Current Issues in Defense Working Capital Funds

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Current Issues in Defense Working Capital Funds

• Tom Lavery
• Revolving Funds
• OUSD(C) Program Budget
• May 28, 2009

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Defense Working Capital Fund (DWCF) Basics

• Established under the authority of Title 10,
  United States Code (U.S.C.), Section 2208
• Five funds (sub-numbered accounts)
• Army,
• Navy,
• Air Force,
• Defense Commissary, and
• Defense Wide
• DWCF consist of twenty activity groups that are
  managed by the Components (e.g., Supply, Depot
  Maintenance, Transportation)
• Charters - DWCF activity group chapter approved
  by the Under Secretary of Defense (Comptroller)
• Funding - initial transfer or appropriation used
  for start-up cost
• Funds for continuing operations are generated by
  the acceptance of customer orders

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FY 2010 Presidents Budget Request120.6 Billion
Obligation Authority
(Dollars in Billions)
Other 3.6B
DFAS 1.5B
Distribution 1.8B
DISA 5.5B
Commissary 12.4B
Transportation12.4B
Supply 63.5B
RD 11.0B
Depot Maintenance12.6B
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Defense Working Capital Fund (DWCF) FY 2010 DWCF
Budget
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Civilian End Strength
Endstrength in Thousands
49 percent reduction in end-strength since the
inception of DBOF/DWCF
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Issues

• Effects of the war to date
• Cash Considerations
• Cash Impacts of Supplemental Appropriations
• Depot Maintenance Growth, Capacity, and Carryover
• Fuel Budgeting and Indefinite Appropriation
• What Happens When the War Slows Down
• Recent Varied Congressional Authorization Changes
• Minimum Capital Investment for Defense Depots
• Effects of Enterprise Resource Planning Systems
  on Budget Structure
• Appropriating Supplemental Funds as Three Year
  Money

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Effect of the War

• DWCF work surged before the war started and, for
  certain business areas, workload has either
  continued to grow or continued at high levels
• Army and DLA Supply, Army and Marine Corps Depot
  Maintenance, Transportation, and Distribution
  Depots have seen significant business growth due
  to the war
• Other business areas grew in FY 2003, but have
  returned to more normal levels
• DWCF Presidents Budgets include planning for
  contingency related workload and funding

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Effect of the War
(Dollars in Billions)
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DWCF Supplementals
(Dollars in Billions)
lt0.1
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Effect of Large Supplemental Appropriation on
Cash Balance over Lead-Time
(Dollars in Billions)
Notes Assume 750 million 10 Days of Cash and
a Supplemental Appropriation of 1 billion for
war reserves in December 2007, which will not
disburse until two years leadtime later
Revolving Fund cash will equal 23 days of cash
during those two years.
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Effect of Increased Business on Cash
(Dollars in Millions)
Timing of Sales is immediate Disbursements occur
one leadtime later
12
Effect of Decreased Business on Cash
(Dollars in Millions)
Timing of Sales is immediate Disbursements occur
one leadtime later
13
Industrial Operations OCO Growth

• Pre-war Army Industrial Operations did 2.37
  billion of business per year and has grown to
  6.99 billion.
• Workload increased by 194 percent.
• Personnel, excluding contractors, have increased
  from 16K to 25K (56 percent) .
• Output is up significantly while the requirement
  has also grown.
• Efficiency is up with increased workload. Army
  activities have performed significant Lean/Six
  Sigma events and are doing more.
• Marine Corps depots do double the pre-war
  business.

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Army Industrial Operations has Increased 194
Since FY 2002
(Dollars in Billions)
FY 02 Orders
Workload has Grown Significantly Due to War
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Representative Workload
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Unfilled Orders at Army I/O Depots Increased
Until FY 2009 Despite Increasing Capacity
Carryover Has Increased 3x from FY 2002 Levels
Depot Total Direct Overtime Percentage Increased
11 From FY07 to FY08
in Billions
2 shifts, 11 hrs/day, 6 days/week
Critical Work Centers (WC) 3 shifts, 7 days/week
Critical WCs 3 shifts
Most Critical WCs 3 shifts, 7 days/week
Other Critical WCs 20 hrs/day, 4 days/week
Critical workload is on 3 shifts
FY02 Level 0.9B

• Unfilled orders, otherwise known as carryover, at
  Army Depots increased to 5.2 billion at the end
  of Dec. 2007
• Carryover has been above the Departments
  established target
• Carryover increases with new orders in the first
  quarter of the new fiscal year.
• Carryover was 2.1B higher than its peacetime
  analog (0.9B in FY 2002)
• Armys Depot capacity has expanded to keep pace
  with orders
• Throughput has increased by 177 since FY 2002
• Orders have increased by 194 since FY 2002

Excess carryover unnecessarily ties up funds that
could be used for other, higher priority
requirements
17
DLA Supply Sales Growth (Non-Energy) Since 2001
(Dollars in Billions)
18
NYMEX Crude Oil Futures
Dollars per barrel
Crude Oil Market FluctuationsJanuary 2003 -
Present
As of May 8, 2009
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Effects of Fuel Pricing Volatility on DoD
(Dollars in Billions)
14.2 billion in Supplemental Fuel Funding
Received FY 2000 FY 2008
2.9B cancellation request in FY 2009 OCO
Revision
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Indefinite Appropriation for Fuel Price
Fluctuation, Refined Marginal Expense Account,
Defense

• Indefinite Appropriation Such sums as are
  necessary
• The funds come from the Treasury like any other
  appropriation the amount is determined by a
  formula
• (Actual Price Budgeted Price) x Quantity
• Covers funding shortfalls due to fuel price
  increase for budgeted quantity of fuel
• Returns to Treasury excess funding budgeted for
  fuel when fuel prices drop
• The assumption is that over time additional funds
  provided to DoD will be offset by funds withdrawn
  from DoD. Zero scoring proposed
• Indefinite appropriations are in use in at least
  nine other federal programs with high volatility
  and difficulty in forecasting

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An Indefinite Appropriation for Fuel Model

• Completely protects DoD fuel budget from price
  inflation during the year of execution but does
  nothing for budget year.
• Does not change how DoD budgets for fuel
• Fuel price based on Administration (Troika of
  OMB, Treasury, Council of Economic Advisors)
  estimate of crude oil price.
• DoD estimates refined fuel cost using model
  approved by OMB.
• DWCF adds overhead cost to price of fuel to
  develop fully burdened price of fuel.
• Services budget for needed amount of fuel.
• During budget formulation, DoD still must fund
  fuel price increases.

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Congressional Authorization Changes

• Advanced Billing Limitation of 1 Billion
• Cash Transfers are made Prior Approval vice
  Notification
• Minimum Depot Capital Investment Threshold of 6
  percent
• Acquisition Workforce Development Fund
• Research and Development Funding Reservations

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Minimum Capital Investment for Certain Depots

• FY 2007 Authorization Act established a minimum 6
  percent capital investment requirement for most
  organic depots.
• There are problems with the laws calculation
  requirement six percent of the last three
  years depot business base may be overly high
  when workload decreases from wartime levels.
• GAO is reviewing status for Senate Armed Services
  Committee.
• At April exit brief, GAO indicated that SASC
  concern is more with what new equipment is slated
  for organic depot maintenance.
• Depot Caucus/GAO concern differs from the
  provision in the FY 2007 Authorization Act.

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Enterprise Resource Planning (ERP) Systems

• Based on Commercial Off The Shelf (COTS) Software
• Mixed success in Defense to date
• Out of the box solution needs to connect with
  other systems and federal financials have been
  distinctive enough to cause problems
• Commercial entities and COTS software do not
  record inter-entity transfers
• DWCF ERPs are changing business area structures
• Air Force ERP for Depot Maintenance and Supply is
  eliminating inter-entity transactions Supply
  sells parts to and buys repair of repairables
  from Depot Maintenance Depot Maintenance
  performs depot repair and buys parts from Supply
• DLA Supply (Non-Energy), Distribution Depots, and
  Reutilization Marketing (DRMS) buy and sell
  from each other
• Air Force and DLA are consolidating these
  businesses into a single entity

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3-Year Supplemental Appropriationvs. No-Year
Funds
ABNORMAL
NORMAL

• For an additional amount of Defense Working
  Capital Funds, 1,000,000,000, to remain
  available until September 30, 2010.Emergency
  Supplemental Appropriations Act for Defense, 2008
  Public Law 110 - 161

• For an additional amount for Defense Working
  Capital Funds, 1,115,526,000.U.S. Troop
  Readiness, Veterans Care, Katrina Recovery, and
  Iraq Accountability Appropriation Act, 2007
  and all other Supplemental Appropriation Acts

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3-Year Supplemental Appropriationvs. No-Year
Funds

• Appropriation to the DWCF as 3-year money
  requires separate apportionment and accounting
  and produces execution difficulties
• Execution in DWCF systems has obligation and all
  other financial events occurring in the basic
  DWCF no-year system
• Financial transactions must then be transferred
  to the separate three-year appropriation to match
  the funding
• Delays in obligation and reporting supplemental
  execution are the result

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Pentagon Arithmetic

• Population 23,000.0
• Miles of Corridor 17.5
• Height Above Sea Level 380.0
• Total 23,497.5

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• Questions