What’s the Deal with Revolving Funds?
March 30, 2021
The U.S. Federal Government spends hundreds of billions of dollars on procuring goods and services each year. From nuclear submarines to copy paper, the business of the government is primarily funded through two mechanisms: appropriated or revolving funds. At WBD, our experts understand how each type of funding impacts the acquisition process, as the type of fund used dramatically impacts the procurement strategy.
What is an appropriated fund?
Appropriated funds are directly appropriated by Congressional Legislation. Legally, these funds can only be used as determined by Congress. Congress may specify how funds may be used and the amounts for any federal program or agency.
For example, in the over 1,100-page National Defense Authorization Act for Fiscal Year 2020 (FY2020 NDAA), Congress appropriated:
- $13,224,000,000 ($13.2 Billion) for “the construction of the aircraft carrier designated CVN-78” – more than the GDP of the Bahamas.
- $33,919,000 for “Global Nuclear Security” – More than the 2020 total payroll of 4 MLB teams (Orioles, Pirates, Rays, Dolphins).
- $10,000,000 for “Detonation Chambers for Explosive Ordnance Disposal” for the Navy. More than the top PGA tour player in 2019 (Brooks Koepka, $9.6M).
These amounts typically represent the absolute maximum that may be spent for a particular project — absent any special circumstances. Congress may introduce certain requirements for projects or agencies in order to receive the funds. An example is listing the maximum amounts that can be spent on travel expenses.
With very few exceptions, appropriated funds must be obligated in the fiscal year that they were appropriated. Any funds not spent by an agency will typically expire and are returned to the treasury.
What is a revolving fund?
A revolving fund is an account where all income has been derived from its operations. A revolving fund can be used to finance continuing operations and is managed like a business.
A revolving fund gives stakeholders insight into the total cost of running a program. These funds maintain solvency by charging customers (other government agencies) for the cost of the services provided. Examples include:
- The Federal Buildings Fund – This fund is maintained by and supports the Public Buildings Service, an agency of the General Services Administration. The fund is derived from rent charged to federal agencies for federal buildings around the country.
- Defense Working Capital Fund (DWCF) – Consisting of six different activity groups, this fund finances portions of three different DoD agencies, the Defense Logistics Agency (DLA), The Defense Information Systems Agency (DISA), and the Defense Finance and Accounting Service (DFAS). Below are some examples of how the DLA and DISA use DWCF funds to meet the mission and support DoD operations worldwide:
- The DLA Energy group sources fuel around the world and charges the military departments for its use.
- DISA’s Computer Storage business area maintains data centers around the country and charges DoD agencies based on the number of gigabytes used.
In the above examples, both agencies leveraged the flexibility of their revolving funds to provide solutions and recover their costs by charging a fee for use to their customers (other federal agencies). The Federal Buildings Fund and DWCF provide the flexibility needed to accomplish the necessary solutions.
Benefits of a Revolving Fund
By using a revolving fund, the obligation challenges many Agencies’ experience with appropriated funds. The revolving fund allows for significantly more flexibility than appropriated funds for the following reasons:
- Revolving funds do no at expire at the end of the fiscal year.
- By combining the power of multiple agencies, a fund manager can use economies of scale to negotiate better contract terms and prices.
The flexibility provided by revolving funds allows federal agencies to meet their mission in a more flexible, forward-thinking, and cost-effective manner. For example, a revolving fund activity may use its unique authority to invest in emerging technology.
Using the above example, without a revolving fund, for GSA to meet its mission of providing office and workspace to federal agencies with direct appropriations; not only would Congress have to provide funds for rent at every federal worksite, GSA would also not be incentivized to negotiate leases that satisfy tenant agencies and save taxpayer dollars. There would also have to be an additional appropriation to GSA to support their own operations.
Revolving Fund Challenges
Since revolving funds do not have a dedicated source of funding, fund managers need to monitor the solvency of the fund. Agencies should adjust rates and fees with the goal of “breaking even.” Revolving fund managers also need to find sources of revenue – that is customers who are willing to pay for the services.
Revolving funds, much like private businesses, must keep customer satisfaction at appropriate levels to retain customers. A customer agency likely does not have a legal requirement to use the services provided by a revolving fund activity and may, largely at their own discretion utilize other sources or in-source a particular function.
Similarly, fund managers must be good stewards of the fund in order to keep the rates and fees competitive and provide value to customers. Fund managers should keep in mind that the overall fund should seek to break even and should raise or lower rates in response to yearly spend plans and budgets. A revolving fund is not a “slush fund”; appropriate oversight and management are imperative to continued solvency of the fund.
Revolving Fund and Contracting
In many ways contracting with a revolving fund is the same as with appropriated funds. Competition requirements, small business goals, and other Federal Acquisition Regulation (FAR) rules and agency supplement requirements (example: DFARS) still apply.
However, there are several important differences:
- Timing – since revolving funds do not expire, agencies have the flexibility to make procurements and other contract actions when needed. Due to self-funding, agencies do not have to wait for Congress to complete the annual appropriations bill to complete or start a project. Managers can begin a project any time funds are available.
- Customer Satisfaction – Revolving fund managers should have a goal of breaking even between expenses and revenue. As such, it is critical for fund managers to charge appropriate rates and make sure customer agencies are satisfied with the services they receive. Customer agencies almost always have multiple options to complete procurement and can use them if they are not satisfied with the services they receive.
However, a revolving fund significantly offers more flexibility than an appropriated fund. Revolving funds can be used for almost any purpose within their authorized scope. Agency management is responsible for oversight and rulemaking.
When making a procurement with revolving funds, managers should be cognizant of the costs and revenue generated by an acquisition.
A revolving fund can be a powerful tool for agency officials and can be a boon for effective and efficient management. The flexibility in a revolving fund is unparalleled in the federal space; however, it is important for fund managers to be conscious of their responsibility to the taxpayer. Fund managers must maintain appropriate cost recovery rates and make appropriate and worthwhile investments. Managers should also remember that customer satisfaction is critical for the fund’s performance and viability.
To learn more about WBD’s services, please visit our acquisition page here.
Gregory Snyder is a Senior Associate at WBD. He has worked in acquisitions at four different agencies and has been with the WBD team since January 2021.