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Nonappropriated funds what, why, and how ... nonappropriated funds (NAFs)--what are they?

By way of example, you pay for lunch at the golf course snack bar on base, place an envelope in the collection plate during an on-base church service, or purchase from the Army & Air Force Exchange Service (AAFES). Where does that money go? Who accounts for the money?

All those dollars are NAFs. This article focuses on NAF programs, to include a little historical perspective, their organizational arrangement, funding sources, and their control and oversight.

NAF-funded Programs for Military Families

NAFs are funds generated by Department of Defense (DoD) military and civilian personnel (and their dependents) to augment funds appropriated by the Congress. The funds are used to provide a comprehensive program of morale-building welfare, religious, educational, and recreational activities. These activities are designed to improve the well being of DoD military and civilian personnel and their dependents.

NAFs are government monies and assets from sources other than monies appropriated by the Congress. NAFs are separate and apart from funds recorded in the books of the United States Treasury.

The DoD is not the only Federal agency that maintains NAFs. Other government agencies, such as the State Department, Coast Guard, and Department of Veterans Affairs, use NAFs. In 2008 DoD Instrumentalities (NAFIs) generated over $3.2 billion in sales and revenues.

Long History of Promoting Military Morale

NAF programs are important for military morale purposes. These programs provide fitness, lodging, recreation, and services for military members and other authorized customers.

Such programs were first introduced during the Revolutionary War as part of troop support through trading posts. In 1895 post exchanges (PXs) were established to furnish products and services to authorized personnel. Profits were used for PX reinvestment and to support recreational activities for the troops. With the establishment of a huge "citizen" army during World War I, the United Service Organizations (Inc.) was founded, along with programs like library services, troop canteens, and sports programs. In 1920 the Army Motion Picture Service was established and was followed by the founding of service clubs during World War II.



Today, NAF programs include morale, welfare, and recreation (MWR) activities, lodging operations, Fisher Houses, civilian welfare programs, family covenant programs, chaplain's funds, and AAFES. Fisher Houses provide lodging for families of military members who are hospitalized. These programs are administered through what's called a NAFI.

Nonappropriated Fund Instrumentalities

A NAFI is a mechanism for receiving and disbursing the money that patrons pay to NAF activities. The DoD operates several hundred NAFIs of various sizes. A NAFI, as an instrumentality of the U.S. Government, enjoys the same immunities and privileges as the U.S. Government in the absence of specific limiting Federal statute. NAFI programs and facilities are operated, maintained, and funded as an integral part of the DoD's personnel and readiness program. As a fiscal entity, a NAFI maintains custody and control of its NAFs and also administers appropriated fund (APF) resources to carry out its purposes.

DoD programs or activities and their supporting NAFIs are classified into one of six program groups to ensure uniformity in the establishment, management, allocation, and control of resource support. For example, each installation in the Marine Corps has a single NAFI under the control of the base commander to handle all NAFs for its MWR and exchange operations. Whereas an Army or an Air Force installation maintains a separate installation MWR NAFI, a separate NAFI (that is, AAFES) operates the exchange operation. Each Military Service handles it a little differently, but the overall concept is about the same.

Sometimes you hear that NAF programs operate exactly like private enterprises or a corporation. That statement is not exactly true since there are certain laws and regulations that preclude commercial procedures, such as the following examples:

* NAFIs are subject to the Services Contract Act, which requires contractors working for a NAFI to pay prevailing wage rates determined by the U.S. Department of Labor. This may mean they have to pay higher wages than would a commercial enterprise.

* A NAF program may have several different personnel systems (for example, APF, NAF, or local national (LN)) that are subject to different labor practices (potentially including labor unions) and processes (including LN laws and regulations in countries where our forces are stationed or forward-deployed).

* For the most part, NAFIs do not consolidate the resources flowing from both APF and NAF into a single financial statement or account. APF and NAF resources used to support NAF activities rarely are viewed or managed as a whole.

* NAF activities do not reimburse military installations for the common support and services that all on-base organizations receive (for example, exterior building maintenance, police and fire protection, or snow removal).

Funding Limited to Specific Purposes

For the most part, NAFIs use a combination of APFs and NAFs to operate their many different programs and activities. APFs are taxpayer dollars controlled through the congressional budget process for specific purposes. NAFs are managed through a NAFI and use is limited to specific purposes. The NAFIs, in turn, are governed by policies issued by the Office of the Secretary of Defense (OSD) and respective Military Services.

Resources are to be administered in an economical, efficient, and business-like manner to ensure that programs and resources are planned, programmed, and budgeted using the proper funding source--APF, NAF, or other approved funding resources, or a combination of these sources. Three funding categories are the basis of the APF and NAF authorizations.


Category A: Mission-Sustaining Activities

Category A activities have virtually no capacity for generating NAF revenues and are supported almost entirely with APFs. The use of NAFs is limited to specific instances where APFs are prohibited by law or when NAF support is essential for the operation. Programs within this category promote the physical and mental well-being of the military member, a requirement that supports accomplishment of the basic military mission. Examples include physical fitness, libraries, unit-level sports, community/recreation centers, and parks.

Category B: Basic Community Support Activities

Category B activities are financed with a combination of NAF and APF resources. In most cases NAF revenue-generating capability is limited, so these activities substantially are supported with APFs. These are activities that likely could not survive without substantial APF support. Examples include automotive skills development, youth activities, child development programs, arts and crafts skills development, and outdoor recreation.

Category C: Revenue-generating Activities

Category C activities have the highest capability to generate NAF revenues and generally receive only limited APF support. NAFIs located overseas are authorized limited direct APF support, along with military MWR and exchange activities at designated remote and isolated locations as approved by the OSD. Revenue-generating programs at designated MWR remote and isolated locations may receive the same type of APF support as Category B programs. These include such activities as bowling, golf, service clubs, aero clubs, and certain boating programs.

The OSD has established certain APF support percentages associated with each category. OSD guidance on the level of APF support generally is supplemented by guidance from the respective Military Service.

Oversight and Control

NAFs are government funds subject to the same fiduciary protection as U.S. Treasury funds. NAF program managers, installation MWR/ Force Support leaders, and installation commanders all have important roles in the oversight and control of both NAFs and APFs that support NAFIs. In addition, the installation comptroller and staff play an important oversight role consistent with their financial expertise and leadership. Depending on the Military Service, the roles and responsibilities may include the following:

* Ensuring that there is individual fiduciary responsibility for properly using NAF resources and preventing waste, loss, or unauthorized use. According to Title 10, United States Code, Section 2783, personnel who violate NAF regulations are subject to the same penalties under Federal laws that govern the misuse of appropriations by APF personnel. Violations by military personnel are punishable under the Uniform Code of Military Justice.

* When warranted, recommending to senior command officials a periodic review and audit of NAF programs to ensure continued need for the functions performed, and that those needs comply with sound business practices.

* Actively preparing and serving on installation NAF councils and other supporting finance/audit committees.

* Offering to assist MWR/Force Support officials with analyses, financial reviews, internal control assessments, etc.

* Ensuring that the appropriate fund source is used for the NAF activity, whether APF, NAF, or some alternative fund source.


NAF programs are important for the morale and welfare of military personnel and other authorized users. These programs are administered through a NAFI, which receives and disburses funds that may have come from APF, NAF, or other approved funding sources. NAFs are entitled to the same corporate governance process, internal control protection, and oversight as funds from the U.S. Treasury. Comptrollers and staff, given their financial management expertise, play an important role in ensuring that NAFs are properly safeguarded and disbursed.

To learn more about NAFs, please review DoD Instruction 1015.15, "Establishment, Management, and Control of Nonappropriated Fund Instrumentalities and Financial Management of Supporting Resources," at



Wally Erck is Chief, Business Management Division, Office of the Assistant Secretary of the Air Force (Financial Management & Comptroller), at the Pentagon. He has a BA in accounting, an MBA in business management, and an MS in counseling. He is a Certified Fraud Examiner and Certified Defense Financial Manager. He has received a variety of awards during his military and civilian career, including the 2008 Air Force Outstanding (Civilian) Contribution to Financial Management/Comptroller.
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Author:Erck, Wally
Publication:Armed Forces Comptroller
Date:Mar 22, 2011
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