Surcharge collections $ 11,596 $ 12,901 $ 14,151 $ 38,648 Less: Mandatory

The excess funds generated have been used, in part, to reimburse appropriated funds used to finance commissary store improvement projects. The costs of such projects during FY's 66, 67 and 68 were $1.0 million, $1.5 million, and $3.4 million, respectively.

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(5) Prior to 1966, the surcharge rate was not reviewed on a recurring basis. The rate was reviewed on two occasions by the USAFSC at the request of the CSS. In February 1966, the USAFSC recommended a worldwide 2.5 per cent rate for FY 67. This recommended rate was based on the ratio of projected mandatory expenses to projected sales and did not include a projection of improvement project costs in establishing the rate. USAFSC also recommended annual reviews of the rate. CSS agreed with the recommendation for annual reviews but did not approve the recommended rate changes stating that all or a major portion of the funds generated in excess of mandatory expenses might be required for improvement projects. On 30 June 1967, the USAFSC recommended to CSS a world-wide surcharge rate of 2.75 per cent for FY 68. The recommended 2.75 per cent rate included a factor to generate funds for improvement projects. The $13.5 million of forecasted expenses used in developing the recommended rate included about $4.6 million for improvement projects. The CSS did not formally reply to this recommendation. Internal correspondence at CSS, dated 18 July 1967, stated that no action would be taken on the recommendation pending further study. One of the reasons cited was: "The space problem is becoming more acute each year. As customers increase with no expansion of sales space

they are able to buy less and less. Congress has not provided the authority and funds for construction of Army needs to serve the customers to whom the Congress has granted the privileges." Discussions with responsible CSS personnel disclosed that no further action had been taken on the recommendation to reduce the surcharge rate.

(6) A letter dated 29 March 1968 from the Office of The Adjutant General, DA, subject: "Use of Surcharge Funds for Commissary Store Improvement Projects", stated that funds in the DFA were authorized for reimbursement of the most urgently needed commissary store improvement projects when appropriated funds were not available. However, the letter provided that improvements to commissary stores would be financed with nonreimbursable funds to the maximum degree. Audit work performed at 14 CONUS installations and various oversea commissaries disclosed that installations gen- ' erally did not attempt to obtain appropriated funds to finance improvement projects prior to submitting requests for surcharge funds. In addition, requests submitted to the USAFSC for approval of improvement projects did not indicate whether the installations had attempted to obtain nonreimbursable appropriated funds and the reasons why it was necessary to use surcharge funds to finance the projects.

(7) The present oversea surcharge rate of 2.5 per cent is significantly less than the experienced costto-sales ratio in Europe and therefore does not provide for the full recoupment of mandatory reimbursable costs. In FY 68, mandatory reimbursable costs in Europe exceeded surcharge collections by approximately $412,000. The unabsorbed costs in Europe were borne by commissary store patrons in CONUS where the surcharge rate of 3 per cent exceeded the experienced cost-to-sales ratio. Application of the world-wide surcharge rate (2.75 per cent) recommended by the USAFSC would have helped to alleviate .the imbalance between surcharge collections and mandatory reimbursable costs in Europe. However, application of a world-wide surcharge rate in Europe would not provide for full recoupment of mandatory reimbursable costs in Europe. The actual cost-to-sales ratios varied significantly between CONUS and oversea commands as indicated by the following comparison:

In our opinion, the current surcharge rates for CONUS
and Europe should be adjusted to more nearly balance
collections and expenditures within these two locations.
(8) The need for an adjustment to surcharge
rates is clearly indicated by the consistent collec-
tions in excess of amounts necessary for mandatory
reimbursements. At 30 June 1968, the DFA had a sur-
plus balance of over $6 million. We recognize that a
reasonable contingency amount is necessary, to preclude
mandatory expenses in excess of collections; however,
establishing the surcharge rate to purposely generate
funds for improvement projects is not in accordance
with current DA policy as defined by the COA. In
response to our request, the COA advised that it was
clearly inconsistent with the provisions and intent
of the DOD Appropriation Act to fix surcharge rates
at a level calculated to generate excess funds to be
used for improvement projects.

(1) Surcharge rates be adjusted to limit the recovery of funds to the amount necessary for mandatory reimbursements plus a reasonable amount for contingency reserve to preclude the buildup of excess funds.

(2) Current surcharge rates be adjusted to more nearly balance collections and expenditures in CONUS and Europe.

(3) Procedures be established to require that requests submitted to the USAFSC for approval of improvement projects be documented to indicate whether attempts had been made to obtain nonreimbursable appropriated funds and why appropriated funds are not Deing used to finance the projects.

(The CSS furnished the following position on the SOCAR:

"(1) The logic of adjusting commissary surcharge rates to recover mandatory reimbursements and the maintenance of a reasonable reserve is generally acceptable to this Office. The degree of adjustment and what constitutes a reasonable reserve is, however, subject to discussion.

"(2) In determining the surcharge rate, caution must be taken that sufficient funds are collected to reimburse fully the appropriated funds for expenditures set forth in the Annual Defense Appropriation Acts. Collection of insufficient funds could result in a violation of the provisions of these Acts.

"(3) Due to the fluctuating volume of sales and the anticipated reimbursable expenses, as compared to actual expenses, the actual rate of collection must be sufficient to meet the above requirement. As such, some excess funds are accumulated and maintained as a reserve fund.

"(4) The amount of reserve funds must be equated against known requirements, the maintenance of a viable commissary system and past experience in meeting contingencies which have occurred in a consistent pattern.

"(5) The program for the utilization of surcharge funds will be studied to determine the optimum surcharge rate considering the factors listed above.

"b. Recommendation b. (2). This recommendation is acceptable to this Office. Of necessity, it must be considered along with recommendation b.(1). Presently being considered is a uniform surcharge rate which would be applicable to CONUS and all oversea commissary sales.

"(2) It is agreed that installations should obtain appropriated funds whenever possible for commissary store improvement projects.

"(3) The USAFSC will be directed to establish procedures to implement this recommendation.")

Auditor's Comments: Action proposed by command with respect to recommendation b. (1) should be satisfactory provided that the reserve amounts are not .established so as to generate funds for improvement projects as stated in the SOCAR. Regarding recommendation b.(2), consideration of a uniform surcharge rate which would be applicable to CONUS and oversea commissary sales does not appear to be appropriate in view of the significant variations in actual cost-to-sales ratios between CONUS and oversea commands shown in the SOCAR.