A new Government Accountability Office (GAO) report found Foreign Military Sales (FMS) program administrative account balances have ballooned over the past decade by an order of magnitude due to insufficient management controls.

The office found that the administrative account for FMS in the Defense Security Cooperation Agency (DSCA), which manages FMS, grew from $391 million in fiscal year (FY) 2007 to $4.1 billion in FY 2017 in current year dollars, a change of over 950 percent. The GAO said this was caused by insufficient management controls such as the lack of timely rate reviews.

Seal of DSCA. Image: U.S. Department of Defense.
Seal of DSCA. Image: U.S. Department of Defense.

The FMS program charges customers overhead fees to cover U.S. government operating costs, like an administrative fee for civilian employee salaries and facilities as well as contract administration services (CAS) fees for the cost of contract quality assurance, management, and audits. As of May, GAO said the administrative fee is 3.5 percent and the CAS fee rate is 1.2 percent.

DSCA has some controls over administrative balance including a method for calculating the minimum desired balance to ensure it has enough funding to complete FMS cases even with uncertain future sales. However, by the end of FY ‘17, GAO found the balance was $2.7 billion over that minimum. DSCA has completed rate reviews less frequently than its policy directs and the agency has not adopted the best practice of combining the minimum balance with an upper boundary for the account to act as a range for the account balance.

Not performing these activities limits DSCA’s ability to prevent the now-excessive balance growth, GAO said. Even with a planned fee reduction to 3.2 percent, the agency said the account balance would likely stay above the minimum level through FY 2024, even if annual expenditures increased by 15 percent more than expected.

The GAO modeled eight scenarios to assess the likelihood of these administrative balances staying above a projected safety level in FY 2018-2024. That level is a minimum balance required by the administrative account to give it enough time to respond to volatility in the FMS business environment and finish ongoing FMS cases.

The modeled scenarios include no changes, a reduction in DSCA fees to 2.9 percent, an increase in annual expenditures in the administrative account of 15 percent above expected, and both changes.

If no changes are made to the fees or expenditures, GAO estimates the administrative account balance will be $2.5 billion-$5.7 billion in FY 2024, with a 90 percent chance the balance will be above the safety level by at least $1.6 billion. However, if the expenditures increase to 15 percent over expected and the fee rate is reduced to 2.9 percent GAO estimated the account would have a balance of $1.1 billion-$3.6 billion in FY 2024, with a 90 percent chance it is above the safety level by at least $25 million.

“As such, the account has the potential to pay for additional expenses. These could include expenses first excluded by statute in 1989 at a time when the account balance was negative and which have since been paid from other appropriated funds. DoD told GAO it is willing to revisit these exclusions,” the report said.

In 1989, Congress excluded certain costs from administrative expenses such as costs associated with military personnel who work on the FMS program, unfunded civilian retirement, and other benefits.

The office noted the contract administration services (CAS) account alone grew from $69 million to $981 million between FY 2007 and 2015. The agency has made some changes, but GAO said DSCA still does not plan to follow its own internal guidance to conduct the next CAS fee rate review within five years.

“DSCA also has inconsistently calculated the desired minimum level for the account” and has not set an upper boundary for the account to help officials use internal guidance directing them to determine when the balance is excessive and when a fee rate reduction should be considered.

“As a result, DSCA is limited in its ability to make timely, appropriate decisions on the fee rate,” the report said.

The GAO recommended that Congress should consider redefining what allowable expense can be charged from the administrative account, like those excluded in 1989.

It also made several recommendations to the director of DSCA to help the agency. This includes recommending the director of DSCA take steps to ensure comprehensive reviews of administrative fee rates are conducted at least every five years, define a method for calculating an upper boundary of a target range for both the administrative and CAS accounts to guide reviews of balances and helping decide the fee rate, ensure comprehensive reviews of the CAS fee rate are done at least every five years, and clarify internal guidance to ensure consistency in calculating CAS account’s minimum safety level.