To help the U.S. Army increase the transparency of reimbursable accounting practices and improve auditability, the authors assess current funding models and impacts that alternative models would have on suppliers, customers, and the Army at two commands that rely heavily upon reimbursable funding. They recommend keeping current models but making improvements that would allow the commands to address stakeholder financial and accounting concerns.
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Research Questions
- Can military departments minimize reimbursable civilian personnel costs to increase the transparency of accounting practices and improve auditability?
- What approaches would be the most effective to funding the activities of RDECOM and ATEC (both of which rely to a large extent on reimbursables)?
- How do these potential approaches compare with the current funding models?
- What are the remaining challenges to incorporating a new funding model?
In 2016, the Office of the Under Secretary of Defense (Comptroller) (OUSD[C]) asked the military departments to minimize reimbursable civilian personnel costs to increase the transparency of accounting practices and improve auditability. The OUSD(C) guidance focuses on minimizing reimbursables because they make transactions between organizations less transparent and harder to trace. Along with financial and accounting considerations, the authors' assessment considered how the current reimbursement models and several alternative funding models at two Army commands—the U.S. Army Research, Development, and Engineering Command (RDECOM, renamed the Combat Capabilities Development Command [CCDC] in February 2019) and the U.S. Army Test and Evaluation Command (ATEC)—impact those commands, their customers, and the Army.
The authors have the following recommendations: that RDECOM and ATEC continue to operate within their current reimbursement models and that the commands pursue improvements to their current funding models that would allow them to address stakeholder financial and accounting concerns without the drawbacks and risks of alternative funding models.
This report should be of most interest to organizations in the Department of Defense that have been asked to minimize reimbursable civilian personnel costs. In addition, the report will be of general interest to government organizations seeking a better understanding of internal transfer pricing, including examples of how transfer pricing is used and the strengths and weaknesses of different mechanisms.
Key Findings
RDECOM and ATEC should pursue improvements to their current funding models
- This would allow them to address stakeholder financial and accounting concerns without the drawbacks and risks of alternative funding models.
Two of the alternatives considered have significant drawbacks
- Relying entirely on direct appropriations instead of reimbursable funding would address most financial and accounting concerns. However, full appropriations would severely jeopardize the performance of the commands because it would reduce their ability to pivot resources and adapt to changing customer and Army priorities, would provide services for "free" to customers leading to capacity shortfalls, and may reduce or eliminate the incentive to be responsive to customer and Army needs.
- A working capital fund (WCF), which is exempt from the Office of the Secretary of Defense guidance to reduce reimbursables, would standardize Army practices. However, it would be unlikely to address many stakeholders' financial and accounting concerns and would likely raise customer prices leading to customers reducing demand and RDECOM and ATEC divesting of capabilities.
- RDECOM could potentially move into a WCF, but the costs and risks of such a change likely outweigh the benefits.
- Current laws and policy would severely constrain the Army's ability to shift ATEC's Major Range and Test Facility Base (MRTFB) ranges to an alternative funding model that relied more on reimbursements from customers, such as a WCF.
- The only alternative model without significant drawbacks would fund ATEC's non-MRTFB capabilities similarly to MRTFB capabilities, but it is unlikely to be a desirable business model for the Army.
Recommendations
- The authors recommend that RDECOM and ATEC continue to operate their current funding models but implement improvements to accounting and business practices.
- RDECOM should continue to operate within a model where it recovers most or all its costs from reimbursable funding from customers and appropriations that are treated equitably.
- ATEC's MRTFBs should continue to use appropriations to fund its indirect costs but reimbursable funding from customers to fund its direct costs.
- ATEC's non-MRTFB capabilities should continue to operate in a model where they recover most or all of their costs from reimbursable funding from customers who are treated equitably.
- RDECOM and ATEC should pursue improvements to their current funding models that would allow them to address stakeholder financial and accounting concerns without the drawbacks and risks of alternative funding models.
Table of Contents
Chapter One
Introduction
Chapter Two
Overview of Funding Models Used by RDECOM and ATEC
Chapter Three
Overview of Funding Models Used Across DoD
Chapter Four
Criteria for Assessing Funding Models
Chapter Five
Assessments of Alternative Funding Models
Chapter Six
Improved Accounting Practices
Chapter Seven
Remaining Challenges and Analyses
Appendix A
RDECOM Funding Overview
Appendix B
ATEC Funding Overview
Appendix C
Indirect Budget Processes at RDECOM and ATEC
Appendix D
RDECOM "Net Zero" Analysis
Appendix E
Overview of Previous Studies and Efforts Within DoD
Appendix F
Funding Models Used Across DoD Intramural RDT&E Organizations
Appendix G
Overview of Auditability, Transparency, and Appropriateness in DoD
Appendix H
Assessment of Financial Auditability Requirements
Appendix I
Required Actions to Transition to Alternative Funding Models
Appendix J
Price Impact Calculations
Appendix K
Use Cases
Appendix L
Additional Details About Some Potential Improvements
Appendix M
Evaluation of Alternative Courses of Action
Appendix N
Potential Hybrid and Dual-Funded Working Capital Fund Approaches
Appendix O
Discussions and Visits
Research conducted by
The research described in this report was sponsored by the United States Army and conducted by the Forces and Logistics Program within the RAND Arroyo Center.
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