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Financial Management and Contract Award and Administration for the Armed Forces Retirement Home DODIG-2018-077

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Objective:

We determined whether officials conducted effective financial management and contract award and administration for the Armed Forces Retirement Home (AFRH). Section 418, title 24, United States Code, requires the DoD Office of Inspector General (DoD OIG) to perform a comprehensive inspection of the AFRH. This is the second report in a series that will collectively meet this requirement.

Background:

Section 411, title 24, United States Code, (24 U.S.C. § 411) establishes the AFRH as an independent executive agency with locations in Gulfport, Mississippi, and Washington, D.C. The purpose of the AFRH is to provide residences and medical services for retired and former members of the Armed Services.

The head of the AFRH is the Chief Operating Officer (COO) who is subject to the authority, direction, and control of the Secretary of Defense. On February 14, 2017, the Deputy Secretary of Defense transitioned the authority for the AFRH from the Under Secretary of Defense for Personnel and Readiness to the Deputy Chief Management Officer (DCMO).

The Department of the Treasury, Bureau of the Fiscal Service (BFS), provides financial management and contracting services for the AFRH through an interagency agreement (IAA).

Findings:

Financial Management

DoD and AFRH officials did not conduct effective financial management of the AFRH. Specifically, DoD and AFRH officials allowed the AFRH Trust Fund to substantially decline from $186.5 million in FY 2010 to $54.7 million in FY 2016 without identifying more reliable revenue sources. Based on its FY 2016 Long Range Financial Plan, the AFRH forecasted that the AFRH Trust Fund will have a negative trust fund balance by FY 2019 without supplemental funding. This occurred because:

  • DoD and AFRH officials did not submit legislative proposals and administrative actions, as requested by Congress, that could be added to existing law to maintain a positive cash balance in the AFRH Trust Fund;
  • other than a charter school lease executed in February 2015, DoD officials were unsuccessful in using the authority granted in 24 U.S.C. § 411(i) to generate additional revenue by leasing AFRH property to interested private developers;
  • DoD officials did not generate additional revenue by raising the monthly amount withheld from the pay of enlisted members, warrant officers, and limited duty officers of the Armed Forces on active duty from $0.50 to $1.00; and
  • the former AFRH COO and former Chief Financial Officer (CFO) overstated future revenue stability and expense reductions associated with the construction of a new residential building.

As a result, the AFRH is unable to financially sustain its day-to-day operations and meet its mission of taking care of the veterans without annual appropriated funds. According to AFRH officials, for the near future, the AFRH will need annual transfers of at least $20 million from the U.S. Treasury to meet its yearly operating expenses and to increase the AFRH Trust Fund balance for its long-term financial obligations.

Contract Award

AFRH officials did not adequately perform acquisition planning for the six ongoing contracts and one contract in the award process that we reviewed. Specifically, AFRH officials did not:

  • define the requirements in the performance work statement; or
  • identify the sources and methodologies used to develop the independent Government cost estimate, as required by the IAA and AFRH guidance.

The AFRH faced procurement process challenges because AFRH officials did not:

  • have sufficient contracting experience and did not rely on the expertise of BFS contracting officials; or
  • segregate the duties of the CFO and the head of procurement or implement appropriate internal controls for financial and contracting decisions.

As a result, the AFRH needed to award replacement contracts because contractors could not provide required services.

Contract Administration

AFRH contracting officer’s representatives performed sufficient surveillance of contractor performance for 21 contracts and two food delivery agreements. Specifically, the CORs sufficiently:

  • monitored contractor performance,
  • verified that contractor services complied with contract requirements, and
  • reviewed and verified invoices.

AFRH contracting officer’s representatives performed contract surveillance in accordance with the requirements in the IAA between the BFS and the AFRH, the COR designation letter, and the contract performance work statement.

However, for 3 of 22 contracts, BFS contracting officers issued 94 modifications from FYs 2012 through 2016. The modifications occurred because AFRH officials did not perform sufficient planning for contract modifications, including identifying additional supplies needed on one contract and funding requirements on two contracts.

As a result, the AFRH had assurance that it received the goods and services for which it paid. However, the number of modifications affected the pricing on the IAA with the BFS. The AFRH paid the BFS $80,222 to modify three contracts from FYs 2012 through 2016.

Recommendations:

We recommend that the DCMO, in coordination with the AFRH COO:

  • establish and implement a long-term strategy for maintaining fiscal solvency at the AFRH, including quantifying impacts of major projects on the balance of funds and developing a plan of action to increase the balance of funds;
  • review the performance of the CFO as the official responsible for procurement at the AFRH to determine whether administrative action is appropriate;
  • follow section 813 of the National Defense Authorization Act for FY 2017 guidance on avoiding the lowest price technically acceptable selection criteria for knowledge-based acquisitions;
  • develop and implement an acquisition strategy to reduce the likelihood of future problems with the nursing contracts and determine whether the AFRH needs to change how it schedules Government nurses;
  • review the duties of the CFO and the head of procurement and design and implement appropriate internal controls or segregate the duties;
  • develop and implement a plan to regularly evaluate contract funding needs and prevent future unnecessary contract modifications; and
  • review contracts to identify areas needing improvement, including a review of the nursing contracts.


Management Comments and Our Response:

The DCMO and Acting AFRH COO agreed with our findings and recommendations. Specifically, the DCMO and Acting AFRH COO:

  • will develop a long-term solvency strategic plan that they expect to complete in July 2018.
  • will work with industry to develop proposals for the underutilized property at the AFRH campus in Washington, D.C.
  • opened a third party review of the CFO’s actions in January 2018.
  • will follow section 813 of the National Defense Authorization Act for FY 2017. The procurement (contracting) functions are transferring from the BFS to the Washington Headquarters Services during FY 2018, which will give DCMO more oversight of the AFRH procurement process.
  • will work together to identify performance requirements and establish the best solutions for contracting needs, including discussion of evaluation criteria and contract types.
  • will develop and implement an acquisition strategy to reduce the likelihood of future problems with the nursing contracts.
  • separated the financial and procurement duties and is in the process of evaluating internal controls and recently appointed a Chief Executive Officer to oversee the AFRH and hire a permanent AFRH COO.

Therefore, the recommendations are resolved but remain open. We will close the recommendations once we verify that the information provided and actions the DCMO and AFRH take fully address the recommendations.

The DCMO and Acting AFRH COO agreed with the recommendation to develop and implement a plan to regularly evaluate contract funding needs. The Acting AFRH COO stated that the AFRH will use its quarterly budget meeting with the CORs and the facility administrators to plan and evaluate funding needs. Therefore, the recommendation is closed.

The DCMO and Acting AFRH COO agreed with the recommendation to review contracts to identify and implement improvements. The AFRH CEO provided supplemental detailed comments for the DCMO and stated that contracting officials review commercial, Government, and historical data during market research and that the WHS is working with other contracting offices to identify best practices and lessons learned. Therefore, the recommendation is closed.

This report is a result of Project No. D2017-D000CF-0070.000.