DOCUMENT RESO E 06810 -- [B2207216] [Ways To Improve Effectiveness C)Jecks-Paid Letter Credit PrograE]. FGMSD-78-53; E-39995. Allgust 3, 1578. 8 pp. Report Jerome A. Miles, Controller, D1partment D. L. Scantlebury, Energy- by Direcr, Financial and General Management Studies Div. Issue Area: Accounting and Financial Reporting (2800). Contact: Financial and General Management Studies Div. docket Function: natural Resources, Ervironment, and Energy: Energy (305); Interes:: Interest on Putlic Debt (901); General Government: Central Fiscal Operations (803). organization Concerned: Energy Research and Development Administration; Department Treasury. The let;er credit system is contracrs used for paying who are eligible be financed by advance Government payments. According Department ficials, Energy use (DOE) this system over past 10 years has saved Government substantial interest costs because it eliminated need pay contracrs billions cf dollars in Contracrs advances. surveyed, who were credit paid system, under had checks-paid excess Federal letter funds in ir tank accounts. One facr contributing tc this situation difficulty was experienced by commercial hanks checks-paid in cperating letter credit accounts consistent with Treasury policy. DOE does not have specific procedures ensure that necessary Federal funds disbursed under system are excessive. net The Controller DOE should: meet Department uith and [reasury consult with Social Security refine Administration checks-paid letters credit policy and develop specific procedures which will minimize Federal funds contracr in bank accounts, require contracrs commercial negotiate hanks with assure that bank requiring least compensation is chosen and that amount cf ccmpensation not more than is that required by bank charges, cover periodically its stated monir balances contracr Federal checks-paid funds letter in credit bank accounts, and use bank-supplied account analyses help accomplish se recommendations. (HTW)
UNITED STATES GENERAL ACCOUNTING OFFICE MaryOUK WASHINGTON, D.C. 20548 DIVISION OF PINANCIAL ANO StDOI nidi ~GURNAL MANGL4 B-39995 Al.GUST 3, 1978 Mr. Jerome A. Miles Controller Department Energy Dear Mr. Miles: This report is advise you results our survey Energy RFesearch and Development Administration's 1/ use checks-paid letter credit system pay its contracrs. Letters credit is a technique used for paying contracrs who are eligible be financed by advance Government payments. The intent letter credit program, as developed by Departuient Treasury, is time payment Government funds coincide with contracrs' requirtments for cash. The Department Energy has used letters credit for about 10 years, and Energy ficials ld us that over years y have saved Treasury substantial interest costs on public debt because letter credit system eliminated need pay contracrs billions dollars in advances well before contracrs needed money. 2/ 1/The functions Energy Research and Development Administration were transferred on Ocber 1, 1977, Department Energy. Many statements and actions attributed Department Energy in this report were actually stated and performed by Energy Research and Development Administration For simplicity, however, Departmert Energy is referred throughout report. 2/Paying contracrs before y need money, entent that Treasury borrows funds finance premature disbursements, causes Treasury incur additional interest costs. FGMSD-78-53 (90376)
Because potential system has for cash improving management in Federal Government, we checks-paid surveyed letter credit system find out how and it works potential for or Government entities adopting system. During course survey we noted ciencies some defi- which, if corrected by Department would Energy, furr improve system's effectiveness and reduce excess Government cash balances in contracr accounts by at least $1.8 million. Details se findings follow. HOW THE CHECKS-PAID LETTER OF CREDIT SYSTEM IS SUPPOSED TO WORK Under letter credit program Treasury, on behalf anor Federal agency, establishes credit a letter at a Federal Reserve Bank in favor a contracr and contracr's bank. The contracr's bank all honors checks presented for payment against contracr's special checking account established transactions. for letter Letter credit credit procedures authoriza bank request and receive daily reimbursement from ury's Treas- account at Federal Reserve Bank checks for amount commercial bank paid on account that day. Commercial banks are entitled compensation handling for activity in contracr accounts. Since Government procurement regulations do not allow contracrs receive reimbursement for bank service charges, t:,e are banks compensated in numerous ways, but generally eir (1) by use funds resulting from a cash balance contracr's in checking account (similar minimum required balance by many banks provide free personal checking individuals) or (2) a noninterest-beari,- time deposit. banks de not The pay interest on se Government funds; use y money earned on se funds as compensation. The amount Government funds is be no that larger necessary than allow a bank earn a sum imating closely what approx- it would ordinarily charge for servicing account. Services include processing deposits, honoring checks, issuing statements, etc. Bank include charges cost for and services an element prit, and vary from bank bank. When a bank is compensated by a noninterestbearing time deposit, average daily balance funds in Federal checks-pjid letter credit account should zero; be when compensated by an a reed-upon minimum balance, average daily balance should be equal agreedupon talance. 2
A bank-management ol called "account analysis" can be used as an aid in determining wher -- amount Fedel1 furds used as compensation by a bank is excessive, -- bank requiring least amount compensation for servicing checks-paid letter credit account is selected, and -- average daily balance maintained at bank exceeds agreed-upon amounts. Most large banks prepare monthly account analyses for ir major accounts, and will generally make m available cusmers upon request. Account analyses are used by bankers dete 4 -mine if cusmers are maintaining sufficiently high average cash balances in ir checking bank accounts earn enough allow money at least cover its charges for servicir'g accounts. If cash balances level, are below bank that may require additional compensation from its cusmers. If cash balances are above that level, is bank receiving more compensation than necessary cover its stated charges. The Department Energy has used letter credit system extensively for making advance payments. During 15-month period ending September 30, 1976, Energy paid $4 about billion its tal $6 billion in payments by lett'e credit. At May 1, 1977, re were 158 open letters credit--taling about $21 billion--which will cover payments be made over a long period cf time. Of se 158 letters credit, 51--taling about $16.7 billion--were under checks-paid letter credit procedures. EXCESS FERERAL FUNDS IN CONTRACTOR CHECKING ACCOUNTS We used account analyses provided by commercial determine banks minimum amounts Federal cash needed by banks as compensation for handling banking activity three Energy's largest contracrs for a 3-month period. These contreacrs, who had five letters credit taling $4.6 billion, were paid under chiecks-paid letter credit system. We determined that contracrs had $1.8 about million in excess Federal funds in ir bank accounts which, extent y increased Treasury borrowing, cost 3
Treasury about $120,000 annually in interest expense. If same conditions exist for remaining 46 letters credit, unnecessary interest expense incurred is probably substantially higher. Energy ficials ld us, however, that se conditions do not exist for most 46 letters credit, and that steps are underway tdke corrective action. One co tracrs whose banking activity we reviewed maintained checks-paid letter credit accounts at two banks in same city. No agreement had been reached with eir bank as minimum amount interest-free Federal cash balances be maintained. However, based on data from ir account analyses, both banks had excessive balances. If se balances were reduced amounts which would produce earnings banks equal ir stated charges for service, about $960,000 could have been returned Treasury's account at Federal Reserve Bank. In addition, one banks charges a much higher rate for services than or bdnk. We believe that if contracr had successfully negotiated with more expensive bank, that bank's charges would have been reduced meet competition provided by or bank. If negotiation did not produce this result, contracr should have used bank which used lower charges in its account analysis. This would have permitted an additional $680,000 be returned Treasury, with commensurate interest savings. Anor contracr had negotiated a minimum balance $600,000 with its commercial bank. By reviewing bank's account analysis, however, we noted that this amount was $71,00C higher than necessary adequately compensate bank for services. Furrmore, we found that average balance maintained was $731,000, or $131,000 more than agreed-urpon minimum balance. Thus, approximately $202,000 excess Federal cash was in bank account. The final contracr negotiated a new minimum balance with its commercial bank each month, based on activity prior month. At time our survey, negotiated minimum balance was $415,000, but bank was actually maintaining an average Federal cash balance $731,000. According charges shown on bank's account analysis, $731,000 actually maintained was less than adequate fully compensate bank for its services. We believe this situation warrants contracr's entering in negotiations (1) with present bank, determine a more realistic minimum 4
balance and (2) with or banks in area, determine if chars-es for services and amount Federal cash maintained provide compensation for handling account activity can be reduced. NEED FOR IMPROVED POLICY, PROCEDURES, AND PROGRAM MANAGEMENT The excess balances Federal funds in contracr bank accounts were caused by --an i.correct assumption in Treasury and Energy policy and procedures for determining timing and amount commercial bank reimbursements from Federal Reserve Banks; --an absence specific Energy procedures for establishing and approving agreements made between contracrs and ir ccmmercial banks, especially regarding negotiation compensating cash balances; and -- inadequate Energy moniring its checks-paid letter credit program. These inadequacies resulted in commercial banks' requesting and receiving premature and/or excessive reimbursement from %1easury's accounts at Federal Reserve Banks. Treasury written policy implies that commercial banks will receive same-day reimbursement from Federal Reserve equaling sum checks clearing tha bank accounts that day. Treasury ficials advised that -his was, in fact, intent Treasury's policy. However, commercial banks have problems operating checks-paid letter credit accounts consistent with this policy. The banks must request reimbursement from Federal Reserve by early afternoon--probably no later than 3 p.m.-- give Federal Reserve time process transaction on same day. Commercial banks, however, generally continue process checks y have accepted for payment against account until a much later hour, perhaps 9 p.m. or later. Thus, same-day reimbursement policy advocated by Treasury is not working. Because th.s, and because a lack oi clear implementing guidance from Department Energy, banks are requesting and receiving reimbursement from Federal Reserve in differing ways. The contracr that had accounts at two banks was initiating reimbursement requests from Federal Reserve on behalf two commercial banks, based partially on 5
amount checks contracr issued each day. Thus, commercial banks were receiving Federal funds prematurely, since several days pass from time se checks are mailed, received by credirs, and cycle back contracrs' banks for payment. As a result, banks had large amounts excess Federal cash on hand. At bank which negotiated a $600,000 minimum balance with contracr. amount checks expected clear contracr's account each day was estimated, and bank requested reimbursement from Federal Reserve for estimated amount. This amount usually exceeded tal actual checks clearing against account, reby causing an excess balance Federal funds in account. The fourth bank we surveyed was basing its reimbursement request on amount checks paid on account previous day. As noted earlier, $731,000 actually maintained did not cover bank's charges for services. Energy ficials ld us that y instruct contracrs negotiate minimum balances or time deposits with commercial banks, and establish a checks-paid letter credit account at bank which will perform necessary services for least cost. These agreements are be reviewed and approved by field fice ficials. No specific Department Energy written procedures, however, eir require that cash talances be negotiated, or detail actions necessary accomplish negotiations. Furrmore, no written procedures specified how banks should be compensated for handling checks-paid letter credit accounts, or how such a'counts should be monired. Treasury regulations make Federal agencies responsible for reviewing reasonableness cash balances on hand in contracrs' bank accounts and for moniring drawidowns Federal funds ensure against excessive and/or premature withdrawals by banks. Agencies are also required establish procedures for performing review. at least quart.erly, each contracr's use funds advanced by letter., credit. We found that reports and data available Energy personnel are noc adequate assist m in determining if balances Federal funds negotiated between contracrs and ir banks are reasonable, if in fact negotiations ok place. Furrmore, reports submitted by Energy's field fices concerning commercial bank account activity and balances Aid not provide enough information for personnel 6
determine if, or what extent, actual balances Federal funds in contracr bank accounts were excessive. CONCLUSIONS There is excess Federal cash in contracr Several bank accounts. facrs have contributed this condition. One facr is difficulty commercial Danks have experienced operating in checks-paid letter credit accounts with consistent Treasury policy. This situation has allowed commercial banks flexibility when seeking reimbursement from Reserve, Federal generally and Treasury detriment ficials should Government. meet and Energy develop workable policies and specific procedures regarding timing and commercial amount bank reimbursements from Federal Reserve. 1/ The Department Energy does nt have specific procedures necessary ensure that Federal funds disbursed under checks-paid letter credit system are not excessive. Any excess funds maintain' provide compensation.or banks servicing checks-paic setter credit accounts might.jsult in Treasury's incurring additional interest costs. Accordingly, Department Energy should establish procedures and take necessary actions (1) ensure minimum use Federal funds necessary compensate commercial banks and (2) monir, identify, and eliminate excess balances Federal funds in checks-paid letter creait accounts. Monthly reviews bank account analyses would enable Energy effectively monir balances Federal contracr funds in accounts. Bank-supplied account analyses provide information which can help in performing comprehensive reviews contracr checking account activity with effort. minimum RECOMMENDATIONS We recommend that you take actions necessary : -- Meet with Treasury Department and consult with Social Security Administration refine checks-paid letters credit policy and develop 1/The only or agency make widespread use paid checks- letters credit is Department Health, Education, and Welfare's Social Security Administration. should It be consulted on any changes checks-paid system. 7
specific procedures wb will minimize Federal funds in contracr bank accounts. -- Require contracrs negotiate with commercial banks assure that (1I bank requiring least ^ompensation is chosen and (2) amount compensation is not more than that required by bank cover its stated charges for handling account's activity. -- Periodically monir balances Federal funds in contracr checks-paid letter credit bank accounts, assure that excess balances Federal funds are identified and withdrawn. -- Use bank-supplied account analyses as an aid in accomplishing above recommendations. The contents this report were discussed with ficials representing Departments Energy and Treasury, contracrs, and ir banks. Their comments were considered in final preparation this report. Energy ficials informed us that specific written procedures will be developed as part Energy's efforts improve its cash management practices. We would appreciate your commients on our recommendations and are available discuss this report with you or your representatives if you so desire. Since President recently directed that a comprehensive review be made Federal cash management policies and practices, we are sending copies this report President's reorganization staff involved in a review Federal cash mnanagement. Furrmore, wi are sending copies Secretaries Departments ot energy, Treasury, and Health, Education, and Welfare; and Direcr, Office Management and Budget. Sincerely yours, D. L. Scantlebury Direcr 8