Defense Primer: Defense Working Capital Funds

Defense Primer: Defense Working Capital Funds

March 23, 2018
Defense Primer: Defense Working Capital Funds
A Department of Defense (DOD) working capital fund
service provided plus all overhead costs. Fund managers
(DWCF) is a type of revolving fund used to finance
generally budget to recover all operating expenses,
operations that function like commercial business activities,
including
(e.g., equipment maintenance, supply and storage activities,
 direct costs, such as labor and materials;
and transporting equipment and people). According to the
 indirect costs, such as facilities operation and
DOD Financial Management Regulation 7000.14-R,
maintenance;
revolving fund accounts finance a “continuing cycle of
 hardware costs, such as acquisition and repair of
business-type operations” by incurring obligations and
equipment needed to support warehouse operations;
expenditures that generate receipts.
 operations costs, such as labor, travel, training,
transportation of personnel; and
DWCFs are used throughout the department in an effort to
 other general and administrative costs.
efficiently provide services or industrial capabilities.

Revolving funds are often considered to have several
Operating and Managing a WCF
benefits. First, they operate without fiscal year limitations
DWCFs may realize gains or losses within each fiscal year.
(i.e., amounts in a WCF do not expire). Second, they
Gains may be returned to customers by setting lower rates
facilitate the aggregation of orders, allowing the
for future fiscal years. Managers can recoup losses by
government to leverage its purchasing power. Finally, they
establishing higher rates in later years or seeking additional
allow for the establishment of supply inventories that can
appropriations from Congress. Regardless, DWCFs must
lead to reduced delivery times.
maintain a positive cash balance at all times to avoid Anti-
How Do Working Capital Funds Work?
Deficiency Act violations.
When establishing a WCF, Congress typically provides a
DOD Financial Management Regulation (FMR) 7000.14-R
direct appropriation to the fund (the initial appropriation
governs DWCFs. The FMR directs DWCFs to operate on a
and positive fund balance is often referred to as a cash
break-even basis (revenue generated equals the cost
corpus). Fund managers can use the cash corpus to buy
associated with receiving the revenue). Fund managers
parts and supplies in advance of an anticipated requirement
track and report two main types of operating results in
(such as a depot overhaul of an aircraft), or to contract for
managing a WCF. The net operating result (NOR) is the
services (such as commercial air transportation for a
net difference between expenses and funds received for a
deploying military unit). A customer―such as an Air Force
single fiscal year. The accumulated operating result (AOR)
squadron―can then buy the good or service from the WCF-
is the net difference between expenses and funds received
funded organization (e.g., a depot), using operation and
since the inception of the fund. Managers typically use
maintenance funds appropriated to the squadron for that
AOR in establishing the future rates to be charged to
purpose. These WCF transactions move hundreds of
customers.
billions of dollars within DOD accounts annually.
History of DOD Working Capital Funds
Rates
Section 2208 of Title 10 was codified in 1962 and provides
In general, DWCFs are expected to be self-sustaining after
the Secretary of Defense the authority to establish a variety
the initial appropriation. Fund managers establish rates
of working capital funds to support DOD operations. In
charged by the fund, taking into account all costs associated
1991, the Secretary of Defense combined five industrial
with each anticipated transaction. The rates cover the
funds, four stock funds, and multiple appropriated fund
commodity cost of materials as well as a surcharge, which
support activities that had been established by the services
includes overhead, operating expenses, and administrative
into the Defense Business Operations Fund (DBOF) to
requirements. Fund managers establish the rates 18-24
streamline management and oversight responsibilities.
months ahead of schedule, and the rates are typically locked
These operations included depot maintenance,
in for a specific fiscal year.
transportation, supply management, and finance and
WCFs are typically organized by budget activity (a category
accounting.
within each fund that identifies the purposes, projects, or
types of activities financed by the fund). In a supply-
By 1996, the DOD recognized the difficulty in managing
oriented budget activity, fund managers generally add a
one large WCF and associated challenges in setting rates
surcharge to all items provided in order to cover
across the DOD. As a result, the Under Secretary of
management and other overhead costs such as warehousing
Defense (Comptroller) disestablished the DBOF in 1997
and shipping. Non-supply budget activities (such as those
and established five DWCFs.
providing maintenance or information technology services)
establish surcharge rates based on the unit cost of the
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Defense Primer: Defense Working Capital Funds
Air Force Working Capital Fund (AFWCF)
Many commercial market factors directly affect DWCF
The AFWCF comprises three activities: two activity groups
operations. Customers pay a set rate (typically for that year)
and the Transportation Working Capital Fund (TWCF). The
regardless of the market conditions. A difference in market
Deputy Assistant Secretary for Budget (SAF/FMB)
price of an item and the set rate for that item results in
manages Consolidated Sustainment Activity Group and the
either transactional profit or loss. Differences can accrue
Supply Management Activity Group Retail. SAF/FMB is
quickly due to the large scale of DOD operations. For
also the Executive Agent for the TWCF, but U.S.
example, a sharp increase in the price of fuel―like the 10%
Transportation Command (TRANSCOM) manages the
increase in two weeks in May 2009 ―can quickly consume
operations. While TRANSCOM manages the TWCF, its
the cash in a DWCF that deals heavily in transportation
three service component commands (Air Mobility
services. Likewise, fuel prices may not increase as much as
anticipated at the time the set rate was determined, leaving
Command, Military Sealift Command, and Military Surface
the DWCF with large amounts of excess cash at the end of
Deployment and Distribution Command) utilize the funds.
the year.
TWCF also includes the Defense Courier Division.
Navy Working Capital Fund (NWCF)
DWCF funds do not expire. When excess cash accumulates
in a DWCF, DOD officials or some in Congress may see
The Assistant Secretary of the Navy (Financial
that money as a funding source for other requirements.
Management & Comptroller) manages five activity groups:
While there are budgetary procedures to enable the transfer
Depot Maintenance, Base Support, Supply Management,
or reprogramming of funds to other accounts, the transfer
Research and Development (all Naval Warfare Centers and
of funds may negatively affect future rates to customers,
the Naval Research Laboratory), and Transportation.
available funds for ongoing or future work, and daily
Army Working Capital Fund (AWCF)
operational risk if a major work interruption or shortfall
occurs.
The Assistant Secretary of the Army (Financial
Management and Comptroller) manages two activity
In addition to the day-to-day challenges associated with
groups: Industrial Operations and Supply Management.
financial management of a DWCF, fund managers
Defense-Wide Working Capital Fund (DWWCF)
sometimes face challenges with performance or quality of
services provided. If an activity funded by a DWCF is
The DWWCF comprises six activity groups managed by
providing a poor-quality service or is not meeting a
three agencies:
customer’s schedule requirements, the customer may seek a
 Defense Logistics Agency (DLA)—DLA reports to the
different provider, which would result in the fund not
Assistant Secretary of Defense (Sustainment) and
making the sale. Often in this case, excess goods will
manages three activity groups: Consumable Supply
remain in WCF-funded warehouses or contracted services
Management, Energy Management, and Document
will go unused. As a result, the fund will not earn the
Automation and Production.
surcharge and its financial profile will begin to suffer.
 Defense Finance and Accounting Service (DFAS)—the
DWCF Budgets
Under Secretary of Defense (Comptroller) oversees
Budget information for DWCFs is publically available
DFAS. It is a service provider that directs, approves, and
through the DOD Comptroller’s website
performs finance and accounting activities for the
(http://comptroller.defense.gov/). The annual budget
military services.

justification books provide a financial profile of each of the
Defense Information Systems Agency (DISA)—DISA
funds covering a three-year period (year of the request and
falls under the DOD Chief Information Officer and
two years prior). The profile generally includes an
manages two activity groups: Computing Services and
accounting of fund revenues, operating expenses, capital
Telecommunications/Enterprise Acquisition Services.
investments, and cash forecasts for the budget year. The
NOR and AOR (actual and projected) can be found in these
Defense Commissary Agency (DeCa)
documents.
DeCA operates a worldwide chain of commissaries
providing groceries to military personnel, retirees, and their
The budget justification books also depict and explain any
families. The DeCA WCF includes three activities: Resale
anticipated rate/surcharge adjustments and provide detail to
Stocks, Commissary Operations, and the Surcharge
support requests for direct appropriations, if required. In
Collections Trust Revolving Fund.
addition, the budget justification books may provide
DOD WCF Challenges
information on fund operations to include performance
metrics (such as customer wait times or supply quality
DOD WCF managers experience a variety of challenges in
assessments), management challenges and initiatives, and
maintaining operating costs and ensuring a stable cash
manpower trends.
corpus. The first of these is variability in customer orders.
Customer requirements may change based on real-world
Jason A. Purdy, jpurdy@crs.loc.gov, 7-5050
operations, increased maintenance requirements, or a
decreased ability to afford services based on higher than
Lynn M. Williams, lmwilliams@crs.loc.gov, 7-0569
expected rates. Delays in appropriations (e.g., operating
IF10852
under continuing resolutions) can also affect customer
orders.
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