The Sutlers

The historical roots of morale, welfare, and recreation (MWR) activities and nonappropriated funds (NAF) date back to the American Revolution.  The American Articles of War of 1775 provided for "sutlers" whose mission was to provide for the individual personal needs of Service personnel.  These itinerant merchants provided many of the services now found through the Exchange Service and were soon such an integral part of the Service that the Rules and Articles of War of 1806 provided that although not enlisted Soldiers, the sutlers were subject to the orders, rules, and discipline of war.

By 1821, the sutlers were returning part of their profit to the units they served.  The Post Fund was created to account for this money and to collect fines levied on Soldiers and the sutlers for various violations of regulations.  The Fund was soon being used for varied welfare projects such as relief for widows and orphans, financial assistance for the post school, purchase of library books, and maintenance of the post band.  Councils administered the Fund and the commanding officer eventually took over the custodians' duties.  Congress, in adopting the Regulations of the Army in 1821, provided its first recognition of welfare programs and this new type of fund.  The regulations included the provision for needs of enlisted men through certain activities and NAF. Officers and Noncommissioned Officers Messes (dining activities) were authorized and encouraged in the Army Regulations of 1835 and 1841, limited to the messing function (dining and ceremony).

Post Traders and the Canteen Associations

The sutlers eventually brought about their own downfall by charging exorbitant prices, engaging in usurious credit practices, and providing inadequate service.  In 1867, Congress authorized the establishment of Post Traders to replace the sutlers.  This new cast of merchants represented some improvement, but Traders were not always available at forts or camps in remote locations.  Soldiers began to form cooperatives to provide their own retail and social outlets. These cooperatives became know as "Canteen Associations."  By 1893, the canteens were so widespread and so successful that an Act of Congress abolished the Post Trader.  Because these canteens had naturally become centers for command sponsored social functions and were recognized as important for promoting esprit de corps, Congress also authorized the use of public buildings and public transportation ("not needed for other purposes") for canteen activities.  By this time, regulations governing nonappropriated canteen funds had been published and the funds were used to provide "gymnastic exercise facilities, billiards and other proper games," among other things.  At the same time, ration savings (unused food, beverage, or supply which had been provided by the government) within a company became a part of the company fund, thus indirectly bringing about an appropriated fund (APF) "contribution" to an MWR NAF activity.

The Post Exchange

The Post Exchange was established with the publication of War Department General Order No. 46, 1895.  The Order directed Post Commanders to establish an exchange (general store) at every post where practicable.  This MWR activity was to combine the features of a reading and recreation room, a store, and restaurant, all providing goods and services not supplied by the government.  In the 1903 Army Appropriations Act, Congress provided APF for the construction, equipment, and maintenance of suitable buildings at military posts and stations for the conduct of the Post Exchange, school, library, reading room, lunch room, amusement room, and gymnasium.  In 1904, Congress appropriated $5,000 for "athletic exercise and sports" as part of the Navy budget.  These appropriations established the precedent for federal funding for MWR programs.  In 1918, funds were again appropriated for "athletic activities."  Funding of the Post Exchange and post company funds continued in this same pattern through World War I.  During World War I, civilian leagues and agencies took much responsibility for troop morale and entertainment.  Although the leagues and agencies enjoyed tremendous public support, they did not coordinate their efforts.  After World War I, the Army studied morale conditions of the American Expeditionary Forces and concluded that the Army should provide these programs regularly, with the Navy militarizing similar functions.  In June 1920, the Army Motion Picture Service was established, supplanting a civilian bureau that had come about during the war.  In 1923, Congress appropriated funds for Army libraries and hostess (later Service club) personnel, thereby affirming the Army's decision to provide for recreation functions that were previously left to private agencies.

The 1933 War Department Appropriations Act

In 1932, due to complaints from local civilian businesses about unfair competition, a Special Committee of the House of Representatives conducted the first in-depth congressional examination of post exchange operations.  The War Department justified post exchanges by explaining that they were the only means for providing troops with recreational funds.  Since Congress did not provide appropriations for recreation, NAF represented a direct savings to the taxpayer and a subsidy to low paid Soldiers, Sailors, and Marines.  To mitigate the post exchange competitive advantage, the 1933 War Department Appropriations Act prohibited the use of any appropriations to pay any expense connected with the conduct, operation, or management of any post exchange.  Appropriations authorization was not eliminated for other kinds of MWR activities. Except for specific exceptions overseas, that prohibition continues to this day.

With the creation of the Army Exchange Service in 1941, General Marshall implemented the recommendations of a study group, creating integrated reporting systems and uniform post exchange organizations.

In 1942, the Supreme Court ruled (in Standard Oil Company of California versus Johnson) that "[the fact that] the establishment of post exchanges has been in accordance with regulations rather than specific statutory directions does not alter their status, for authorized War Department regulations have the force of law.  "Exchanges" are arms of the government...They are integral parts of the War Department, and partake of whatever immunities it may have under the constitution and federal statutes."  This ruling established the precedent that NAF activities are an integral part of the federal government with certain legal status and led to the name "nonappropriated fund instrumentality" to describe the legal fiscal entity. This legal status continues to be affirmed in case law and in rulings and opinions of the Comptroller General of the United States.

Military resale activities and related MWR programs did not again receive congressional attention until after World War II.  In 1949, a Special House Armed Services Subcommittee comprehensively reviewed military resale and related activities and admonished the Defense Department for using exchange profits (i.e., NAF) to finance other MWR programs.  The Subcommittee believed appropriations ought to be the principal source of recreation and welfare funds.  However, the Subcommittee further recognized that it was unlikely that the full Congress would appropriate adequate resources to support the MWR programs.

The President's Committee on Religion and Welfare in the Armed Forces - 1951

In 1951, the President's Committee on Religion and Welfare in the Armed Forces reported on the special services (MWR) program during the period of rapid expansion of the armed forces. In this review, free-time activities were divided into three categories: indispensable, essential, and desirable.  The Committee recommended providing programs and funding based on an order of precedence, not by an arbitrary allotment of resources.  The Committee believed that the more indispensable a free-time activity, the more it becomes a public responsibility to pay for it with appropriations.

In 1953, DoD issued the first funding policy statement for MWR activities.  It stated that appropriations were intended to provide, operate, and maintain "adequate [MWR] facilities" while NAF supplemented the cost of [MWR] programs using the facilities.  Except where APF was specifically authorized, NAF had to be used to pay MWR activity expenses for civilian employees, operating equipment, stock, supplies, utilities, and maintenance of interior space and equipment.  This Defense policy statement agreed with the 1949 House Subcommittee's opinion that in as much as the full Congress did not fully fund MWR programs, MWR programs continued to rely on NAF.

In 1953, complaints from private businesses about unfair competition again resulted in a House Armed Services Subcommittee investigation of post exchanges.  The subcommittee expressed its view that one of the secondary functions of the military exchanges was to save taxpayers' money by providing funding for MWR benefits.  However, the report reiterated the 1949 view that those facilities should be funded by direct appropriations.

In 1957, a House Armed Services Special Subcommittee on Military Exchange Matters convened and essentially reaffirmed the 1949 and 1953 conclusions that exchanges were not run primarily to generate "MWR profits."  Rather, the mission was to provide goods and services essential for the welfare and general well-being of the troops.

Investigations Lead to Changes

In 1968, military club scandals resulted in two years of investigation and hearings by the Senate Permanent Subcommittee on Investigations of the Government Operations Committee.  The Committee found that a group of uniformed personnel with experience in the MWR business had managed to gain control of the military job assignments process and, with the complicity of a few very senior people, were successful at placing corrupt cohorts in virtually all key military club management jobs around the world, especially within the Army and Air Force.  With this network of people in place, the group was able to engage in all manner of illicit business activity.  Procurement of food and beverage for resale was fraught with kickbacks, extortion, fraud, favoritism, and graft.  The entertainment program was notorious for kickbacks, extortion, and prostitution.  All of that was made possible because MWR operations were officially de-centralized and independently managed.  The "khaki mafia," as it came to be called, centrally organized all significant aspects of the business behind the scenes, albeit for nefarious purposes.  Ironically, other than the criminals who made millions from this activity, the other unwitting beneficiaries of this corruption were the military customers, who during much of the 1960s enjoyed cheap steaks and drinks, continuous first class entertainment, and fancy facilities.  Once exposed, this situation focused congressional interest on control and oversight of military resale activities and funding of MWR programs.  The military Services took significant steps to institutionalize a structure for executive control and oversight, which continues to evolve to the present.  

In 1970, during the Senate's investigation, the House Armed Services Committee recreated its Special Subcommittee on Exchanges and Commissaries.  The Subcommittee again noted that the principle objective of the military exchanges was being subordinated for the purpose of generating profits for the welfare and recreation fund.  The Subcommittee recognized the necessity for adequate recreational and welfare facilities, but held the position that Congress was responsible for providing facilities.  The Subcommittee chastised the Department for neglecting its responsibility "to the sources of the funds - that is, to all men and women whose purchases made the funds available."

In 1972, the House Armed Services Committee again established a Special Subcommittee to examine NAF Activities.  The Subcommittee noted in its report that the military community needed both resale activities and other MWR programs, citing them as the most important benefits in addition to pay.  The Subcommittee seemed reconciled to the often-criticized practice of funding MWR with resale profits.  It concluded that it was difficult to make rational decisions about MWR activities because DoD did not report the APF support for the program and, therefore, did not identify all resources used to produce NAF profits.  The Subcommittee recommended that DoD identify APF costs.  In response, DoD issued financial management policies for NAF and related APF resources.  It required annual reports on the amount of APF support furnished to military MWR activities.

In the 1977 Appropriations Act, the Senate Appropriations Committee tasked the Office of Management and Budget to "consider and report to the committee on Appropriations not later than February 1, 1977, on the feasibility and advisability of making NAFs fully self-supporting and eliminating appropriated fund subsides, both direct and indirect." That led to the creation of DoD funding policy, which authorized APF support by MWR category and elements of expense, and restricted or prohibited APF support where DoD considered it reasonable and prudent to expect DoD personnel to pay a portion of the cost.

A January 1986 House MWR Panel Report on NAF Construction criticized DoD regulations, which appeared to allow broad APF support for profit-generating activities.  The Panel opposed using APFs to operate profit-generating activities, except in remote and isolated areas.  During the Fiscal Year 1987 authorization and appropriation process, Congress reduced Operations and Maintenance (O&M) funding of MWR programs twenty percent across the board.  The Services were to take reductions in direct support of revenue generating MWR activities in large metropolitan areas of the United States.

Mission Essential Activities Funded

In August 1987, DoD reported to the House and Senate Armed Services and Appropriations Committees on a reassessment of program authorizations, organization and staffing, and funding policies for programs.  The funding policy grouped MWR into four categories to recognize the responsibility for constraining APF support for revenue generating activities. The policy stated that APF should support mission essential activities.  It further promoted the idea of revenue generating activities supporting the needs of desirable MWR activities that do not generate revenue.  The Fiscal Year 1988 Appropriations Act directed DoD to follow this funding policy.  The Congress retained the prerogative to review and evaluate the level of APF support under the new policy.

The Fiscal Year 1989 Authorization Act reduced the number of categories from four to three to promote a "business like" operation.  APF was authorized for "remote and isolated" business activities.  Congress directed reallocation of APF to mission sustaining MWR programs and family support areas.

In November 1991, the House Armed Services Committee questioned the use of NAFs, "Soldier, Sailor, Airman, and Marine dollars," to support essential activities which were viewed as a "taxpayer" responsibility.  Congress criticized the disparity among the Services in APF per capita support to mission essential MWR activities and held the Department and the Services responsible for not properly supporting MWR.

Penalties Established for Misuse of NAF

The Fiscal Year 1993 Authorization Act codified congressional concerns about MWR support. The statute required that the Office of the Secretary of Defense (OSD) establish oversight of NAFs and NAF Instrumentalities (NAFIs) and define how NAFs may be used.  In addition, the law established penalties for misuse of NAFs.  Congress sought to ensure that Service members benefit from NAF and that those benefits are equitable across all Services.

Supplemental Funding for Operation Iraqi Freedom and Operation Enduring Freedom

Between 1993 and the present, Congress has continued to pressure DoD to provide the maximum amount of APF support to Category A and B MWR activities as is practicable.  Major studies have resulted in recommendations for greater efficiency and consolidation where appropriate among the Category C activities.  Congress authorized supplemental APF support for MWR operations in Operation Iraqi Freedom and Operation Enduring Freedom, in Desert Shield and Desert Storm, in the Bosnia / Herzegovina theater, and in many other contingency locations, re-confirming the long-standing policy that MWR activities are essential and should be supported by the taxpayer.