oversight

Foreign Assistance: USAID's Operating Expense Account Does Not Fully Reflect the Cost of Delivering Foreign Assistance

Published by the Government Accountability Office on 2003-09-30.

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

A

United States General Accounting Office
Washington, D.C. 20548



                                    September 30, 2003

                                    The Honorable Christopher Shays, Chairman
                                    The Honorable Dennis J. Kucinich, Ranking Minority Member
                                    Subcommittee on National Security, Emerging Threats, and
                                      International Relations
                                    Committee on Government Reform
                                    House of Representatives

                                    Subject: Foreign Assistance: USAID’s Operating Expense Account Does
                                    Not Fully Reflect the Cost of Delivering Foreign Assistance

                                    Humanitarian and economic development assistance has long been an
                                    important component of U.S. global security strategy. Since 1962, the U.S.
                                    Agency for International Development (USAID) has managed more than
                                    $273 billion in such assistance. In fiscal year 2003, USAID estimates that it
                                    will obligate about $13 billion for assistance programs in almost 160
                                    countries. In recent years, demands on USAID’s budget and workforce
                                    have increased as the agency strives to meet emerging requirements, such
                                    as reconstruction efforts in Afghanistan and Iraq and increased funding for
                                    health programs. However, USAID officials have expressed concern that
                                    funds provided for its administrative or operating expenses have not kept
                                    pace with the agency’s requirements.

                                    Since 1976, Congress has included a separate appropriation to consolidate
                                    USAID’s operating expenses into a single budget item. Congress intended
                                    that USAID pay for the administrative costs of delivering foreign assistance
                                    (its “cost of doing business”) from an operating expense account separate
                                    from its humanitarian and development assistance program funds. 1 These
                                    operating expenses are costs incurred primarily for the benefit of the
                                    United States rather than the foreign assistance recipient. In accordance
                                    with congressional guidance,2 USAID reports all expenses related to U.S.
                                    direct-hire staff as operating expenses3 and, based on its guidance on what
                                    constitutes the cost of doing business, other operating expenses—from
                                    rent to office utilities and supplies. In fiscal year 2003, USAID estimates


                                    1
                                     S. Rept. 94-704.
                                    2
                                     H. Rept. 95-701 and S. Rept. 95-1194.
                                    3
                                     USAID’s Automated Directives System, Functional Series 600, chapter 601 (Funding Source
                                    Policy).




                                    Page 1                                         GAO-03-1152R USAID Operating Expenses
                    that it will obligate $668 million for its operating expenses. At your request,
                    we examined (1) trends in USAID’s operating expenses since 1995 and (2)
                    whether charges to USAID’s operating expense account reflect the agency’s
                    actual cost of doing business.

                    To accomplish our objectives, we interviewed cognizant officials in
                    USAID’s regional bureaus and its bureaus for management and policy and
                    program coordination. In connection with other work, we also conducted
                    fieldwork at seven overseas missions. We reviewed budget and workforce
                    data generated by USAID missions and headquarters offices from fiscal
                    years 1995 to 2003. We present our analysis in obligations because this
                    information was readily available in USAID’s annual congressional budget
                    justifications. We converted the obligations data into constant year 2003
                    dollars to adjust for inflation and better reflect the agency’s purchasing
                    power over the period.



Results in Brief	   According to data USAID reported, over fiscal years 1995 to 2003, USAID’s
                    total obligated operating expenses have ranged from a low of $595.7 million
                    in 1998 to a high of $654.8 million in 1995, and USAID estimates total
                    obligations in 2003 will be about $668 million (in constant 2003 dollars).

                    •	 The largest administrative category in USAID’s operating expense
                       account is salaries and related support for U.S. direct-hire staff.
                       Obligations for these expenses account for 43 percent ($277.7 million)
                       of USAID’s estimated operating expenses for fiscal year 2003. However,
                       funds obligated for direct-hire personnel declined during fiscal years
                       1995 through 2001—from $302.5 million to $249.2 million—primarily
                       due to declining levels of direct-hire staff during this period. But, in
                       fiscal years 2002 and 2003, U.S. direct-hire personnel costs have
                       increased over 11 percent. USAID expects these costs to continue rising
                       as it continues its recent hiring efforts.

                    •	 Three other administrative categories—other staff costs, information
                       technology, and rent—account for about 33 percent ($216.5 million) of
                       USAID’s estimated operating expenses for fiscal year 2003. Although
                       these expenses varied from year to year, the net change in total from
                       fiscal year 1995 was a decline of less than 1 percent.

                    •	 Between fiscal years 1995 and 2002, operating expense obligations as a
                       percentage of program obligations remained fairly level—averaging
                       about 8.5 percent. However, in fiscal year 2003, the operating expenses



                    Page 2                                    GAO-03-1152R USAID Operating Expenses
   to program funds ratio dropped to 5 percent due to large amounts of
   supplemental funding.4

USAID’s operating expense account does not fully reflect the agency’s cost
of doing business primarily because the agency pays for some
administrative activities done by contractors and other nondirect-hire staff
with program funds. As we noted in our recent report,5 USAID’s overseas
missions have increasingly relied on personal services contractors—
foreign national personal services contractors make up about 60 percent of
its workforce—to manage USAID’s development activities due to declining
numbers of U.S. direct-hire staff. Nondirect-hire staff may be paid with
either program or operating expense funds. Many of these staff perform
administrative duties that directly benefit the United States, and it is often
difficult to distinguish between the administrative duties they perform and
those done by U.S. direct-hire personnel. In four missions we visited, some
foreign national personal services contractors were financial and
procurement analysts, secretaries, and drivers. Although these analysts
and support staff performed primarily administrative tasks for USAID’s
benefit, some were assigned to specific technical teams, and their salaries
and support costs were paid from program funds because USAID
considered their services directly allocable to these activities and did not
report them as operating expenses. According to USAID officials, based on
data recently collected from its missions, USAID estimates that about $350
million in program funds will be used to pay for nondirect-hire staff
performing both administrative and technical support functions in fiscal
year 2003. As a result, the operating expense account and other funds
authorized for operating expenses do not fully reflect the cost of delivering
foreign assistance.

To help provide increased visibility over USAID’s operating expenses and a
more realistic accounting of the agency’s cost of doing business, we
recommend that the USAID Administrator identify all administrative costs
that primarily benefit the United States—whether paid for with operating
expense funds or program funds—and report this information to the



4
 Primarily, funding provided for relief and reconstruction activities in Iraq and the global
initiative to fight human immunodeficiency virus/acquired immune deficiency syndrome.
5
 U.S. General Accounting Office, Foreign Assistance: Strategic Workforce Planning Can
Help USAID Address Current and Future Challenges, GAO-03-946 (Washington, D.C.:
Aug. 22, 2003).




Page 3                                             GAO-03-1152R USAID Operating Expenses
              Congress in its annual budget requests for operating expense account
              appropriations.

              In commenting on a draft of this report, USAID fully agreed with our
              recommendation. USAID also stated that it is well aware of the issues
              raised and is taking corrective actions to fundamentally restructure
              financing for the administration of foreign assistance to reflect the full cost
              of assistance delivery and match resources with changing circumstances.



Background	   Until the mid-1970s, about two-thirds of USAID’s operating expenses were
              funded from appropriations to program accounts, and the rest were funded
              from a separate administrative expenses account.6 In 1975, the House
              Appropriations Committee noted that when USAID was first established, a
              large percentage of direct-hire employees implemented assistance projects
              as technical specialists, and their salaries and support were paid from
              program funds because they were considered to be working primarily for
              the benefit of the recipient country.7 USAID staff working for the benefit of
              both the recipient country and the U.S. government were also paid from
              program funds, while the remaining staff—whose activities were primarily
              in the interest of the United States—were paid from the administrative
              expense account. The Committee noted that this distinction became
              blurred as USAID delegated more program implementation responsibilities
              to third parties and its direct-hire staff took on more of a monitoring role.
              The Committee concluded that operating expense activities paid from
              program funds did not really differ from those paid from the administrative
              expenses account and suggested the creation of a separate account that
              would reflect all operating expenses.

              In 1976, Congress began providing a line-item appropriation for operating
              expenses separate from USAID’s humanitarian and economic development
              assistance programs.8 The accompanying Senate report noted that USAID’s
              cost of doing business would be better managed if these funds were




              6
               The administration’s budget request for fiscal year 1975 identified 11 separate funding
              accounts from which administrative expenses would be funded.
              7
              H. Rept. 94-53.
              8
              P.L. 94-330.




              Page 4                                            GAO-03-1152R USAID Operating Expenses
separately appropriated.9 Congress authorized USAID’s separate operating
expense account the following year.10

USAID’s criteria for determining the expenses to be paid from operating
expense funds are based on guidance it has received from Congress as well
as its assessment of who benefits from a particular activity. A 1977
congressional report stated that “operating costs include not only the
traditional ‘administrative expenses,’ but also the substantial cost of
support and management of programs and projects (such as technical
planning and management of specific projects, contracting, procurement of
commodities, engineering services, and handling of trainees from
abroad).”11 Congressional reports in the late 1970s directed USAID to fund
the costs of all full-time staff in permanent positions from the operating
expense account. 12

We also note that since 1976 Congress has approved funding sources other
than USAID’s operating expense account appropriation to pay USAID’s
operating expenses. For example, in fiscal year 2003, USAID’s estimated
appropriations for operating expenses are about 86 percent ($572.2
million) of the agency’s total estimated obligations, and other sources
comprise the remaining 14 percent ($95.8 million). Other congressional
sources of operating expense funds have included specific uses of program
funds and specific amounts in supplemental appropriations for
humanitarian and reconstruction assistance—$21 million for fiscal year
2003.

In addition, local currency trust funds generated by the sale of U.S.
commodities, which totaled more than $27 million at 18 overseas missions
in fiscal year 2003, can be used for their operating expenses. However, the
Office of Management and Budget offsets the use of trust funds from
USAID’s estimated operating expense account requirements. In addition,
USAID regulations allow missions to charge a portion of leased office
space, utilities, and maintenance costs to program accounts based on the
number of program-funded personnel employed at the mission.


9
S. Rept. 94-704.

10
     P.L. 95-88, Sec. 129, 22 U.S.C. 2427.

11
     H. Rept. 95-240.

12
     H. Rept. 95-701 and S. Rept. 95-1194.





Page 5                                        GAO-03-1152R USAID Operating Expenses
                     Enclosure I provides more detail on USAID’s sources of funding for
                     operating expenses in fiscal year 2003.



Trends in USAID’s    Over fiscal years 1995 to 2002, USAID’s total obligated operating expenses
                     in constant 2003 dollars have ranged from a low of $595.7 million in 1998 to
Operating Expenses   a high of $654.8 million in 1995, and USAID estimates total obligations in
                     2003 will be about $668 million.13 However, as table 1 shows, the various
                     administrative categories have varied considerably over this period with
                     the net changes resulting in a modest total decline of about 1.2 percent
                     between fiscal years 1995 and 2003.

                     •	 The largest administrative category in USAID’s operating expense
                        account is salaries and related support for U.S. direct-hire staff—
                        accounting for 43 percent of USAID’s estimated operating expenses in
                        fiscal year 2003. However, funds obligated for direct-hire personnel
                        declined during fiscal years 1995 through 2001, primarily due to
                        declining levels of direct-hire staff during this period. But, in fiscal years
                        2002 and 2003, U.S. direct-hire personnel costs have increased over
                        11 percent. USAID expects these costs to rise as it continues its recent
                        hiring efforts.

                     •	 Three other administrative categories—other staff costs, information
                        technology, and rent—accounted for about 33 percent of USAID’s
                        estimated operating expenses for fiscal year 2003. Since fiscal year
                        1995, rent has increased more than 10 percent while other staff costs
                        and information technology declined 6 percent and 3.4 percent,
                        respectively. Although these expenses varied from year to year, the net
                        change in total from fiscal year 1995 was a decline of less than 1 percent.

                     •	 Twelve other administrative categories account for the remaining
                        operating expenses—about 24 percent in fiscal year 2003. Several
                        categories varied widely over this period. Most notably land and
                        structures ranged from a high of about $21 million in fiscal year 2000 to
                        a low of $241,000 in 1996. Beginning in fiscal year 2004, most funding
                        for new buildings will be provided from a newly established Capital
                        Investment Fund.


                     13
                        Including a $21 million supplemental for operating expenses that USAID has not allocated
                     to its administrative categories.




                     Page 6                                           GAO-03-1152R USAID Operating Expenses
Table 1: Table 1: Operating Expense Obligations by Administrative Category, Fiscal Years 1995-2003 (Constant 2003 dollars in
thousands)

                                                                                    Fiscal years

                                                                                                                                         Percentage
                                                                                                                                            change
Administrative category                1995     1996         1997       1998       1999       2000       2001      2002      2003a        1995-2003
U.S. direct-hire personnel
costsb                                $302.5   $292.3      $268.2     $255.1     $255.2     $254.3     $249.2    $264.5     $277.7                   -8.2
Other staff costsc                      90.4     87.3         79.6       77.2      77.3       67.8       74.4       78.5       85.0                  -6.0
                               d
Information technology                  68.2     56.0         47.7       60.0      61.7       64.1       83.8       78.6       65.9                  -3.4
Rente                                   59.4     55.2         54.7       56.8      59.3       57.3       61.6       62.8       65.7              10.5
Goods and services from
government accountsf                    24.7     24.3         38.0       28.5      29.0       31.7       29.4       33.5       38.2              54.6
Other USAID-contracted
servicesg                               19.5     14.6         19.4       32.5      38.5       20.0       21.5       21.1       22.3              14.2
Operation and
maintenance                             14.2     14.3         11.4       11.8      10.8         8.6      11.1       14.0       15.7              10.8
Communications and utilities            20.8     19.1         17.3       18.9      14.1       12.9       13.0       12.1       13.8             -33.5
Land and structures                      0.7         0.2       9.8        1.9      12.2       21.0         3.5       4.3       13.3           1,715.1
Security                                 6.8         7.6       6.8        6.8        7.7        8.2      10.4        9.8       11.6              71.7
Equipment                               11.8     19.5         30.0       14.4      19.4       18.3       25.3       18.3       10.1             -14.3
Transportation of goods                 15.9     13.0         10.5       11.7      10.8       10.5         9.9       9.2        9.9             -37.8
Supplies and materials                  11.8         8.9       9.6       10.5      10.7       11.1       10.9       10.3        8.8             -25.6
Training                                 5.7         5.9       5.9        8.9        5.5        7.2      10.2        7.0        8.4              47.7
Claims and indemnities                   0.6         1.0       0.7        1.1        2.3        0.4        4.1       0.6        0.6                  -6.4
Grants, subsidies,
and contributors                         1.7         1.7       2.4          0        0.2        0.4        1.5       1.2          0            -100.0
        h
Total                                 $654.8   $621.0      $612.2     $595.7     $614.5     $593.9     $619.9    $625.8     $647.0                   -1.2
Source: GAO analysis of USAID data.

                                                 Note: USAID data are taken from its congressional budget justification documents.
                                                 a
                                                  We did not include $21 million provided to USAID in supplemental funding for operating expenses in
                                                 fiscal year 2003 because USAID has not allocated it among the administrative categories.
                                                 b
                                                  Includes compensation, benefits, training, and travel expenses, such as home leave, post-assignment
                                                 travel, and travel expenses incurred for training.
                                                 c
                                                   USAID funds many of its overseas non-U.S. direct-hire personnel using operating expenses because
                                                 their tasks are administrative in nature, such as providing support to the executive office.
                                                 d
                                                     Includes costs for computer equipment, systems design and analysis, maintenance, and support.
                                                 e
                                                     Includes domestic and overseas rental payments.
                                                 f
                                                 Includes USAID’s portion of administrative costs shared by U.S. agencies with an overseas presence
                                                 and paid primarily to the Department of State.




                                                 Page 7                                                  GAO-03-1152R USAID Operating Expenses
g
 Includes operation and maintenance of facilities and goods, security costs, equipment, and
transportation of household goods.
h
Totals may not add due to rounding.


As shown in figures 1 and 2, between fiscal years 1995 and 2002, USAID’s
program obligations decreased at a faster rate than operating expense
obligations, with fluctuations during this period. In constant 2003 dollars,
USAID’s program obligations decreased by more than 10 percent—from
almost $7.8 billion in fiscal year 1995 to about $6.9 billion in fiscal year
2002. In fiscal year 2003, USAID’s estimated program obligations increased
almost 88 percent to $13 billion because of $4.2 billion in supplemental
funds for, among other things, relief and reconstruction activities in Iraq
and the global initiative to fight human immunodeficiency virus/acquired
immune deficiency syndrome. However, USAID’s estimated operating
expense account obligations for fiscal year 2003 did not increase at a
similar rate. Including $21 million in operating expense funds provided by
supplemental legislation, estimated operating expenses increased less than
7 percent.




Page 8                                                GAO-03-1152R USAID Operating Expenses
Figure 1: Program Obligations, Fiscal Years 1995 to 2003




Notes: USAID data are taken from its congressional budget justification documents and the
Emergency Wartime Supplemental Appropriations Act of 2003 (P.L. 108-11). Fiscal years 1995 to
2002 are actual obligations adjusted to constant fiscal year 2003 dollars. Fiscal year 2003 data are
estimated amounts. Fiscal year 2003 operating expenses include $21 million provided by
supplemental legislation. Program data for fiscal years 2000 to 2003 include disaster recovery,
emergency response, and supplemental funds. Program funding obligations sources include
development assistance; child survival and health; development fund for Africa; international disaster
assistance; transition initiatives; economic support funds; support for Eastern European democracy;
Freedom Support Act; Public Law 480; Iraq relief and reconstruction fund; and credit program funds.




Page 9                                                 GAO-03-1152R USAID Operating Expenses
Figure 2: Operating Expense Obligations, Fiscal Years 1995 to 2003




Note: See figure 1 notes.


As shown in figure 3, from fiscal years 1995 to 2002, USAID’s operating
expense obligations fluctuated as a percentage of program obligations but
averaged about 8.5 percent. In fiscal year 2003, estimated operating
expense obligations dropped to about 5 percent of estimated program
obligations, including the supplemental funding.




Page 10                                     GAO-03-1152R USAID Operating Expenses
                       Figure 3: USAID’s Operating Expense Obligations as a Percentage of Program
                       Obligations, Fiscal Years 1995 to 2003




                       Note: See figure 1 notes.




USAID’s Operating      USAID’s operating expense account does not fully reflect the agency’s cost
                       of doing business primarily because the agency pays for some
Expense Account Does   administrative activities done by contractors and other nondirect-hire staff
Not Include All        with program funds. As we reported in August 2003, as the number of U.S.
                       direct hire foreign service officers has declined over the years, USAID
Administrative Costs   missions have often hired personal services contractors—usually foreign
                       nationals—to manage development activities and provide technical project
                       support.14 Approximately 60 percent of USAID’s staff are foreign national
                       personal service contractors. Many of these nondirect-hire personnel are
                       engaged in activities that directly support USAID programs and are paid
                       with program funds.

                       14
                            GAO-03-946.




                       Page 11                                   GAO-03-1152R USAID Operating Expenses
Many nondirect-hires perform administrative duties that directly benefit
the United States, and it is often difficult to distinguish between the
administrative duties they perform and those done by U.S. direct-hire
personnel. These staff can be paid with program or operating expense
account funds. In four missions we visited—the Dominican Republic, Mali,
Peru, and Senegal—some foreign national personal services contractors
were financial and procurement analysts, secretaries, and drivers.
Although these analysts and support staff performed primarily
administrative tasks for USAID’s benefit, some were assigned to specific
technical teams and their salaries and support costs were paid from
program funds because USAID considered their services directly allocable
to these activities and did not report them as operating expenses.
According to USAID officials, based on data recently collected from its
missions, USAID estimates that about $350 million in program funds will be
used to pay for personal services contractors performing administrative
functions overseas in fiscal year 2003.15

Institutional contract staff also provide administrative and technical
services in support of USAID programs. In 2002, for example, USAID
estimated that 758 institutional contractor staff were involved in the
administration of foreign assistance at an estimated cost of $95 million. Of
this total staff, 450 positions were funded from operating expense
appropriations ($56 million), and 308 positions were funded from program
funds ($39 million).16 USAID is continuing its review of institutional
contractors to decide how to characterize their work.

A 2002 USAID team examining USAID’s operating expense account found
that most of the agency’s evaluations and analyses have been paid with
program funds, based on the rationale that these activities are intended to
enable the agency to better serve its “ultimate beneficiaries.” But this may
not be what Congress intended.




15
 One senior level USAID program planning officer told us that about 10 to 15 percent of
program funds may be a more realistic estimate of USAID’s cost of doing business
(compared with the 8.5 percent average since 1995).
16
 According to USAID, these figures were developed as part of a staff study of institutional
contractors and were as of September 30, 2002.




Page 12                                           GAO-03-1152R USAID Operating Expenses
              •	 The team’s report stated that “although strategy development, project
                 design, evaluation and other activities relate to the agency’s cost of doing
                 business, in the longer run they are essential building blocks of agency
                 operations and are necessary for program oversight. Ultimately, the impact of
                 improved strategies, design, and projects has an impact on the agency’s
                 beneficiaries. In that sense, there clearly is a rationale for providing program
                 funding for these activities.17”

              •	 In contrast, a USAID attorney assisting the team noted that a 1980
                 Senate Appropriations Committee report stated that only such planning
                 and evaluation activities that are project specific should be paid with
                 program funds, but that activities with a primary objective of serving the
                 agency, including analyses for development assistance policy planning,
                 were part of the cost of doing business.

              Cognizant USAID officials contend that congressional intent has shifted
              and that from 1980 to the present, Congress has increasingly encouraged
              the agency to use program funds to support certain administrative costs.
              However, these officials also stated that the increased reliance on program
              funded staff for some administrative activities further demonstrates the
              need to restructure how operating expenses are accounted for to better
              reflect USAID’s cost of doing business.



Conclusion	   Since 1976, Congress has provided a separate appropriation for USAID’s
              operating expenses and, over the years, has approved additional funding
              sources for operating expenses to separate administrative costs from
              USAID’s humanitarian and development assistance programs. However, as
              U.S. direct-hire staff levels have declined, overseas missions have hired
              personal services and institutional contractors and other nondirect-hire
              staff to manage development activities and perform various administrative
              duties, but pay for some of these services with program funds. But USAID
              has not fully identified or reported the extent of these costs. Therefore,
              separating USAID’s cost of doing business from its humanitarian and
              development programs is not always done. As a result, the operating
              expense account and other funds USAID has available for operating
              expenses do not fully reflect the cost of delivering foreign assistance.


              17
                 U.S. Agency for International Development/Bureau for Policy and Program Coordination,
              USAID’s Operating Expense Account: Current Practices and Planned Reforms
              (Washington, D.C.: Oct. 7, 2002).




              Page 13                                         GAO-03-1152R USAID Operating Expenses
Recommendation for   To help provide increased visibility over USAID’s operating expenses,
                     better reflect what USAID spends on program administration, and provide
Executive Action     a more realistic accounting of the agency’s cost of doing business, we
                     recommend that the USAID Administrator identify all administrative costs
                     that primarily benefit the United States—whether paid for with operating
                     expense funds or program funds—and report this information to the
                     Congress in its annual budget requests for operating expense account
                     appropriations. Such an accounting should form the basis of USAID’s
                     annual budget request for operating expense funds.



Agency Comments	     USAID provided written comments on a draft of this report (see enc. II). It
                     fully agreed with the recommendation. USAID acknowledged that the
                     current structure of the operating expense account does not serve
                     workforce planning needs or foreign policy objectives because (1) staffing
                     decisions are often made according to funding source rather than
                     workforce requirements and (2) as a result, the heavy reliance on short-
                     term contractors has limited USAID’s capacity to respond to foreign
                     assistance needs.

                     USAID also stated that it is well aware of the issues raised in the report and
                     is taking corrective action. USAID noted that, within the past 18 months, it
                     has completed assessments of operating expenses and overseas staffing, a
                     survey of program-funded personnel, and an approach for full costing of
                     assistance at a unit level. It has also initiated a long-term assessment of
                     human resources. As a result of these efforts, USAID is reviewing ways to
                     fundamentally restructure financing for the administration of foreign
                     assistance to reflect the full cost of assistance delivery and match
                     resources with changing circumstances.

                     In addition, USAID officials provided clarification of certain technical
                     matters that we have incorporated into this report, as appropriate.



Scope and 	          To examine trends in USAID’s spending for operating expenses and
                     program activities since 1995, we analyzed obligations data reported by
Methodology	         USAID in its annual budget justification documents. We converted
                     obligations for operating expenses and program activities into constant
                     fiscal year 2003 dollars to adjust for inflation and better reflect the agency’s
                     purchasing power during this period. We also met with cognizant budget
                     officials at USAID to better understand the reported operating expense and


                     Page 14                                    GAO-03-1152R USAID Operating Expenses
program funding data. We did not verify the accuracy of USAID’s reported
data.

To determine whether USAID’s operating expenses reflect its cost of doing
business, we reviewed USAID reports and annual budget justifications and
met with knowledgeable officials in USAID’s Bureau for Policy and
Program Coordination, the U.S. Department of State, and the U.S. Office of
Management and Budget. In conjunction with other work,18 we conducted
fieldwork at seven overseas missions—the Dominican Republic, Ecuador,
Egypt, Mali, Peru, Senegal, and the West Africa Regional Program in Mali.19
We reviewed mission staffing reports to determine whether staff were
funded from the operating expense account or program funds and
discussed the duties of personnel with cognizant mission officials.

Our review was conducted from May through September 2003 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to appropriate congressional
committees, the Administrator of USAID, the Secretary of State, and the
Director of the Office of Management and Budget. We will also make
copies available to others upon request. In addition, this report will be
available at no charge on our Web site at http://www.gao.gov.




18
     GAO-03-946.
19
  We also examined documents and interviewed officials at USAID’s mission to Indonesia at
its temporary location in Arlington, Virginia, following its evacuation in October 2002.




Page 15                                         GAO-03-1152R USAID Operating Expenses
If you or your staff have any questions concerning this report, please
contact me at (202) 512-4268 or Al Huntington, Assistant Director, at (202)
512-4140. Other key contributors to this report were Kimberley Ebner,
Emily Gupta, and Audrey Solis.




Jess T. Ford, Director
International Affairs and Trade




Page 16                                  GAO-03-1152R USAID Operating Expenses
Enclosure I: Description of Sources of
Funding for USAID’s Operating Expenses
Fiscal Year 2003
              Since 1976, Congress has approved funding sources other than the U.S.
              Agency for International Development’s (USAID) operating expense
              account appropriation to pay for operating expenses. Although USAID
              reports these other funds as operating expenses, they are not part of its
              single budget item appropriation. As shown in table 2, for example, in
              fiscal year 2003, other sources comprised 14.2 percent ($95.8 million) of
              what USAID is estimating as operating expense obligations.



              Table 2: USAID’s Estimated Obligations for Operating Expenses in Fiscal Year 2003
              by Sources of Funding (Dollars in millions)

              Funding source                                                                          Amount                       Percent
              Annual appropriation                                                                   $572,200                         85.6
              Unobligated balance                                                                       34,231                         5.1
              Local currency trust funds                                                                27,557                         4.1
              Supplemental funding                                                                      21,000                         3.1
              Authorized program funds                                                                    7,417                        1.1
              Reimbursements                                                                              5,600                        0.8
              Total                                                                                  $668,005                        99.8a
              Source: USAID fiscal year 2004 congressional budget justification documents and the Emergency Wartime Supplemental
              Appropriations Act of 2003 (P.L. 108-11), which provided supplemental operating expense funding.
              a
              Does not add to 100 percent due to rounding.


              Annual appropriation: These are funds for which USAID receives new
              budget authority every fiscal year and do not include supplemental
              appropriations for operating expenses obtained during the course of the
              fiscal year.

              Unobligated balance: The unobligated balance is of any unobligated funds
              that USAID has the authority to transfer to the following fiscal year’s
              operating expense account.

              Local currency trust funds:20 U.S. commodity import programs normally
              generate this type of funding. In fiscal year 2003, 18 USAID missions have
              local currency trust funds. The Egypt mission’s trust fund is the largest



              20
               USAID cites a recurring provision in its appropriations bills as legal authority to use local
              currency trust funds. For fiscal year 2003, see Public Law 107-115, section 529.




              Page 17                                                             GAO-03-1152R USAID Operating Expenses
Enclosure I: Description of Sources of
Funding for USAID’s Operating Expenses
Fiscal Year 2003




(almost $73 million in January 2003), and the mission uses it to pay for
training, housing, and dependents’ education.

Supplemental funding: Supplemental legislation for an emergency
response or large-scale reconstruction generally specifies an amount that
USAID may use as operating expenses in administering such activities.

Authorized program funds: Some specific program funding can be
transferred to the operating expense account. The amount varies
according to different rules governing the transfer of program funding from
each account. For example, USAID can transfer a limited amount of
program funds to the operating expense account to finance travel to
countries with USAID activities but no USAID field presence. Additionally,
USAID has the authority to transfer larger program funding amounts from
other accounts to the operating expense account, not to exceed 10 percent
of the originating program account.21 But this action requires presidential
approval and is rarely undertaken.

Reimbursements: These funds are primarily generated internally by
USAID. Examples include reimbursements to USAID from the its Office of
the Inspector General or the Development Credit Program—units that
receive separate operating expense appropriations—for services by
USAID, such as computer services and rent. Proceeds from the sale of
equipment overseas are also included in this category.




21
     Foreign Assistance Act of 1961, as amended, title 22, section 610a.




Page 18                                              GAO-03-1152R USAID Operating Expenses
Enclosure II: Comments from the Agency for
International Development




              Page 19        GAO-03-1152R USAID Operating Expenses
Enclosure II: Comments from the Agency for
International Development




Page 20                                      GAO-03-1152R USAID Operating Expenses
           Enclosure II: Comments from the Agency for
           International Development




(320191)   Page 21                                      GAO-03-1152R USAID Operating Expenses
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