The Government's Use of 'M' and Merged Surplus Accounts

Published by the Government Accountability Office on 1990-08-02.

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

                    United States General Accounting Offbe               / q / 4 3 /

 For Release         The Government's Use of                Vl"    and
 on Delivery
 Expected    at      Merged Surplus Accounts
 9:30 a.m.
 August   2, 1990

                     Statement      of
                     Milton    J. Socolar
                     Special     Assistant      to   the
                        Comptroller        General     of    the
                        United    States

                     Before  the
                     Senate Committee
                        on Governmental         Affairs

                                                                            GAO Form 160 (12/‘37)
Mr.     Chairman              and      Members              of        the       Committee:

           We are         pleased             to     be here                  today         to discuss                   the        government’s
use of         “Ml’ and merged                      surplus                  accounts           and     to        provide              our
perspectives                  on legislation                          to      strengthen               control                 and oversight
of     these       accounts.

What       Are     “M”        and      Merged         Surplus                   Accounts?

           Government               agencies                receive                 appropriations                       with        differing

periods           of     availability--generally                                       1,     2 or      3 years.                     After           that

time,       the        appropriations                       expire              and     are      not         to     be used                to     incur

new obligations.                         They        remain                  available,           however,                     to    pay        bills

associated               with       obligations                       that       were         incurred              during             the        period
of     availability.

           When entering                     contracts,                      agencies           cannot            always             precisely
identify           all        the      costs         they             will          incur       on those                 contracts                and

adjustments               are       commonplace.                             Unused         obligational                       authority                can

be used           to     fund         increases                  in     valid          obligations                  if         an agency

subsequently                  finds          that      it         has         underestimated                      the          amount           of      the

obligation               or     receives             an unexpected                          charge           that         can        be clearly

associated               with       a given            fiscal                 year        and    appropriation.

Adjustments               can         also      go the                other          way when            agencies                   find        that
they       have        overestimated                   the            amount           of     an obligation.

          In    order            to     streamline                   a cumbersome                     process             for      certifying

separate           payments                 from         appropriation                    account             balances                 that          were
being       maintained                  forever,              the        Congress,               in     1956,         established                       the

current         system            of        surplus,            merged             surplus,             and      so-called                     “Ml’

accounts           for         federal             agency            use      in    recording                 and     accounting                      for

transactions                   affecting                 expired           appropriations.                           (See          attachment                 I
for     a diagram               of     the         relationship                    and     operation                 of         these


          The system                  works         as follows.                     At     the         end     of     the          period             an
appropriation                   is     available                for        obligation,                  the      unobliqated

balances           expire             and         are      withdrawn               to     the         Treasury             where           they         are
designated               as     surplus                 authority.                 The     surplus              funds             of     an expired
appropriation                   retain             their        fiscal             year         identity             for          2 years,
after       which         time         any         remaining               balances              are       transferred                     to     merged

surplus         accounts.                    Once          surplus            funds        enter           a merged                surplus
account,           Treasury              maintains                   a KeCOKd of                 the       general               purpose              of

the     original              appropriation,                       but      the         balances              lose         their           fiscal

year      identity.                   For     example,                there         iS     a Separate                 merged               SUK~~US

account         for       the         appropriation,                       Operation              and        Maintenance,                       Army,
which       includes              unused            obligational                    authority                back          to      the
account's             1956        inception.                    Surplus             funds         are        available                   for
restoration               to      an expired                  appropriation                      or     an “M” account                          to      pay

upward         adjustments                   in     obligations.

          The obligated                      balances              of      appropriations                      also             retain          their

fiscal           year           identity               for      2 years               following                the      end           of    their

period           of      availability.                          At    the         end        of     this         2-year            period,
agencies                transfer             any         remaining                obligations                    to     an lfMff account.

The “M” account                         accumulates                   unliquidated                        obligations                      from          all

prior           appropriations                         for      the        same general                       purpose             (the           Operation
and      Maintenance,                      Army,             appropriation,                        for        example)             and           the       fiscal
year       identity                is      no longer                 maintained.

           It      is      important                   to     note         that        the         balances             in       the        surplus,
merged           surplus            and           "M"        accounts             are        not         stashes            of     cash           waiting

for      a rainy            day         to       be spent.                  They          are       not        intended                to        be used              as
a slush           fund.             Rather,                  they     constitute                    spending                authority                   that

may legally                 be used                only         to    pay         valid            preexisting                   obligations                      or

valid           adjustments                  to        these         obligations.                         But,         because              these              are
an accumulation                         of       old         balances,                without             fiscal            year
identification                      and          without             the      kind           of     visibility                   and        scrutiny

afforded              current              appropriations,                            “M”       and merged                  surplus               accounts

are      subject            to      abuse.                   We have          reported                   on abuses               in        the      past.

The Growth                 of      I'M"      and         Merged            Surplus              Accounts

          The balances                       in        I'M" and merged                       surplus             accounts                  are         large

and have              grown         considerably                      in      recent               years.              At    the           end      of

fiscal           year       1989,            as detailed                    in        attachment                 II,        "M"        accounts                 for
executive                agencies                totaled             over         $28        billion.                  Two-thirds                   of         that

amount           came       from           the         military             services                 (i.e.,            Army,           Navy,            and       Air

Force).             The balances                     for        the         Departments                          of      Labor           and      Education,
the      Agency           for      International                       Development                             (AID),           and       the        Foreign

Military            Sales         Program             account                    for         about             70 percent                 of      the
remainder.                 For      the      military                      services,                     the       vlMqt account                  balance

grew        from         $2.7     billion                 in    fiscal                 year         1980          to      $18.5           billion               in
fiscal        year         1989,       an almost                      7.fold                 increase.

            The military                  services                held            over             $25         billion            in      their          merged

surplus            accounts           at      the          end        of      fiscal                year           1989,          up from               a little
over        $15 billion              at       the          end        of      fiscal                1980.                At     your          request,               we

are      making           a similar             analysis                    of         the         other          agencies.                    BY any
measure,            however,           we are                  talking                 about             large           balances               that        have

typically            received               little              visibility.

            Treasury             records             show         that            in         fiscal             year          1989        there          were
1,362        individual              payments                   from         agency                 trM” accounts                        of     $500,000               or

more        which         totaled           $8.1           billion.                     While             over           half       of        this       amount

came from            the        military              services,                        AID         was the               second           largest               user

having           367 such           payments                   valued             at         almost             $1.3          billion.                 AID

officials            explained               that              U.S.         foreign                 assistance                    appropriations

are      often       obligated               by means                  of         a bilateral                         agreement                with         a
foreign            government.                  Final             bills                are         not         paid       until           after

delivery            of     the      goods            or        services.                      They             said       funds           must         be
available            for         a long         period                because                 of         the      lead          times           involved               in

international                    competitive                    bidding,                     the         delays           involved                in     dealing

with        less     developed               countries                      to         finalize                 procurement
requirements,                      and        the      long      delivery                times       involved             in     providing

goods        and          services             to      frequently                remote          project          sites.

           Treasury                records             show      there           were       36 restorations                      over

$500,000             in      fiscal            year       1989,        that         amounted              to    $320       million.
While        the      military                 services             had      over         two-thirds              of     this         amount,

AID had            less       than            $1 million.                  Finally,               individual             withdrawals

(or       deobligations)                       over       $500,000               from       the      "MU' accounts                to        the

merged        surplus               accounts              totaled            almost          $1 billion,                 or      almost            3
times        the      amount             of         restorations.

"M"       Account           Problems

           Over       the         years,             we have         reported              problems             with       the        use     of

"M"       accounts            and        the         merged         surplus              funds      and have             recommended
actions         to         strengthen                  oversight,                accountability,                    and        control.

For       example,            in      a March             1987       report,              Financial             Management:

Defense         Accountinq                     Adjustments                 for      Stock          Fund        Obligations                Are
Illegal            (GAO/AFMD-87-l),                        we detailed                    Defense's             improper              use     of

$563       million            of      "M"       account           balances                and      recommended                 that

signif       icant          adjustments                   to   “M” and merged                        surplus           balances              be

approved            by      the       Defense             Comptroller                 and        reported           to     the        Congress.

This       followed               a report              by the        House           Committee                on Appropriations
(House        Report              99-792,             August         14,         1986)       which         called          on Defense                  to

improve         the         management                  and    control              of     these        balances.

           Subsequently,                       the         Defense            Authorization                    Act        for         fiscal            years

1990       and        1991         (Public            Law 101-189,                        November           29,        1989)          required
that       the        Secretary                of     Defense             approve                 I’M” account                restorations
from       the    merged                surplus             authority                 for         any late          contract                    change
exceeding              $4 million                    in     a fiscal                year.            Any restoration                        Causing
the    total           amount            of     restorations                        for      a program,                 project,                 or
activity              to    exceed             $25 million                    in     a fiscal               year        requires                 30-day

advance          written                notification                     to    the          Senate          and     House            Committees
on Armed              Services             and        Appropriations.

           In    another                case,         we reported                    in      October           1989           that         Air        Force

transfers              of     $238         million             of       merged              surplus          funds            to     its         Stock

Fund       lacked           the         documentary                    evidence              required              by    law         and         should

not    have       been         made            (B-236940).                     Because               the     Stock            Fund         is     a

revolving              fund,            amounts             transferred                     from      the     merged               surplus              would
be available                  to        fund        current             Stock             Fund      operations.

           In    1989,            the      President’s                    Council                 on Integrity                  and        Efficiency

(PCIE) , under                    the      direction                of        the         Treasury           Inspector                 General

(IG) I initiated                        a review             of        “M”     accounts.                    Inspectors                 general            in
13 agencies                 participated                     in     the        review,              and      12 have               issued

reports          on the            status             of     selected                “M” accounts.                       The         PCIE
expects          to        issue         an overall                 report                early       in     fiscal             year        1991.

           The two           most          common problems                           identified               in        the        IG reports
involve$poor                 documentation                        of      “M” account                  obligations                     and        the

continued               retention                    of      excessive                balances             in    these             accounts.               For
example,               in      total,               the      IGs        reviewed             ttMqt account              obligations
amounting               to         $842        million             and         recommended               that       $383            million,             or

45 percent,                   be deobligated.                                 Most      of these            recommended
deobligations                           were        for      contracts,                 grants,          or loans                  that      had
expired           or         for         which            there         had     been         no activity                for         several

           The types                     of    problems                 reported             by GAO and             the            IGs     are     not

new,       and,         if         anything,                have         probably             worsened             over        the         years         as
the      government                      has     struggled                 with         weak       accounting                 systems            and

internal           controls.                         It      seems         that         every        few        years         concerns             arise
over       the     use             of     "MU and merged                        surplus            accounts.                  In     the        early

1970s       there             was concern                     about            these         accounts,            and         in     a March             1981

letter           responding                    to         concerns             raised         by     Senator            Levin,             we
recommended                   a reduction                     in     the        merged          surplus            fund        and         additional

controls           over             and        periodic              audits             of    "Ml'    and merged                    surplus


Recent       Legislative                         and        Other          Proposals

Could       Result                 in     Needed            Changes             to

“MN and           Merged                 Surplus            Accounts

           Recent             public             debate            has         again         highlighted                concerns                over      the

use      and potential                         for         abuse         of     "M"      and merged               surplus                 accounts,

leading          ,to        a reevaluation                         of      current            statutory             provisions.                        The

recent          use        by the          Air         Force             of     over         $1 billion                    of        expired          and
merged          Surplus             funds             to    cover             contract              modifications,                          contracts
that       have       exceeded              their                contract              prices,                 and      contingent

liabilities                 and      claims                for         the      B-1B         program                 has        helped         fuel         the
debate.              Although              these            Air          Force         actions                 were        legal,           the       result
was that             the     B-1B          program                will          use         about         $500          million             more       than

it      contributed                to      the         surplus                accounts              in         unused            obligation


           In    recent            months,                 legislation                     has      been             introduced                in     both

houses          of    the         Congress                 which          would            affect              the      availability                   of
and      control            over         expired                 appropriations.                               The principal                      areas        of
change          typically                center             on the              establishment                         of        limits         to     the

time       period           for      which             “M” and merged                         surplus                 accounts              are

available             for         use,      the            rescission                  of     funds             after            specific             time
periods          OK the            completion                     of      specific               activities,                         and    the       funding

of      preexisting                obligations                      after            the      rescission                        of    funds

available             for         those          obligations.                          While         Chairman                    Glenn’s            and

Senator          Roth’s            bills          differ                somewhat              as     to         approach,                  we support

the      overall            purpose              of        both         bills          in     limiting                  the          availability                 of

expired          appropriations                            and      eliminating                     the         “M”        and merged                 surplus

           Specifically,                    we favor                    the      approach                 in     Chairman                  Glenn’s
bill,         under         which          individual                     appropriation                         balances                 would        be
carried          forward             for         5 years                after          expiration.                         It        provides          the

I   flexibility                   needed          to      pay       valid                obligations                   and       increases

    control             over        these         accounts                   by     retaining                   fiscal          year         identity.
    This      would             provide           for          fiscal             year          visibility                 of     appropriations

    which          is     now lacking                   with        the           ttM1t accounts.                        Both      bills            would
    eliminate              the       “M” account                    and merged                        surplus.

              Chairman               Glenn’s              bill          would             permit             limited            use,of             current
    year      appropriations                         to     cover             any         preexisting                    obligation                 that

    needs          to     be paid            after          the         5-year              period             has       passed.              This          would
    eliminate               the      need         for          an agency                  to     come           to   the        Congress              for

    immaterial                  amounts           to      pay       bills.                 Also,             we believe                it     prudent,                  as

    the     bill         calls         for,          to     close             no-year                 accounts            when         no
    disbursement                   has      been          made          against                 the         appropriation                    for      2

    consecutive                   fiscal          years           and         the         agency             head        determines                 that          the
    purposes              for       which         the       appropriation                             was made have                    been         carried

              We do have                   some suggestions                               for         further            strengthening                      the
    legislation.                     We need              better              financial                     information                on the             status

    of     appropriations.                           As highlighted                             in     the       recent           IG studies                   of

    “Ml’ accounts,                   the         balances               of        reported                  “M” account                obligations

    are     not         reliable.                 We recommend                       that             the     legislation                    include              a

    new requirement                        for       an annual                    certification                      from        the         head         of    each

    agency          that         obligated                balances                  in     the         account            are      accurate                 and
    expenditures                   since          the      previous                  year’s                 review        were         supported                  by
    programY            obligations.                      In      addition,                     we suggest                that         the

 legislation                     require             that          the     IGs review                    and report                  each         year             on

the       reasonableness                         of,        and        basis          for,         the         agency           head’s

            In        addition,                as         I mentioned                 earlier,                 the      Department                     Of
Defense               has        legislative                    approval              and     notification                       requirements

for       “M” account                     adjustments                    over         certain             amounts.                   We suggest

that       this            requirement                    be expanded                  beyond             Defense               to     include                all

           We also                need         leadership                  to        improve             the         reporting              and         control
over       appropriations.                                Mr.       Chairman,                you         and         Senator           Roth        have

introduced                  legislation                      (S.       2840)          to     establish                  a chief             financial

officer               structure                for        government                  which         we fully               support.                     We see

the     Chief              Financial                 Officer             as having                 the         responsibility                          for

monitoring                  the         uses         of     appropriations                         and         for      annually              reporting

an accurate                      set     of     numbers.                   We see            the         counterpart                  chief

financial                  officers             in        the       agencies               taking              the      lead         for      assuring
the       job         is    done         well          and       for       providing                the         agency           head         with            the

basis           for        the         annual          certification.

           Another                aspect             of     S.      2840        is     a requirement                       for        annual                 agency
financial                  statements                  which           should          strengthen                     control              over
appropriations.                            To improve                    visibility,                 we propose                      the     expansion

of     financial                  statement                 reporting                 to     include                 an analysis                  of         the
unliquidated                      obligation                    and      unobligated                 balances                  for         each         expired

appropriation              and     will     be working        with        agencies        to     achieve      this.

        Mr.     Chairman,            this    concludes        my formal             statement.            We will

be available              to    assist      the   Committee          as     it    considers        this

legislation,              and    we will      be happy        to     answer         any   questions         you       or

members        of   the        Committee      may have        at     this        time.

Attachment      I                                                                      Attachment   I

     The PrOCe88 of Withdrawalr,   RertOratiOns, and Transfers of Appropriation flalances

                                                                        General fund
                                                  (2 Year)

                1 qbligated   i

ATTACHMENTII                                                   ATTACHMENTII

                Executive Agency "M" Account Balances
                        as of September 30, 1989
                          (Dollars in Millions)

Executive Office of the Presidenta                         $ 4,275
Agriculture                                                     183
Commerce                                                         94
Department of Defenseb                                      18,671
Education                                                    1,253
HHS                                                             428
HUD                                                             474
Interior                                                         88
Justice                                                         177
Labor                                                        1,221
State                                                           122
Transportation                                                  571
Treasury                                                        101
Veterans Affairs                                                 64
EPA                                                              98
GSA                                                              11
NASA                                                            174
OPM                                                              13
SBA                                                               3
Energy                                                            7
Independent agencies                                            181
                                                         $ 28.208

aThis figure consists mainly of funds appropriated    for Foreign
 Military    Sales Credit, Economic Support Funds, and Development
bThis figure   includes   Army, Navy, Air   Force,     and Defense
Source:  Data compiled from the Department           of the Treasury's   1989
annual report and not verified.