Financial Management: DOD's Use of Expired and Lapsed Appropriations

Published by the Government Accountability Office on 1990-09-20.

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

                         United States General Accounting OflIce    J LlJJS’3

    GAO                  Testimony


    For Release          FINANCIALMAN%=
    on Delivery
    Expected at
    1O:OOa.m. EST
    September 20, 1990   DOD's Use of Expired and Lapsed Appropriations

                         Statement of
                         Nancy R. Kingsbury
                         Director, Air Force Issues
                         National Security and International   Affairs   Division
                         Before the
                         Subccxrunittee on Legislation and National Security
                         House Ctittee     on Government Operations


Mr.     Cnairman               and Members                     of     the      Subcommittee:

We are         pleased                to    be here                 today      to        discuss             our        work      on the          use      of

expired           and      lapsed                budget         authority                  by the            Department                of     Defense

 (DOD) I and              to     provide                additional                 perspectives                      on legislation                   to

strengthen               control               and       oversight                 of      these         budget            authorities.                    We

testified            last             month         before            the      Senate            Governmental                     Affairs

Committee            on some government                                 wide            issues         which            concern          us about

lapsed         and       expired                 funds         and      on other                legislative                    proposals

relating            to     these            accounts.                   Today            we will             focus         on our           analyses             of

DOD’s         use    of        these           authorities,                    and         provide            some examples                    of

specific            instances                  of       transactions.                         As you          know,         we are            performing

this       work      at        the         request             of     the      Senate            Committee                 on

Appropriations,                        House            Committee              on Energy                 and       Commerce,                and     the

Honorable            Andy             Ireland.                As you           requested,                    we will            also        provide             our
views         on the           bill         you         have         proposed              to    address              some of           the       problems

that       we and          others              have        reported                on in         the         past.

Most       appropriations                         for     government                     activities,                    including            DOD

activities,                are         available                for         obligation                 for      a finite               period,
normally            one,         two        or      three           years.               At     the      end       of      this        period,            the
appropriations                        expire            and     are         no longer                 available             for        incurring

new obligations.                            The entire                 purchasing                  and        payment             cycle--
establishing                   requirements,                        developing                  programs,                contracting                for

goods        and      services,                     producing                  end          items,          modifying                 program

elements,               invoicing                   and         paying              of      bills,          and         settling             claims           and
adjustments--                   for      government                      activities                    can       take          considerably                   longer

than       the     period              of      time             that          the         appropriations                       are     available               for

obligation.                    Also,           it         is      not        always               possible              for        agencies            to

precisely               identify               all             costs          they         will        incur          on contracts,                     and

adlustments                are         commonplace.                            Therefore,                   mechanisms                 have       been

established                to         pay      bills              as        they          become           due     or         to     fund      increases              to

valid       obligations                     recorded                    or     incurred.                    These             mechanisms               are

referred           to      as expired                          appropriations,                         “M” accounts,                        surplus,           and
merged        surplus                 accounts.

I tnink          at      this          point              it      would            be helpful                 to      briefly               discuss           the

relationship                   and      operation                      of      these              accounts.                   In     essence,           I will
be discussing                    budget              authority                      in,      for       want        of         a better          term,          three

conditions:                    current,                expired,                    and        lapsed.

Federal          agencies,                  including                    the         Department                  of      Defense              (DOD) receive
a variety             of       appropriations                            with             differing              periods              of     availability.

For     example,               most         procurement                        appropriations                         are          available            for

obligation               for          3-years                  and     Operations                     & Maintenance                    appropriations

are     available                for        obligation                       for          l-year.             These            are     current

appropriations.                         At          the         end      of        the       period           that            an appropriation                       is

current          or      available                   to         be obligated,                        the      funds            expire.
The        unoblig,a,t.e.d                   balance             of    expired           funds         is    withdrawn                  to     the

Treasury            and          designated                   as      “surplus           authority.”                     These         balances
retain        their              fiscal             year         identity          for         2 fiscal            years.              After          this
time,       the          balances                  lapse         and     are      transferred                to     “merged              surplus

authority,”                    which           accumulates                  unobligated               balances              for        all      prior

fiscal        years.                   While          the        Treasury          does         maintain            general              purpose

identity                (e.g.          Air         Force         aircraft          procurement),                    it      does         not
maintain                the      fiscal             year         identity          of     the        original             appropriation                       for

balances                in     the      merged              surplus          authority.

The obl,igat.ed                    balances                 of     expired         appropriations                        also      retain             their
fiscal        year              identity              for        2 fiscal          years.             At     the         end      of     that

period,            any         obligated                  balances             remaining,             those         not         disbursed               or

expended,                lapse          and         are       transferred                to     an    “M” account                  where             they

lose       their              fiscal           year         identity.              This         lapsed          budget            authority

account            is        maintained                   by the         agency          and     accumulates                    unliquidated

obligations                    from          all      prior           appropriations                  made         for      the         same general


The balances                     in     the         Treasury’s               surplus            authority                remain          available

for      restoration                    to         cover         adjustments              to     obligations                    during          the         2-

year       period              after           an appropriation                     expires.                 Balances              of        lapsed

budget        authority                      in     the       “M” accounts                remain            available              indefinitely

to     an agency                 for         payment             of    previously               recorded            obligations.

Merged        surplus                  authority                 balances          remain            available              for        restoration
to     the        “Ml’ account                to    cover            upward         adjustments                of     previously

recorded             or     incurred               but     unrecorded                obligations.


As of         September                30,     1989,           the         amount       in    the      DOD “Ml’ account                          was

about         $18.7         billion.                The DOD merged                      surplus             accounts,                  which          have

accumulated                 surplus            budget           authority               since         their          inception                 in       1956,

contain            an additional                    $25        billion.              By comparison,                        the         “M” accounts

for     all        other       executive                  branch            agencies          total           $9.5         billion.

We obtained                 information                   on most            of     DOD’s         “M” account                    transactions

over      $100,000             in       the        Army,        Navy         and     Air      Force           for     fiscal             years

1985-1989.                  The number                   and    dollar             value      of      these          transactions                      has

increased             significantly                       during            that     period.                For      example,               in        fiscal

year      1985        the      Air       Force            had        55 transactions                   using          I’M” account

authority             totalling                about           $43 million;                  in     fiscal           year         1989,          it      had

111     transactions                    totalling               about            $445      million.

We reviewed                 18 “M” account                      transactions--6                       each          from         the     Army,

Navy,         and Air          Force,              with        both         large       and       small        dollar             values--to

determine             whether            the        use        of     the        “Ml’ account             was appropriate.

Although             we are          still          reviewing                some of          the      details,                  our      initial

review            indicates             that        in     7 of            these     cases,           the      transactions                      appear

to     be appropriate.                         In        3 cases,            we believe               the         transactions

involved            an improper                    use     of        the     “M” account.                     In     the      other            8 casesl

the     services                 used     expired          budget            authority                in    circumstances                           which,

for     a variety                 of     reasons,           are      questionable.                         In    these            latter
instances,             our          case        studies           indicate            that        the       questionable
circumstances                     of     the     individual                 cases       relate             more       to     financial                      and

contract            management                  deficiencies                 within          DOD, than                to     the        use            of

expired         and         lapsed           accounts.

We agree            that          additional              legislation                 would           be helpful                  to        limit            the

amount         of     surplus             budget          authority                which         is     available,                 and            to

improve         accountability.                           We also            believe             that       financial                  leadership,
such      as wouid                be provided              by      the       establishment                      of    a Chief                Financial

Officer         for         the         government,             and         improved             reporting             and         auditing                   of
transactions                     using       lapsed        authority,                 are        necessary             to         resolve               the
kinds      of       problems              we observed                in      our      work.             Finally,             it        is      also
necessary             for         DOD to         correct           certain            financial                 and    contract

management             practices                 which       contribute                 to       unnecessary                 use        of          “M”

account         authorities.

In     1956,        when          the     Congress           established                   the        “M” account                  and         related
mechanisms,                 it      anticipated              that         the       balances               of    these            budget

authorities                 would         remain          relatively                small         and       that       the         number               of

transactions                     involving          the      use       of       these        authorities                   would             be few.

Recently            this          has     not      been      the       case.            In    DOD, the                amounts                in        these
budget       authorities                 have         become      quite            large         and        the       number         of
transactions               has        increased           dramatically.

We were          able      to     obtain          relatively               complete                  information                on   "M"

account          transactions                  over      $100,000             in       the      Navy        and Air             Force.        Both
agencies           significantly                  increased              their          use      of        "M"       account         funds

during       the        last      five         years,      as shown                in        table         1.

Table       1:      Navy and             Air      Force        Transactions                     Involving              Lapsed          Budget


                           FY 85                  FY 86                  FY 87=                       FY 88                 FY 89
Number of
transactions               18                     28                     84                           64                    63
Value                      $lJ.tiM                $30.5M                 S132.2M                      $78.7M                S117M
aIn 1987 the Navy requested      an unusually   high amount                                                                of    "M"      account
budget  authority for Shipbuilding      and Conversion.

                                                               AIR       FORCE
                           FY 85                  FY 86b,                FY 87                        FY 88                 FY 89
Number of
transactions               55                                                                         100                   111
Value                      $43.3M                                        $4.9M                        $344.7M               $444.9M
bAir    Force           "M"     account           data     for       the         4th     quarter                of    1986       was

Information               on Army             Q*~tv account          transactions                      was Only             readily

available           for        part      of     FY 1989          and      FY 1990--a                   total          of    about         7

months.            However,             during         that          time,        the      Army          identified                103
transactions               over         $100,000             involving                 I’M” account               authority

totalling             $133    million.

Our    analysis            also         shows         that       more          than       60% of           the         transactions
involved           surplus         funds             from      the        major         procurement                    appropriations.

Although           we did         not     examine              all        of     the      transactions                    in    detail,        the

services           most      frequently                cited          as justification                           for      using       lapsed

budget       authority             such          reasons             as cost            overruns              and       contract



As I mentioned                earlier,                we reviewed                 in     detail            18 I’M” account

transactions               as case          studies,                 in       an effort             to     determine              whether       the

use    of    the       lapsed           funds         was appropriate,                         and       to      better         understand

the    nature         of     any        questionable                  practices                if    they         occurred.

Examples         of      appropriate                  use      of     lapsed            budget           authority

         Navy:           Radio          Procurement

The Navy         used        about         $29 million                    in    expired             and       lapsed           budget

authority           to     procure          secure            channel             radios            that       were        being

developed           under         an Army            Contract.                   In     this        case,         in      1983      the      Navy

originally            contracted                to     buy       a different                   radio          (Bancroft)              that

would        provide             interim                 capability                  until         the         more      capable                Single

Channel         Ground             & Airborne                     Radio          System            (SINCGARS)                  became            available
in     the    early             1990s.               The         1983        contract             was terminated                          for     default

in     June     1988,            and          the        Na’vy initiated                        plans          to     issue         a replacement

contract            for         radios              that         were        technically                  similar              to    the         Bancroft

radios        for         delivery                  in     the      mid-1990s.                    Because              of      concerns                about

having        two         different                  radios             in    use , particularly                            when          SINCGARS
would        also         be available                      in      the       mid-1990s,                  theFiscal                  Year             1989         DOD
                                                                                                            ‘% ,,
Appropriation                    Act      directed                  that         “funds           appropriated                      for         the

procurement                of      the...Bancroft...                             radios           shall             be available                      only         for

procurement                of     SINCGAHS radios.”

The resulting                    use      of         $29 million                     of      expired            and      lapsed            funds             for

this     procurement                     is     consistent                    with           Comptroller                General                 decisions

regarding            replacement                         contracts.                   Such         funds            may be used                  when          the

contracting                agency              terminates                    a contract                  for        default          by the

contractor,                and      enters                 into         a replacement                     contract              to        satisfy              the
agency’s            continuing                  bona             fide        need         for     the          goods        and      services

involved.                 We have              held         that          funds           provided              for      the        original

contract            remain             available                  to      fund        a replacement                      contract                of      the

same size            and         scope          as         the      original                 contract.                 Therefore,                  we

consider            that         this          transaction                    was appropriate.

In   another          example               of       an appropriate                         use       of    expired            or      lapsed

budget       authority,                   the        Army          used          about        $7.3         million            in     expired              and
lapsed       budget            authority                   to      fund          the      negotiated                 settlement                for

repair       and        retrofit                of     T-700           engines              on various                  Army       aircraft.                   The

settlement            was the               result              of        the         contractor’s                claim        for      costs

associated            with           a defect                in      the         engines.               According              to      Army

officials,              the         settlement                  with            the      contractor                is    an    implied

admission          of      Army           liability                  and         this       liability                was      interpreted                  to

be within          the         scope            of     the         contract.

In   a number            of      Comptroller                      General                decisions,             we ruled               that          an

agency’s        negotiated                      settlement                  of         a claim          which           is    within           the        scope

of   the     contract                is    properly                  charged              against           the         appropriation

available          at         the      time          of      the       original               contract.                  Accordingly,                     we

believe        that        the        Army’s               use       of         lapsed        budget          authority                in      this

instance        was appropriate.

In   February            1988,            the        Air        Force            approved             the     use        of    $38.5           million

in   lapsed        budget             authority                   and       $74.4           million           in        expired         budget
authority              to     fund         contract                 modifications                            calling              for      testing            of

four      satellites,                     satellites                    14 through                     17,      procured                 for      the     Defense
Support          Program.                  Two of                the       four           satellites                  were         procured              in

fiscal          year        1983          and         the        other             two        were          procured              in     fiscal          year

1984.           Although             the         original                procurement                         contract              included              some
contractor              testing,                 certain                “qualification                          and      acceptance”                     testing
was not          included,                 unlike                similar                contracts               in     this             program.              Air

Force       documents                indicate                    that         this            was a deliberate                           omission             due      to

“budget          limitations.”

Lapsed          and     expired                 budget            authority                     was         requested              to     complete              the

previously              omitted                 testing.                 An Air                 Force          legal         opinion              dated
January          27,        1988,          noted            that         the         deferred                 testing              was         “considered

an integral                 part      of         this            purchase                 and         the     program              office          had,         at

the      time     the         contract                 was awarded,                        every             intent          of         purchasing              this
type      of     testing.”                      Further,                the         contracting                   officer                had      concluded
that      the     modification                         was within                       the      scope          of     the         original              contract

for      satellites                14 through                     17.

We do not              believe             it         was proper                    for         the     Air       Force            to     use      expired

and      lapsed         authority                     to    fund         this             contract              modification.                        Although

such      funds         may be used                        for      unanticipated                            adjustments                  to

obligations,                  it     is         not        proper             to        fund          a modification                      with       expired
funds       when        the        performance                      called                for         by the          modification

deliberately                  was omitted                        from         the         original              contract                 for      budgetary

reasons.               Tne use             of         expired            and         lapsed              funds         in     this             fashion          is

    inconsistent                       with         sound         financial             management                      and         contracting


              Air             Force:            Payment            of     Con.tract               Dispute               Judgemen_t

    In      the         Sidewinder               missile             program,              which             is        jointly             funded           by    the
    Navy      and             Air      Force,         the         contractor               submitted                    a claim                for        the    costs
    associated                      with      correcting                 defects             in     some of                  the        components               being

    produced.                       The government                   disputed              the       claim              in         1981,        maintaining

    that          the         contractor              was         responsible                 for        the       costs.                  The contractor

    filed          a claim                 before         the      Armed         Services                Board            of        Contract               Appeals.
    In      1988,             the      Board         ruled         in     favor         of        the        contractor.                        The Air           Force

    inappropriately                           used        over       $1.4        million                in     lapsed               procurement                  funds

    to      pay         its         portion          of     the      award         to      the          contractor.                        The Navy,              on

    the      other             hand,          appropriately                     paid       its       share              of        the      same award

    (about              $750         thousand)              out      of     current               funds.                     In     Comptroller

    General              decisions,                  we have             held      that,            under          the            Contract                Disputes

    Act      of         1978,          payments             required             by     the         Board          or         court            judgments

    should          be funded                  by appropriations                           current                at      the           time         of    the

    judgment,                  as was done                 by      the      Navy        in        this        case.


    Examples             of         Transactions                          Involving

    Questionable                         Practices

    Several             of         the         cases             we reviewed                  involved              use     of    lapsed             budget

    authority                 in         circumstances                       where            questionable                  actions            were         taken          at

    the     time         the          original                    obligation                  or     funding             commitment                was or

    should         have             been             made.           As a direct                     result          of     these’questionable

    actions,             requests                     were         made        later            to     use     expired            or     lapsed             budget

    authority.                      The         “M”         account            transactions                     themselves               appear             to

    satisfy             the         appropriate                         criteria              for      use     of        those     funds.                  However,
    we believe                     that         the         circumstances                       as a whole                point         to     serious

    deficiencies                         in     financial                  and      contract                 management            which             also         need

    to    be      addressed                     if         the     perceived                problems                in    the     use         of     “M” account

    funds         are         to      be        resolved.

                Navy:               A-6         REWING ,Agreemeqt

    In    1985,          the          Navy            contracted                   for        replacement                 wings         for         the     A-6E
    aircraft.                  In         a July                 1987      Memorandum                  of     Agreement,                the         contractor
    and     the         Navy          reached                agreement                   on additional                    work     that            would          be

    necessary                 to     make             the         replacement                   wing         compatible            with             the

    aircraft.                  This             agreement                  provided                 that      the        cost     for         the         work         would

    not     exceed             $19 million,                          and       covered               work      that        had     been            underway              at

    the     direction                     of         the     Navy          since          1986.              However,            no funds                 were
    obligated                or       committed                    at      this          time        because             such     funds            were          not


Normally,             commitment                  of        funds          for      contract              modifications                       is    made at
the      time       of    the         modification,                     although                  Navy         officials               stated            that
commitment               of     funds            was only             required               when         contract               modifications

are      definitized,                  or        prices            finalized.                     Even         so,      Navy         regulations
require           that         contract               modifications                       be definitized                        no more            than         180

days      after          the      award,              in     this       case           by    January                 1988.           However,             the

agreement             was not            definitized                    until             February              1990,           or     over        two        and

a half          years         after         it        was signed,                   and      almost              four         years       after           the

Navy      authorized                  the        contractor                 to      perform              the         work.           The Navy             used

$15.2       million             in     lapsed              budget           authority                ($7.6            million           from         each        of

fiscal          years          1983      and          1985)         and          about       $3.8         million               in     expired            and

current           budget          autnority                  to     fund          the       agreement.                     We believe                this
case      illustrates                  now improper                     contract                  management                  can      result            in

the      unnecessary                  use        of    lapsed           and         expired              funds,            and may raise

other       legal         issues            as well.

As is       appropriate                  under             DOD and Air                    Force          regulations,                   the        Air

Force       had      committed                   $610,000             of         fiscal           year         1985        funds        for

contractor               award         fees           in     the      Defense               Support             Program.                The program

encountered               schedule                delays,             and         in      April          1987,          the      Air      Force

withdrew           the        funds         committed                 for         the       award         fees          because           they           would

otherwise            have        expired               at     the      end          of      the      fiscal             year.           The        funds


    were       reprogrammed                      to      help        fund          a classified                    program.               In        February

    1988,        the        Air      Force            determined                   that         the       Defense             Support           Program

    contractor               was entitled                       to     the         award         fees        and        $610,000              of      expired
    fiscal           year         1985       funds           were           used.

    Air      Force          officials                 told       us         that        it      is    a common practice                              to
    withdraw           committed                   but       unobligated                      funds        to      maximize              the         use        of

    current           budget              authority.                   However,                we believe                 the      practice                  of

    withdrawing                   funds          committed                   for    a potentially                       valid       requirement,

    reprogramming                    them          for       another               purpose,               and      then         using          the         expired

    or     lapsed           accounts               to      reinstate                the         funds        for        their       original
    purpose           results,               at       a minimum,                   in        questionable                 budgeting


    In     recent           months,              several             bills          have            been     introduced                  to        limit             the

    availability                   of      expired              appropriations                        and        to     provide           additional

    controls            on the             use        of     such           authority.                    Your        bill,        Mr.         Chairman,                     is

    the      most       recent             of      these.              While            the      bills          differ           somewhat                  in        their

    approach,               we support                   your        bill          and        the        general          intent          of         each            of

    the      bills          to     eliminate                 the       current                “M” and           merged           surplus              account

    structures,                   limit           the      amount             of    surplus               budget          authority                  which            is

    available               at     any       time,           and       improve                accountability                     and      the             integrity

    of     appropriation                     accounts                after          expiration.



     For      example,                 under            your         proposal,                   individual                    appropriation                     balances
     would          be carried                    forward              for        5 years             after              they         expire.             The

     current              “Ml’ account                   and merged                    surplus             balances                   would         be

     eliminated.                       This            approach              provides               the       flexibility                     needed             to     pay
     valid          obligations                      while,            at      the         same time,                    it         increases            control

     over       these               accounts             by         retaining               fiscal            year             as well          as

     appropriation                          identity.                  This        provision                  revitalizes                     the        Anti-

     Deficiency                     Act’s         application                     to       expired            accounts                  by providing                    for

     the      fiscal                year       visibility                    of      appropriations--a                                feature            that          is,

     for      all         practical                  purposes,                 now lacking                    for             the     I’M” and merged

     surplus              accounts.

     Our      analysis                 of      the       services’                   “Ml’ account                   transactions                     revealed

     that,          of        697      transactions                      for       which            information                       was available                     on

     either             the         year       the       contract                 was signed                  or     the             year     from        which              “M”

     account              funds            were         drawn,           16 percent                   used          about             $120      million                of

     funding              authority                    from         fiscal         years           which            had          been        expired             for         more

     than       5 years.                     This        analysis                 suggests                that       the             five     year        period              of

     availability                      of      lapsed               appropriations                     suggested                      in     your        legislation

     is      a reasonable                      approach.

     Your       legislation                       also         permits               limited           use          of         current          year

     appropriations                          to     cover            preexisting                    obligations                       that      must           be paid

     after          the        period             of     availability                       of     expired                    authority             has     passed.

     This      would                eliminate                 the      need          for     any       agency                  to     come to            the

     Congress                 for      small            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            OK the          President

        determines             that        the         purposes               for        which     the          appropriation                     was made

        have      been        carried             out.

        ADD.1T I ONAL A,C,TI.QN,S,.J4AY ,B.E,.NEE.DE.D

        The "M" account                    transactions                    we examined                    for        this         study          suggest

        that         there     are      several              concerns                which        need          to     be addressed                    in        other

        aspects          of    DOD financial                      and      contract               management                  to     avoid            the
        questionable                 outcomes               we observed.                     There         is        great         variation                 in     the

        details          attendant                to     each         case          we examined;                 as a result                 we are               not
        convinced             that      our        sample             is   an exhaustive                        indicator             of     all            of    the

        concerns             which      need           to    be addressed.                        However,              several             matters               are


        --     Clarification                 may be necessary,                             at     least          for        the     Air      Force,               on

               the     appropriate                 procedures                  for        financing,                 from         current             rather

               than      expired           budget            authority,                   contract              claims            awards          by the
               Armed         Services             Board          of    Contract              Appeals             or     the        courts.

        --     Contract          management                  appears                to    need     strengthening                      in

               definitizing                contract               modifications                    and          obligating                 the        required

               funds         on a more             timely             basis.

--    Additional          controls          may be necessary                   to    ensure        that   committed

      funds       for    valid         contingent          liabilities              are      not   reprogrammed           but

      are     retained           for    appropriate           payment          upon        occurrence         of    the

      contingent          event.           In    a separate              report,      we will         soon     be
      providing          additional             information              on this          issue.

Mr.    Chairman,          this         concludes       my formal              statement.            We will         be happy
to    answer       any    questions             you   or    members          of     the      Subcommittee           may have

at    this     time.