[Comments on Air Force Compliance With Congressional Notification Requirement]

Published by the Government Accountability Office on 1990-10-31.

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

Ad ~n*              General
       of the United States
             Washington, D.C. 2054

                                     DO NOT MAKE AVAIABLE TO PUBLIC READING
                                                  FOR 30 DAYS


              October 31, 1990

                  The Honorable John P. Murtha
                  Chairman, Subcommittee on Defense
                  Committee on Appropriations
                  House of Representatives

                  Dear Mr. Chairman:

              By letter dated February 1, 1990, you asked for our opinion
              on whether the Air Force, before using $13.5 million to keep
              the B-lB's ALQ-161A core (Core) program operational, complied
              with the congressional notification requirement of
              section 9071 of the. Department of Defense Appropriations Act
              for fiscal year 1990, Pub. L. No. 101-165, 103 Stat. 1112,
              1145 (1989) (Appropriations Act). We have determined that the
              Air Force complied with section 9071.


              In 1982, the Air Force awarded contracts to Eaton Corporation
              for the development and production of 100 units of the ALQ-
              161A and related support equipment. Because of performance
              and production problems and design deficiencies, the Air Force
              is negotiating with Eaton a scaled-down version of that
              contract, i.e., the Core program.l/ According to the Air
              Force, it has periodically obligated limited amounts to fund
              operations for specific increments of time. The Air Force
              explained that the incremental funding of the contract allows
              it to continue to correct the ALQ-161A's design and hardware
              deficiencies, while providing the Congress an opportunity,
              before the Core program is fully funded, to review that

              The Air Force informs us that on November 1, 1989, it
              obligated $22 million to the contract to fund operations
              through January 31, 1990. Unless additional funds were
              forthcoming, the contract would terminate on January 31;
              paragraph 17(a) of the contract allows Eaton to refuse to
              continue performance once it incurs costs equal to the amount
              obligated on the contract.

                  1/  See GAO Report, Strategic Bombers: B-1B Program's Use of
                  Expired Appropriations, GAO/NSIAD-89-209 (Sept. 5, 1989).
         .   if                                    ;~~~~~~~~~~~~
Included in those costs would be termination costs. Paragraph
17(b) of the contract limits Air Force termination liability
to an amount not to exceed the funds obligated on the
contract. This limitation would preclude Eaton from
recovering termination costs if no money remained on the
contract upon termination. Consequently, as dictated by good
business practice, Eaton kept an accounting of the
unliquidated funds which were obligated on the contract so as
to guarantee that sufficient amounts remained to liquidate
termination costs. Thus, on January 31, when Eaton's
termination costs equalled the amount remaining on the
contract, the Air Force could not demand that Eaton continue
to perform unless the Air Force obligated additional funds to
the contract.

Correspondence between the Air Force and Eaton shows that the
Air Force did not want the contract to terminate on
January 31. In order to ensure a continuation of contract
operations, the Air Force decided to explore the possibility
of applying to operations obligated but unliquidated funds
that might otherwise be used to cover termination costs. In
this regard, by letter of January 19, the Air Force asked
Eaton to advise it of the total amount of the funds, obligated
on the contract but not yet liquidated, that Eaton would need
to cover termination costs on January 31. Eaton responded
that it would need $13.5 million (in addition to other funds
available to the contractor) to cover termination costs, but
that if those funds were used to continue performance rather
than to pay for termination, contract operations could
continue through March 9, 1990.

Effective January 31, the Air Force and Eaton added a new
termination clause to the contract providing that if Eaton
applied all remaining obligated funds in continuation of
performance, the Air Force would make available sufficient
funds to cover Eaton's termination costs. Under the terms of
the new clause, the Air Force, upon termination at the
convenience of the government, will pay Eaton up to
$13.5 million in "special termination" costs, as defined by
the contract. The Air Force considered the new clause a
contingent liability; thus, it did not record an obligation to
cover the "special termination" costs. As a result of the new
clause, however, the Air Force committed itself either to
continue funding the contract or to pay for termination costs.
Eaton, no longer concerned about financing termination,
applied the $13.5 million obligated on the contract, which
might otherwise have been used to pay termination costs, to
continue performance through March 9.

In order to ensure funding to continue operations after
March 9, the Air Force, by letter of January 24, notified the
Congress that it would restore $418 million from its expired,
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unobligated appropriation accounts to use on the Core
Section 9071 of the Appropriations Act provides that:
     "None of the funds available to the Department of
     Defense, including expired appropriations and M
     account balances, may be used for the B-lB's ALQ-
     161A CORE program unless the Secretary of Defense
     has notified the Congress in advance of his
     intention to use funds for such purpose. . . .
Pub. L. No. 101-165, 103 Stat. at 1145-46.
In our view, this provision, enacted November 21, 1989,
requires the Secretary of Defense (the Secretary) to notify
the Congress before he obligates3/ any additional funds to the
Core program. If the Air Force did not obligate additional
funds, section 9071 does not apply. The first question raised
in addressing section 9071, then, is whether the Air Force, on
January 31, obligated any additional funds to the contract.
The Air Force, in effect, undertook two actions on
January 31: it instructed Eaton to continue performance at
least until March 9, and it agreed to a new termination
provision in Eaton's contract. As discussed above, the
$13.5 million used to finance operations after January 31 had
already been obligated on the contract (but not yet
liquidated). Therefore, section 9071 did not require
notification of its use to liquidate amounts billed by Eaton.
With regard to the new termination provision, Air Force
officials state that since the Air Force may never have to pay
the "special termination" costs, the new clause creates a

2/ On March 10, 1990, the Air Force obligated $26 million to
the contract to fund performance through May 31. An Air Force
official informs us that the Air Force obligated an additional
$23.3 million to the contract on June 19, 1990, and
$13 million on August 18.

3/ The law's conference report recommends that notification
take the form of "prior approval reprogramming." See
H.R. Conf. Rep. No. 345, 101st Cong., 1st Sess. 140 (1989).
A prior approval reprogramming takes place prior to that
point in time when funds are obligated to a contract as
opposed to the time, for example, when obligated amounts are

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contingent liability which does not constitute an
obligation.4/ We disagree. The "special termination" costs
cannot be viewed as a contingent liability. Until the Air
Force fully funds the contract,5/ the Air Force has a firm
obligation to pay Eaton $13.5 million over and above whatever
amount the Air Force has incrementally committed to the
contract. In other words, should the Air Force decide not to
further incrementally fund the contract, the Air Force remains
liable to Eaton for $13.5 million. In similar situations, we
have held that the government has obligated the amount of the
termination liability. See 62 Comp. Gen. 143,- 146-47 (1983).
See also 48 Comp. Gen. 497, 502 (1969). We conclude,
therefore, that the new termination provision effected an
obligation of $13.5 million.

Having determined that the Air Force incurred an obligation,
we now turn to the question of whether the Air Force satisfied
the notice provision of section 9071 of the Appropriations
Act. As noted above, this provision requires the Secretary
to notify the Congress, in advance, of his intention to
obligate funds to the Core program. In our opinion, the
January 24 letter, notifying the Congress that the Air Force
would obligate $418 million more to the Core program contract,
satisfies this requirement.
It appears, however, that the Air Force may not have complied
with section 1603 of the National Defense Authorization Act
for fiscal years 1990 and 1991, Pub. L. 101-189, 103
Stat. 1352, 1597 (1989) (Authorization Act). Section 1603
provides that if the Defense Department plans to withdraw, in
any one fiscal year, more than $25 million from its expired,
unobligated appropriation accounts, it must notify Congress
and wait 30 days before restoring any funds. 103 Stat.
at 1597. The Air Force incurred the $13.5 million obligation
seven days after the Secretary notified the Congress of Air

4/ As a general matter, a contingent liability does not
constitute a valid obligation under 31 U.S.C. ยง 1501, the
statute governing the recording of obligations; thus, the
government does not record an obligation based on a contingent
liability until the contingency occurs. See,54 Comp.
Gen. 824, 827 (1975); 42 Comp. Gen. 708, 712 (1963).

5/ This process of either paying "special termination" costs
or obligating additional money on the contract will continue
until the Air Force fully funds the contract. Paragraph S of
the "special termination" provision states that the provision
shall remain in full force until the Air Force fully funds the

4                                                     B-238581
Force's intention to restore $418 million from the expired,
unobligated accounts. (The Air Force should have'recorded the
obligation but did not because it considered the $13.5 million
in "special termination" liability to be a contingent
liability.) According to its letter of January 24, the Air
Force apparently intended to record all obligations for the
Core program against amounts in the expired, unobligated
accounts. Pursuant to section 1603 of the Authorization Act,
amounts to cover these obligations were not available for
restoration prior to the expiration of the 30-day waiting
I hope that you find our views useful. In accordance with
our general policy, we will furnish the Air Force a copy of
this letter 30 days from today, unless you release it earlier,
and will make the letter generally available to other
interested parties at that time.

Sincerely yours,

Comptroller   eneral
of the United States

6/ Air Force officials have informally advised us that the
Air Force could have reprogrammed funds within the fiscal year
1990 Aircraft Procurement appropriation to cover the
$13.5 million obligation. Had the Air Force used current
funds to cover the new obligation of $13.5 million,
section 1603 of the Authorization Act would not apply.
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