How the Special Defense Acquisition Fund works

← All Insights

1. A fund to buy ahead of demand

Chapter 5 of the Arms Export Control Act creates the Special Defense Acquisition Fund (22 U.S.C. 2795(a)(1)). Under the President’s direction and in consultation with the Secretary of State, the Secretary of Defense must establish the fund as a revolving fund, separate from other accounts and under Defense Department control. It finances buying defense articles and defense services in anticipation of their transfer to eligible foreign countries and international organizations. The transfer may be under the Arms Export Control Act, the Foreign Assistance Act of 1961 or other law. The Secretary of Defense decides which articles and services to buy with the fund’s money.

The statute sets a priority for what the fund buys (22 U.S.C. 2795(a)(1)). It emphasizes items for which the initial issue quantity requirements of the American armed forces have not been met and are not under current procurement contract, where that fits security assistance needs. The fund does not limit or impair the responsibilities the two Acts give the Secretaries of State and Defense (22 U.S.C. 2795(a)(2)). How the fund appears in the Treasury accounts is covered in the Treasury accounts behind Foreign Military Sales.

2. Continuous orders and narcotics control items

Two further uses are written into the statute. The fund may keep on continuous order defense articles and services that the Defense Department assigns to a single agency for integrated management for the common use of all military departments (22 U.S.C. 2795(a)(3)). It does so in anticipation of transferring similar articles and services to foreign countries and international organizations.

The fund must also be used to buy defense articles particularly suited to narcotics control and appropriate to recipient countries’ needs (22 U.S.C. 2795(a)(4)). The statute’s examples are small boats, planes including helicopters, and communications equipment.

3. Where the money comes from

The fund is built from three kinds of collection from sales (22 U.S.C. 2795(b)). The first is collections under offers for articles from stock, representing the actual value of articles not intended to be replaced (22 U.S.C. 2795(b)(1)). The second is collections representing asset use charges, including contractor rental payments for government-owned plant and production equipment (22 U.S.C. 2795(b)(2)). Charges for proportionate recoupment of nonrecurring research, development and production costs are included as well.

The third is collections from sales or Foreign Assistance Act transfers of the articles and services the fund itself acquired (22 U.S.C. 2795(b)(3)). These represent the items’ value, calculated under the pricing rules for sales from stock, for procurement for cash sales, or for transfers under the Foreign Assistance Act, as appropriate. Any funds authorized and appropriated or otherwise made available for the fund are added. How the nonrecurring cost charge is calculated is covered in how the nonrecurring cost charge is calculated.

4. A cap and an appropriations check

The fund may not grow beyond the dollar amount set in section 114(c) of title 10 (22 U.S.C. 2795(c)(1)). For that limit, its size is the money in the fund plus the acquisition cost of articles it has bought and not yet transferred. The cap therefore counts untransferred inventory as well as cash. Amounts in the fund are available for obligation in any fiscal year only to the extent or in the amounts provided in advance in appropriation acts (22 U.S.C. 2795(c)(2)).

5. Transfers and temporary use

Buying an item through the fund does not authorize its transfer. No article or service the fund acquires may go to a foreign country or international organization unless the Arms Export Control Act, the Foreign Assistance Act or other law authorizes the transfer (22 U.S.C. 2795a(a)).

Before transfer, the President may let the American armed forces use fund items temporarily (22 U.S.C. 2795a(b)). The use must be necessary to meet national defense requirements. The armed forces must bear the costs of operating and maintaining the items while using them. They must also bear the costs of restoring or replacing the items when the use ends.

6. Costs the fund may carry

Apart from temporary use, the fund may pay for storing and maintaining its items, and other costs of preserving and preparing them for transfer (22 U.S.C. 2795a(c)). It may also pay the Defense Department’s administrative costs of acquiring them, to the extent those costs are not reimbursed under the administrative expenses provision of the Act. That provision builds administrative expenses, including official reception and representation expenses, into the administrative charge on sales (22 U.S.C. 2792(b)). It does so when the functions are mainly for a foreign country’s benefit and the expenses are not already charged to the sale of defense services. The expenses must also be neither salaries of the armed forces nor unfunded estimated costs of civilian retirement and other benefits.

7. How sales cash may be used

A related fiscal rule governs cash received on sales generally (22 U.S.C. 2777(a)). Cash payments received for sales from stock, procurement for cash sales and sales of design and construction services, and advances received for credit sales, may be used only for payments to suppliers, including the military departments, and refunds to purchasers. They may not finance credits and guarantees.

Repayments of sales credits, proceeds from disposing of instruments of indebtedness, and other collections such as fees and interest go to the Treasury’s miscellaneous receipts (22 U.S.C. 2777(b)). Proceeds that must be held as a reserve for guaranty claims at the time of disposition are excluded. If the guaranty reserve pays a claim on a guaranteed loan, later payments from the foreign borrower on that claim are credited to the reserve, merged with it and available for its purposes (22 U.S.C. 2777(c)). Sales credit is covered in FMS credit and who may receive it.

Key terms

Revolving fund	A fund replenished by its own collections and used again for the same purpose.
Initial issue quantity	The first quantity of an item the American armed forces require.
Continuous order	A standing order for commonly managed items bought ahead of foreign transfer.
Asset use charge	A charge on sales for the use of government-owned plant and equipment.
Guaranty reserve	The reserve that pays claims on guaranteed loans and takes back later recoveries.
Miscellaneous receipts	The general Treasury account that receives credit repayments and fees.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

How Sentfore supports this

Items bought ahead of demand still have to be stored, prepared and delivered. Sentfore works at the delivery end of defense programs in difficult environments, providing secure movement, protective security, facilities and life support. Requirements can be sent through the contact page.