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PRE-DECISIONAL/ UNCLASSIFIED

PDI 2015 DWCF Current Issues v1.0

Defense Working Capital FundsCurrent Issues

Gretchen Anderson, Director, Revolving Funds

Cynthia Jones, Senior Analyst

May 2015



Agenda

I. Department-Wide Initiatives with WCF impacts

1. Information Technology

2. Institutional Reform

3. Intergovernmental Transactions

4. Transportation Financial Auditability

5. Cash Accountability Model

II. Applied Initiatives and WCF Management Issues

1. Cash Management

2. Carryover

3. Fuel

4. Budgetary Resources

1

Goal: Present WCF initiatives in context of Departmental objectives



Information Technology:

Joint Information Environment (JIE) &

Joint Regional Security Stack (JRSS)

• JIE:

– Designed to create an enterprise information environment that

optimizes the use of DoD IT assets

– A concept, NOT an end-state--continually re-evaluated and

changed as appropriate

– Transitioning to the JIE Single Security Architecture (SSA) will

increase operational effectiveness, achieve cost effectiveness,

and enhance cyber security posture

• JRSS:

– Designed to improve network defense--a new architecture-

sharing/modernization approach to managing the network,

started in FY 2014

– Reimbursably funded prior to FY 2016; then funded in the DISN

Subscription Services



Linking Activities, Outcomes, Resources, and Costs for Transparency and Cost Visibility

Institutional Reform: Three “Cost-Related” Initiatives in Perspective

3

Cost Management Framework (All of DoD)

• DCFO / DCMO joint strategic initiative to develop enterprise-level cost

management capability, unifying disparate cost efforts across DoD (long term)

• Goal is to provide DoD leaders a framework and capability to allow

organizational cost information to inform business decision making

Financial Flow Management Reform (Selected elements of FM

Costs)

• 1 of 6 key business functions reviewed under 90 day assessment of FM

processes

• Created a DoD-wide baseline of cost by business function

• Baseline costs being refreshed for performance analysis & benchmarking

BPSR “Deep Dive” (Fourth Estate Underway)

• DCMO / CIO joint initiative to review business & supporting IT systems within

the orgs of the PSAs and their associated agencies & field activities

• PSA is expected to clarify organization alignment to Departmental outcomes

• IDs resources and investments; focuses on obstacles to achieving outcomes

• Represents the Fourth Estate “slice” of Financial Flow Management costs

18-May-15 | Slide: 4

Initiative: Intragovernmental Transactions

System Improvement

• Establish enterprise data warehouse of intra-governmental transactions for audit, research and analysis

• Automate handshake and agreement between buyer and seller before settlement (reduces chargebacks)

• Leverage DoD Global Exchange (GEX) solution and Standard Line of Accounting (SLOA)

Standardization

• Establish common identifier to synchronize buyer and seller accounting transactions

• Establish proper general ledger treatment for all events

• Build common Intragov Data standard

Process Improvement

• Documented terms and conditions

• Documented performance and receipt

• Eliminate the pay and chase mentality

IGT Summary Process

Transportation Financial Auditability (TFA)

5

• Current Status

- Three active Working Groups: TPPS, TWCF, & HHGs

- Standardizing Policy, Processes, Systems, Billing, & Training

• Major Recent Accomplishments

- DCFO and ASD L&MR Approved Way Ahead on Feb 23, 2015

- Policy Guidance Memo signed by ASD L&MR on Apr 23, 2015

• Major Challenges and Impediments

- Unique Processes and Systems

- Access to Key Supporting Documentation & Control Measures

• Key Next Steps and Milestones

- Develop Department-wide Standardized Processes

- Codify Standardized Processes into Policy and then Implement

TFA Analytical Approach

Army Navy Air Force

STAGE 1: Inventory policy, processes & systems

STAGE 2: Analysis & Courses of Action development

Key Supporting Documents (KSD)

WarehouseProof of Delivery

Financial Management Systems Improvements

6

TFA Working GroupAuditability Guidance

STAGE 3: Enterprise Solution development, policy guidance & execution

USMC DLA

DCMA

TRANSCOM

USCG

Obtain ESC guidance & OSD Senior Leader approval

18-May-15 | Slide: 7

Initiative: Cash Accountability Model

System Improvement

• Single system – Defense Cash Accountability System – to perform expenditure reconciliations

• Adapt legacy disbursing systems to perform daily disbursing using Treasury standards

• Reduce the number of systems reporting to Treasury

Standardization

• Formation of DoD Cash Accountability Working Group

• Expand development of data standards around a FBWT Business Enterprise Architecture

• Leverage Treasury Shared Services processes and procedures

Process Improvement

• Single DoD solution for Cash Reconciliation and Reporting

• Leverage ERP capabilities to perform Treasury Direct Disbursing functions

• Partner with Treasury and DoD Disbursing Offices to implement CARS and GTAS reporting

Cash Notional Target



Agenda

I. Department-Wide Initiatives with WCF impacts

1. Information Technology

2. Institutional Reform

3. Intergovernmental Transactions

4. Transportation Financial Auditability

5. Cash Accountability Model

II. Applied Initiatives and WCF Management Issues

1. Cash Management

2. Carryover

3. Fuel

4. Budgetary Resources

8

Goal: Present WCF initiatives in context of Departmental objectives


PDI 2015 DWCF Current Issues v1.0 9

Cash Management Policy

Background

• Historically, operating cash was budgeted at 7-10 days of disbursements

– Arbitrary rubric that sufficed for decades, because better data was not

available

– Lacked rigor needed to adequately manage cash in today’s environment

• Modernized systems

• Auditability requirements

• NDAA 2011 Study focused on appropriate level of cash to prevent execution

year price changes

• Internal 2013 Study focused on Government Wide Accounting

– Each business has unique challenges and capabilities

– Daily visibility / reporting may require higher cash balances

– Managers need tools to address specific risks and business events

– Managers need flexibility to tailor cash level requirements to ensure

solvency

• Increased transparency

• More granular data and reporting



Cash Management

Interim Policy

• Implemented interim policy for the FY 2016 PBR

• Provided flexibility to explore best cash management parameters for

each activity’s business and operating environment

• Eliminated the “7 – 10 day” cash metric

• Managers developed upper and lower cash requirements tailored to

ensure solvency for their funds

– Based on relevant business events and activities like:

• Collection and disbursement cycles

• Retention or Return of Accumulated Operating Results to customers

• Capital investments

• Liquidation of direct appropriations

• Risk and Volatility

• Reserves for Commodity Price Fluctuations and/or future capital investments

• New exhibit, Fund 13b, Cash Requirements

10

Management techniques and policy must evolve with the fiscal environment



HASC and SASC FY 2015 NDAA Language

11

• The House Armed Services Committee was supportive…

“The committee commends the Department for initiating processes to determine

the correct cash corpus thresholds for each working capital fund.”

• The Senate Armed Services Committee wanted more…

“…the committee is concerned that the Services are purposefully building up

excess cash as the Department of Defense (DOD) determines the

appropriate amount of cash balances

[needed under Government Wide Accounting]”

– Directed a report by October 2015 on:

• A specific definition of sufficient cash

• The methodology used to calculate such definition

• Recommendations on how to mitigate the need to carry excess cash to avoid

Anti-deficiency Act violations

Congressional feedback on the interim cash policy was mixed




2015 Workshops

• Five Cash Management Policy Workshops (February – April)

• Overview for Revolving Fund and DWCF Senior Leaders across the

Department – set ground rules and goals

• Action Officers (AOs) and Subject Matter Experts (SMEs) briefed each other

on:

– Fund status and cash flows

– Successes and challenges

• Each organization developed an Agency policy position or proposal and shared

electronically with the group

• Built a composite policy concept that met the following criteria:

– Provided managers flexibility to manage

– Driven by business events and conditions

– Simple and easily understood by all stakeholders

– Framework that can be applied by all

• Each organization tested and provided feedback on the policy concept

– Management tools, triggers and actions

– Best business practices and good ideas




Workshop Results

• Developed a conceptual framework; began drafting the next

iteration of cash management policy

• Identified list of management tools / actions for controlling

cash, for example:

– Change the frequency of collections

– Control timing of contract renewals and large obligations/disbursements

– Negotiate timing of customer orders

– Using command and control to foster responsibility and accountability at lower

levels

– Using non-recoverable authorities to re-size corpus based on mission changes

– Request policy waivers and approvals when needed, for example:

• To make AOR non-recoverable

• To return AOR over more than one year

• To make out of cycle rate increases or advanced billings

Cash doesn’t just “happen.” We MAKE it happen!



The 3 ‘R’s

14



The 4 ‘R’s

1. Rate

2. Range

3. Risk Mitigation

4. Reserves

15

New conceptual framework for cash management



Notional Example

16

$0

$-100M

$-200M

$-300M

$-400M

$400M

$300M

$200M

$100M

Cumulative impact of net outlays on cash

– Disburse $6.0B annually – Collect twice a month



1. Rate

17

Average Disbursements

Average amount disbursed between collection cycles

$0

$-100M

$-200M

$-300M

$-400M

$400M

$300M

$200M

$100M

Average disbursed

between collections

$250M

$6.0B Disbursements / 24 Cycles = $250M

• The amount of cash needed to get from one collection cycle to the next

• Influence the amount of cash needed by changing the number of collection

cycles



2. Range

18

Range of Operation

The difference between the highest and lowest expected cash level

• Expect cash balance to fluctuate within this range during the year

• Range is based on budget assumptions and past experience

• Captures seasonal trends and periodic events

• Allows us to identify causes of cash volatility and develop strategies

for reducing the range of operation

• Reducing the range reduces the amount of cash needed to operate

$450M

$0M

Average disbursement

amount will fall within

this range



3. Risk Mitigation

19

Risk Mitigation

• Identifies cash held to mitigate risk of unplanned or uncontrollable

events

• Level reflects management’s tolerance for risk and tools to mitigate

risk in short term

• Examples:

– Estimation error

– Commodity price fluctuations

– Crisis response

Cash Held for Unplanned or Unforeseen events



4. Reserves

20

Reserves

• Identifies cash on hand for a specific requirement that is not

expected to disburse until subsequent fiscal years

• May not be required every year

• Examples:

– Return of Accumulated Operating Results (AOR)

– Liquidation of a direct appropriation

– Planned investment

Cash Reserved for Known Future Requirements



• The expected operating range [NOTE: NOT “limit”] is between

$250M and $700M

• The rate falls within the operating range (measured from lower bound)

• The lower bound of the operating range equals the sum of amounts

held for reserves and risk mitigation

Notional Example

Complete Cash Plan

21

How the 4 ‘R’s come together

$700M

$600M

$500M

$400M

$300M

$200M

$100M

$0M

$800M

4. Reserves

3. Risk Mitigation

2. Range of Operation

Upper bound of operating range

Lower bound of operating range

1. Rate (Average Disb)



• How much cash is needed to begin the next fiscal year?

• What are the tools and capabilities, other than holding cash, to react

to unplanned events?

• How much time is needed to take action if things go wrong?

• How can we reduce the operating range?

Cash Planning Considerations

22

$700M

$600M

$500M

$400M

$300M

$200M

$100M

$0M

$800M

4. Reserves

3. Risk Mitigation

2. Range of Operation

Upper bound of operating range

Lower bound of operating range

1. Rate (Average Disb)

Things to consider when building the cash

plan and setting rates



WCF Management Issues:

Carryover

Definition:

Carryover is the dollar value of work that has been

ordered and funded (obligated) by customer appropriations

but not yet completed by working capital fund (WCF) activities

by the end of the fiscal year (FY)

• Large drivers of carryover within DoD include depot

maintenance, ordnance, and research and development activities

• SF-133 Line 3090 Uncollected Federal Orders

• Carryover is necessary at year end (allowable carryover) so

that WCF activities have enough work to ensure a smooth

transition between FYs (especially during a continuing resolution)

• Too much carryover indicates an activity is receiving orders for

work that clearly cannot be performed until subsequent years



Carryover Guidance

• Congressional interest:

– The committees review budgeted, allowable, and actual

carryover as submitted in the budget materials

– Exceeding budgeted carryover places the component at

risk of a mark against the appropriation used for funding

• Ensure that sufficient labor, parts, tools, processes, and capacity

are available to complete a given workload before accepting the

funded order

• Activities are required to provide written justification as part of the

budget submission when actual carryover balance (with

exemptions) exceeds the computed allowable carryover in any year

24

Regulatory Guidance: DoD FMR Vol 2B, Ch. 9, pp 96-102 (Dec 2014)



• The Department uses industry standards.

• Jet fuel is the most widely consumed fuel product

• DoD consumption ranks 6th in the US jet fuel petroleum market

• About the same as Southwest Airlines

• 61 million barrels (90m/bbl including non-DoD customers)

(FY 2014)

• Two parts to the fully burdened standard fuel price:

• Product – The cost of refined petroleum products

• Non-product – The costs for transportation, terminal operation,

facility sustainment restoration & maintenance, and operations


DoD Fuel

Evaluating current FY 2015 composite fuel rate

25



• Can create execution year turbulence

• Bill or surplus ($1.4 billion bill in FY 2013 reprogramming,

$750 million surplus in 1st quarter of FY 2015)

• WCF goal is to preserve customer program but swings of

such magnitude exceed WCF’s ability to absorb the shock

• Leads to frequent price changes

• Twice in FY 2005 through FY 2007, 5 times in FY 2009

• No price change in FY 2013 and FY 2014, but the

Department had to reprogram into the DWWCF

• FY 2015 standard price budgeted at $155.40bbl, reduced to

$136.92 (February 1st)

26

Market Volatility

Customer O&M accounts retain the $18.48/bbl savings



• National Defense Authorization Act (H.R.1735):

– Reduces the Department’s Operation and Maintenance

accounts by $1,628 million for fuel

– Requires the Department to establish a reserve fund of up to

$1 billion to offset future fuel market fluctuations.

– House Appropriations Committee – Defense:

– Reduces appropriations $814 million for fuel costs

Setting the Stage for FY 2016

To date, the Department has not appealed.

27



Fuel Humor




Evaluating Budgetary Resources

• Budgetary resources means the legal authority that allows an

activity to incur obligations on behalf of the government and must

be apportioned by OMB

• Not the same as the cash balance (FBWT), which may be

fully encumbered by obligations

• Additional sources for obligations may be required

• The SF-133 is the monthly report that provides the status of

budgetary resources



• Reimbursable authority (Spending authority from offsetting

collections) allows an activity to obligate against the resources

provided on a customer order

– The authority to obligate resides in the order itself

Anticipated orders do not provide obligation authority

(reimbursable authority carries forward into the next FY)

– Non-federal orders must be collected in advance before an

obligation can occur

30




• Contract authority allows an activity to incur an obligation

in advance of appropriated resources.

– Applies to Supply activities and Capital Investment Programs.

– Expires at the end of the FY

– Does not provide a source for disbursement

– Collections must be posted against contract authority

(USSGL 4139) before a disbursement can be made

• Direct appropriations to the DWCF cash balance allow

financing of obligations and carries forward into the next FY

31




Evaluating Budgetary Resources - Indicators

• Line 1000 PY Unobligated Balance Brought Forward

• Amount of reimbursable authority, direct appropriations, and

unencumbered cash available for obligation in the current period

• Line 3090 Uncollected Federal Orders

• Amount of workload accepted but not completed and collected

(carryover plus accounts receivable)

• Amount should not perpetually grow; that could indicate potential

workflow inefficiencies

• Line 3200 Net obligations, End of period

• Amount of reimbursable authority remaining for non-supply activities

or amount of obligations above customer orders for supply activities

• Negative indicates the amount of obligation authority remaining

(non-supply) (normal balance is negative for non-supply activities)

• Positive number indicates obligations above customer orders

(supply)



• Fund Balance with Treasury

– The amount of financing available for obligations that can be

disbursed (may be entirely encumbered by obligations)

• Obligated Contract Authority (USSGL 4139)

– Amount of obligated contract authority without an offsetting

collection to source a disbursement (should not grow endlessly)

• Obligations to Collections Comparison

– Obligations for supply activities should not perpetually exceed

the amount of collections

– Resulting cash balance for the activity will decrease

33

Evaluating Budgetary Resources - Indicators

Subsidizing an activity from the corporate account risks misaligning the

effect of operating results from another activity



AND In Summary . . .

34

Break even over time

Support the leadership

Meet the mission goals

WCF

Go to PDI!

Adapted from The

annual meeting of the

World Economic Forum



Backups

35



HASC FY 2015 NDAA Report Language

“The committee has been concerned for a number of years that the determination of

process and rates for Defense Working Capital Fund activities is driven by an

arbitrary, outdated goal of maintaining 7 to 10 days of cash to sustain business

operations. This metric cannot respond to changes related to external pressures such

as fluctuations in commodity markets that are outside of the Department of Defense’s

control.”

“The committee commends the Department for initiating processes to determine

the correct cash corpus thresholds for each working capital fund.”

“The committee looks forward to future budget submissions with prices and rates set

to maintain an adequate cash balance to absorb external pressures, thereby

maintaining a steady, dependable rate for the customer throughout the fiscal

year.”

36



SASC FY 2015 NDAA Report Language

“The committee is concerned that the Department of the Treasury’s decision to migrate

from monthly to daily cash balances for the defense working capital funds will likely be

delayed beyond October 1, 2014. In preparation for such migration, the committee is

concerned that the Services are purposefully building up excess cash as the

Department of Defense (DOD) determines the appropriate amount of cash

balances or sufficient cash balances in accordance with DOD’s financial military

regulation policy. It remains unclear to the committee precisely what DOD intends with

respect to defining sufficient cash balances.”

“…The committee directs the Secretary of Defense to prepare a briefing or report to

the committee no later than October 1, 2015, on: (1) DOD’s status made on the

proposed change to daily cash balances; (2) A specific definition of sufficient cash

balances that DOD and each military service will follow; (3) The methodology used to

calculate such definition; (4) Recommendations on how to mitigate the need to carry

excess cash to avoid Anti-deficiency Act violations; and (5) A mitigation plan to address

the projected ARA shortfall, including any initiatives that could result in savings.”

37



Government Wide Accounting (GWA)

• Department of Treasury initiative to:

– Streamline accounting and reporting processes across the

government

– Increase transparency and improve accuracy of financial information

for stakeholders

• Eliminate stovepipe reporting – brings proprietary and budgetary

accounting in synch

• Real-time classification of transactions and reporting on Fund

Balance with Treasury (Cash)

– Disbursing entities will report transactions directly to Treasury on a

daily basis

– Central Accounting Reporting System (CARS) will provide daily

visibility of cash transactions and balances

38

DoD plans to implement GWA in 2016



Current Monthly View of Cash

39

700.0

800.0

900.0

1,000.0

1,100.0

1,200.0

1,300.0

1,400.0

Treasury Reported Cash

Treasury Reported Cash



Daily View of Cash

40

700.0

800.0

900.0

1,000.0

1,100.0

1,200.0

1,300.0

1,400.0

Treasury Reported Cash Daily Cash Balance



Revolving Fund Issues and Concerns

• Revolving Funds are subject to the Anti-Deficiency Act for

cash balances

• Loss of flexibility and reaction time– Extraordinary actions ( reprogramming / advance billing) take time to

implement

• Factors outside managers’ control influence cash– Commodity cost volatility; Congressional transfers

– Customers delaying payments and incremental ordering

• Fiscal constraints and budget uncertainty create additional

challenges

– Operating on tighter margins

– Stakeholder and customer decisions (loss of sales / work)

– Improved financial records and accounting systems

41

Daily visibility poses unique challenges to Revolving Funds



FY 2013 Cash Study

• In February 2013, WCF managers were asked to provide:

– Daily collection, disbursement and cash balance data

– An evaluative report addressing fund unique challenges, controls,

planned actions and policy recommendations

• What we learned:

– Each business area has unique challenges and capabilities

– Cash tends to decrease as daily disbursements occur, but increase only periodically with collection cycles

– Some funds have good visibility of daily cash through ERPs today; others have limited visibility of cash during the month

– Some funds plan to increase the frequency of their collection cycles

– Most funds will need to grow and maintain a larger cash corpus

– Need to justify and defend cash balances based on actual risks and business events; the standard 7-10 day metric is no longer sufficient

42

Need to re-think our traditional rules about cash



DoD’s Place in the Petroleum MarketTotal DLA Energy Purchases

vs.

US Petroleum Consumption

(Thousand Barrels)

43



FY 2015 Fuel Requirement

44

DLA Energy Sales96.2 million barrels

DoD (89.8 mbbls)

Non-DoD (6.4 mbbls)

DoD Sales89.8 million barrels

Base (77.8 mbbls)

OCO(12.0 mbbls)

Non-DoD Sales include ~ 1.8

mbbls of sales to

USTRANSCOM Commercial

Contract Carriers



7

W A RFIGHTER-FOCUSED, GL OB A L L Y RESPON SIVE, F ISCA L L Y RESPON SIB L E SUPPL Y CHA IN L EA DERSHIP

BULK BUSINESS MODEL

Refinery Intermediate Depot ConsumerInstallation-Level Depot

Aviation

Contract Facility ConsumerInstallation-Level DepotGround

Vessel

Refinery Intermediate

DepotFleet Logistics

Center

Point of SaleEnergy Supply Chain

Point of Sale

Point of SaleDLA Energy Pays

Market Price for

Product Purchases

Service Pays

Standard Price for

Product Received

DLA Capitalized

Fuel Inventory

Defense Working Capital Fund

Bulk Fuel Business Model

45

FY 2016 PB Price

per Barrel Breakout

Refined product $122.56

Transportation

$4.43

Terminals

$4.23

FSRM

$5.16

Operations

$5.01

Product Loss$2.51

Rounding

$0.16

Total

$144.06

FY 2014 total sales of 89.9m/bbls with an average refined product cost, $141.49/bbl ($7.81/bbl Above budgeted )

FY 2015 PB Price

per Barrel Breakout


Transportation

$4.05

Terminals

$4.04

FSRM

$5.33

Operations

$4.62

Product Loss$2.52

Rounding

$0.38

Total

$155.40

FY 2015 sales through April 52.7m/bbls with an average refined product cost, $96.16/bbl ($38.30./bbl Below budgeted )

FY 2015 Feb 1st Price

per Barrel Breakout


Transportation

$4.05

Terminals

$4.04

FSRM

$5.32

Operations

$4.63

Product Loss$2.41

Rounding

$0.49

Total

$136.92



46As of: April 2015

$25

$45

$65

$85

$105

$125

$145

$165

$185

Budget Execution Pricing for WTI Crude

WTI Crude

Budget Forecast for WTI Crude

Standard Price

Product Cost

Refined Product Forecast

WTI Trend

Cost Per BarrelCost Per Barrel

FY 2014FY 2013FY 2012FY 2011FY 2010FY 2009FY 2008

FY 2007FY 2006FY 2005

FY 2015

• No price change in FY 2013 and FY 2014.

• Except in FY 2011, multiple price changes every year:

- FY 2005 through FY 2007 two upward prices changes per year

- FY 2008 price changed 3 times, $170.94 to $97.02 - FY 2009 price changed 5 times, $170.94 to $89.46

- FY 2010 price changed 3 times, $116.76 to $98.28 - FY 2012 price changed 4 times, $165.90 to $97.02

• FY 2015 PB price budgeted at $155.40per barrel

FY 2015 price changed February 1st to $136.92

Crude Market Drives Standard Price Changes

Monthly Average Fiscal Year 2005 – Present

$2.9 B

Rescission

$1.283 B

Congressional

Transfer Out

$1.0 B

ASFF Transfer

In

$1.394 B

O&M Transfer

In

$0.3475 B

Congressional

Transfer Out

5

Price

Changes

4

Price

Changes



Comparison To Airlines

DLA Energy Acquisition Tool Airlines

One Year Contract Length Typically One Year

75 percent Min Lift Guarantee ~ 90 percent

Tied To Market Index Pricing Tied To Market Index

Primarily Producers (Refiners)

Military & Commercial SpecsSuppliers

Producers & Third Parties

Commercial Specs Only

Majority Origin – Intermediary

Storage and Distribution PointsDelivery

Destination (Pipeline) Direct to

Airport Point of Use

~2 percent of Overall DoD Budget

Percent of Total

Budget/Operating Costs

Financing Mechanism

~30-40 percent

DWCF Financing MeansVaries – Use of Financial

Instruments

Comparison to Commercial Practices

47

June 10, 2015

Draft Pre-Decisional