Defense Primer: Defense Working Capital Funds

Defense Primer: Defense Working Capital Funds

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Updated December 6, 2024

Defense Primer: Defense Working Capital Funds

Since 1870, the U.S. military has operated various types of working capital funds to procure and provide materiel and commercial products and services to its forces. Codified under Title 10, Section 2208, of the United States Code (U.S.C.), a defense working capital fund (DWCF) is a type of revolving fund intended to operate as a self-supporting entity to fund buying and selling activities of the Department of Defense (DOD) (e.g., acquiring parts and supplies, maintaining equipment, transporting personnel, conducting research and development). DWCF transactions move more than $100 billion within DOD annually.

According to the DOD Financial Management Regulation (FMR) 7000.14-R, revolving fund accounts finance a continuing cycle of business-type operations by incurring obligations and expenditures that generate receipts. These funds are designed to break even over the long term through fees charged for goods and services provided. DWCFs are broadly categorized as intragovernmental revolving funds— a type of revolving fund “whose receipts come primarily from other government agencies, programs, or activities,” according to the Fiscal Law Deskbook 2023. DWCFs and other types of revolving funds are used in DOD to support recurring requirements and to ensure the continuous delivery of goods and services such as utilities, fuels, food, clothing, and a range of industrial base capabilities.

DWFCs offer certain procurement advantages and flexibilities to DOD. For example, they generally operate without fiscal year limitations (i.e., funds in a DWCF account do not expire); facilitate the aggregation of orders, allowing DOD to leverage its purchasing power; and allow for the establishment of inventories that can reduce delivery times.

Fund Basics

When establishing a DWCF, Congress typically provides a direct appropriation to the fund. This initial appropriation and positive fund balance is called a cash corpus. Using the cash corpus, fund managers purchase products and services, usually in advance of an anticipated requirement (e.g., a depot overhaul of an aircraft or ship), and establish a product catalog (e.g., a parts and supplies catalog) for its customers. Fund managers set product prices and stabilized rates for services that typically do not change until the next fiscal year.

Once a DWCF-funded organization (e.g., a depot) is established, the customer orders the product or service through a reimbursable agreement. Typically, the customer is a military unit or DOD organization (though a private party can also be a customer). Upon receipt of the product and/or service, the DOD customer reimburses the DWCF with funds appropriated for that specified purpose. Private- party customers typically prepay for the products and services.

Figure 1. How a DWCF Operates

Source: Figure created by CRS using data from DOD. Notes: The process illustrated above is a notional example of how a DWCF operates. Variations can exist (e.g., for private-party customers).

Rates and Budgeting DWCFs are expected to be self-sustaining, after the initial cash corpus, through rate setting and budgeting. Fund managers typically establish rates 18-24 months in advance, locking in rates for a specified future fiscal year. Fund managers establish each rate taking into account all costs associated with each anticipated transaction, including the cost of the goods and services and a surcharge that includes overhead, operating costs, and any other administrative expenses.

According to the DOD FMR, DWCFs are organized by chartered activity groups (i.e., categories within each fund that identify the purposes, projects, or types of activities financed by the fund). In a supply-oriented activity group, a surcharge is generally added to items provided to cover management and other overhead expenses (e.g., shipping costs). For activities that are service-oriented (e.g., equipment maintenance or information technology services), fund managers establish surcharge rates based on an estimated unit cost of the service provided, plus overhead costs. In general, fund managers budget to recover all operating expenses, including

• direct costs (e.g., labor and materials);

• indirect costs (e.g., facilities operation and maintenance);

• hardware costs (e.g., acquisition and repair of equipment to support operations);

• operations costs (e.g., labor, travel, training, transportation of personnel); and

• general and administrative costs.

Defense Primer: Defense Working Capital Funds

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Financial Management DWCFs may realize gains or losses within a fiscal year. At the end of each fiscal year, fund managers recoup losses by establishing higher rates in future years or, if necessary, by seeking additional appropriations from Congress. Inversely, fund managers assess gains and lower rates for customers in future fiscal years, potentially providing a benefit to DWCF customers. Regardless, DWCFs must maintain a net positive cash balance at all times to avoid Anti-Deficiency Act (P.L. 97-258, 96 Stat. 923) violations.

DOD FMR 7000.14-R directs DWCFs to operate on a “break-even” basis (revenue generated equals the cost associated with receiving the revenue). Fund managers track and report two main types of operating results: the (1) net operating result (NOR), the net difference between expenses and funds received for a single fiscal year; and the (2) accumulated operating result (AOR), the net difference between expenses and funds received since the inception of the fund. Managers normally examine AOR when establishing future rates for customers.

A Brief History of DWCFs

The modern DWCF evolved from other forms of revolving funds (e.g., stock funds, industrial funds) over the course of approximately 150 years. However, statutory authority for DOD to establish its own working capital funds was first enacted in law in the National Security Act Amendments of 1949 (P.L. 81-216, §405; 10 U.S.C. §2208). Under this authority, the Secretary of Defense can establish as many DWCFs as necessary to support DOD operations.

In 1991, the Secretary of Defense combined five industrial funds, four stock funds, and multiple appropriated fund business activities into the Defense Business Operations Fund (DBOF). This consolidated revolving fund was created to streamline management and oversight responsibilities and was the precursor to the current DWCF structure. Major activities performed under the DBOF included depot maintenance, transportation, supply management, and finance and accounting.

By 1996, DOD recognized the difficulty in managing one large fund, including the challenge of setting suitable rates for the entire DOD. As a result, DOD disestablished the DBOF and reorganized it into four DWCFs: three Military Department funds and one defense-wide working capital fund (DWWCF). Since 1997, other DWCFs have been established within DOD that support the department, such as the Defense Commissary Agency (DeCA) DWCF, and the Defense Counterintelligence and Security Agency (DCSA) DWCF.

Military Department DWCFs

Navy Working Capital Fund (NWCF) The Assistant Secretary of the Navy (Financial Management & Comptroller) manages the NWCF. Four activity groups (called “business areas”) support the Navy and Marine Corps: Depot Maintenance, Research and Development, Transportation, and Supply Management.

Army Working Capital Fund (AWCF) The Assistant Secretary of the Army (Financial Management and Comptroller) manages the AWCF. There

are two activity groups in the fund: Supply Management and Industrial Operations.

Air Force Working Capital Fund (AFWCF) The Air Force’s Deputy Assistant Secretary for Budget (SAF/FMB) manages the AFWCF. There are two activity groups in the fund: Consolidated Sustainment, and Supply Management-Retail. SAF/FMB is also the Executive Agent for the U.S. Transportation Command (TRANSCOM) Transportation Working Capital Fund (TWCF); however, TRANSCOM manages the day-to-day operations of the fund.

DOD DWCFs

Defense-Wide Working Capital Fund (DWWCF) The Defense-Wide Working Capital Fund funds the operations of three defense agencies: the Defense Logistics Agency (DLA), the Defense Information Systems Agency (DISA), and the Defense Finance and Accounting Service (DFAS). These agencies manage a total of five activity groups within the DWWCF: • DLA. The Assistant Secretary of Defense (Sustainment)

has oversight of the DLA DWCF. DLA manages three activity groups: Supply Chain Management, Energy Management, and Document Services.

• DISA. The DOD Chief Information Officer oversees the

DISA DWCF. DISA manages one activity group: Information Services.

• DFAS. The Under Secretary of Defense (Comptroller)

oversees the DFAS DWCF. DFAS is the one activity group within the fund.

DeCA DWCF The Under Secretary of Defense (Personnel and Readiness) has oversight of the DeCA DWCF. There are two activity groups in the DWCF: Commissary Resale Stocks and Commissary Operations.

DCSA DWCF The Under Secretary of Defense (Intelligence) has oversight of the DCSA DWCF. DCSA manages one activity group: Background Investigation Services.

Budget Information

Budget information for DWCFs is published on DOD and military department comptroller websites. The annual budget justification books provide a financial profile of each fund over a three-year period (year of the request and two years prior). This profile generally includes an accounting of fund revenues, capital investments, cash forecasts for the budget year, and NORs and AORs (actual and projected). Justification books also describe any anticipated rate or surcharge adjustments, and provide details to support requests for direct appropriations.

Cameron M. Keys, Analyst in Defense Logistics and Resource Management Policy Brendan W. McGarry, Specialist in U.S. Defense Budget

IF11233

Defense Primer: Defense Working Capital Funds

https://crsreports.congress.gov | IF11233 · VERSION 11 · UPDATED

Disclaimer

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