_-_-l---l_.. l..l-l”-“..” _““_ ITllittvI .--.- I_..^--.-.---.-..-----__.-._--_-__._ States (;t~trt~w.l --- Awount.iIlg Ol’l’iw --~----------- --..-._l-----l.---...~ ..-._.--_. ..--.. May I!l!tO FINANCIAL MANAGEMENT Army Stock Fund Pricing and Refund Practices %i 141527 (;AO,'AVMI)-W-f;8 . United States GAO General Accounting Office Washington, D.C. 20648 Accounting and Financial Management Division B-238448 May 9,199O The Honorable John P. Murtha Chairman, Subcommittee on Defense Committee on Appropriations House of Representatives Dear Mr. Chairman: In an April 11, 1989, letter, you requested that we review and prepare separate reports on certain Army, Navy, and DefenseLogistics Agency stock fund pricing and refund practices. You made this request follow- ing our April 1989 report’ to you on the Air Force stock fund, which discussesthe budgetary impact of reducing the operating cash balance of that stock fund. In responding to your most recent request, we reviewed the operating cash balancesof the Army, Navy, and Defense Logistics Agency and briefed your staff on the status of our work. This, the third in our series of reports on stock fund cash balances,presents information on (1) whether the Army stock fund can operate with less . than an 1l-day operating cash balance, (2) how refunds made to stock fund customers affected the 1l-day cash balance, and (3) how stock fund customers used the refunds. Cur reports on the Navy and the DefenseLogistics Agency’s stock funds will be issued separately. Results in Brief We found that from 1987 through 1989, the stock funds average month- end operating cash balanceshave ranged from 1.3 to 9 days of cash. We believe, similar to our earlier position regarding the Air Force, that the Army stock fund has shown it can operate with less than 11 days of cash. The Department of Defense,considering what it believes to be nor- mal fluctuations in income received from customers and payments made to suppliers, established an 1l-day requirement to ensure that a suffi- cient amount of cash was available to pay bills from suppliers. However, our analysis of the Army’s operating cash balancesfrom fiscal years 1986 through 1989 showed that the average fluctuation in the cash bal- ancesfrom one month to the next was only 1.8 days. In addition, for the past 6 years, the stock fund has refunded $736 mil- lion to selectedcustomers. By making these refunds, the Army reduced the operating cash level below 11 days. We were unable, just as the lFinancial Management: Operating Cash Requirement for Air Force Stock Fund Can Be Reduced @W--60 , April 7,lQSQ). Page 1 GAO/AF’MBW Army Stock Fund , B-233443 Army was unable, to determine the ultimate disposition of over $600 million of these refunds becausethey were merged into other accounts.Of the remaining refunds, officials told us that about $88 mil- lion were used to improve readiness,support training, and purchase supplies in two of the Army’s nine retail divisions. In addition, an Army National Guard official responsible for operations and maintenance activities told us that $28 million of the refunds were used for clothing, repair parts, and equipment purchases. The Department of the Army stock fund provides for the financial man- Background agement, inventory control, and distribution of consumablesupply items to support Army peacetime and wartime operations. At the end of fiscal year 1989, the stock fund had a total reported inventory value of $8.9 billion and annual salesof $7.3 billion. The total assetsheld by the stock fund, consisting of inventory and cash, are referred to as the stock fund corpus. The stock fund operates under a revolving fund concept, whereby it buys and holds inventory for sale to authorized customers, such as activities funded by the Army’s Operation and Maintenance appropria- tion. Salesof stock fund inventory generate cash that is used to replen- ish inventory levels. To ensure that sufficient cash is available to pay incoming bills from suppliers, Department of DefenseRegulation 7420.13-Rrequires that the stock fund maintain a certain level of funds with Treasury. Until November 1989, when the House and SenateAppropriations Commit- tees recommendedthat this balance be reduced to 5 days, Defensehad used 11 days of operating cash to accommodatefluctuations in revenue received from customers and payments made to vendors. Such a cash level is achieved by adding a surcharge to the acquisition cost of inven- tory items when setting prices charged customers. For the Army stock fund, the disbursements for 1 day are currently worth about $18.4 mil- lion, for an 11-day total of $202.4 million. While the stock fund obtains most of its funds by selling inventory items to its customers, it also receives appropriations from the Congress.The congressionalcommittees indicated that these funds are intended to purchase war reserve material and inventory items to support weapon system modernization and modification. By designating funds for these items, the congressionalcommittees attempted to gain a degreeof Page 2 GAO/AFMD-90-63 Amy Stock Fund , budget visibility over certain stock fund purchases.These appropria- tions increase the corpus of the stock fund and are available to cover stock fund cash needs.For fiscal year 1989, the Army stock fund received $292 million in appropriated funds. The stock fund has only a single cash balance consisting of both the operating and appropriated cash amounts. Therefore, when calculating the fund balance that is available to cover stock fund cash needs, Department of Defenseofficials can use the appropriated funds, to the extent they are available, to cover temporary cash shortages in the operating portion of the stock fund. Basedon our April 1989 report on the Air Force stock fund, which dis- Objectives, Scope,and cussesthe budgetary impact of reducing the operating cash balance of Methodology the stock fund, you requested that we review certain Army, Navy, and DefenseLogistics Agency stock fund pricing and refund practices. In responding to your request, we reviewed the operating cash balancesof these stock funds and briefed your staff on the status of our work. The objectives of this review were to determine (1) whether the Army stock fund can operate at less than an 1l-day operating cash balance, (2) how refunds made to stock fund customers affected the 1l-day cash balance, and (3) how stock fund customers used the refunds. Our reports on the Navy and the DefenseLogistics Agency’s stock funds will be issued to you separately. You also asked us to provide certain information regarding the use of refunds. In this report, the term “refund” describestwo kinds of pay- ments: (1) payments made under various statutory transfer authorities and (2) payments made to adjust the original price charged stock fund users. Although different legal authorities govern these two types of payments, we have used the sameterm to cover both. To accomplish these objectives, we discussedwith the Office of the Sec- retary of Defenseand Army officials how stock fund (1) inventory prices and surcharges are determined, (2) operating cash balancesare calculated, and (3) cash is returned to customers.We examined Army stock fund budget documents and related accounting records. We reviewed congressionalreports and legislation as well as Department of Defenseand Army regulations concerning stock fund cash balancesand refund policies. In addition, to determine if any material weaknesseshad Page 8 GAO/AFMD-BME Army Stock Fund B-238448 previously been reported on Army stock fund pricing and refund prac- tices, we reviewed the Army’s Federal Managers’ Financial Integrity Act reports. Army officials could only provide us with year-end data on appropri- ated and operating cash balancesfor fiscal years 1984 and 1986 and monthly data for fiscal years 1986 through 1989. We did not verify the accuracy of the budgetary data, but we did analyze the monthly Army stock fund cash balances.We performed our work at the Office of the Secretary of Defense;Headquarters, U.S. Army; the Army Materiel Com- mand; and the Army Accounting and Finance Center. We conducted our work from June 1989 to March 1990 in accordancewith generally acceptedgovernment auditing standards. The Army stock fund has functioned with less than an 1l-day operating Stock Fund Operated cash balance. Army information shows that since 1987, stock fund fiscal at Less Than an ll- year-end operating balanceshave been equivalent to or less than 8.4 Day Operating Cash days of cash. Furthermore, our analysis of the operating cash balances from fiscal year 1986 through fiscal year 1989 showed that the average Balance month-end fluctuation was only 1.8 days. In essence,the cash balances changed,on average,no more than 2 days from one month to the next, which was less than the &day cash target recommendedby the House and SenateAppropriations Committees. Four-Year 1balvsis u --- of -- the ---- From our analysis of Army stock fund cash, we determined that the Stock Fund Operating Army’s fiscal year-end operating cash balanceshave been less than 11 days since 1986. Table 1 displays the fiscal year-end balances,the aver- Cash Balance age month-end balances,and the range of the operating month-end cash balancesfrom 1986 through 1989. Table 1: Stock Fund Operatlng Cash Balances for Fiscal Years 1988 Through Dollars in millions 1989 Range of month-end Fiscal y;~;;z;q Average month-end balances Fiscal Year balance Hiah Low 1986 - $110.3 $304.8 $659.8 $78.1 1987 102.0 108.1 151.0 57.1 1988 13.1 24.6 92.1 (38.0) 1989 153.9 164.6 274.4 '22.4' Page 4 GAO/AFMD-go-88 Army Stock F’und B-228448 Table 1 shows that from 1986 through 1988, the fiscal year-end and average month-end cash balancesdecreasedwhile the balances increased in 1989. To relate this information to the 1l-day requirement, table 2 provides the samedata as shown in table 1, but converts the dollar information to equivalent days. To determine the equivalent days of cash for each fiscal year, we used the Department of Defenseformula of total stock fund operating expenditures divided by 360 days. The l- day disbursement rate for fiscal years 1986 through 1989 was $18.2 mil- lion, $18.9 million, $18.4 million, and $18.4 million, respectively. Table 2: Stock Fund Operating Cash Balances for Fiscal Years 1986 Through Range of month-end 1989 Converted to Equivalent Day8 Fircal y;i;;;wt Average month-end balances Fiscal year balance High Low 1986 6.1 16.8 36.3 4.3 1987 5.4 5.7 8.0 3.0 1988 0.7 1.3 5.0 (2.1) 1989 8.4 9.0 14.9 1.2 Table 2 shows that in 1986, the average month-end operating cash bal- ance exceededthe 1l-day operating cash target. However, since 1986, the averagemonth-end and fiscal year-end operating cash balanceshave both been less than 11 days of cash. In our April 1989 report, we stated that the Air Force stock fund operat- ing cash balance could be substantially reduced. By reducing the cash target below 11 days, the surcharge added to the selling price of inven- tory items could be reduced, thus lowering the prices the stock fund charges its customers by a,corresponding amount. This, in turn, could result in a reduction to Defensebudget authority. Acting on our recommendation, in November 1989, the House and Sen- ate Appropriations Committees recommendedlowering the stock fund operating cash requirement from 11 days to 6 days which resulted in the Congressreducing the fiscal year 1990 Department of Defense budget by $707.2 million. Further, becausestock fund customers should theoretically be able to purchase the samequantity of items at reduced prices, the customers’ ability to perform their missions should not be adversely affected. Page 6 GAO/AF’MD-90-68 ARny IsltocL; Pud , I B-228446 Changesin Stock Fund The fluctuation in the monthly cash balancesis a key measure in analyz- Month-end Cash Balances ing the neededlevel of the stock fund cash balance. In analyzing the monthly fluctuations in the operating cash balances,we adjusted the Have Been Less Than 6 operating cash balancesfor refunds. As agreed with the Office of the Days Secretary of Defenseand Army officials, refunds need to be added back to the operating cash balancesbecausethey are not part of the normal stock fund processof income received from customers and payments made to vendors. Our analysis showed that for the 4-year period there were minor fluctu- ations or changesin operating cash balances.For example, of the 47 months of data available, the average operating cash fluctuation was 1.8 days. In addition, of the 47 months of data, there were 24 months in which cash increased and 23 months in which cash decreased,with only 1 of these fluctuations exceeding6 days. Neither we nor Army head- quarters officials were able to determine the reason for this fluctuation. The Army has made substantial amounts of refunds from the stock fund Refunds Total $736 operating cash to its customers- $736 million since fiscal year 1986. Million in I.&St 5 ‘Years Table 3 shows the refunds made during the year as well as the fiscal year-end operating cash balancesafter refunds, in dollars and equivalent days. Table 3: Stock Fund Refund8 and Year- end Operating Carh Balances for Fircal Dollars in millions Year8 1985 Through 1889 Operatii ,;;:h after Refunds B Equivalent Equivalent Fibcal year Amount days Amount days 1985 $102.3 5.7 $596.1 33.5 1986 389.5 21.4 110.3 6.1 1987 28.9 1.5 102.0 5.4 1988 70.0 3.8 13.1 0.7 1989 145.4 7.9 153.9 8.4 Total $730.1 As table 3 shows, in 1986, after the refunds were made, the stock fund maintained 33.6 days of cash. However, in fiscal years 1986 through 1989, after the refunds were made, the level of cash was reduced below 11 days. In July 1989, the Office of the Secretary of Defensenotified the House and SenateCommittees on Armed Servicesand on Appropriations that it intended to transfer $196 million from stock fund operating cash Page 6 GAO/AFMD-9686 Army Stock F’und to the Army appropriation for Operations and Maintenance activities. On April 30,1989, the stock fund balance was $228.6 million, or 12 days of cash. This transfer would have left the stock fund with 6 days of cash at the end of fiscal year 1989. However, the House Appropriations Com- mittee, Subcommittee on Defense,opposedportions of the transfer. Con- sequently, the Army transferred a total of only $146.4 million. As a result, at the end of fiscal year 1989, the stock fund operated at about 8 days of cash. The $736 million in refunds were made with various levels of congres- sional involvement and approval. These refunds were generally intended to offset budget reductions in the customers’ accounts,which allowed Army units to have more money to spend for general operating and maintenance purposes. When we attempted to determine how the $736 million in refunds were used by customers, we found that over $600 million had been merged with customers’ appropriations and, therefore, could not be traced. As a result, neither we nor the Army could determine how these refunds were ultimately used other than for the general purposes of the appropriation which received the refund. Basedon what Army customers told us, of the remaining refunds, about $88 million were used to improve readiness,support training, and purchase supplies in two of the Army’s nine retail divisions. In addition, an Army National Guard official responsible for operation and mainte- nance activities told us that $28 million of the refunds were used for clothing, repair parts, and equipment purchases. While we were not able to determine the use of all refunds, table 4 shows the amount of refunds major Army stock fund customers received by fiscal year from 1986 to 1989. Table 4: Amount of Refunds Stock Fund Customers Received From Operating Dollars in millions Funds 1989 for Fircal Year8 1985 Through Fiscal year Customers 1985 1886 1987 1888 1989 Operation and Maintenance, Army $102.3 $343.3 $28.9 $70.0 $145.4 Operation and Maintenance, Army Reserve 0 18.2 0 0 0 Operation and Maintenance, g”r;dNational 0 28.0 0 0 0 Page 7 GAO/AF’MD-90438 Army liltoclr Fund B-222448 Over the last 6 years, the majority of Army stock fund refunds have been received by Operations and Maintenance, Army, with a very small portion distributed to other stock fund customers.Specifically, Army operations and maintenance activities have received about $690 million or 94 percent of the $736 million in refunds from operating cash in the last 6 years. Since 1987, the Army stock fund operating cash balance has been less Conclusions than 11 days. During 1989, the House and SenateAppropriations Com- mittees recommendedthat Defensechangeits policy and lower the stock fund operating cash requirement from 11 days to 6 days. Our analysis shows that a &day cash supply is adequate and, as a result, we are not making any recommendations at this time. As requested by your Office, we did not obtain written comments on a draft of this report. We did, however, discussits contents with pertinent Defenseand Army officials and have incorporated their views where appropriate. Unless you publicly announcethe contents of this report earlier, we will not distribute it until 30 days from its date. At that time we will send copies to the Secretary of Defense,the Secretary of the Army, the Direc- tor of the Office of Management and Budget, and other interested par- ties. We will also make copies available to others upon request. Pleasecontact me at 276-9607,if you or your staff have any questions concerning this report. Other major contributors to this report are listed in appendix I. Sincerely yours, Jeffrey C, Steinhoff Director, Financial Management Systems and Audit Oversight Page I3 GAO/AFMD-QO-68 Army Stock Fund Page 9 GAO/AFMDMMB Army Stock Fund Appendix I Major Ckmtributorsto This Report Joseph Potter, Assistant Director, (202) 696-6922 Accounting and RosaL. Ricks, Accountant-in-Charge Financial Management Wilma G. Raymo, Accountant Division, Washington, DC. (908109) Page 10 GAO/~f)O43 Army Stock Fund
Financial Management: Army Stock Fund Pricing and Refund Practices
Published by the Government Accountability Office on 1990-05-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)