oversight

Budget Issues: Franchise Fund Pilot Review

Published by the Government Accountability Office on 2003-08-22.

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

              United States General Accounting Office

GAO           Report to the Committee on Government
              Reform, House of Representatives



August 2003
              BUDGET ISSUES
              Franchise Fund Pilot
              Review




GAO-03-1069
              a
                                                August 2003


                                                BUDGET ISSUES
                                                Franchise Fund Pilot Review
Highlights of GAO-03-1069, a report to the
Committee on Government Reform,
House of Representatives




Congress is considering the                     The six franchise fund pilots are part of a group of 34 intragovernmental
reauthorization of the six franchise            revolving (IR) funds that were created to provide the common support
fund pilots authorized by the                   services required by many federal agencies. In general, the legal authorities
Government Reform Act of 1994.                  for these 34 funds are very similar. Twelve of the 34 funds—including 5 of
These self-supporting business-like             the franchise fund pilots—have explicit authority to charge for an operating
entities were established to provide
common administrative services on
                                                reserve and/or to retain a reserve for acquisition of capital equipment and
a fully reimbursable basis. The                 financial management improvements.
authorization for most of the pilots
will expire at the end of fiscal year           The franchise fund pilots at the Departments of Interior and Commerce have
2003. In addition to the suggestion             both (1) taken into account many of the 12 business operating principles, (2)
of giving the pilots permanent                  designed their cost accounting processes to set fees to recover the full cost
authorization, there has been some              of operations, and (3) progressed toward implementing the main cost
discussion in recent years of                   accounting standards. The Interior Franchise Fund’s (IFF) major business
expanding the franchise fund                    line, GovWorks, provides acquisition services and has seen dramatic growth
concept so that all departments                 in revenue and workload since fiscal year 1997. GovWorks expects
and independent agencies can set                continuing growth through fiscal year 2007. The IFF has been subject to an
up a franchise fund. To provide the
context to evaluate franchise fund
                                                audit of its financial statements at the franchise fund level through fiscal
pilots and fully understand                     year 2002. The Commerce Franchise Fund’s (CFF) only business line, Office
reauthorization issues, GAO agreed              of Computer Services (OCS), provides information technology infrastructure
to identify the many funds, called              support services and has had a declining revenue and customer base.
intragovernmental revolving funds,              However, OCS expects its revenues to remain stable through fiscal year
that operate with purposes similar              2005. The CFF was subject to financial audits at the franchise fund level for
to that of franchise funds and to               fiscal years 1997 and 1998, and at the department level for fiscal years 2001
analyze their legal authorities to              and 2002. No audits were conducted for fiscal years 1999 or 2000.
determine if franchise funds were
somehow unique. In addition, we                 Longer-term reauthorization (more than 1 or 2 years) would be helpful to the
examined the operations and                     operation of franchise fund pilots, but neither their legal authority nor their
managerial cost accounting
processes of the franchise fund
                                                operation makes franchise funds unique compared to other IR funds. A
pilots at the Departments of the                primary attraction to the franchise fund label is the explicit ability to retain
Interior and Commerce. We                       reserves, and Congress could, and has, given this authority to other IR funds.
determined if they had taken into               The explicit authority provisions granted to franchise fund pilots (and a few
account the criteria suggested by               other IR funds) could be considered case-by-case for individual IR funds. In
the Office of Management and                    deciding whether to provide these authorities to any individual fund,
Budget (OMB), including: (1)                    Congress could use the same criteria suggested by OMB for franchise fund
adhering to OMB/Chief Financial                 pilots, including: (1) examining operations against OMB/CFO’s 12 business
Officers (CFO) Council’s 12                     operating principles, (2) determining if managerial cost accounting
business operating principles, (2)              processes are in place to account for the full unit costs of outputs produced,
accounting for full cost, and (3)               and (3) considering if annual or periodic independent audits are being
conducting audits of financial
statements at the fund level.                   conducted at the fund level to ensure the reliability of the fund’s financial
                                                information. Individual case-by-case authority would also permit Congress
                                                to consider and evaluate the agency’s commitment and the strength of the IR
                                                fund’s leadership, which are additional factors that can influence the success
www.gao.gov/cgi-bin/getrpt?GAO-03-1069.
                                                of the fund.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Susan J. Irving
at (202) 512-9142 or irvings@gao.gov.
Contents



Letter                                                                                                                  1
                             Results in Brief                                                                           2
                             Background                                                                                 2
                             Intragovernmental Revolving Funds and Their Legal Authorities                              4
                             Operations of the Franchise Fund Pilots at Interior and
                                Commerce                                                                                5
                             Reauthorization Issues                                                                     5


Appendixes
              Appendix I:    Franchise Fund Pilot Review                                                                8
             Appendix II:    12 Business Operating Principles                                                       49
             Appendix III:   Authority to Retain Unobligated Balances— Franchise Pilots
                             and Comparable IR Funds                                                                50




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                             Page i                                          GAO-03-1069 Franchise Fund Pilot Review
Page ii   GAO-03-1069 Franchise Fund Pilot Review
A
United States General Accounting Office
Washington, D.C. 20548



                                    August 22, 2003                                                                              Leter




                                    The Honorable Tom Davis
                                    Chairman
                                    The Honorable Henry A. Waxman
                                    Ranking Minority Member
                                    Committee on Government Reform
                                    House of Representatives


                                    In your January 9, 2003, letter you asked us to evaluate the franchise fund
                                    pilots authorized by the Government Management Reform Act of 1994 as
                                    you consider their reauthorization. To fully understand reauthorization
                                    issues, we agreed to (1) examine the universe of intragovernmental
                                    revolving (IR) funds1 (of which franchise funds are a type) and their legal
                                    authorities and to determine how these authorities differ, (2) study the
                                    operations of selected franchise fund pilots, and (3) identify issues that
                                    Congress might consider as it contemplates permanent reauthorization of
                                    franchise funds. On July 11, 2003, we briefed committee staff on the results
                                    of our work. As agreed with your office, this letter summarizes and
                                    transmits the information provided in that briefing.

                                    We used budget data to identify IR funds and reviewed the U.S. Code to
                                    analyze their legal authorities. We selected the franchise fund pilots at the
                                    Departments of the Interior and Commerce for case studies. We
                                    determined that GovWorks is the primary component of the Interior
                                    franchise fund (IFF) and that the Office of Computer Services (OCS) is the
                                    sole component of the Commerce franchise fund (CFF), and our case-study
                                    work focused on these two entities. We interviewed agency officials at the
                                    department and franchise fund levels, examined a variety of
                                    documentation, and did an in-depth review of the managerial cost
                                    accounting processes at the franchise fund level. During this review, we
                                    examined work done by other auditors and performed limited testing of
                                    data reliability but did not conduct audit procedures designed to render an
                                    opinion on the franchise funds’ financial information. We obtained
                                    comments from GovWorks and OCS on a draft of the report relevant to
                                    each and incorporated those comments, which were technical in nature,


                                    1
                                      An IR fund conducts continuing cycles of business-like activity within and between
                                    government agencies. It charges for the sale of products or services and uses the proceeds
                                    to finance its spending, usually without requirement for annual appropriations.




                                    Page 1                                           GAO-03-1069 Franchise Fund Pilot Review
                   where appropriate. Our work was conducted in Washington, D.C., from
                   January through July 2003, in accordance with generally accepted
                   government auditing standards. (See pages 12 to 14.)



Results in Brief   Although longer-term authorization for franchise fund pilots would be
                   helpful to the operation of the funds and their clients, neither their legal
                   authority nor their operation makes franchise funds unique compared to
                   other IR funds. A primary attraction to the franchise fund label is the
                   explicit ability to retain 4 percent of total annual income, and Congress
                   could, and has, given this authority to other IR funds. Since most large
                   agencies already have at least one IR fund, allowing all departments and
                   independent agencies to set up franchise funds is unnecessary. Instead, the
                   explicit authority provisions granted to franchise fund pilots (and a few
                   other IR funds) could be considered case-by-case for individual IR funds. In
                   deciding whether to provide these authorities, Congress could use the
                   same criteria suggested for franchise fund pilots, including: (1) examining
                   operations against the 12 business operating principles established by the
                   Office of Management and Budget (OMB) and the Chief Financial Officers
                   (CFO) Council, (2) determining if managerial cost accounting processes
                   are in place to account for the full unit costs of outputs produced, and (3)
                   considering if annual or periodic independent audits are being conducted
                   at the fund level to ensure the reliability of the fund’s financial information.
                   Individual case-by-case authority would also permit Congress to consider
                   and evaluate the agency’s commitment and the strength of the IR fund’s
                   leadership, which are additional factors that can influence the success of
                   the fund. (See pages 47 and 48.)



Background         Federal agencies are prohibited by law from transferring funds from one
                   agency to another, unless otherwise authorized by law. The Economy Act
                   of 1932 authorizes a federal agency to provide goods or services to another
                   federal agency and generally provides authority for federal agencies to
                   enter into intragovernmental transactions when no other, more specific,
                   authority applies. However, the Economy Act restricts flexibility by
                   requiring the client agency to deobligate fiscal year funds at the end of the
                   period of availability to the extent that these funds have not been obligated
                   by the performing agency. In contrast, where an interagency agreement is
                   based on specific statutory authority other than the Economy Act, an
                   agency is not required to deobligate funds at the end of the period of
                   availability. The specific legal authorities creating IR funds authorize these



                   Page 2                                     GAO-03-1069 Franchise Fund Pilot Review
funds to enter into intragovernmental transactions and provide more
flexibility by allowing the client agency’s fiscal year funds to remain
obligated, even after the end of the fiscal year, to pay the IR fund for the
provision of services which meet a legitimate or bona fide need incurred
during the period of availability of the customer agency’s appropriation.2,3

The Government Management Reform Act of 1994 authorized OMB to
designate six franchise fund pilots. These pilots are a type of IR fund that
were established as self-supporting business-like entities providing
common administrative services on a fully reimbursable basis. Between
May 1996 and January 1997, OMB designated pilots at the Departments of
Commerce, Veterans Affairs (VA), Health and Human Services (HHS), the
Interior, and the Treasury, and at the Environmental Protection Agency
(EPA). As criteria for operation, OMB and the CFO Council defined 12
business operating principles for the franchise fund pilots.4 OMB also
stressed the importance of accounting for full cost5 and suggested that
agencies consider the usefulness of audited financial statements at the fund
level. The six pilots provide a variety of common services, such as
acquisition management, financial management services, and employee
assistance programs. They are similar to other business-like entities such
as the National Finance Center (NFC) at the Department of Agriculture and
the Federal Systems Integration and Management Center (FEDSIM) at the
General Services Administration (GSA).

The pilots were originally to expire at the end of fiscal year 1999, but the
date has been extended three times (the last two times on an annual basis).
As of August 2003, authorization for most of the pilots will expire at the end
of fiscal year 2003. The Treasury franchise fund is authorized through the
end of fiscal year 2004 and the EPA pilot has permanent authorization. In


2
  The use of a revolving fund does not change the period of availability of the customer
agency’s appropriation. It is improper for a customer funded by fiscal year appropriations to
place orders in excess of legitimate needs, thereby using the revolving fund to extend the
life of the appropriation.
3
  This is only one of the differences between the Economy Act of 1932 and the legal
authorities for IR funds, but it is the one most important for our discussion. Other
differences are mentioned on page 15.
4
    See appendix II for a list of the 12 business operating principles.
5
  The Statement of Federal Financial Accounting Standards (SFFAS) No. 4 sets forth basic
cost accounting concepts and five main standards for managerial cost accounting by the
federal government.




Page 3                                                GAO-03-1069 Franchise Fund Pilot Review
                          addition to suggestions of permanent authorization for the pilots, there has
                          been some discussion in recent years of expanding the franchise fund
                          concept governmentwide, that is, allowing all departments and
                          independent agencies to set up franchise funds.



Intragovernmental         We identified 58 IR funds with varying titles and purposes. Most IR funds
                          function under the title or label “working capital fund.” Examples of other
Revolving Funds and       labels include revolving funds, supply funds, and franchise funds. Most
Their Legal Authorities   large agencies have at least one IR fund, and many have more than one. For
                          example, Interior has a franchise fund pilot and four working capital funds.
                          Intragovernmental revolving funds were created for a variety of purposes,
                          but most frequently, to provide the common support services required by
                          many federal agencies. Examples include photocopying, payroll services,
                          information technology services, and financial management services. We
                          determined that 34 of the 58 IR funds provide common services, while the
                          remaining 24 have very specific purposes of providing goods or services to
                          satisfy needs unique to their agencies. (See pages 22 and 23.)

                          The 34 IR funds that provide common services operate under similar legal
                          authorities. These authorities generally specify the means of initial
                          capitalization and allow both internal entities and external agencies to pay
                          the IR funds for services provided, either by reimbursement or in advance
                          (some are required to receive payments in advance). Intragovernmental
                          revolving funds are generally required to charge rates for their services
                          sufficient to recover all operational expenses, although over the long term
                          they are not intended to earn more than is required to break-even. In fact,
                          the legal authorities for IR funds commonly require the return of surplus
                          amounts to the Treasury at the end of the fiscal year. However, some
                          receipts may be carried over to the next fiscal year as unobligated
                          balances, including amounts reserved to cover the costs of annual leave
                          and depreciation. Some additional discretion to carry over unobligated
                          balances is provided to 22 of the 34 IR funds. For example, the head of the
                          agency is allowed to determine the level of funding required to meet the
                          needs of 16 of the IR funds and 6 IR funds are not specifically required to
                          return surpluses to the Treasury. This discretion does not mean that IR
                          funds are allowed to operate with continuing surpluses; over the long term,
                          they are still required to break-even. The remaining 12 of the 34 funds—
                          including 5 of the franchise fund pilots—have explicit authority to retain
                          additional unobligated balances. By statute, the 12 funds are authorized to
                          charge for an operating reserve and/or to retain a reserve for acquisition of
                          capital equipment and financial management improvements. Five of the



                          Page 4                                    GAO-03-1069 Franchise Fund Pilot Review
                         franchise fund pilots have explicit authority for both a “reasonable
                         operating reserve” and “to retain up to 4 percent of total annual income for
                         acquisition of capital equipment and financial management
                         improvements.”6 Appendix 3 shows the various authorities by fund. (See
                         pages 24 through 27.)



Operations of the        During our case studies at the Interior and Commerce franchise fund pilots,
                         we found that both have (1) taken into account many of the 12 business
Franchise Fund Pilots    operating principles, (2) designed their cost accounting processes to set
at Interior and          fees to recover the full cost of operations, and (3) progressed toward
                         implementing the five main cost accounting standards.7 The IFF’s major
Commerce                 business line, GovWorks, provides acquisition services and has seen
                         dramatic growth in revenue and workload since fiscal year 1997. GovWorks
                         projects continuing growth through fiscal year 2007. The IFF has been
                         subject to an audit of its financial statements at the franchise fund level
                         through fiscal year 2002. The CFF’s only business line, OCS, provides
                         information technology infrastructure support services and has had a
                         declining revenue and customer base. However, OCS expects its revenues
                         to remain stable through fiscal year 2005. The CFF was subject to financial
                         audits at the franchise fund level for fiscal years 1997 and 1998, and at the
                         department level for fiscal years 2001 and 2002. No audits were conducted
                         for fiscal years 1999 or 2000. (See pages 28 through 35 for the IFF and pages
                         36 through 43 for the CFF.)



Reauthorization Issues   During the course of our work, we identified several reauthorization issues.
                         Franchise fund managers cited the benefits of working under the franchise
                         fund label and perceived the ability to retain 4 percent of total annual
                         income as a benefit of a franchise fund. However, there is not a clear
                         understanding of the relationship between the “4 percent retention”
                         provision and the “operating reserve” provision. Clarification of the


                         6
                          The HHS franchise fund pilot operates under the statutory authority for the HHS service
                         and supply fund, which is not required to return excess to the Treasury. There is no explicit
                         authority specifying an operating reserve or the retention of up to 4 percent of annual
                         income, although HHS franchise fund officials believe that they are allowed this authority
                         according to Chief Financial Officers Council, Federal Franchise Pilots: Pilot Program
                         Implementation Guide (Washington, D.C.: April 1996).
                         7
                             The standards are set forth in SFFAS No. 4.




                         Page 5                                            GAO-03-1069 Franchise Fund Pilot Review
relationship between these two provisions could avoid different
interpretations. (See pages 44 and 45.)

If franchise funds were to be reauthorized, longer term reauthorizations
(i.e., more than 1 or 2 years) would be beneficial and might provide less
uncertainty for current and potential clients than do annual
reauthorizations. Franchise fund managers mentioned other changes that
might be helpful. Although the ability to receive payment in advance is
sometimes advantageous, the requirement for advance payment reduces
the IR funds’ flexibility to work with some clients. One franchise fund
manager said that additional human capital flexibilities, such as in hiring
practices, might be beneficial. (See page 45.)

If the pilots were not reauthorized, many of the services provided would
probably continue under other authorities. For example, both GovWorks
and OCS operated under different authorities prior to becoming part of
their respective franchise fund pilots. OCS officials told us that they would
probably continue to operate under the authority of the working capital
fund if the CFF pilot did not continue. GovWorks would seek authorization
as a working capital fund so that it would not have to operate under the
authority of the Economy Act. (See page 46.)


As agreed with your office, unless you announce the contents of this report
earlier, we plan no further distribution until 30 days from the date of this
letter. At that time, we will provide copies of this report to other interested
congressional committees and make copies available to others upon
request. In addition, the report will be available at no charge on the GAO
Web site at http://www.gao.gov.

If you or your staff have any questions regarding the information in this
report, please contact me at (202) 512-9142 or Christine Bonham, Assistant




Page 6                                     GAO-03-1069 Franchise Fund Pilot Review
Director, at (202) 512-9576. Key contributors to this review were Jennifer A.
Ashford, Michael S. LaForge, Bill Wright, Hannah R. Laufe, Mark P.
Connelly, and Elizabeth Lessman.




Susan J. Irving
Director, Federal Budget Analysis
Strategic Issues




Page 7                                    GAO-03-1069 Franchise Fund Pilot Review
Appendix I

Franchise Fund Pilot Review                                                           AA
                                                                                       ppp
                                                                                         ep
                                                                                          ned
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                                                                                            id
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                                                                                             Iis




             Franchise Fund Pilot Review

               Briefing for Chairman Davis and Ranking
                           Member Waxman
                  Committee on Government Reform
                     U.S. House of Representatives
                             July 11, 2003




                       Page 8                   GAO-03-1069 Franchise Fund Pilot Review
                   Appendix I
                   Franchise Fund Pilot Review




                      Introduction
•    The Government Management Reform Act (GMRA) of 1994
     authorized the Office of Management and Budget (OMB) to
     designate six franchise fund pilots:
    – One of many types of intragovernmental revolving (IR)
        funds
    – Self-supporting business-like entities providing common
        administrative services on a fully reimbursable basis
    – Compete for federal customers, both internal and external
    – OMB designated the following six pilot agencies:
       •   Interior (May 17, 1996)
       •   Treasury (May 17, 1996)
       •   Commerce (May 20,1996)
       •   Environmental Protection Agency (EPA) (May 30, 1996)
       •   Veterans Affairs (VA) (May 30, 1996)
       •   Health and Human Services (HHS) (January 24, 1997)




                   Page 9                        GAO-03-1069 Franchise Fund Pilot Review
                    Appendix I
                    Franchise Fund Pilot Review




                       Introduction
• Original expiration extended three times
• Current expiration at end of fiscal year 2003; Treasury
  franchise fund will expire at end of fiscal year 2004
• Little literature is available regarding franchise fund pilots’
  operations
• Expanding the franchise fund concept on a
  governmentwide basis has been discussed in recent years
• In consideration of reauthorization, need to understand the
  universe of similar types of IR funds and the operation of
  the pilots




                    Page 10                       GAO-03-1069 Franchise Fund Pilot Review
                  Appendix I
                  Franchise Fund Pilot Review




                   Key Questions

1.   What types of intragovernmental revolving funds exist,
     under what authorities do they operate, and how do these
     authorities differ?

2.   How have selected franchise funds operated?

3.   What issues might Congress consider as it contemplates
     permanent reauthorization of franchise funds?




                  Page 11                       GAO-03-1069 Franchise Fund Pilot Review
                        Appendix I
                        Franchise Fund Pilot Review




               Scope and Methodology
•   To identify IR funds and their legal authorities, we:
     – Used budget data from OMB’s MAX budget database
     – Reviewed U.S. Code and fund information in the President’s 2004 Budget
•   For background on franchise funds and their operations, we examined:
     – 1997 and 1999 OMB/Chief Financial Officers (CFO) Council reports on
       franchise funds
     – Legal and budget documents, GAO reports, agency documents
     – Documentation from franchise fund websites and magazine articles
•   For detailed information on operations, we selected Interior and
    Commerce franchise funds for case studies based on size and activity:
     – Interviewed agency officials at the department and franchise fund levels
     – Examined original franchise fund applications, Inspector General reports,
       and other documentation on the history and operation of the funds
     – Examined each against specific OMB/CFO Council operating principles
       and determined whether franchise funds had taken into account these
       principles




                        Page 12                             GAO-03-1069 Franchise Fund Pilot Review
                       Appendix I
                       Franchise Fund Pilot Review




         Scope and Methodology (cont.)
•   We also examined in-depth the managerial cost accounting processes
    at:
     – GovWorks, which makes up over 95 percent of all Interior
        franchise fund revenues as of October 1, 2002
     – Office of Computer Services (OCS), currently the only business
        line within the Commerce franchise fund
•   By studying their cost accounting processes, we were able to:
     – Gain an understanding of their financial operations
     – Review underlying methodologies for identifying, accumulating,
        and assigning costs to cost objects
     – Trace sources for cost-related information in internal management
        reports to supporting systems and documentation
     – Investigate anomalies or potential problems found in the design of
        the costing processes and discuss these issues with agency officials




                       Page 13                          GAO-03-1069 Franchise Fund Pilot Review
                    Appendix I
                    Franchise Fund Pilot Review




        Scope and Methodology (cont.)
• Reviewed work by other auditors and performed limited testing
  of data reliability, but did not conduct audit procedures designed
  to give an opinion on the franchise funds’ financial information
• Reauthorization issues were identified during our document
  reviews and interviews
• GovWorks and OCS have each reviewed the relevant slides;
  they provided technical comments which have been
  incorporated where appropriate
• Conducted our work between January and July 2003 in
  accordance with generally accepted government auditing
  standards




                    Page 14                       GAO-03-1069 Franchise Fund Pilot Review
                                           Appendix I
                                           Franchise Fund Pilot Review




    Background–Intragovernmental Revolving
                    Funds
•    The Economy Act of 1932 provides broad authority:
       – Allows a federal agency to enter into an agreement to provide goods or
         services to another federal agency, and generally is the authority governing
         intragovernmental transactions when no other, more specific, authority applies
       – Requires that payment from the client agency be based on the “actual cost of
         goods or service” provided
       – Restricts flexibility by requiring client agency to deobligate fiscal year funds at
         end of period of availability to the extent unobligated by the performing entity
•    In contrast, specific legal authorities creating IR funds at the agency level:1
       – Describe the fund’s purpose and authorized uses
       – Detail the receipts or collections the agency may credit to the fund
       – Provides more flexibility by allowing client agency funds to remain obligated,
         even after the end of the fiscal year, to pay the performing IR fund
       – Other authorities specific to the fund



1 There are other types of revolving funds that share common elements with IR funds, but they are not relevant to

our discussion. IR funds are revolving funds whose receipts come primarily from other government accounts.




                                           Page 15                                                         GAO-03-1069 Franchise Fund Pilot Review
                                        Appendix I
                                        Franchise Fund Pilot Review




               Background–Franchise Fund Pilots
•       Franchise funds are a type of IR fund
•       First conceptualized in the 1993 National Performance Review to
        establish fully self-supporting business-like entities within the federal
        government to compete in the market to provide federal common
        administrative support services
•       GAO reported and testified on the franchise concept in early 19942
        and questioned whether governmentwide legislation was necessary
        since the concept so closely resembled existing IR funds
•       GMRA 1994 authorized OMB to designate six franchise fund pilots
•       OMB chose pilots through an application process
•       Legal authorities for pilots:
      –        Five of the six pilots received authority in respective agency’s
               appropriations bill (all but HHS)
      –        HHS pilot operates under authority of the HHS service and supply fund
      –        EPA franchise pilot established as a “working capital fund” and law was
               amended so fund has no expiration date
2See U.S. General Accounting Office reports Improving Government: GAO’s Views on H.R. 3400 Management Initiatives,
GAO/T-AIMD/GGD-94-97 (Washington, D.C.: Feb. 23, 1994) and Working Capital Funds: Three Agency Perspectives,
GAO/AIMD-94-121 (Washington, D.C.: May 20, 1994).




                                        Page 16                                                     GAO-03-1069 Franchise Fund Pilot Review
                                               Appendix I
                                               Franchise Fund Pilot Review




        Background–Franchise Fund Pilots (cont.)
•            Pilots did not begin to operate until fiscal year 1997
•            OMB and the CFO Council defined 12 operating principles for
             business-like operations in a 1996 guide for franchise fund pilots:3
            1. Services                                                            7. Adjustments to Business Dynamics
            2. Organization                                                        8. Surge Capacity
            3. Competition                                                         9. Cessation of Activity
            4. Self-sustaining/Full Cost Recovery                                  10. Voluntary Exit
            5. Performance Measures                                                11. FTE Accountability*
            6. Benchmarks                                                          12. Initial Capitalization*
            * We did not examine these principles in our case study of the Interior and Commerce Franchise Funds


•            In addition to emphasizing these 12 principles, OMB has stressed
             the importance of accounting for full cost and suggested that
             agencies consider the usefulness of audited financial statements at
             the fund level
•            Statement of Federal Financial Accounting Standards (SFFAS) No.
             4 sets forth basic cost accounting concepts and five main standards
             for managerial cost accounting by the federal government
3 See   appendix 2 for description of principles.




                                               Page 17                                                     GAO-03-1069 Franchise Fund Pilot Review
                       Appendix I
                       Franchise Fund Pilot Review




    Background–Franchise Fund Pilots (cont.)
•   Franchise fund pilots provide common administrative services such as:
     – Acquisition management                   – Administrative management
     – Information technology services – Financial management services
     – Records management                       – Employee assistance programs
     – Facilities management                    – Clinical occupational health

•   Franchise fund pilots are often discussed in the literature with other
    recognized business-like entities such as:
     – Agriculture’s National Finance Center (NFC)
     – Central Intelligence Agency’s (CIA) central services working capital
        fund (WCF)
     – General Services Administration’s (GSA) Federal Systems Integration
        and Management Center (FEDSIM)
     – Cooperative administrative support units (CASUs)




                       Page 18                                GAO-03-1069 Franchise Fund Pilot Review
                       Appendix I
                       Franchise Fund Pilot Review




                         Results in Brief
•     Identified 58 IR funds with varying labels and purposes:
    –     Determined that 34 IR funds (including 6 franchise fund pilots) are
          authorized to provide common services required by many federal
          agencies; 24 IR funds have more specific purposes
    –     In addition to the 58 IR funds, we identified cooperative
          administrative support units, another type of government entity that
          provides common services
•     34 intragovernmental revolving funds that provide common services
      operate under similar legal authorities:
    –     For example, most authorize advances and reimbursements, as well
          as the carryover of unobligated balances to recover the costs of
          accrued leave and depreciation
    –     Some, but not all, have authority explicitly allowing 1) an operating
          reserve and/or 2) retention of up to 4 percent of total annual income
          for capital equipment/financial management improvements




                       Page 19                            GAO-03-1069 Franchise Fund Pilot Review
                         Appendix I
                         Franchise Fund Pilot Review




                     Results in Brief (cont.)
•   Interior and Commerce franchise fund pilots have:
     – Taken into account many of the business operating principles
     – Designed their cost accounting processes to set fees to recover the full cost
       of operations
     – Made progress toward implementing the five main cost accounting
       standards set forth in SFFAS No. 4
     – Had financial statement audits performed at different levels
•   Interior franchise fund’s (IFF) major business line, GovWorks:
     – Provides acquisition services
     – Has seen dramatic growth in revenue and workload since fiscal year 1997
       and projected through fiscal year 2007
•   Commerce franchise fund’s (CFF) business line, OCS:
     – Provides information technology (IT) infrastructure support services
     – Has had a declining revenue and customer base, but OCS expects
       revenues to remain stable through fiscal year 2005




                         Page 20                              GAO-03-1069 Franchise Fund Pilot Review
                     Appendix I
                     Franchise Fund Pilot Review




                  Results in Brief (cont.)
• We identified several reauthorization issues:
    – Franchise fund managers cited benefits of working under the
      franchise fund label
    – Ability to retain 4 percent of total annual income is generally
      perceived as a benefit of a franchise fund
    – If reauthorized, longer-term authorization for selected franchise
      fund pilots would be beneficial
    – If not reauthorized, many services being provided under franchise
      funds probably would continue under other authorities
    – Franchise funds are not unique from other IR funds in their legal
      authority or operation
    – Expanding franchise funds governmentwide is not necessary since
      funds are individually authorized and may receive expanded
      authorities from Congress




                     Page 21                         GAO-03-1069 Franchise Fund Pilot Review
                                                Appendix I
                                                Franchise Fund Pilot Review




      58 intragovernmental revolving funds have varying
                     labels and purposes
 •      IR funds exist under a variety of labels, with “working capital fund”
        being the most common:

           – 28 working capital funds                                      – 3 supply funds
           – 6 revolving funds                                             – 3 building funds
           – 5 franchise funds4                                            – 13 “other” funds

 •      Most large agencies have at least one IR fund, and many have more
        than one, for example:
         – Department of Interior has a franchise fund pilot and 4 working
            capital funds
         – Department of Commerce has a franchise fund pilot and 3 working
            capital funds
4 As discussed, the EPA franchise fund is labeled a “working capital fund” and the HHS pilot operates under its “service and supply fund.” On

the other hand, the Federal Aviation Administration (FAA) has a fund that it labels a “franchise fund.” It is not part of the franchise fund pilot
program although it operates under similar authority.




                                                Page 22                                                           GAO-03-1069 Franchise Fund Pilot Review
                          Appendix I
                          Franchise Fund Pilot Review




    58 intragovernmental revolving funds have varying
                labels and purposes (cont.)

•    IR funds were created for a variety of purposes, most frequently to
     provide common services:
      – 34 IR funds, including 6 franchise fund pilots, are authorized to provide
        common services required by many federal agencies
      – 24 provide goods or services that are not commonly required
•    In addition to the IR funds, there are entities called cooperative
     administrative support units (CASUs):
      – CASUs are entrepreneurial organizations that provide the full range of
        support services to federal agencies on a cost reimbursable basis
      – Have provided services since 1986 in those regions of the country with
        intense federal government activity
      – CASUs generally derive their authority to enter into agreements with other
        federal entities from the Economy Act
      – Several CASUs have moved to operate under the authority of a franchise
        fund to make use of provisions more expansive than those of the Economy
        Act




                          Page 23                             GAO-03-1069 Franchise Fund Pilot Review
                    Appendix I
                    Franchise Fund Pilot Review




 Funds that perform common services operate under
               similar legal authorities
• The legal authorities for the 34 IR funds that provide common
  services generally specify:
   – The means of initial capitalization
   – That funds may be received from clients external to the
      agency, i.e., “other government/federal agencies” or “other
      sources”
   – That both payment in advance and payment by
      reimbursement are allowed; some funds require advance
      payment and do not permit reimbursement
   – That rates should be set to recover all operational expenses;
      authority most frequently stipulates the inclusion of annual
      leave and depreciation as part of expenses to be recovered




                    Page 24                       GAO-03-1069 Franchise Fund Pilot Review
                      Appendix I
                      Franchise Fund Pilot Review




 Funds that perform common services operate under
           similar legal authorities (cont.)
• Receipts earned in a fiscal year, i.e., offsetting collections, are a
  result of the rates charged for services provided
• Most revolving funds are intended to operate on a break-even
  basis over the long term
• Statutes frequently include the requirement for the periodic
  payment of any surplus amounts to the general fund of the
  Treasury at the end of the fiscal year
• However, not all unspent receipts are considered surplus, some
  are carried over as unobligated balances, including amounts
  reserved to recover the costs of accrued leave and depreciation




                      Page 25                        GAO-03-1069 Franchise Fund Pilot Review
                                        Appendix I
                                        Franchise Fund Pilot Review




    Funds that perform common services operate under
              similar legal authorities (cont.)
• 22 of 34 IR funds that provide common services have some
  additional discretion in determining unobligated balances that
  may be retained (see appendix 3):
   – 16 allow the head of the agency to determine what level of
     funding meets the needs of the fund
   – 6 do not specifically stipulate the return of surpluses to
     Treasury
   – While some funds have the discretion described above, GAO
     has stated that operating with deficits or surpluses
     continuously for periods of several years is not consistent
     with the funds’ statutory objective of operating on a break-
     even basis over the long term5

5See U.S. General Accounting Office, OPM's Revolving Fund Policy Should Be Clarified and Management Controls Strengthened,
GAO/GGD-84-23 (Washington, D.C.: Oct. 13, 1983).




                                        Page 26                                                     GAO-03-1069 Franchise Fund Pilot Review
                     Appendix I
                     Franchise Fund Pilot Review




 Funds that perform common services operate under
           similar legal authorities (cont.)
• Several funds were given explicit authority to accumulate
  reserves (see appendix 3):
   – 8 IR funds, including 5 of the franchise fund pilots, have the
      authority to charge for “a reasonable operating reserve”
   – 8 IR funds, including 5 of the franchise funds pilots, have
      authority to retain “up to 4 percent of total annual income for
      acquisition of capital equipment and financial management
      improvements”
   – Labor, Justice, and the National Archives and Records
      Administration have other explicit language allowing
      reserves for specified purposes




                     Page 27                       GAO-03-1069 Franchise Fund Pilot Review
                      Appendix I
                      Franchise Fund Pilot Review




                    Interior Franchise Fund
Organizational history:
• Began operating in October 1996
• Two primary components, Minerals Management Service (MMS) and
   National Business Center (NBC)
• MMS contained GovWorks, two CASUs, and U.S. Films & Video; all
   existed prior to the creation of the franchise fund
• NBC included a few of its services under the franchise fund, most
   stayed under the working capital fund
• In 2001, CASUs left IFF to go to the Treasury franchise fund
• In October 2002, those NBC services under the franchise fund were
   moved to the working capital fund
• GovWorks accounted for over 95 percent of all IFF revenues as of
   October 1, 2002, and is currently the primary business line under the
   franchise fund
• Through fiscal year 2002, IFF subject to an audit of its financial
   statements at the fund level




                      Page 28                         GAO-03-1069 Franchise Fund Pilot Review
                      Appendix I
                      Franchise Fund Pilot Review




Interior Franchise Fund: Implementation of Business
                     Principles
Principle 1: Services–provide only common administrative support
     services
•    GovWorks:
    –   Provides acquisition services
    –   OMB defines procurement as inherently governmental in nature
    –   Some clients do not have a procurement office; others choose to
        use GovWorks rather than their own procurement office
    –   Supports project from contract initiation to contract close-out and
        helps client choose appropriate vendor to perform work
Principle 2: Organization–clearly defined organizational structure
•    GovWorks:
    –   Separate organizational coding structure in general ledger
        accounting system for transactions




                      Page 29                          GAO-03-1069 Franchise Fund Pilot Review
                      Appendix I
                      Franchise Fund Pilot Review




Interior Franchise Fund: Implementation of Business
                  Principles (cont.)

Principle 3: Competition–not sheltered or a monopoly
• GovWorks:
    – Accounts for and pays MMS for support services
    – Pays the Department of the Interior for an allocation of
      departmental overhead
    – In fiscal year 2002, received 95 percent of revenue from customers
      external to Interior and 5 percent of revenue from customers within
      Interior
    – Has competitors who also offer procurement services




                      Page 30                         GAO-03-1069 Franchise Fund Pilot Review
                       Appendix I
                       Franchise Fund Pilot Review




Interior Franchise Fund: Implementation of Business
                  Principles (cont.)
Principle 4: Self-sustaining/Full Cost Recovery–fees established to
   recover full cost
• GovWorks:
    – Management reports and financial statements indicate the
      collection of revenues in excess of what would normally be
      considered full costs, as permitted by law
    – Design of the managerial costing processes identifies full (direct
      and indirect) costs of operations
    – Service fees are set at a fixed percentage of contract amounts in
      order to recover the full cost of operations, including support
      services provided by MMS and overhead allocated by the
      Department of the Interior; however,
    – Has not regularly calculated the unit costs of outputs, i.e., actual
      unit cost per contract dollar awarded, which could be useful as a
      measure of performance




                       Page 31                           GAO-03-1069 Franchise Fund Pilot Review
                       Appendix I
                       Franchise Fund Pilot Review




Interior Franchise Fund: Implementation of Business
                  Principles (cont.)

Principle 5: Performance Measures–should have comprehensive
   performance measures to assess services
• GovWorks:
    – Prepares trend analysis on revenues and expenses in addition to
       total number and dollar amount of awards and funding documents
    – Hired KPMG Consulting to conduct customer survey; June 2000
       report assessed clients’ opinions on satisfaction with services,
       marketing strategies, interest in potential future service offerings
Principle 6: Benchmarks–cost and performance measures against
   competitors
• GovWorks:
    – Has cost and performance data that could be compared to
      competitors, but GovWorks staff said that information is not
      available from entities with similar functions




                       Page 32                          GAO-03-1069 Franchise Fund Pilot Review
                       Appendix I
                       Franchise Fund Pilot Review




Interior Franchise Fund: Implementation of Business
                  Principles (cont.)
Principle 7: Adjustments to Business Dynamics–ability to adjust
        capacity and resources up and down
•       GovWorks:
    –      Experienced dramatic growth in revenue and workload since
           fiscal year 1997 and projected through fiscal year 2007
    –      Actively marketing in print and electronic media using the
           “GovWorks” brand name in its franchise awareness program
    –      Has hired new staff to meet increasing workloads and has
           developed training
    –      Reviewing core business processes and documenting procedures
           to facilitate consistent delivery of services




                       Page 33                       GAO-03-1069 Franchise Fund Pilot Review
                          Appendix I
                          Franchise Fund Pilot Review




Interior Franchise Fund: Implementation of Business
                  Principles (cont.)
Principle 8: Surge Capacity–resources to provide for peak business periods,
        capital investments, and new starts
•       GovWorks:
    –       Legal requirement for advance payments allows cash flow for hiring of
            additional employees as needed
    –       Flexibility limited by constraints on using private contractors to
            perform inherently governmental acquisition management
    –       Combined reserve balance as of June 2003 is about $6.3 million
    –       Desired “operating reserve” would total $16 million, and would include
            funds intended to:
           •    Pay for ordinary/necessary operating costs that may be incurred
           •    Offset any future short-term operating losses
           •    Replace existing capital equipment/software
           •    Pay employees’ annual leave earned since business line inception
           •    Cover costs of shutting-down business line (if ever necessary)
    –       Desired “reserve for improvements” would total $3 million, and would
            include funds intended for improvements in the financial, procurement,
            and business management systems




                          Page 34                            GAO-03-1069 Franchise Fund Pilot Review
                          Appendix I
                          Franchise Fund Pilot Review




Interior Franchise Fund: Implementation of Business
                  Principles (cont.)
Principle 9: Cessation of Activity–reasonable notice to customer before
    eliminating service
•   GovWorks:
    – No elimination of service has occurred; clients reportedly not affected by
       movement of NBC services to working capital fund
    – Franchise fund management has the freedom to not enter into additional
       contracts with clients
    – Operating reserve includes funds intended to cover 1 year of costs to
       perform shut-down if service is eliminated
    – Believes that if the franchise fund was not reauthorized, it could continue
       successful operations if it were authorized as a working capital fund;
       would not want to operate under the authority of the Economy Act
Principle 10: Voluntary Exit–customers should be able to exit
•   GovWorks:
     – Procurement contracts are discrete, customers can leave at contract’s end
     – Has many return clients but does not document whether all customers
       return




                          Page 35                            GAO-03-1069 Franchise Fund Pilot Review
                       Appendix I
                       Franchise Fund Pilot Review




                   Commerce Franchise Fund

Organizational History
•   Began operating in October 1996
•   Two primary business components, OCS and National Oceanic and
    Atmospheric Administration’s (NOAA) Administrative Service
    Centers (ASC)
•   Both existed prior to creation of the franchise fund
•   NOAA’s ASCs left franchise fund in 1998
•   Department requested adding another business line in 2001, but OMB
    did not authorize it
•   Currently, OCS is the only business line in the franchise fund
•   OCS was subject to financial audits at the fund level for fiscal years
    1997 and 1998, and at the department level for fiscal years 2001 and
    2002 (no audits for fiscal years 1999 or 2000)




                       Page 36                          GAO-03-1069 Franchise Fund Pilot Review
                      Appendix I
                      Franchise Fund Pilot Review




    Commerce Franchise Fund: Implementation of
               Business Principles
Principle 1: Services–provide only common administrative support
   services
• OCS:
    – Provides information technology infrastructure support services
    – Uses subcontractors to provide some services such as disaster data
      recovery, computer maintenance, and technical support
Principle 2: Organization–clearly defined organizational structure
• OCS:
    – Separate organizational coding structure in general ledger
      accounting system for transactions
    – Is the only business line in the franchise fund and its internal
      management reports clearly lay out its revenues and types of costs




                      Page 37                         GAO-03-1069 Franchise Fund Pilot Review
                     Appendix I
                     Franchise Fund Pilot Review




    Commerce Franchise Fund: Implementation of
           Business Principles (cont.)
Principle 3: Competition–not sheltered or a monopoly
• OCS:
    – Accounts for and pays for its own support costs
    – Pays the Department of Commerce for an allocation of
      departmental overhead
    – In fiscal year 2002, received 57 percent of revenue from customers
      external to Commerce and 43 percent of revenue from customers
      within Commerce
    – Has competitors who also offer information technology support
      services




                     Page 38                         GAO-03-1069 Franchise Fund Pilot Review
                       Appendix I
                       Franchise Fund Pilot Review




    Commerce Franchise Fund: Implementation of
           Business Principles (cont.)
Principle 4: Self-sustaining/Full Cost Recovery–fees established to
   recover full cost
• OCS:
    – Management reports and financial statements indicate the
      collection of total revenues in excess of what would normally be
      considered full costs, as permitted by law
    – Design of the managerial costing processes identifies full costs
      (direct and indirect costs) of operations
    – Activity-based pricing model is used to estimate future costs to be
      recovered and fees for each output are set at a level that is expected
      to recover full costs; however,
    – Has not calculated the actual unit costs of outputs to determine if
      fees are sufficient to recover full costs for each type of output,
      which could be useful as a measure of performance




                       Page 39                          GAO-03-1069 Franchise Fund Pilot Review
                      Appendix I
                      Franchise Fund Pilot Review




     Commerce Franchise Fund: Implementation of
            Business Principles (cont.)

Principle 5: Performance Measures–should have comprehensive
   performance measures to assess services
• OCS:
    – Prepares trend analysis on number and types of customers and
       related revenues
    – Positive feedback from customers but has not used a formal
       mechanism to evaluate its performance
Principle 6: Benchmarks–cost and performance measures against
   competitors
• OCS:
    – Has developed cost-based fees for units of output delivered to
      customers that could be compared against those of competitors, but
      OCS staff stated that competitors’ fees for similar units of output
      are difficult to obtain




                      Page 40                         GAO-03-1069 Franchise Fund Pilot Review
                     Appendix I
                     Franchise Fund Pilot Review




    Commerce Franchise Fund: Implementation of
           Business Principles (cont.)

Principle 7: Adjustments to Business Dynamics–ability to adjust
   capacity and resources up and down
• OCS:
    – Has had recent declines in number of customers and revenues, but
      OCS expects revenues to remain stable through fiscal year 2005
    – In fiscal year 2002, INS accounted for 77 percent of external
      revenue and 44 percent of total revenue
    – Not focused on actively marketing; management relies on satisfied
      customers and referrals to find new customers that can be served
      with existing systems
    – Has subcontractors available to meet short-term requirements and
      to avoid carrying excess capacity
    – Computer processors sometimes operate near capacity but
      processors could be added to serve additional customers




                     Page 41                         GAO-03-1069 Franchise Fund Pilot Review
                      Appendix I
                      Franchise Fund Pilot Review




    Commerce Franchise Fund: Implementation of
           Business Principles (cont.)

Principle 8: Surge Capacity–resources to provide for peak business
   periods, capital investments, and new starts
• OCS:
    – Received authority to retain up to 4 percent of total annual income
      for capital/improvements starting in fiscal year 1999
    – Reserve balance at end of fiscal year 2002 is approximately
      $500,000, or about 1 percent of total revenues earned since
      receiving retained earnings authority
    – Currently developing a capital plan




                      Page 42                         GAO-03-1069 Franchise Fund Pilot Review
                         Appendix I
                         Franchise Fund Pilot Review




    Commerce Franchise Fund: Implementation of
           Business Principles (cont.)
Principle 9: Cessation of Activity–reasonable notice to customer before
   eliminating service
• OCS:
    – Has never eliminated a service unless requested by the client
    – Service agreements allow either party to terminate the agreement,
       usually with 120 days advance notification
    – Would probably return to the Department of Commerce working
       capital fund if it were not reauthorized as a franchise fund (as such,
       would not have the explicit authority to retain 4 percent of total
       annual income for capital/improvements)
Principle 10: Voluntary Exit–customers should be able to exit
• OCS:
    – Has had several clients leave when client IT applications were no
      longer supportable; the clients chose new applications and new IT
      support providers




                         Page 43                         GAO-03-1069 Franchise Fund Pilot Review
                         Appendix I
                         Franchise Fund Pilot Review




                       Reauthorization Issues
•   Managers cited benefits of working under the franchise fund label:
     – Believe it energized operations and provided opportunities for growth
     – CASUs have joined franchise funds to make use of provisions more
       expansive than those of the Economy Act
•   Ability to retain 4 percent of total annual income generally perceived
    as a benefit of a franchise fund, although our discussions with
    franchise fund managers and others have raised several considerations:
     – There is not a clear understanding of the provision allowing the 4 percent
       retention of total annual income, although many interpret it as a reserve
       for capital/improvements and therefore maintain a separate operating
       reserve
     – The need for capital reserves depends on the amount of capital assets used
       in providing services
     – There is evidence that franchise fund pilots have not been able to retain 4
       percent of total annual income and indications that charging rates that
       would allow a 4 percent reserve might make their prices uncompetitive




                         Page 44                             GAO-03-1069 Franchise Fund Pilot Review
                         Appendix I
                         Franchise Fund Pilot Review




                  Reauthorization Issues (cont.)
•   If reauthorized, longer-term authorization for selected franchise fund
    pilots would be beneficial:
     – Annual reauthorizations create unease for current and potential clients
       concerned with stability
     – Adding new business lines unlikely until future operations are more
       certain
•   If reauthorized, additional changes might be helpful for agencies:
     – Clarification of relationship between reserve of “4 percent of total annual
       income” for capital/improvements and operating reserve could avoid
       differing interpretations
     – Ability to receive advances helpful, but requirement for advance payment
       reduces flexibility to work with some clients
     – Additional human capital flexibilities, such as in hiring practices, might be
       helpful, according to one franchise fund manager




                         Page 45                              GAO-03-1069 Franchise Fund Pilot Review
                        Appendix I
                        Franchise Fund Pilot Review




                 Reauthorization Issues (cont.)

•   If not reauthorized, many services being provided under franchise
    funds probably would continue under other authorities:
     – All the business lines we examined were in existence before becoming
       part of the franchise fund
     – Several business lines have left the franchise funds and continue to
       provide services
     – OCS would probably return to the existing working capital fund
     – GovWorks would want authorization to be a working capital fund
•   Proposed revisions to OMB’s Circular A-76 regulations would have
    affected IR funds, but final version does not:
     – A-76 provides rules for competition of commercial activities, including
       many of the common services provided by IR funds
     – November 2002 proposed revisions would have required customer
       agencies to compete their “contracts”(i.e., inter-service support
       agreements) over $1 million
     – Final version issued May 29, 2003, omitted this provision




                        Page 46                             GAO-03-1069 Franchise Fund Pilot Review
                   Appendix I
                   Franchise Fund Pilot Review




                Concluding Observations

•   Longer-term authorization for selected pilot funds would be
    helpful to the operation of the funds and their clients
•   Nonetheless, neither the legal authority nor the operation of
    franchise funds makes them unique from other IR funds
•   The “attraction” to the franchise fund label seems to be the
    explicit ability to retain 4 percent of total annual income-
    need legal authority but not franchise label to do that
•   For any IR fund, agencies may request additional legal
    authorities, and Congress may expand those authorities if it
    wishes to do so (and has done so in the past)
•   A governmentwide authorization is not necessary




                   Page 47                       GAO-03-1069 Franchise Fund Pilot Review
                    Appendix I
                    Franchise Fund Pilot Review




           Concluding Observations (cont.)

•   In considering the provision of franchise-type authorities to
    individual IR funds, criteria include:
      1.   Operations should adhere to OMB’s 12 business principles
      2.   Managerial cost accounting process should be in place that
           can account for the full unit costs of outputs produced
      3.   Annual or periodic independent audit should be considered
           at the fund level to ensure the reliability of the fund’s
           financial information
      4.   Additional elements to consider:
           – Top level commitment at agency
           – Strong leadership at the fund level
           – Well-developed business-like operating philosophy
           – Commitment of staff to customer service




                    Page 48                         GAO-03-1069 Franchise Fund Pilot Review
Appendix II

12 Business Operating Principles                                                                                                             Appendx
                                                                                                                                                   Ii




Operating Principle               OMB Description
1) Services                       The enterprise should only provide common administrative support services.
2) Organization                   The organization would have a clearly defined organizational structure including readily
                                  identifiable delineation of responsibilities and functions and separately identifiable units for the
                                  purpose of accumulating and reporting revenues and costs. The funds of the organization must
                                  be separate and identifiable and not commingled with another organization.
3) Competition                    The provision of services should be on a fully competitive basis. The organization’s operation
                                  should not be “sheltered” or be a monopoly.
4) Self-sustaining/               The operation should be self-sustaining. Fees will be established to recover the “full costs,” as
Full Cost Recovery                defined by standards issued in accordance with FASAB (the Federal Accounting Standards
                                  Advisory Board).
5) Performance Measures           The organization must have a comprehensive set of performance measures to assess each
                                  service that is being offered.
6) Benchmarks                     Cost and performance benchmarks against other “competitors” are maintained and evaluated.
7) Adjustments to Business        The ability to adjust capacity and resources up or down as business rises or falls, or as other
Dynamics                          conditions dictate, if necessary.
8) Surge Capacity                 Resources to provide for “surge” capacity and peak business periods, capital investments, and
                                  new starts should be available.
9) Cessation of Activity          The organization should specify that prior to curtailing or eliminating a service, the provider will
                                  give notice within a reasonable and mutually agreed time frame so the customer may obtain
                                  services elsewhere. Notice will also be given within a reasonable and mutually agreeable
                                  timeframe to the provider when the customer elects to obtain services elsewhere.
10) Voluntary Exit                Customers should be able to “exit” and go elsewhere for services after appropriate notification
                                  to the service provider and be permitted to choose other providers to obtain needed service.
11) FTE Accountabilitya           Full Time Equivalents (FTEs) would be accounted for in a manner consistent with the Federal
                                  Workforce Restructuring Act and OMB requirements, such as Circular A-11.
12) Initial Capitalizationa       Capitalization of franchises, administrative service, or other cross-servicing operations should
                                  include the appropriate FTE commensurate with the level of effort the operation has committed
                                  to perform.
Source: OMB and the CFO Council
                                        a
                                         We did not examine these principles in our case study of the Interior and Commerce franchise fund
                                        pilots.




                                        Page 49                                               GAO-03-1069 Franchise Fund Pilot Review
Appendix III

Authority to Retain Unobligated Balances—
Franchise Pilots and Comparable IR Funds                                                                                         Appendx
                                                                                                                                       iI




                                                               Secretarial       Explicit                              Other
                                                             discretion to   authority to    Explicit authority       explicit
                                                                    retain         retain   to retain up to 4%    authority to
     Department/                                              unobligated      operating        of total annual        retain
     agency              Fund name/bureau                       balancesa        reserve                income      balances
1    Commerce            Franchise fund, Departmental                                  X                     X
                         Management
2    Interior            Franchise fund, Minerals                                      X                     X
                         Management Service
3    Treasury            Franchise fund, Departmental                                  X                     X
                         Offices
4    VA                  Franchise fund, Departmental                                  X                     X
                         Administration
5    EPA                 Working capital fund (WCF)                                    X                     X
6    Transportation      Administrative services franchise                             X                     X
                         fund, FAA
7    Commerce            WCF, Census                                                   X
8    Homeland Security   WCF, Departmental Management                                  X
9    Justice             WCF, General Administration                                                         X              X
10   CIA                 Central services WCF                                                                X
11   Labor               WCF, Departmental Management                                                                       X
12   National Archives   Records center revolving fund                                                                      X
     and Records
     Administration
13   Agriculture         WCF, Executive Operations                      X
14   Commerce            WCF, Departmental Management                   X
15   Commerce            WCF, National Institute of                     X
                         Standards and Technology
16   Defense—Military    Buildings maintenance fund                     X
17   Energy              WCF, Departmental Administration               X
18   HHSb                HHS service and supply fund,                   X
                         Program Support Center
19   Housing and Urban   WCF, Management and                            X
     Development         Administration
20   State               WCF, Administration of Foreign                 X
                         Affairs
21   Interior            WCF, Bureau of Reclamation                     X
22   Interior            WCF, Departmental Management                   X
23   Interior            WCF, United States Geological                  X
                         Survey
24   Treasury            WCF, Departmental Offices                      X




                                         Page 50                                      GAO-03-1069 Franchise Fund Pilot Review
                                                 Appendix III
                                                 Authority to Retain Unobligated Balances—
                                                 Franchise Pilots and Comparable IR Funds




(Continued From Previous Page)
                                                                             Secretarial           Explicit                                      Other
                                                                           discretion to       authority to       Explicit authority            explicit
                                                                                  retain             retain      to retain up to 4%         authority to
          Department/                                                       unobligated          operating           of total annual             retain
          agency                Fund name/bureau                              balancesa            reserve                   income           balances
25        Transportation        Transportation Administrative                            X
                                Service Center, Office of the
                                Secretary
26        VA                    Supply fund, Departmental                                X
                                Administration
27        Equal Employment      Education, technical assistance                          X
          Opportunity           and training revolving fund
          Commission
28        GSA                   WCF, General Activities                                  X
29        GSA                   Federal buildings fund, Real                             X
                                Property Activities
30        GSA                   General supply fund, Supply and                          X
                                Technology Activities
31        GSA                   Information technology fund                              X
                                (FEDSIM), Supply and Technology
                                Activities
32        International         WCF, Agency for International                            X
          Assistance            Development
          Programs
33        Legislative Branch    Fedlink program and Federal                              X
                                research program, Library of
                                Congress
34        Office of Personnel   Revolving fund                                           X
          Management
Total                                                                                   22                  8                         8                  3
Source: GAO analysis

                                                 Note: Shading highlights franchise fund pilots.
                                                 a
                                                  Most of these funds are required to deposit in miscelleneous receipts of the Treasury amounts in
                                                 excess of the needs fo the fund; however, in some cases this requirement is not specifically stipulated.
                                                 b
                                                  The HHS franchise fund pilot operates under the statutory authority for the HHS Service and Supply
                                                 Fund, which is not required to return excess to the Treasury. There is no explicit authority specifying an
                                                 operating reserve or the retention of up to 4 percent of total annual income, although HHS franchise
                                                 fund officials believe that they are allowed this authority according to Chief Financial Officers Council,
                                                 Federal Franchise Pilots: Pilot Program Implementation Guide (Washington, D.C.: April 1996).




(450182)                                         Page 51                                                  GAO-03-1069 Franchise Fund Pilot Review
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