Defense Primer: Defense Working Capital Funds

March 23, 2018

Defense Primer: Defense Working Capital Funds

A Department of Defense (DOD) working capital fund

(DWCF) is a type of revolving fund used to finance

operations that function like commercial business activities,

(e.g., equipment maintenance, supply and storage activities,

and transporting equipment and people). According to the

DOD Financial Management Regulation 7000.14-R,

revolving fund accounts finance a “continuing cycle of

business-type operations” by incurring obligations and

expenditures that generate receipts.

DWCFs are used throughout the department in an effort to

efficiently provide services or industrial capabilities.

Revolving funds are often considered to have several

benefits. First, they operate without fiscal year limitations

(i.e., amounts in a WCF do not expire). Second, they

facilitate the aggregation of orders, allowing the

government to leverage its purchasing power. Finally, they

allow for the establishment of supply inventories that can

lead to reduced delivery times.

How Do Working Capital Funds Work?

When establishing a WCF, Congress typically provides a

direct appropriation to the fund (the initial appropriation

and positive fund balance is often referred to as a cash

corpus). Fund managers can use the cash corpus to buy

parts and supplies in advance of an anticipated requirement

(such as a depot overhaul of an aircraft), or to contract for

services (such as commercial air transportation for a

deploying military unit). A customer―such as an Air Force

squadron―can then buy the good or service from the WCFfunded organization (e.g., a depot), using operation and

maintenance funds appropriated to the squadron for that

purpose. These WCF transactions move hundreds of

billions of dollars within DOD accounts annually.

Rates

In general, DWCFs are expected to be self-sustaining after

the initial appropriation. Fund managers establish rates

charged by the fund, taking into account all costs associated

with each anticipated transaction. The rates cover the

commodity cost of materials as well as a surcharge, which

includes overhead, operating expenses, and administrative

requirements. Fund managers establish the rates 18-24

months ahead of schedule, and the rates are typically locked

in for a specific fiscal year.

WCFs are typically organized by budget activity (a category

within each fund that identifies the purposes, projects, or

types of activities financed by the fund). In a supplyoriented budget activity, fund managers generally add a

surcharge to all items provided in order to cover

management and other overhead costs such as warehousing

and shipping. Non-supply budget activities (such as those

providing maintenance or information technology services)

establish surcharge rates based on the unit cost of the

service provided plus all overhead costs. Fund managers

generally budget to recover all operating expenses,

including

 direct costs, such as labor and materials;

 indirect costs, such as facilities operation and

maintenance;

 hardware costs, such as acquisition and repair of

equipment needed to support warehouse operations;

 operations costs, such as labor, travel, training,

transportation of personnel; and

 other general and administrative costs.

Operating and Managing a WCF

DWCFs may realize gains or losses within each fiscal year.

Gains may be returned to customers by setting lower rates

for future fiscal years. Managers can recoup losses by

establishing higher rates in later years or seeking additional

appropriations from Congress. Regardless, DWCFs must

maintain a positive cash balance at all times to avoid AntiDeficiency Act violations.

DOD Financial Management Regulation (FMR) 7000.14-R

governs DWCFs. The FMR 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 in

managing a WCF. The net operating result (NOR) is the

net difference between expenses and funds received for a

single fiscal year. The accumulated operating result (AOR)

is the net difference between expenses and funds received

since the inception of the fund. Managers typically use

AOR in establishing the future rates to be charged to

customers.

History of DOD Working Capital Funds

Section 2208 of Title 10 was codified in 1962 and provides

the Secretary of Defense the authority to establish a variety

of working capital funds to support DOD operations. In

1991, the Secretary of Defense combined five industrial

funds, four stock funds, and multiple appropriated fund

support activities that had been established by the services

into the Defense Business Operations Fund (DBOF) to

streamline management and oversight responsibilities.

These operations included depot maintenance,

transportation, supply management, and finance and

accounting.

By 1996, the DOD recognized the difficulty in managing

one large WCF and associated challenges in setting rates

across the DOD. As a result, the Under Secretary of

Defense (Comptroller) disestablished the DBOF in 1997

and established five DWCFs.

www.crs.gov | 7-5700

Defense Primer: Defense Working Capital Funds

Air Force Working Capital Fund (AFWCF)

The AFWCF comprises three activities: two activity groups

and the Transportation Working Capital Fund (TWCF). The

Deputy Assistant Secretary for Budget (SAF/FMB)

manages Consolidated Sustainment Activity Group and the

Supply Management Activity Group Retail. SAF/FMB is

also the Executive Agent for the TWCF, but U.S.

Transportation Command (TRANSCOM) manages the

operations. While TRANSCOM manages the TWCF, its

three service component commands (Air Mobility

Command, Military Sealift Command, and Military Surface

Deployment and Distribution Command) utilize the funds.

TWCF also includes the Defense Courier Division.

Many commercial market factors directly affect DWCF

operations. Customers pay a set rate (typically for that year)

regardless of the market conditions. A difference in market

price of an item and the set rate for that item results in

either transactional profit or loss. Differences can accrue

quickly due to the large scale of DOD operations. For

example, a sharp increase in the price of fuel―like the 10%

increase in two weeks in May 2009 ―can quickly consume

the cash in a DWCF that deals heavily in transportation

services. Likewise, fuel prices may not increase as much as

anticipated at the time the set rate was determined, leaving

the DWCF with large amounts of excess cash at the end of

the year.

Navy Working Capital Fund (NWCF)

The Assistant Secretary of the Navy (Financial

Management & Comptroller) manages five activity groups:

Depot Maintenance, Base Support, Supply Management,

Research and Development (all Naval Warfare Centers and

the Naval Research Laboratory), and Transportation.

DWCF funds do not expire. When excess cash accumulates

in a DWCF, DOD officials or some in Congress may see

that money as a funding source for other requirements.

While there are budgetary procedures to enable the transfer

or reprogramming of funds to other accounts, the transfer

of funds may negatively affect future rates to customers,

available funds for ongoing or future work, and daily

operational risk if a major work interruption or shortfall

occurs.

Army Working Capital Fund (AWCF)

The Assistant Secretary of the Army (Financial

Management and Comptroller) manages two activity

groups: Industrial Operations and Supply Management.

Defense-Wide Working Capital Fund (DWWCF)

The DWWCF comprises six activity groups managed by

three agencies:

 Defense Logistics Agency (DLA)—DLA reports to the

Assistant Secretary of Defense (Sustainment) and

manages three activity groups: Consumable Supply

Management, Energy Management, and Document

Automation and Production.

 Defense Finance and Accounting Service (DFAS)—the

Under Secretary of Defense (Comptroller) oversees

DFAS. It is a service provider that directs, approves, and

performs finance and accounting activities for the

military services.

 Defense Information Systems Agency (DISA)—DISA

falls under the DOD Chief Information Officer and

manages two activity groups: Computing Services and

Telecommunications/Enterprise Acquisition Services.

Defense Commissary Agency (DeCa)

DeCA operates a worldwide chain of commissaries

providing groceries to military personnel, retirees, and their

families. The DeCA WCF includes three activities: Resale

Stocks, Commissary Operations, and the Surcharge

Collections Trust Revolving Fund.

DOD WCF Challenges

DOD WCF managers experience a variety of challenges in

maintaining operating costs and ensuring a stable cash

corpus. The first of these is variability in customer orders.

Customer requirements may change based on real-world

operations, increased maintenance requirements, or a

decreased ability to afford services based on higher than

expected rates. Delays in appropriations (e.g., operating

under continuing resolutions) can also affect customer

orders.

In addition to the day-to-day challenges associated with

financial management of a DWCF, fund managers

sometimes face challenges with performance or quality of

services provided. If an activity funded by a DWCF is

providing a poor-quality service or is not meeting a

customer’s schedule requirements, the customer may seek a

different provider, which would result in the fund not

making the sale. Often in this case, excess goods will

remain in WCF-funded warehouses or contracted services

will go unused. As a result, the fund will not earn the

surcharge and its financial profile will begin to suffer.

DWCF Budgets

Budget information for DWCFs is publically available

through the DOD Comptroller’s website

(http://comptroller.defense.gov/). The annual budget

justification books provide a financial profile of each of the

funds covering a three-year period (year of the request and

two years prior). The profile generally includes an

accounting of fund revenues, operating expenses, capital

investments, and cash forecasts for the budget year. The

NOR and AOR (actual and projected) can be found in these

documents.

The budget justification books also depict and explain any

anticipated rate/surcharge adjustments and provide detail to

support requests for direct appropriations, if required. In

addition, the budget justification books may provide

information on fund operations to include performance

metrics (such as customer wait times or supply quality

assessments), management challenges and initiatives, and

manpower trends.

Jason A. Purdy, jpurdy@crs.loc.gov, 7-5050

Lynn M. Williams, lmwilliams@crs.loc.gov, 7-0569

www.crs.gov | 7-5700

IF10852