAA reported labor costs of approximately $192 million: employee compensation
                    was about $147 million, and contract labor cost about $45 million.

                    Table 2. Number of Franchise Fund FTEs and Contractors by
                    Service Organization
                                                        Personnel                            Personnel
                       Service Organization             (end of FY 2017)                     (end of FY 2018)
                                                        711 FTEs                             687 FTEs
                       ESC                              427 contractors                      406 contractors
                                                        12 FTEs                              10 FTEs
                       ITD                              3 contractors                        4 contractors
                                                        11 FTEs                              11 FTEs
                       FLLI                             32 contractors                       31 contractors
                                                        573 FTEs                             571 FTEs
                       AML                              197 contractors                      178 contractors
                                                        273 FTEs                             205 FTEs
                       FPO                              0 contractors                        9 contractors
                                                        29 FTEs                              24 FTEs
                       AAQ                              17 contractors                       22 contractors
                                                        1,618 FTEs*                          1,516 FTEs**
                       Total                            676 contractors                      650 contractors

                    Note: All counts are approximate. * FTE totals in fiscal year 2017 include nine
                    employees from Corporate Services. ** FTE totals in fiscal year 2018 include eight
                    employees from Corporate Services.

                    Source: FAA Franchise Fund Brief




               FAA’s Oversight of the Franchise Fund’s
               Unexpended Balances Is Insufficient
                    The Treasury Department maintains the Franchise Fund’s unexpended funds—the
                    obligated funds plus the unobligated balance. Federal law gives FAA the
                    authority to use unexpended funds to cover its costs and liabilities. While this
                    amount fluctuates from year to year, in general it has increased since 2014. We
                    found that Franchise Fund officials did not adequately oversee the unexpended
                    balance for fiscal year 2018. Specifically, they did not return unused funds in a
                    timely manner or identify invalid interagency agreements associated with unfilled
                    customer orders. 29 In addition, the Fund provided services without receiving



29 FAA   records advance payments from customers as unfilled customer orders in the financial system.


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            payment in advance, and did not verify whether capital reserve plans at service
            organizations were in compliance with FAA and Federal requirements.

            The Franchise Fund’s Unexpended Balances Rose and Fell
            Between FY 2014 and FY 2018

            Over a 5-year period, beginning in fiscal year 2014, the amount of the Fund’s
            unexpended balance increased steadily until fiscal year 2017, when it peaked at
            approximately $457 million. By fiscal year 2018, the balance had decreased to
            approximately $411 million (see table 3).

            Table 3. Unexpended Balances, FY 2014–FY 2018
              Type of
              Balance             FY 2014       FY 2015        FY 2016        FY 2017         FY 2018
              Obligated
              Balance        $177,610,000   $173,212,000   $155,970,008   $196,197,650   $191,270,289
              Unobligated
              Balance        $185,649,000   $184,268,000   $260,375,992   $260,687,350   $220,225,711
              Unexpended
              Balance        $363,259,000   $357,480,000   $416,346,000   $456,885,000   $411,496,000

            Source: OMB and FAA

            FAA Officials Did Not Adequately Oversee the Franchise
            Fund’s Unexpended Balances

            To assess the Franchise Fund’s oversight of its fiscal year 2018 unexpended
            balances, we examined a statistical sample of 82 unfilled customer orders (UFCO)
            valued at $177 million from a universe of 1,161 UFCOs valued at $338 million. We
            found that FAA could not always determine which service organizations were
            associated with the UFCOs. Furthermore, the service organizations themselves did
            not return unused funds to their customers in a timely manner, identify invalid
            interagency agreements, or require advance payments before providing goods or
            services.

            FAA does not always know which service organizations are
            responsible for unfilled customer orders.

            Specifically, Franchise Fund officials have not determined to which service
            organization(s) they should apply approximately $6.9 million in unassigned
            UFCOs. “Unassigned” is the organizational code the Fund uses to capture
            unknown amounts in the UFCO account or discrepancies with the Delphi
            database. The officials stated they can accurately monitor the multimillion-dollar
            discrepancy between the UFCO account and the balances recorded in Delphi.
            However, for the last 8 years, FAA has not identified which Franchise Fund service
            organization(s) generated the discrepancies or officially reconciled the



FI2020012                                                                                     17
                  unassigned $6.9 million with specific service organizations. The Treasury 30 has
                  established that failure to implement timely and effective reconciliation processes
                  could increase the risk of fraud, waste, and mismanagement of funds. In addition,
                  GAO 31 defines effective internal controls as those that ensure all transactions are
                  recorded completely and accurately.

                  FAA agreed that it should assign the unassigned $6.9 million in unfilled customer
                  orders to the appropriate service organization(s).

                  The Franchise Fund does not always return unused
                  unexpended funds to its customers in a timely manner.

                  DOT Order 1200.9, DOT Inter and Intra Agency Agreements Order (July 2018),
                  states that an agreement must go through a financial completion process no
                  more than 90 days after the performance is completed; the period of
                  performance or underlying contract has expired, whichever is later; or the
                  agreement has been terminated. At that point, DOT components must return
                  unexpended funds to the buyer and send final bills.

                  However, our analysis found that the service organizations do not adequately
                  oversee their UFCO balances and do not always enforce the financial completion
                  agreement process requirements in DOT Order 1200.9. For example, during our
                  review of the statistical sample of 82 UFCOs, we found 26 items representing
                  $2.6 million in unexpended funds, although the periods of performance had
                  ended or the projects were completed. Based on these findings, we project that
                  the FAA Franchise Fund has not returned $26 million in unexpended funds to its
                  customers, or 7.7 percent of the $338 million in the universe. 32

                  The Franchise Fund service organizations do not
                  consistently identify invalid or delinquent agreements.

                  Our review of the statistical sample of 82 UFCOs found 8 items, totaling
                  $16.3 million, with invalid 33 or delinquent agreements. The Franchise Fund’s
                  Delinquent Agreement Process 34 states that agreements are considered
                  delinquent if they are not signed before the start date, expire before the work is
                  completed, or have expenses that exceed the advance funding level. According to
                  this guidance, an organization that discovers an agreement is delinquent should




30 Treasury Financial Manual, section 5145.
31 GAO, Standards for Internal Control in the Federal Government (GAO-14-704G), September 10, 2014.
32 Our $26 million projection has a precision of +/-$16.6 million or 4.9 percent of the universe amount at the

90-percent confidence level, which means our 90-percent confidence limits ranged from $9.4 million to $42.6 million.
33 Invalid agreements occur because they did not have all approvals or do not have timely approvals before the

agreement start dates.
34 FAA Franchise Fund, Delinquent Agreement Process, August 25, 2011.




FI2020012                                                                                                        18
                  take immediate corrective action and convert it to a binding agreement, signed
                  by the Franchise Fund Director. 35

                  While DOT and FAA have established policies 36 on developing and monitoring
                  agreements, they do not have sufficient processes to enforce them. As a result,
                  Franchise Fund service organizations lack clarity and do not always comply with
                  those policies. We identified several instances in which agreements were not
                  signed before the start date and expired before all the work was performed.
                  Based on these findings, we project that the Franchise Fund’s invalid or
                  delinquent agreements represent $39 million or 11.4 percent of the $338 million
                  in the universe. 37

                  The Franchise Fund provided services to its customers
                  without being paid in advance.

                  Among the sample of 82 UFCOs, we found two instances, representing a total of
                  $2.1 million, in which a service organization provided goods or services before it
                  had received payment from the customer. The 1997 DOT Appropriations Act
                  requires FAA service organizations to obtain advance payments from Franchise
                  Fund customers before they provide the products or services.

                  Our survey results 38 indicate that timely communication can affect the receipt of
                  advance payments. For example, many ESC customers told us that waiting for
                  responses to their questions about interagency agreements or price changes
                  caused payment delays. Franchise Fund officials told us continuing resolutions
                  are another reason. Based on our statistical sample of 82 UFCOs, we project that
                  the Franchise Fund did not collect advances totaling approximately $4.5 million
                  or 1.3 percent of the $338 million in the universe. 39 As a result, even though work
                  was completed, the Fund did not earn any revenue and had to use operating
                  reserves to cover the costs of providing the services. According to an official from
                  the Franchise Fund Management Council, operating reserves are not meant to
                  cover the costs of customers who do not pay their bills.




35 At FAA, the Director of the Aeronautical Center serves as the Franchise Fund Director.
36 Franchise Fund Policy Statement FY 2017–02 Agreements for Products/Services (November 2017); DOT Financial
Management Policies Governing Funded Inter and Intra Agency Agreements, section 9 (October 2006–July 2018); DOT
Order 1200.9, DOT Inter and Intra Agency Agreements Order (July 2018).
37 Our $39 million projection has a precision of +/-$19.8 million or 5.8 percent of the universe amount at the

90-percent confidence level, which means our 90-percent confidence limits ranged from $18.9 million to
$58.5 million.
38 We surveyed all Franchise Fund customers with unpaid (outstanding) advances as of November 26, 2018. The

outstanding advances, totaling about $2.1 million, were attributable to 16 customer agreements—all with ESC.
39 Our $4.5 million projection has a precision of +$4.0 million or 1.2 percent of the universe amount at the 90-percent

confidence level and -$2.4 million or 0.7 percent of the universe amount at the 100-percent confidence level. This
means the lower 100-percent and upper 90-percent confidence limits ranged from $2.1 million to $8.5 million.


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            Capital Reserve Plans at Some Service Organizations Do
            Not Fully Comply with FAA and Franchise Fund
            Requirements

            The DOT Appropriations Act of 1997 established operating and capital reserves
            for the Franchise Fund. Specifically, the law authorized the FAA Administrator to
            determine a reasonable operating reserve, which was set at 4 percent of the
            highest annual revenue. The law also established the capital reserve at 4 percent
            of the total annual revenue. The Franchise Fund uses customer revenues to
            accumulate funds in the reserves and can retain these funds until they are
            expended, without fiscal year limitation. At the end of fiscal year 2018, the
            Franchise Fund reported that it held $21.6 million in its operating reserves and
            $29.6 million in its capital reserves.

            The Franchise Fund has a policy in place to guide its oversight of the operating
            reserve, which covers cash-flow deficiencies caused by nonpaying customers,
            Government shutdowns, downturns in the market, and other unexpected events.
            Capital reserve funds are used for acquisition, improvement, installation of assets,
            support systems, facilities, or infrastructure. FAA policy requires service
            organizations to submit project plans that forecast the amount the Fund must
            collect from customers to pay for these capital projects.

            We randomly selected and reviewed the plans for six capital projects (one per
            service organization). Only two service organizations, AAQ and AML, properly
            documented their plans and expenditures. Four of them—ESC, FLLI, FPO, and
            ITD—were noncompliant with FAA policy and Federal requirements. Specifically:

               •   ESC and FLLI did not provide a cost-estimate analysis or plan; in ESC’s
                   case, that was due to a recent staff turnover. ESC’s summary of
                   expenditures also was not sufficient to verify the accuracy of the costs.

               •   FPO and ITD did not document formal approvals from their directors.

            The Franchise Fund’s Major Business Investment and Expenditures Policy
            establishes a three-tiered approval process. Depending on the estimated project
            cost, approvals may be made by the Service Organization Director, Franchise
            Fund Director, or Franchise Fund Management Council. In addition, FAA’s
            Acquisition Management Policy requires appropriate documentation for all
            market analyses, formal or informal. Service organizations that do not document
            project approvals increase the risk that they will mismanage capital reserve funds
            or select a product or service that does not represent the best value.

            Agency officials agreed on the need to implement a requirement for documented
            approvals and business cases for larger capital investment projects that require
            the Council’s approval.




FI2020012                                                                                      20
FAA Is Changing Its Governance of the Franchise
Fund but Can Do More To Address Customer
Concerns
                    FAA is changing the mechanisms it uses to govern and oversee the Franchise
                    Fund but can do more to address ongoing customer concerns about its two
                    largest services providers. In addition, the Fund tracks performance metrics, but
                    does not make them all publicly available. We also found areas, other than those
                    discussed above, in which the Fund can improve its compliance with Federal
                    policy and guidelines.



                FAA Recently Reorganized the Franchise
                Fund Management Council
                    The Franchise Fund is governed by a Management Council, whose voting
                    members were reduced in number from 11 to 5 when the new charter was
                    approved. The revamped Council comprises the Assistant Administrator for FAA’s
                    Office of Finance and Management, FAA’s Chief Financial Officer (CFO), DOT’s
                    Deputy CFO, the Franchise Fund Director, and the Chief Operating Officer for
                    FAA’s Air Traffic Organization (ATO). In December 2018, FAA updated the
                    Franchise Fund charter, and the new version was approved in June 2019. 40 Based
                    on the charter in place at the time of our audit, the Council is responsible for
                    monitoring the performance and status of each service organization, reviewing
                    and approving business plans, and developing procedures. According to Agency
                    officials, since 2018, FAA has been implementing changes to give the
                    Management Council the authority to make strategic decisions for the entire
                    Franchise Fund rather than each specific service organization. According to
                    Council members, FAA also created a Finance Working Group to provide
                    oversight of Franchise Fund’s financial data and review, analyze, and
                    communicate the financial results. This will allow the Council to focus on the
                    strategy and performance of the Fund as a whole.

                    FAA had two reasons for expanding the Management Council’s oversight role.
                    First, Council members had reported that customers were not sending payments
                    in advance, as required by law. This was a key concern as service organizations
                    used operating reserves instead, putting themselves at risk of having negative
                    account balances and spending more money than they had in the reserves.



40   DOT/FAA Franchise Fund Charter, revision dated April 24, 2019 (signed June 5, 2019).


FI2020012                                                                                          21
                  According to Council members, FAA also needed to address a lack of
                  transparency issue raised by a couple of the Franchise Fund’s biggest customers.
                  We were told that customers had questions about the fees charged by ESC and
                  AML. During the audit, we encountered other customers that expressed concerns
                  about the lack of transparent pricing. We conducted a survey that focused
                  primarily on customer satisfaction with service provider communication and
                  performance. While the survey did not specifically ask customers if they
                  understood or were satisfied with the transparency of service provider’s pricing, it
                  did ask them if they participated in cost negotiations and to rate their satisfaction
                  with the value of the product(s)/service(s) received for the price paid.

                  Only 37 of 173 ESC customers responded41 to the survey. Half of those that
                  responded rated ESC as “above average” for value of the product(s)/service(s)
                  received for the price paid. Of the remaining respondents, 3 said it was “below
                  average,” and 15 said “average.” 42 Two respondents commented 43 about ESC’s
                  lack of transparent pricing, specifically:

                      •    “We have been unsuccessful in obtaining backup documentation to
                           support the cost estimate from ESC…ESC provides a cost without much
                           backup and is unable to adequately explain its cost model.”

                      •    “Never seemed to get a clear accounting of how the funds were applied
                           to different line items. Quotes for services were adjusted according to
                           funding levels without documentation as to how services were adjusted.
                           Funds went into a pot and services came out.”

                  Thirteen of 44 AML customers responded44 to the survey. They rated the value of
                  the product(s)/service(s) received for the price paid as follows: 2 respondents said
                  it was “below average,” 1 said “far below average,” 4 said “average,” 4 said “above
                  average,” and 2 said “far above average.” Three respondents expressed concern
                  about AML’s lack of transparent pricing, specifically:

                      •    “The Logistics Center does not provide enough information in their
                           Service Order Report to do EVM [earned value management; EVM helps
                           project managers measure project performance]…The description for the
                           service provided by each labor category for the hours they charged was
                           very vague.”




41 The Survey of ESC Communication and Performance was emailed to 173 ESC customer points-of-contact with
active fiscal year 2018 agreements; 37 responded to the survey, and 10 addresses bounced back as undeliverable.
42 The response rate to the survey was very low. We did not assess non-response bias, and survey results only apply to

the customers that responded to the survey and not to all Franchise Fund customers.
43 The survey offered multiple choice answers; any narrative comments received were optional.

44 The Survey of AML Communication and Performance was emailed to 44 AML customer points-of-contact with

active fiscal year 2018 agreements; 13 responded to the survey, and 2 addresses bounced back as undeliverable.


FI2020012                                                                                                         22
                     •    “Data systems to provide correct counts and consumption are still not
                          fixed. Old system was bad; new system…is still not providing reliable
                          data.”

                     •    “The FAALC [Logistics Center] needs to have a team that evaluates the
                          checks and balances of costs that are billed to the customer, instead of
                          the customer having to question all the costs.”

                 The Franchise Fund faces a number of challenges, including inadequate
                 administration and a lack of transparency. FAA has not developed or
                 implemented an actionable plan for identifying and prioritizing its expected
                 outcomes to those challenges. Until the Agency does so, the Council may not be
                 able to provide adequate oversight for the large and complex Franchise Fund.



             FAA Service Organizations Track
             Performance Metrics But Do Not Make
             Them All Publicly Available
                 In a May 2016 audit, 45 GAO stated that, franchise funds should add competition
                 to the market for administrative services and that a well-functioning market
                 requires transparent information about a fund’s performance. As a result, GAO
                 recommended that FAA make the Fund’s performance metrics publicly available.
                 Our review of the Fund found that five of the six FAA Franchise Fund service
                 organizations have developed performance metrics, but only ESC provides these
                 metrics on the General Services Administration (GSA) website (see table 4).
                 Because the Fund at large does not publicly report its metrics, potential
                 customers might be unable to fully understand how it is performing.

                 According to FAA officials, the website for GSA’s shared services forum provides a
                 venue to publish metrics for services in high demand—such as the financial
                 services provided by ESC. However, publishing metrics for the other service
                 organizations would have minimal impact, the officials say, because demand for
                 them outside FAA is limited. GAO accepted FAA’s rationale for publishing metrics
                 only for ESC and in March 2018 closed the recommendation from its May 2016
                 report.




45GAO, Revolving Funds: Additional Pricing and Performance Information for FAA and Treasury Funds Could Enhance
Agency Decisions on Shared Services (GAO-16-477), May 2016.


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                  Table 4: Selected Performance Metrics for Each Franchise Fund
                  Service Organization
                      Service                                                          Internally       Publicly
                      Organization      Performance Metric                             Available        Available
                      ESC               Travel payments made in 6 days >95%            Yes              Yes
                      AML               On-time delivery = 81% effectiveness           Yes              No
                      FPO               Developing new metrics                         No               No
                      AAQ               Cost to procure =1.24%                         Yes              No
                      FLLI              Course satisfaction >90%                       Yes              No
                      ITD               Provide schedule class offerings->90%          Yes              No

                  Source: OIG analysis of Franchise Fund data and GSA and FAA websites



              Other Instances of Noncompliance with
              Federal Policies and Guidelines
                  We reviewed select policies and procedures to assess conformance with Federal
                  policies and guidance. We noted areas of noncompliance, in addition to the
                  financial-related control weaknesses discussed previously.

                  For example, FPO accepted expiring year-end funds from an internal
                  organization, its customer, with minimal supporting documentation establishing
                  scope, schedule and cost of the project. As a result, it was difficult to determine
                  from the procurement documentation that there was a legitimate, bona fide,
                  need identified during the fiscal year the appropriation was made. The bona fide
                  needs rule 46 requires Federal agencies to enter into an obligation only if it bears a
                  sufficient relationship to the legitimate need during the time period the
                  appropriation is available. As FAA’s appropriations law training materials describe,
                  the bona fide needs rule guides officials to use this year’s funds for this year’s
                  needs. 47

                  The interagency agreement we reviewed was modified on September 14, 2018, to
                  obligate $3 million in funds expiring on September 30, 2018, to a project that was
                  still in the planning phase. As of May 2019, the project was still in the planning
                  phase, a statement of work (SOW) was not yet available, and the service


46 The bona fide needs rule is rooted in Title 31, U.S. Code (U.S.C.), section 1502(a), which states that a fixed-term
appropriation is available only for payment of expenses properly incurred during the appropriation’s period of
availability and to complete contracts properly made during that period. If an agency does not act to fill an identified
bona fide need before the end of the period of availability, the appropriation will no longer be available.
47 Federal Aviation Administration, FAA Appropriations Law Procurement Restrictions: Bona Fide Needs & 12-Month

Rules, May 30, 2019.


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                   organization had not begun any work. We do not dispute that there may be a
                   legitimate need for the project in question; however, the procurement
                   documentation did not demonstrate that the need was sufficiently defined in
                   fiscal year 2018, when the expiring funds were obligated. Without a SOW or
                   documentation that clearly described the work to be performed, it appeared from
                   the documentation that the service provider was unable to start the project in
                   fiscal year 2018.

                   In addition, the Office of Management and Budget (OMB) 48 has established a
                   checklist of responsibilities to help both the requesting and the servicing
                   agencies navigate the acquisition process. The checklist includes such items as
                   preparing detailed scope of work, financial documents, defining deliverables,
                   milestones, performance standards, acquisition strategies, etc.

                   Developing documentation standards, particularly for end-of-year obligations,
                   can help agencies ensure there is a genuine need for goods or services and
                   eliminate the perception that funds have been obligated so that they will not
                   lapse. The FAA Franchise Fund lacks a policy that requires customers to
                   document the bona fide need for projects, and thus the Fund runs the risk of
                   improperly obligating funds. This could potentially cause a service organization
                   to mismanage its obligations and violate the Antideficiency Act, which prohibits
                   Federal employees from expending or obligating monies in excess of the amount
                   available in the appropriation or fund unless authorized by law. 49 As FAA moves
                   to expand its governance over Franchise Fund service organizations, the Agency
                   will need to establish proper controls to ensure interagency agreements are not
                   modified unless there is a bona fide need.




Conclusion
                   Congress established FAA’s Franchise Fund to help foster competition, increase
                   efficiency, and reduce costs across the Federal Government. As it makes changes
                   to its oversight practices, the Fund faces financial and governance challenges that
                   reduce its ability to meet Federal mandates and policy. Until it addresses these
                   challenges, the Fund cannot fully account for and optimize its resources or
                   provide transparency to its customers.




48   OMB Memo, Improving the Management and Use of Interagency Acquisitions, June 6, 2008.
49 31  U.S.C. § 1341(a)(1)(A).


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Recommendations
            To help FAA strengthen its management and oversight of the Franchise Fund, we
            recommend that the Federal Aviation Administrator:

                   1. Engage an auditor to perform an independent audit of the Franchise
                      Fund’s financial statements in accordance with generally accepted
                      Government auditing standards and the Government Accountability
                      Office’s Financial Audit Manual and that includes an opinion on the
                      Fund’s internal controls.

                   2. Develop and implement a process directing the Logistics Center to
                      maintain detailed records of the age and costs of inventory items as a
                      way to identify obsolete items and prevent unnecessary storage and
                      maintenance costs or purchase of assets already on hand.

                   3. Revise the accounting treatment for imputed costs to avoid the
                      appearance of overstating losses.

                   4. Assign the unassigned balance of $6.9 million in unfilled customer
                      orders identified in this report to the appropriate Franchise Fund
                      service organization(s).

                   5. Review the $2.6 million in unused unfilled customer orders identified
                      in this report, and return the unexpended balances as appropriate.

                   6. Develop and implement a plan to improve oversight of the Franchise
                      Fund’s unfilled customer orders balance, such as tracking performance
                      to ensure unexpended funds are returned timely as required.
                      Implementing this recommendation could potentially put $26 million
                      in funds to better use.

                   7. Revise the Franchise Fund’s policies on agreements to include dealing
                      with delinquent agreements, and require service organizations to
                      adhere to applicable DOT and FAA policies. Implementing this
                      recommendation could potentially put $39 million in funds to better
                      use.

                   8. Implement the requirement that service organizations collect advance
                      payments before they provide products or services, in accordance with
                      Public Law 104-205.

                   9. Develop and implement a process that requires Franchise Fund service
                      organizations to respond promptly to customer questions about
                      agreements and price changes before the period of performance
                      begins.


FI2020012                                                                                  26
            10. Develop and implement formal, documented procedures that require
                service organizations to include a business case when they submit a
                capital reserve project to the Franchise Fund Management Council for
                approval to ensure the project represents the best value.

            11. Implement the Major Business Investment and Expenditures Policy
                requirement to document formal approval of capital reserve projects.

            12. Develop a plan that clearly describes the Franchise Fund Management
                Council’s vision, goals and expected outcomes for the services
                provided to its customers. The plan should include what initiatives or
                specific actions the Council will take to provide the additional
                oversight and transparency needed.

            13. Develop Franchise Fund process and procedures that require
                (a) customers to document bona fide needs for new projects before
                agreements are written and funds obligated and advanced and
                (b) service organizations to accept year-end funding only for projects
                that clearly represent a bona fide need.




FI2020012                                                                           27
Agency Comments and OIG Response
            We provided FAA with our draft report on October 15, 2019, and received its
            response on November 25, 2019, which is included as an appendix to this report.
            FAA fully concurred with recommendations 3 through 13 as written and provided
            appropriate completion dates. Accordingly, we consider these recommendations
            resolved but open pending completion of the planned actions. FAA did not
            concur with recommendations 1 and 2, and we are requesting that the Agency
            reconsider its responses.

            For recommendation 1, we asked FAA to engage an auditor to perform an
            independent audit of the Franchise Fund’s financial statements—in accordance
            with generally accepted Government auditing standards and GAO’s Financial
            Audit Manual—that includes an opinion on the Fund’s internal controls. However,
            FAA did not concur with this recommendation, stating that “…the Franchise Fund
            is already included in independent financial audits for the FAA” and ”the
            transactions and balances of the Franchise Fund roll up into the FAA Financial
            Statements; therefore, they are included in the auditors’ tests to determine that
            the FAA’s Financial Statements are fairly presented in all material respects.” We
            do not agree with FAA’s rationale. As we discussed with Agency officials, FAA’s
            financial statement audit results cannot be used to draw conclusions about the
            Franchise Fund’s financial statements due to the significant difference between
            the materiality thresholds of the two entities. For example, a financial statement
            audit of the Franchise Fund would have likely revealed that the Fund’s fiscal year
            2018 reported loss of $71 million was grossly overstated by approximately
            $60 million. However, FAA’s fiscal year 2018 performance and accountability
            report makes no mention of this overstatement. Instead, it clearly labels the
            Franchise Fund statements as “unaudited.” Since the Fund’s statements have not
            been audited in years, users have no basis to assess if they are fairly presented.
            An independent audit of the Fund’s finances, even if not done on an annual basis,
            would allow the Fund to report to Congress and the public on its progress in
            establishing transparency, internal controls, and compliance with laws and
            regulations, as well as the fair presentation of its financial statements. We
            therefore consider recommendation 1 to be open and unresolved and ask FAA to
            reconsider its position.

            For recommendation 2, we asked FAA to develop and implement a process
            directing the Logistics Center to maintain detailed records of the age and costs of
            inventory items. Such a process could identify obsolete items and prevent
            unnecessary storage and maintenance costs or the purchase of assets already on
            hand. However, FAA did not concur, stating that “…obsolescence is not
            determined by the age of an asset; rather, it is determined based on the



FI2020012                                                                                   28
                    decommissioning of NAS systems that the asset is used to support. Therefore,
                    AML does not produce an aged asset report; AML tracks issue and receipt of
                    inventory in accordance with generally accepted accounting principles.” Further,
                    according to FAA, our report incorrectly states that “the FAALC [AML] does not
                    track inventory or have a system in place to track inventory.” We disagree. Our
                    audit report states accurately that the Logistics Center has an inventory system,
                    although we note that independent audits have repeatedly identified issues with
                    Franchise Fund’s inventory accuracy. Moreover, the inventory system cannot
                    produce a report that shows the age of the item. According to the Joint Financial
                    Management Improvement Program (JFMIP) Inventory System Requirements, 50
                    an inventory system must record the date of receipt to be used for the purposes
                    of making prompt payments and monitoring the timeliness of placing items into
                    inventory and the age of inventory items. To ensure the Fund can demonstrate
                    compliance with laws and regulations, we ask FAA to reconsider its position on
                    recommendation 2, which we consider open and unresolved.

                    Finally, FAA states that this report should not have discussed the oversight of
                    excess inventory since the Franchise Fund does not manage excess. We disagree
                    with this assumed limitation on reporting requirements. GAO’s Government
                    Auditing Standards 9.31 requires auditors to communicate any deficiencies in
                    internal controls that are not significant to the audit objectives but warrant the
                    attention of those charged with governance. 51 If we did not disclose such issues,
                    OIG would not be in compliance with GAO audit requirements.




Actions Required
                    We consider recommendations 3 through 13 resolved but open pending
                    completion of the planned actions. We request that FAA reconsider its position
                    regarding recommendations 1 and 2 and provide specific actions that meet the
                    intent of the recommendations along with the target dates for completion. In
                    accordance with DOT Order 8000.1C, we ask that the additional information
                    requested for each recommendation be provided within 30 days of this final
                    report.




50   JFMIP, Federal Financial Management System Requirements, FFMSR-7, June 1995
51   GAO, Government Auditing Standards 2018 Revision (GAO-18-568G), July 17, 2018.


FI2020012                                                                                           29
Exhibit A. Scope and Methodology
                 We conducted this performance audit between November 2018 and October
                 2019 in accordance with generally accepted Government auditing standards as
                 prescribed by the Comptroller General of the United States. Those standards
                 require that we plan and perform the audit to obtain sufficient, appropriate
                 evidence to provide a reasonable basis for our findings and conclusions based on
                 our audit objectives. We believe that the evidence obtained provides a
                 reasonable basis for our findings and conclusions based on our audit objectives.
                 The audit objectives were to assess FAA’s management and oversight of the
                 Franchise Fund’s operations and activities.

                 To assess FAA’s management and oversight of the Fund, we followed the
                 requirements in the FAA Reauthorization Act of 2018. The law required our office
                 to conduct an audit of FAA’s Franchise Fund to (1) review the history, purpose,
                 and objectives of the Fund; (2) describe and assess each program, service, or
                 activity that uses the Fund; (3) assess FAA’s governance and oversight of the
                 Fund, including the use of internal and publicly available performance metrics;
                 (4) evaluate the current and historical unobligated and unexpended balances; and
                 (5) assess the degree to which policies and controls conform with generally
                 accepted accounting principles, Federal policies, best practices, or other guidance
                 relating to revolving funds.

                 To review the history, purpose, and objectives of the Fund, we researched laws,
                 Federal policies, and prior audits and financial statements. We also interviewed
                 FAA and Franchise Fund personnel to determine their roles in the service
                 organizations, Corporate Services, and the Franchise Fund Management Council.
                 We met with each of the six service organizations for an overview of its financial
                 history, the products and services offered, and how performance is measured. In
                 addition, we met with the Franchise Fund Manager and the Council Chair to
                 understand their oversight functions for the Fund.

                 To assess each service organization, we reviewed financial and budgetary
                 documentation extracted from Delphi, and the organizations internal systems. To
                 verify the number of FTEs the Franchise Fund reported 52 to us, OIG’s Statistician
                 reconciled those data with information in the Federal Personnel and Payroll
                 System. We did not verify the number of Franchise Fund contractors. Instead, we
                 looked at potential trends to explain the fluctuation in the number of contractors
                 at each service provider. 53 The Franchise Fund provided reasonable explanations
                 for significant fluctuations that we could not explain. We used information from


52All personnel counts (FTEs and contractors) are reported as of the end of the fiscal year, September 30.
53Examples of trends we observed include, contractor numbers in relation to annual revenue and increases in the
contractor-to-FTE ratio, which was reflective of a Franchise Council initiative.


Exhibit A. Scope and Methodology                                                                       30
                  Delphi to verify the costs associated with Franchise Fund FTEs and contractors.
                  We reviewed the procedures the Franchise Fund uses to track the cost of non-
                  Fund employees who perform Fund-related tasks. It appears that these costs are
                  minimal and are covered by Franchise Fund revenues. We used information from
                  Delphi to verify the Franchise Fund’s annual revenue. We reviewed Trading
                  Partner codes 54 for fiscal year 2018 revenue transactions to verify the sources:
                  FAA, DOT, non-DOT Federal entity, or non-Federal entity. To assess expenses, we
                  reviewed each service provider’s annual labor and non-labor costs, which are
                  reported on the Franchise Fund’s financial statements. Service providers
                  explained the causes of all cost irregularities, high and low. To assess overhead
                  fees charged to Franchise Fund customers, we reviewed applicable Federal and
                  FAA policy and methodologies for the three types of overhead charges likely to
                  be billed to customers: FAA Headquarters corporate, MMAC, and service provider
                  specific overhead rates. We determined that the methodologies were reasonable
                  and in compliance with applicable policies. We did not assess the adequacy of
                  overhead cost models for FAA and the service organizations.

                  To evaluate FAA’s governance and oversight we visited MMAC in Oklahoma City
                  where most of the service organizations are located. There, we met with the
                  Franchise Fund Director and the leaders of the service organizations. We toured
                  the AML, ESC, and FPO facilities, guided by their respective personnel. We
                  reviewed the charters and meeting minutes of the Franchise Management
                  Council and the Finance Working Group. In addition, we confirmed that
                  performance metrics existed for the service organizations and the Fund itself and
                  checked to see whether they were publicly available on different Government
                  websites. We found that, with the exception of ESC, the metrics are only available
                  internally.

                  We performed two surveys during the course of the audit: one for customers with
                  outstanding advances (customers that received goods and/or services before
                  making a payment), and the other to gauge customer satisfaction with service
                  provider performance and communication. We sent the first survey to 13 unique
                  customers associated with 16 agreements with ESC and whose outstanding
                  advances totaled about $2.1 million, as of November 26, 2018. We requested that
                  each customer complete a separate survey for each agreement. Our goal was to
                  obtain customer perspectives on the causes for the outstanding advances. We
                  developed and tested the survey, in consultation with OIG’s Statistician, Certified
                  in Survey Statistics, through brainstorming and survey testing between December
                  2018 and February 2019, and distributed it to customers via Survey Monkey in
                  March 2019. We received 13 responses to the survey for a response rate of
                  81 percent.


54A Trading Partner is a Federal entity that conducts intragovernmental transactions with another Federal entity. The
Treasury assigns each entity an attribute to identify the trading partner.


Exhibit A. Scope and Methodology                                                                          31
                 We developed a survey to evaluate service provider communication and
                 performance in the same manner. This survey asked about the frequency,
                 methods, and topics of provider-to-customer communication, and about
                 customer satisfaction with the quality, timeliness, and price of products and
                 services. We sent it out in April 2019, to customers 55 of all six service providers.
                 The Franchise Fund provided points of contact for the active fiscal year 2018
                 agreements. The response rate to this survey was very low. 56 We did not assess
                 non-response bias, and survey results only apply to the customers that
                 responded to the survey and not to all Franchise Fund customers.

                 We reviewed the amount of unexpended balances from fiscal year 2014 through
                 fiscal year 2018. We verified the unassigned amount as $6.9 million and asked
                 Fund officials about the reason for this unreconciled item. In addition, Corporate
                 Services sent us a file with 15,429 UFCO balances as of September 30, 2018. From
                 that list, we deleted 14,268 UFCOs, as they had $0 balances. We stratified the
                 remaining 1,161 UFCOs with a total balance of $337,978,657.05—into 4 strata
                 and selected a stratified sample as follows: stratum 1 was a census of all 15 high-
                 risk UFCOs that were older than 5 years; stratum 2 was a census of all 6 UFCOs
                 that were closed but had remaining balances; stratum 3 was a census of all
                 4 UFCOs with balances greater than $10 million; and stratum 4 was a sample of
                 63 of the remaining 1,136 UFCOs, selected with probability proportional to size
                 with replacement where size was the UFCO balance. Six UFCOs in stratum 4 were
                 selected twice due to our “with replacement” sampling methodology, which
                 reduced our actual sample size for stratum 4 from 63 to 57, and our total sample
                 size from 88 to 82, or 7.1 percent of the 1,161 UFCOs in the universe. Our sample
                 had a UFCO balance of $177,359,382.13 or 52.5 percent of the $337,978,657.05 in
                 the universe. We computed sample size based on desired estimates with
                 90 percent confidence and a precision no greater than +/-10 percent. We used
                 this sampling methodology because it is widely used and accepted in the
                 accounting industry.




55The survey was sent to customer program managers for all active fiscal year 2018 agreements.
56Survey populations and response rates: the ESC survey was emailed to 173 ESC customer points-of-contact with
active fiscal year 2018 agreements; 37 responded to the survey, and 10 addresses bounced back as undeliverable for a
response rate of 23 percent; the AML survey was emailed to 44 customer points-of-contact; 13 responded to the
survey, and 2 addresses bounced back as undeliverable for a response rate of 31 percent; the ITD survey was emailed
to 109 customer points-of-contact; 19 responded to the survey, and 8 addresses bounced back as undeliverable for a
response rate of 19 percent; the FLLI survey was emailed to 30 customer points-of-contact; 10 responded to the
survey, and 2 addresses bounced back as undeliverable for a response rate of 36 percent; the AAQ survey was
emailed to 6 customer points-of-contact; 2 responded to the survey, and 0 addresses bounced back as undeliverable
for a response rate of 33 percent; and the FPO survey was emailed to 8 customer points-of-contact; 1 responded to
the survey, and 0 addresses bounced back as undeliverable for a response rate of 12 percent.


Exhibit A. Scope and Methodology                                                                       32
Exhibit B. Organizations Visited or Contacted

          FAA Facilities
             FAA Headquarters, Washington, DC

             FAA Leadership and Learning Institute, Washington, DC

             FAA Acquisition Services, Washington, DC

             Mike Monroney Aeronautical Center, Office of Financial Services,
             Oklahoma City, OK

             Enterprise Services Center, Oklahoma City, OK

             FAA Logistics Center, Oklahoma City, OK

             International Training Division—FAA Academy, Oklahoma City, OK

             Flight Program Operations/Aircraft Maintenance & Engineering,
             Oklahoma City, OK

             Thomas Road Warehouse, Oklahoma City, OK




Exhibit B. Organizations Visited or Contacted                                   33
Exhibit C. List of Acronyms
             AAQ              Acquisition Services
             AML              FAA Logistics Center
             ATO              Air Traffic Organization
             CFO              Chief Financial Officer
             DoD              Department of Defense
             DOT              Department of Transportation
             ESC              Enterprise Services Center
             FAA              Federal Aviation Administration
             FAALC            FAA Logistics Center
             FASAB            Federal Accounting Standards Advisory Board
             FFMSR            Federal Financial Management System Requirements
             FLLI             FAA Leadership and Learning Institute
             FPO              Flight Program Operations
             FTE              Full-time equivalent
             FY               fiscal year
             GAAP             Generally Accepted Accounting Principles
             GAO              Government Accountability Office
             GSA              General Services Administration
             ITD              International Training Division
             JFMIP            Joint Financial Management Improvement Program
             MMAC             Mike Monroney Aeronautical Center
             NAS              National Airspace System
             OIG              Office of Inspector General
             OMB              Office of Management and Budget
             OPM              Office of Personnel Management
             PAR              Performance and accountability report
             SOW              Statement of work
             Treasury         Department of the Treasury
             UFCO             Unfilled customer order



Exhibit C. List of Acronyms                                                    34
Exhibit D. Service Organizations Profits (Losses) from Operations,
FY 2014–FY 2018 (Dollars in Thousands)
  Fiscal                                             Corp                                                                               Total
  Year      Description                           Services       ESC      FPO      FLLI    ITD       AML       AAQ     Unassigned   Franchise

  2014     Net Income (Loss) from Operations          649     22,272       896    (100)   (272)     8,086       (79)         (00)     31,452

           Net Gains or (Losses)                       00         00        00      00      00     52,126        00           00      52,126

           Imputed OPM Costs                          (59)    (4,747)   (2,015)    (47)   (161)    (3,690)    (559)           00     (11,278)

           Imputed Overhead Charge from FAA            00    (13,240)   (5,940)   (382)   (551)   (21,768)   (2,438)          00     (44,318)

           Imputed Financing absorbed by others        59     17,987     7,955     429     712     25,458     2,996           00      55,595

           Total Consolidated Income (Loss)           649     22,272       896    (100)   (272)    60,212      (79)          (00)     83,578

  2015     Net Income (Loss) from Operations         (140)   (13,429)    1,257    (508)   (301)    (2,090)      (79)         179     (15,111)

           Net Gains or (Losses)                       00         00        00      00      00     32,057        00           00      32,057

           Imputed OPM Costs                          (39)    (3,784)   (1,704)    (38)   (152)    (3,056)    (447)           00      (9,220)

           Imputed Overhead Charge from FAA            00    (16,369)   (6,828)   (457)   (547)   (19,692)   (1,962)          00     (45,856)

           Imputed Financing absorbed by others        39     20,154     8,533     495     699     22,747     2,409           00      55,076

           Total Consolidated Income (Loss)          (140)   (13,429)    1,257    (508)   (301)    29,967      (79)           179     16,946

  2016     Net Income (Loss) from Operations         (353)     4,751    (1,194)   (654)    316     (8,178)      286           03      (5,022)

           Net Gains or (Losses)                       00         00        00      00      00     44,624        00           00      44,624

           Imputed OPM Costs                          (39)    (3,828)   (1,722)    (34)   (148)    (3,150)    (315)           00      (9,236)

           Imputed Overhead Charge from FAA            00    (18,243)   (7,449)   (624)   (603)   (21,726)   (1,866)          00     (50,510)

           Imputed Financing absorbed by others        39     22,070     9,171     658     751     24,876     2,180           00      59,746

           Total Consolidated Income (Loss)         (353)      4,751    (1,194)   (654)    316     36,446       286           03      39,602




Exhibit D. Service Organizations Profits (Losses) from Operations FY 2014–FY 2018                                                   35
   Fiscal                                                   Corp                                                                                 Total
   Year      Description                                 Services         ESC      FPO      FLLI    ITD       AML       AAQ     Unassigned   Franchise

 2017       Net Income (Loss) from Operations              1,751       (3,668)    1,779    (756)   (485)       915       102          (07)        (368)

            Net Gains or (Losses)                             00           00        00      00      00     (9,052)       00           00      (9,052)
            Imputed OPM Costs                                (37)      (3,359)   (1,357)    (36)   (119)    (2,796)    (220)           00      (7,924)
            Imputed Overhead Charge from FAA                  00     (17,904)    (7,721)   (807)   (605)   (23,288)   (1,492)          00     (51,817)
            Imputed Financing absorbed by others              37       21,263     9,078     843     725     26,084     1,712           00      59,742
            Total Consolidated Income (Loss)                1,751     (3,668)     1,779    (756)   (485)    (8,136)      102          (07)     (9,420)

 2018       Net Income (Loss) from Operations                (24)      (6,105)   (1,963)   (248)   (626)     6,796     (332)           00      (2,502)

            Net Gains or (Losses)                             00           00        00      00      00     (5,363)       00           00      (5,363)
            Imputed OPM Costs                                (66)      (5,027)   (1,714)    (72)   (122)    (4,304)    (247)           00     (11,552)
            Imputed Overhead Charge from FAA                  00     (14,201)    (6,920)   (906)   (538)   (27,485)   (1,260)          00     (51,311)
            Imputed Financing absorbed by others              66       19,228     8,634     978     660     31,789     1,507           00      62,863
            Total Consolidated Income (Loss)                 (24)      (6,105)   (1,963)   (248)   (626)     1,433     (332)           00      (7,866)

Source: OIG analysis of unaudited Franchise Fund internal financial statements




Exhibit D. Service Organizations Profits (Losses) from Operations FY 2014–FY 2018                                                            36
Exhibit E. Major Contributors to This Report
             KEVIN DORSEY                      PROGRAM DIRECTOR
             DORY DILLARD-CHRISTIAN            PROJECT MANAGER
             LAKARLA LINDSAY                   SENIOR AUDITOR
             FRANCISCO RAMOS-HILERIO           SENIOR AUDITOR
             ALLISON LA VAY                    SENIOR ANALYST
             AMY BERKS                         DEPUTY CHIEF COUNSEL
             FRITZ SWARTZBAUGH                 ASSOCIATE COUNSEL
             GEORGE ZIPF                       SUPERVISORY MATHEMATICAL
                                               STATISTICIAN
             PETRA SWARTZLANDER                SENIOR STATISTICIAN
             WILLIAM SAVAGE                    IT SPECIALIST
             JANE LUSAKA                       WRITER-EDITOR
             CHRISTINA LEE                     VISUAL COMMUNICATIONS SPECIALIST
             SHAWN SALES                       VISUAL COMMUNICATIONS SPECIALIST
             ERIC WEEMS                        CONGRESSIONAL AND PUBLIC AFFAIRS
                                               OFFICER




Exhibit E. Major Contributors to This Report                                37
Appendix. Agency Comments

                           Federal Aviation
                           Administration

    Memorandum
    Date:      November 25, 2019
    To:        Louis C. King, Assistant Inspector General for Financial and Information Technology
               Audits
    From:      H. Clayton Foushee, Director, Office of Audit and Evaluation, AAE-1
    Subject:   Federal Aviation Administration’s (FAA) Response to Office of Inspector General (OIG)
               Draft Report: FAA Needs To Improve Oversight and Enhance Transparency in Its Franchise
               Fund

    The FAA Franchise Fund 1 was established through the Department of Transportation and Related Agencies
    Appropriations Act of 1997, Public Law 104-205, to promote competition, increase efficiency, and reduce
    costs across the Federal Government. Since its inception in 1997, the FAA’s Franchise Fund has successfully
    grown from providing consolidated services only to FAA to servicing over 23 agencies in 2019. During this
    period, Franchise revenue has grown from $18 million to $500 million. This growth occurred by consistently
    offering and delivering products and services that met the customer needs and were of value, while driving
    cost reduction for the customers of the Franchise Fund. Through sharing of services, fixed costs have been
    spread across the customer base, saving millions of dollars annually for the FAA and other federal customers.
    Examples of recent Franchise Fund outcomes include the following:
          •In Fiscal Year (FY) 2018, Acting Chief of the US Border Patrol (USBP) recognized
           the FAA Logistics Center (FAALC) for saving USBP more than $76M by capitalizing
           on the Logistics Center’s infrastructure, proven processes, and technical expertise. The
           Department of Homeland Security also recognized the Enterprise Services Center
           (ESC) for saving $12.9M.
      • In FY 2019, a large customer base allowed for the distribution of fixed costs across external
           customers that reduced FAA’s portion by $12.5M. Further, ESC realized $7.7 million in
           annual cost savings through contract services restructuring, contract re-negotiations, and
           automation efforts.
      • In October 2019, ESC received the Office of Management and Budget’s approval to on-
           board the Office of Personnel Management (OPM) onto the Delphi system, 2 with projected
           benefits and savings of over $3 million across OPM and the remaining Delphi customer
           base.
The FAA has reviewed the OIG draft report and offers the following comments:
 • The report incorrectly states the FAALC does not track inventory or have a system in place
     to track inventory. The issue raised was specifically that the FAA does not have a report to
     track the age of its inventory. The FAALC maintains detailed records of all inventory

1
  The Franchise Fund is composed of six service organizations; Enterprise Services Center (ESC), International
Training, Federal Leadership Training, Logistics Center, Flight Program Operations, and Acquisition Services.
2
  A web-based financial management system.

Appendix. Agency Comments                                                                                   38
                                                                                                 2

   issued and receipted through the current Logistics Center Support System and the
   predecessor Logistics Inventory System. These systems track inventory from the date
   FAALC receives the asset until they are shipped. However, the age of the inventory item is
   not the criteria for stocking or excessing a part needed for maintenance, repair, or overhaul
   functions. Inventory support for the National Air Space (NAS) is atypical in that parts must
   be available, regardless of the NAS asset age. The mission is to support the NAS regardless
   of its age.
   •   The report includes item oversight issues related to Utilization, Screening, & Disposal
       inventory at the Thomas Road warehouse. This inventory is not managed by the
       Franchise Fund and therefore should not be cited as issues in this report.

Upon review of the recommendations, we concur with recommendations 3 through 13 as written.
We plan to complete actions for recommendations 4 and 8 by March 31, 2020 and complete actions
for recommendations 3, 5–7 and 9–13 by September 30, 2020.

The FAA does not concur with recommendation 1 to engage an auditor to perform an independent
audit of the Franchise Fund’s financial statements since the Franchise Fund is already included in
independent financial audits for the FAA. The transactions and balances of the Franchise Fund roll
up into the FAA Financial Statements; therefore, they are included in the auditors’ tests to determine
that the FAA’s Financial Statements are fairly presented in all material respects.

We do not concur with recommendation 2 to develop and implement a process directing the Logistics
Center (AML) to maintain detailed records of the age and costs of inventory. Obsolescence is not
determined by the age of an asset; rather, it is determined based on the decommissioning of NAS
systems that the asset is used to support. Therefore, AML does not produce an aged asset report;
AML tracks issue and receipt of inventory in accordance with generally accepted accounting
principles.

We appreciate this opportunity to offer additional perspective on the OIG draft report. Please contact
H. Clayton Foushee at (202) 267-9000 if you have any questions or require additional information
about these comments.




Appendix. Agency Comments                                                                            39
             Our Mission
 OIG conducts audits and investigations on
behalf of the American public to improve the
performance and integrity of DOT’s programs
   to ensure a safe, efficient, and effective
       national transportation system.