[Senate Hearing 108-540]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-540

           TRIBAL CONTRACT SUPPORT COST TECHNICAL AMENDMENTS

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON INDIAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

                                S. 2172

         TO MAKE TECHNICAL AMENDMENTS TO THE PROVISIONS OF THE
         INDIAN SELF-DETERMINATION AND EDUCATION ASSISTANCE ACT
                   RELATING TO CONTRACT SUPPORT COSTS

                               __________

                             APRIL 28, 2004
                             WASHINGTON, DC



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                      COMMITTEE ON INDIAN AFFAIRS

              BEN NIGHTHORSE CAMPBELL, Colorado, Chairman

                DANIEL K. INOUYE, Hawaii, Vice Chairman

JOHN McCAIN, Arizona,                KENT CONRAD, North Dakota
PETE V. DOMENICI, New Mexico         HARRY REID, Nevada
CRAIG THOMAS, Wyoming                DANIEL K. AKAKA, Hawaii
ORRIN G. HATCH, Utah                 BYRON L. DORGAN, North Dakota
JAMES M. INHOFE, Oklahoma            TIM JOHNSON, South Dakota
GORDON SMITH, Oregon                 MARIA CANTWELL, Washington
LISA MURKOWSKI, Alaska

         Paul Moorehead, Majority Staff Director/Chief Counsel

        Patricia M. Zell, Minority Staff Director/Chief Counsel

                                  (ii)

  
                            C O N T E N T S

                              ----------                              
                                                                   Page
S. 2172, text of.................................................     2
Statements:
    Allen, Ron, chairman, Jamestown S'Klallam Tribal Council.....    11
    Black, Charles, director, Office of Tribal Programs, 
      Department of Health and Human Services....................     7
    Campbell. Hon. Ben Nighthorse, U.S. Senator from Colorado, 
      chairman, Committee on Indian Affairs......................     1
    Demeray, Ron, Director, Self-Determination Services, 
      Department of Health and Human Services....................     7
    Fenster, Herbert, Esq., McKenna, Long and Aldridge, LLP, 
      Denver, CO.................................................    20
    Grim, Charles, director, Indian health Service, Department of 
      Health and Human Services..................................     7
    Miller, Lloyd, Sonosky, Chambers, Sachse, Miller, and Munson, 
      Anchorage, AK..............................................    18
    Sinclair, William A., director, Office of Self-Governance and 
      Self-Determination, Department of the Interior.............     9
    Smith, Chadwick, principal chief, Cherokee Nation............    13

                                Appendix

Prepared statements:
    Allen, Ron...................................................    27
    Fenster, Herbert (with attachment)...........................    36
    Grim, Charles................................................    29
    Miller, Lloyd (with attachment)..............................    42
    Sinclair, William A..........................................    31
    Smith, Chadwick..............................................    33

 
       TRIBAL CONTRACT SUPPORT COST TECHNICAL AMENDMENTS OF 2004

                              ----------                              


                       WEDNESDAY, APRIL 28, 2004


                                       U.S. Senate,
                               Committee on Indian Affairs,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m. in room 
485, Senate Russell Building, Hon. Ben Nighthorse Campbell 
(chairman of the committee) presiding.
    Present: Senators Campbell, Inouye, and Murkowski.

        STATEMENT OF HON. BEN NIGHTHORSE CAMPBELL, U.S.
         SENATOR FROM COLORADO, CHAIRMAN, COMMITTEE ON
                         INDIAN AFFAIRS

    The Chairman. The committee will come to order. We meet 
today to receive testimony on S. 2172, the Tribal Contract 
Support Cost Technical Amendments of 2004.
    [Text of S. 2172 follows:]
      


    The Chairman. Since President Nixon's time Indian tribes 
have shown that they are much better prepared than the Federal 
Government at providing services and programs to tribal 
members. There is no question on that point. Our policy as the 
Congress is to encourage more tribes to become contracting 
tribes, but frankly they will not be willing to do so if they 
are not equipped with all the tools and resources they need.
    We will hear today from a commercial contract expert and, 
as he will testify, in all other contracts that the United 
States enters there is no question that the cost to carryout 
those contracts are provided to the contractor. I think that 
tribal contractors should be treated the same way.
    I will enter my complete statement in the record so that we 
can move along, because I have a time conflict this morning 
with a markup in another committee. So we will go ahead and 
when Senator Inouye gets here we will make his opening 
comments.
    With that, we will ask our first panel to be seated. That 
will be William Sinclair, the director of the Office of Self-
Governance and Self-Determination from the Department of the 
Interior; and Dr. Charles Grim, director of Indian Health 
Service for the Department of Health and Human Services. I 
think what we will go ahead and do is start with you, Dr. Grim, 
if we could. Your complete testimony, by the way, will be 
included in the record. I understand Douglas Black will be here 
accompanying you, is that right?
    Mr. Grim. Yes, sir; and also Ron Demeray.
    The Chairman. Mr. Demeray is also here accompanying you. 
Okay. Why don't you go ahead and proceed. Your complete 
testimony will be in the record, if you would like to 
abbreviate.

 STATEMENT OF CHARLES GRIM, DIRECTOR OF INDIAN HEALTH SERVICE, 
  DEPARTMENT OF HEALTH AND HUMAN SERVICES ACCOMPANIED BY DOUG 
 BLACK, DIRECTOR, OFFICE OF TRIBAL PROGRAMS, DEPARTMENT OF THE 
 HEALTH AND HUMAN SERVICES; AND RON DEMERAY, DIRECTOR OF SELF-
DETERMINATION SERVICES, DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Grim. Thank you, Senator Campbell. I will do so.
    As you indicated, I also have Doug Black, our director of 
the Office of Tribal Programs and Ron Demeray, our director of 
the Self-Determination Services team in that same office, so 
that we can be responsive to the committee's questions.
    Mr. Chairman, the IHS has testified previously before this 
committee on the importance of contract support costs, the 
promotion of strong, stable tribal governments, and the 
provision of quality health care. I come before you today in 
support of your continued efforts to address CSC issues.
    A little update on what the Indian Health Service is doing 
in that realm. We continue to work with tribal leaders and 
their representatives on a regular basis to improve the 
administration and allocation of contract support costs in the 
Indian Health Service.
    We have had four CSC policies in the IHS since 1992. Each 
policy has been an improvement on its predecessor based on our 
accumulated experience and our ongoing discussions with tribes 
concerning the agency's management of contract support costs. 
Earlier this month, we met again with representatives of tribes 
to consider several changes to our existing CSC policy that are 
intended to further improve the manner in which we manage 
contract support costs.
    Our CSC policy contains allocation procedures that are 
intended over a period of time to reduce the disparity in CSC 
funding among tribes in our system, without reducing CSC 
funding for tribes that are still underfunded. The allocation 
procedures we use were developed once again in consultation 
with tribes to address the present environment in which 
available contract support cost appropriations are insufficient 
to fund the total CSC need.
    S. 2172 contains provisions that appear to legislate the 
full funding of contract support costs. At the crux of the CSC 
dilemma and controversy are provisions in the Indian Self-
Determination Act that are seemingly in conflict with one 
another. The law directs the Secretary to fund the full amount 
of need for such costs, while elsewhere in the act it provides 
that contract funding is subject to the availability of 
appropriations. As a result, the IHS continues to be involved 
in litigation over contract support cost issues that are rooted 
in this confusion. In November, the Supreme Court will hear 
arguments concerning this conflict in statutory interpretation.
    S. 2172 attempts to address and ostensibly end the 
confusion over CSC by amending the act to fully fund these 
costs. Although I have been a strong advocate for increased 
contract support cost funding throughout my tenure as director 
and throughout my career in the Indian Health Service, I am 
concerned about this provision. S. 2172 does not specify the 
sources of funding that will be used to fully address the CSC 
need and I would be opposed to funding for CSC that comes from 
existing IHS appropriations for health care programs and 
services and supersedes the other critical priorities for 
budget increases for all IHS-funded programs.
    S. 2172 also contains a provision that reaches outside of 
the IHS and BIA by allowing tribes to recover their full 
indirect cost needs from awards made by other Federal agencies. 
This provision would result in the diversion of limited program 
funds to administration and create an inequity in treatment 
between tribal and non-tribal grantees. The Department cannot 
support the requirements of this provision.
    In closing, I would again like to express my support for 
contract support costs and the activities of this committee. 
Senator Campbell, I would also like to thank you for your 
efforts and achievements on behalf of Indian people as chairman 
of this committee.
    I would like to complete my opening comments by emphasizing 
that the IHS is committed to upholding, promoting and 
strengthening the principles of the Indian Self-Determination 
Act, the empowerment of tribal governments, and the government-
to-government relationship that exists between Indian Nations 
and this country.
    Thank you for the opportunity to discuss S. 2172 and 
contract support costs in the IHS. At this time, we are 
available to answer any questions that you might have.
    [Prepared statement of Mr. Grim appears in appendix.]
    The Chairman. Thank you, Dr. Grim.
    Mr. Sinclair, if you would go ahead and proceed.

  STATEMENT OF WILLIAM A. SINCLAIR, DIRECTOR, OFFICE OF SELF-
 GOVERNANCE AND SELF-DETERMINATION, DEPARTMENT OF THE INTERIOR

    Mr. Sinclair. Yes, sir; thank you.
    Good morning, Mr. Chairman. I am William Sinclair, director 
of the Office of Self-Governance at the Department of the 
Interior. I am pleased to be here today to impart the 
Department's views on S. 2172, to amend Public Law 93-638.
    The Department supports developing strong tribal 
governments by having contracts and compacts with over 90 
percent of all Indian tribes and by funding contract support 
costs incurred by those tribes. However, we are unable to 
support this bill.
    As background, the original act requires that tribes who 
are contracting and compacting for services, or a program, 
receive full Federal funding that the Secretary would have 
expended if the Secretary had provided the service directly.
    In addition, the Secretary is required to provide contract 
support costs to those contracting and compacting tribes to 
cover overhead expenses incurred by those tribes in 
implementing the contracts and compacts. For example, a tribe's 
personnel or accounting operation that provides administrative 
support services to more than one contract would be eligible 
for contract support.
    In 1988, the Act was amended requiring the Secretary to 
provide contract support funding for all administrative costs 
incurred by contracting and compacting tribes. However, the act 
also says that the provision of the funds are subject to the 
availability of appropriations, which leads us to our major 
concern with the bill. Section three of the bill attempts to 
make contract support costs similar to an entitlement by 
eliminating all references within the Act that make payment of 
funds, quote, ``subject to the availability of 
appropriations,'' unquote.
    Similarly, if the words ``subject to the availability of 
appropriations'' are eliminated in section 105(c)(1) of the 
act, then funding for all programs included in compacts and 
contracts could be considered as an entitlement.
    Section three of the bill also amends section 408 of the 
act which authorizes appropriations of the act. The bill would 
add the following language: ``Including such sums as are 
necessary to pay contract support costs when not otherwise 
provided for.'' As Congress has recognized, the BIA has many 
competing priorities that provide necessary funding for many 
important programs and services for Indian and Alaska Native 
communities. We believe that this language inappropriately 
singles out contract support as a high priority at the expense 
of other high priorities that tribal communities have.
    Beginning in 1994, Congress placed a legislative ceiling on 
the amount the Department could use toward contract support 
costs. The ceiling provision has continued to be included in 
each annual Interior Appropriations Act. For fiscal year 2005, 
the statutorily mandated ceiling that is being requested for 
contract support is $133.3 million. Enactment of the ceiling is 
important as it reflects the need to ensure that all Indian 
Affairs-related programs have sufficient resources to carry out 
their responsibilities and functions. We believe that there is 
some ambiguity created between the ceiling provision contained 
in congressional appropriations language and what is authorized 
by section 3 of the bill.
    We recognize that the full funding of contract support 
costs remains a major issue for all parties involved in 
contracting and compacting Federal programs and services under 
the act. If S. 2172 is enacted, the Department will be forced 
to reduce funding for equally important federal programs, some 
of which may be for inherently Federal functions and for 
programs and services directly to tribes, and for programs and 
services included in contracts and compacts. The latter would 
make the Department vulnerable to costly and time-consuming 
litigation.
    Section 2 impacts all Federal agencies including those who 
are not testifying before the committee today. If enacted, this 
provision would bind all Federal agencies to fully fund 
indirect costs at each agency's negotiated indirect cost rate. 
Implementation of this provision would most likely create some 
budgetary pressures on other agencies and may discourage these 
agencies from engaging in contracting and compacting with 
Indian tribes in the future.
    In addition, section two authorizes tribes to use indirect 
cost funding for other uses not related to indirect 
administrative costs. We are unclear as to the need for this 
provision because it implies that full funding for all indirect 
costs is unnecessary.
    Finally, section 4 attempts to supersede any conflicting 
provision of the law. The effects of this provision are unknown 
as it appears to attempt to override all previous 
appropriations and authorizing statutes and Federal regulations 
governing tribal contracting and compacting of Federal services 
and programs.
    Mr. Chairman, funding for contract support remains a 
serious issue for the Congress, the Administration, and Indian 
tribes, and we would like to work with the committee and the 
tribes in addressing these concerns in the future.
    This concludes my statement. If you have any questions, I 
would be glad to answer them.
    [Prepared statement of Mr. Sinclair appears in appendix.]
    The Chairman. We will. My question is, if this is not the 
answer, what is, to improve contracting and compacting since 
most tribes certainly agree with it and have done very well in 
the attempts to manage their own affairs? Clearly, a bill 
cannot become a law unless it is supported by the 
Administration, so I would hope as we move along both of you 
are willing to work with our staff and try and find something 
that can be a vehicle for change that is going to benefit 
tribes.
    I have to tell you, this will be my last trip. As you know, 
I am going home. But it has always been a concern of mine that 
an awful lot of agencies in Washington, it seems to me, are 
just scared to death of any kind of change that might benefit 
tribes. They always give us this kind of doublespeak. They want 
to do things to help Indian people, but when it comes right 
down to supporting a bill that will help Indian people, somehow 
they find a reason to oppose the damn bill. I have never quite 
understood that.
    If the Department of the Interior and the Indian Health 
Service both are really, their mission under the legislation 
that empowered them in the first place is to try to help 
Indians, we are not doing a very good job of it. It is as 
simple as that.
    Although I will not be here to fight the battle and Senator 
Inouye will not be on the committee either next year, in our 
tenure, he as chairman and me also following his leadership as 
chairman, that is something we faced right from the beginning, 
that people continually here in Washington tell us how much 
they want to help Indians, then when you propose a bill that 
helps Indians, they finally want to dissect it in 17 different 
ways and, what do you know, they have to come in an oppose the 
darn bill.
    So I would hope that you are willing to sit down with staff 
and try to find some middle ground where we can in fact help 
Indians help themselves more. I will submit some of my 
questions in writing to you, if you would answer them when you 
can.
    Thank you.
    We will now move to the next panel. That will be Ron Allen, 
chairman of the Jamestown S'Klallam Tribal Council from 
Washington; and Chadwick Smith, principal chief of the Cherokee 
Nation in Tahlequah, OK.
    Gentlemen, as with the first panel, your complete written 
statement will be included in the record. I would appreciate it 
if you would abbreviate some, and we will try to move forward. 
You already heard how the Administration feels about this bill. 
It is not my belief and I know it is not a lot of the tribes' 
belief, but we will move along and hear you. Why don't you go 
ahead and proceed.
    Ron, nice to see you again here.

 STATEMENT OF RON ALLEN, CHAIRMAN, JAMESTOWN S'KLALLAM TRIBAL 
                            COUNCIL

    Mr. Allen. Good to see you again, too, Mr. Chairman. It is 
always an honor and a pleasure to be here before this committee 
to testify on behalf of NCAI and my tribe, the Jamestown 
S'Klallam Tribe up in Western Washington.
    This issue is clearly an important issue to the tribes. We 
could not agree with you more in terms of the commitment that 
the Congress and the Administration should be making to the 
tribes to help advance policies that have been 30 years old in 
terms of helping the tribes become more self-determinant and 
self-reliant. That is an agenda that has been clearly 
articulated by this committee many, many times over the years.
    We are quite frustrated with this issue. I chair the 
Contract Support Task Force for NCAI and have helped champion 
our collective political strategy effort to try to persuade the 
Congress and the Administration to close this gap. We firmly 
believe that the way that the Federal Government is dealing 
with the tribes is a discriminatory policy. Nowhere else in 
this Government that deals with contracting of any other 
services or activities or functions with mainstream America in 
any venue do they treat contractors like they do Indian tribes.
    Without a doubt, it amazes us that as tribal governments, 
and as Congress and Administration after Administration has 
promoted that the tribes become self-reliant and do for 
ourselves, take care of our own community, be able to manage 
all of these affairs from public safety to natural resources 
and so forth, and yet they do not completely fund the 
contractual expenses. Our minds are boggled. Why?
    We get GAO reports. We have conducted our own reports and 
analyses of other institutions who also get Federal contract 
support. And yet we still do not find any consistency on how 
the Federal Government is dealing with this particular issue.
    In the end, the bottomline is that tribes are having to 
subsidize this activity to assure that as we are carrying out 
these functions and that we are accountable showing we are 
responsible, and that we are doing a good job. So the bills 
come in and the Federal Government is not paying their share, 
then who is? We have to do that. Otherwise, we get penalized 
and get scrutinized for mismanaging Federal dollars in those 
activities, as if we are the problem.
    We are not the problem. We have many successes. Self-
governance and self-determination has been shown to be 
unequivocally successful out there in our communities. 
Unfortunately, the Federal Government is not doing its part. We 
get a little frustrated how the Administration and the Congress 
has played a bit of a shell game for us. We go to the 
Administration and say, we want you to submit a budget where 
you are going to fully fund 100 percent. They point the finger 
at the Congress, and then Congress says, no, we do not want to 
pay 100 percent. We go to Congress and say, what is going on? 
Why can't we close this gap? There is only so much money.
    Well, the Administration does not submit a budget to us 
that closes the gap, so they apparently do not believe it is a 
priority.
    So we are going back and forth on this issue and not 
finding any solution to it. NCAI and our tribes who have been 
working on this issue unequivocally for a lot of years now 
believe that this bill can help close the gap. It provides 
clear instructions to the Administration, you need to submit a 
budget to us that closes this gap and treats the tribes in 
their governmental contracting relationship with the Federal 
Government like all other contractors. You will submit a budget 
and pay 100 percent. You will not cause the tribes of having to 
go to court to try to get our remedy.
    So here we are spending our own tribal money trying to get 
the Federal Government to own up to its responsibilities, and 
yet the Federal Government cannot seem to find a way to make 
that happen.
    So we believe this bill goes a long way and we would hope 
that we can move it or some variation of it along to provide 
that very clear unequivocal direction. We think that we are 
doing a good job out there in our communities. We do not 
believe the Federal Government can and ever will fully fund all 
the needs of our community. We have documented to this 
committee and others that there is a huge amount of unmet needs 
in our communities. We do not ever believe that gap will be 
closed, but at least with the existing functions and programs 
that we are contracting out, at least with those you could pay 
100 percent and that would be a fair relationship with the 
tribes.
    I will close. You have my testimony with some of the more 
specifics about our suggestions with regard to this bill, and 
this technical amendment bill. But the issue for us, Senator, 
is how we are going to close this gap and stop this 
discriminatory policy as it applies to the Indian tribes. It is 
an atrocity. It is embarrassing and we are just really 
frustrated that it still exists. We want a solution. Right now, 
we are not finding anybody who is providing us a solution.
    We appreciate your leadership and Senator Inouye's 
leadership to say, look, enough is enough; let's solve this 
problem and get on to other issues that are more important.
    Thank you.
    [Prepared statement of Mr. Allen appears in appendix.]
    The Chairman. Thank you for that testimony.
    Ron, I agree with you, tribes are not the problem. 
Washington is the problem and some of us certainly recognize 
that. You know as well as I do that discrimination against 
Indian people is not exactly new around this place or in many 
places in America.
    Very frankly, I hope that Indian country really registers 
their displeasure this November. Washington is the only game in 
town for Indians anymore. You know that as well as I do. It 
just seems to me what Indian people have got to do is get more 
active in public policy, not less active, because very clearly 
regardless of Administration, whether it is Republican or 
Democrat, there are people and will continue to be people in 
Washington who are more concerned about taking away what is 
left in Indian country, rather than helping Indians be self-
sufficient. That is a sad commentary, I have to tell you.
    Thank you for your testimony.
    Mr. Smith, nice to see you here. Thanks for being here.

 STATEMENT OF CHADWICK SMITH, PRINCIPAL CHIEF, CHEROKEE NATION

    Mr. Smith. Good morning, Chairman Campbell. I personally 
want to thank you for your service to Indian country. We value 
that. You are very special to us. We are sad to see you go.
    My name is Chad Smith and I am the principal chief of the 
Cherokee Nation, a federally recognized Indian nation with over 
244,000 citizens and 23 treaties with Great Britain and the 
United States.
    Before I talk about what I wanted to say, I found it very 
interesting from Mr. Sinclair's position that apparently with 
self-governance contracts there is are different definitions. A 
self-governance contract has a different definition than other 
kinds of contracts in the private sector and with other Federal 
agencies, and an obligation does not have the same definition 
in Indian country as it does in the rest of the contracting 
world. We found that a bit peculiar. It seems like in Federal 
contracting there is one uniform definition for contracting 
obligation.
    Let me say, I am a student of history in Federal Indian 
policy. It appears that every 20 to 40 years a pendulum swings, 
the pendulum of public sentiment and Federal policy. At one 
extreme, this sentiment and policy is hostile to American 
Indian tribes. At the other end of that swing, it allows tribes 
to determine their own destiny. Each hostile Federal policy has 
failed. There was extermination in the 1770's; removal in the 
1830's and forced assimilation; and in the 1890's ethnocide; 
and in the 1920's relocation; and termination in the 1950's.
    The one policy that has been successful is self-
determination and self-governance. This is one that each of us, 
Indian and non-Indian, hold precious in our own lives, where we 
control and become responsible for our own futures.
    The Cherokee Nation was one of the first tribes in the 
United States to execute a self-determination contract with the 
original 1975 Self-Determination Act. In 1990, we were also the 
very first tribe to execute a self-governance agreement under 
title III of the Act.
    Of course, pursuant to the act, we carry out a wide realm 
of services and sometimes folks ask what we do at the Cherokee 
Nation. We tell them we do everything the United States does 
except raise an army, from health care to social services to 
education.
    Unfortunately, the nation's progress has been severely 
impeded by the Government's not funding the required support 
costs as mandated by this act. Since the time of the first 
self-governance compact in 1990, the Cherokee Nation has never 
been fully funded with the contract support cost as mandated by 
the Indian Self-Determination Act, which amounts to over $4.7 
million a year for these fixed costs. We cannot create these 
programs without the administrative tools provided by contract 
support cost.
    As a result of the gross underfunding of these contracts, 
the nation has had to forego such substantial service to 
thousands of the Indian people simply to cover the shortfall in 
the government funding. This compounds an already deficit 
funding level and required us to ration basic health care and 
other services to our citizens. This has worked a great 
hardship on our people, who must rely on these programs and 
facilities for their basic health care, and that is why I am 
here today.
    I would like to share with you a brief story. It is a story 
about a 42-year-old Cherokee man, a laborer, who has been 
suffering chronic knee pain since 1995 and has been placed on 
multiple medications to help reduce the pain and swelling, but 
they have not been successful. His condition has continued to 
deteriorate, as shown by his x-rays, which now shows bone-on-
bone. He needs a total knee replacement. This is not a service 
we can provide in our outpatient clinics.
    Referral was sent to a specialty care, but it was denied 
due to lack of funding. This left this strong otherwise healthy 
man unable to perform his job as a carpet layer. This man 
quickly lost his job and his family was unable to pay its 
bills. The family turned to our Human Services Department for 
emergency help, which provided only limited relief. The family 
was ultimately forced to move in with the wife's parents, which 
added additional stress on his family. The husband became 
severely depressed due to being unemployed and living in 
constant pain.
    A once-productive member of our community, this man now 
cannot provide for his family, play with his kids, or have a 
moment that he is not in pain. Rather than being able to earn a 
living free of chronic pain and being a contributor in the 
Cherokee community, this family must seek assistance from other 
resources.
    We see these cases every day and I am sure you hear about 
them. This situation could have been prevented had we had the 
resources to perform the knee replacement on this man, a simple 
surgery, allowing him to work again. But knee replacements and 
similar procedures must be deferred, many times indefinitely, 
due to heart attacks, strokes, and other immediately life-
threatening conditions that demand higher priority for our 
limited funds.
    The Cherokee Nation has tried to resolve these issues. We 
have been to the court. The Supreme Court is going to be 
looking at this in the next coming months. We do not believe 
this is the way to resolve these situations.
    How can we be asked to satisfy the performance of these 
contracts without full payment by the agencies? It is clear 
that reforms are needed and we strongly support S. 2172 and we 
applaud the committee for including the provisions, especially 
in section three, that are key to strengthening the mandate to 
fully pay contract support cost. This clause prevents us from 
not knowing up front what the contract is going to be, how much 
we will have to budget, how to manage those scarce resources. 
Nobody in the private sector would imagine going into contract 
open-ended, not knowing what the amount and scope of the 
services would be, and expected to subsidize that contract with 
their own funds or perform less than what the requirements 
were.
    It is often repeated in these hearings that the greatest 
threat to the success of the Self-Determination Act is the 
failure to fully fund contract support cost. On behalf of the 
Cherokee Nation, I can tell you that the contract support 
funding has indeed been one of our greatest problems that 
impeded our progress.
    Thank you, Mr. Chairman. We strongly support your bill, S. 
2172. It really is not a mundane, simple issue. It undermines 
the whole idea of the relationship between this government and 
these tribal governments. We believe that a contract should be 
a contract, an obligation should be an obligation, and these 
support costs be fully provided for.
    Again, thank you, Mr. Chairman.
    [Prepared statement of Mr. Smith appears in appendix.]
    The Chairman. Thank you for that testimony. I guess I am a 
little old-fashioned, but I believe that a nation's word is 
like a person's word. You give you word, you ought to keep it. 
If a nation gives its word, it ought to keep it. You mentioned 
the hostile policies of the past have failed. We all recognize 
that. I have to tell you, from my own perspective we have too 
many of our current policies that are also failing because 
there are too many people still looking for end-ways around 
implementing the policies. I think a lot of that, very frankly, 
is driven by turf or emotion or money or something else, but we 
are not doing the best we can for Indian people. That is for 
sure.
    Let me start with Ron, and maybe ask a couple of questions, 
Ron. It seems to me that part of the reasoning for the Federal 
agencies is so that the 638 contract tribes, that are bound by 
congressional appropriations, can kind of stand in the shoes of 
the Federal Government. I know that contracting tribes can 
access the GSA, for instance, their purchasing schedules. If a 
tribe purchases a computer, as an example, a computer system, 
and 638 contract funds are exhausted, who is responsible for 
that expense? The Federal Government or the tribes?
    Mr. Allen. In our opinion, it is the Federal Government who 
is responsible.
    The Chairman. In your experience, what difference is there 
between a private government contractor and an Indian tribal 
government contractor?
    Mr. Allen. There is no difference, Senator. There 
absolutely is no difference.
    The Chairman. So they ought to be treated alike? Is that 
your position, too?
    Mr. Allen. Exactly.
    The Chairman. As it is mine.
    Mr. Allen. We also believe that this issue is not just with 
the BIA and IHS. It is with the Federal Government. This policy 
should be consistent with regard to any contract that deprives 
a securer from any agency or department in the Federal 
Government.
    The Chairman. Interior and Indian Health Service, excuse 
me, the HHS claim that fulfilling the contract support cost 
agreements they made will mean that they have to cut funding 
for direct service tribes. Do you agree with that?
    Mr. Allen. To fully fund it?
    The Chairman. They will have to cut funding for direct 
service tribes.
    Mr. Allen. Yes; if they were to redirect moneys that they 
have available to fully fund contract support, that means that 
some programs, some activities somewhere will be diminished.
    The Chairman. And what would be ways to make sure that 
those tribes are not impacted?
    Mr. Allen. We believe that legislation should make it very 
clear that contract support should be fully funded for all 
activities, and that on top of the program activities that are 
provided to the tribes, that those moneys should be made 
available.
    We believe that the Congress really does need to make sure 
that it needs to increase the budget that it makes available 
for Interior, for Indian Affairs, or IHS; that as they identify 
those activities, the contract support just accompanies it. It 
should not diminish programs. The point I did not make earlier 
is that the way the policy is administered right now, it means 
that we have to diminish programs. For us to administer these 
contracts appropriately and responsively, to do that and cover 
those costs, that means that they come from the programs. The 
programs have to be diminished to balance out that 
administrative responsibility.
    The Chairman. Maybe I have it wrong, because finance is not 
my strong suit. But it just seems to me that contracting, when 
the Federal Government gives direct funding through contracting 
to the tribe, it is a more efficient use of taxpayer money. 
Because if we filter it through all the process and then down 
to the tribe, there is always some peeled off through salaries 
and all kinds of things, travel, you name it.
    So if we appropriate a dollar and we contract with the 
tribe and give them that dollar, I know where that is going. I 
know what is happening to it. But if we put it through the 
system, I often wonder how much of that dollar to the tribe 
actually gets to deal with the problems they are facing.
    I sometimes think that is why we get opposition, regardless 
of whose Administration it is, is that they do not want to 
diminish what they consider is part of their turf. But from a 
dollar and cents standpoint, when we talk about whether 
contracting would save or cost more, I think it is in the best 
interests of the taxpayer at large to direct contracting to 
Indian tribes as we do with other entities.
    Mr. Allen. We could not agree more. When we advanced self-
governance throughout the 1990's and said that we can manage 
these programs and functions much better than the Federal 
Government, the deal was that the tribes should be able to 
negotiate from the Federal Government every function and 
activity, every function, all the way to the Secretary's 
office, so that we could take over everything we wanted to take 
over.
    In principle, it started that way. But slowly but surely, 
they are digging in their heels and they are retracting from 
it. So that is becoming more and more challenging. Our success, 
both through self-governance and title I contracting, has shown 
that the tribes are more efficient. I can tell you, if we said 
no, we are sick and tired of not being fully funded, and 
returned all the programs and activities, the Federal 
Government would have one difficult time taking over those 
programs. It would be a greater diminishment of those services.
    The Chairman. Yes.
    Mr. Smith. Senator Campbell, if I may?
    The Chairman. Yes.
    Mr. Smith. It is not only efficiency. It is also 
effectiveness, with the flexibility of the self-governance 
policy, it allows us to be responsive to our local needs. It 
helps us put a priority on the most critical needs. It allows 
us to do strategic planning for decades to come. So it is not 
only efficient, it is effective.
    The Chairman. Yes.
    Chief Smith, in your case, in your testimony you noted that 
the Cherokee Nation had to forego substantial services because 
of the CSC shortfalls. What were some of the services that you 
had to forego?
    Mr. Smith. Health care, Indian child welfare, law 
enforcement, anything that is under our self-governance 
policies through the Bureau of Indian Affairs or IHS.
    The Chairman. You also noted in your testimony that the 
Cherokee Nation took over operation of the health programs in 
the early to mid-1990's. During that time, you did not receive 
any contract support funding for those programs? Is that true?
    Mr. Smith. For that period of time, yes, sir.
    The Chairman. Why would the Cherokee Nation take over those 
programs if you were not going to receive the contract support 
funding? And knowing that history, do you have plans to take 
over more programs or not?
    Mr. Smith. Anytime we look at a program, as how we can best 
can provide a service; not whose turf we are on, ours or yours 
or the IHS; we have taken over those programs because we 
believe, and we have been able to demonstrate, that we have 
done a better job, more responsive, more effective, more 
efficient, created partnerships with local county governments, 
State governments, Federal agencies. We have a vested interest 
in making it successful.
    The Chairman. I thank you for appearing and supporting this 
bill. I know Senator Inouye will be also grateful for that. 
With only 70 days left of this session, and so many things 
backlogged, very frankly I do not know if we are going to be 
able to make much progress or not, but I would hope so. Whoever 
comes in to take our seats, at the next term Senator McCain 
will be the chairman. As you know, Ron, he can be a real tiger 
when he wants to and hopefully he will pursue this. If we 
cannot get it through, he will.
    When I am back in the private sector, I certainly will try 
to make it a priority of mine to make sure the Indian voice is 
still heard here.
    Thank you for appearing today. I appreciate it.
    Mr. Smith. Thank you, sir.
    Mr. Allen. I would say, Mr. Chairman, Indian country is 
going to be very active in the upcoming elections. We are going 
to make it real clear where our priorities are and what we are 
going to be seeking from presidential candidates to congressmen 
with regard to where do you stand with regard to your 
relationship with Indians and the Federal Government's 
obligations to Indians. We will be out there. Our voters will 
be out there.
    The Chairman. Good. Glad to hear that.
    The third panel will be Herbert Fenster, Esquire, McKenna, 
Long and Aldridge of Denver; and Lloyd Miller, Sonosky, 
Chambers from Anchorage, AK. Go ahead. Sit down there.
    Nice to have you both here.
    Why don't we go ahead and start with Mr. Miller.

 STATEMENT OF LLOYD MILLER, SONOSKY, CHAMBERS, SACHSE, MILLER 
                   AND MUNSON, ANCHORAGE, AK

    Mr. Miller. Thank you, Mr. Chairman. It is an honor to be 
here this morning.
    The Chairman. You can also abbreviate and we will put your 
full testimony in the record.
    Mr. Miller. Absolutely.
    As this committee is all too aware from its frequent return 
to the Indian Self-Determination Act, no single issue has 
plagued the success of the Indian self-determination policy 
more than underfunding contract support costs. For tribes that 
are running hospitals and clinics and law enforcement programs, 
no other deficiency in the Federal system plagues the 
successful implementation of those contracts as much as the 
underfunding of contract support costs.
    This committee said it in 1988. The single most serious 
problem with implementation of the Indian self-determination 
policy is the underfunding of contract support costs. The 
committee enacted amendments to remedy that policy; that was 
the primary purpose of the 1988 amendments.
    The problem, however, is, as you have heard today, embedded 
in the act itself. On the one hand, in 1988 Congress amended 
the act to mandate that the Secretary, upon the approval of a 
self-determination, shall add to the contract the full amount 
of funds to which the contractor is entitled, including, quote, 
``contract support costs.'' Congress even provided a remedy in 
court under the Contract Disputes Act for damages if there was 
insufficient payment. But Congress also provided in the act 
that the agency's payment of contract amounts is subject to the 
availability of appropriations, and appropriations have indeed 
been capped for the BIA since 1994 and for IHS since 1999.
    This has created an untenable position, where Congress 
directs the agencies to award contracts for specific sums that 
Congress mandates be paid in full, but at the same time a later 
Congress, acting at the agencies' instigation due to 
insufficient Administration requests, also limits the legal 
availability of the appropriations to pay the full amount.
    Contractors are caught in the middle, fully performing 
their contracts to operate Federal programs, but with the 
agencies now regularly requesting insufficient appropriations 
to pay the very contracts it has signed. At the very time it is 
signing the contracts, it is requesting insufficient funds to 
pay the contracts.
    Indeed, as currently implemented, the contractors are now 
regularly kept in the dark about exactly how much they will be 
paid in the contract year until the year is almost over and 
performance is nearly complete.
    I am here a little bit to talk about litigation. 
Litigation, as an alternative mechanism, has not proven to be 
efficacious, to say the least. On the one hand, it is true that 
judgments have been awarded against the BIA largely for pre-
1994 contract claims totaling some $115 million in damages. But 
other cases have dragged on for years and years. Most recently, 
we now have the two Cherokee cases, one involving the Cherokee 
Nation, the other the Cherokee Nation and the Shoshone-Paiute 
Tribes, and the 10th Circuit and the Federal Circuit Court of 
Appeals have reached different conclusions. The Supreme Court 
will resolve the differences in the views of the law reached by 
those two courts. This teaches us that litigation is not an 
efficient means of remedying the shortfall in these contracts.
    Worse yet, both for contractors and for the achievement of 
Congress' goals, in the one case where the agencies' 
appropriations were actually capped by an appropriations Act, 
the court ruled that the tribes' contract amount, not just the 
agencies' ability to pay it, but the contract amount itself, 
was limited to the insufficient appropriations, even though the 
appropriations came in bulk and there was no way for the tribe 
to know how much it had in its contract.
    Against this backdrop, S. 2172 is a welcome development and 
a necessary change. The measure will overcome the agencies' 
excessive reliance on the clause and conform the act to other 
government contracting regimes where an insufficient agency 
appropriation never stands in the way of the fulfillment of a 
government promise in a contract.
    At the conclusion of my written testimony, I quoted at some 
length Senator Inouye's remarks in connection with the 1988 
amendments. Those remarks reflected the committee's goal at the 
time once and for all to place tribal contractors on the same 
footing as other government contractors. Time has shown that to 
achieve that goal still requires the kind of reform proposed by 
S. 2172. In this way, prompt payment of the contracts will no 
longer be dependent on the politics of the budget process, 
competing demands within the agencies, or the fortitude of 
tribal contractors like the Cherokee Nation to take on the 
United States of America in litigation.
    Thank you, Mr. Chairman, for the opportunity to testify.
    [Prepared statement of Mr. Miller appears in appendix.]
    The Chairman. Thank you, Mr. Miller. Thank you very much.
    Mr. Fenster.

   STATEMENT OF HERBERT FENSTER, ESQUIRE, McKENNA, LONG AND 
                   ALDRIDGE, LLP, DENVER, CO

    Mr. Fenster. Yes, Senator; Mr. Chairman, I appreciate the 
opportunity to appear and speak before the committee. I want to 
state right away that I have no expertise in Indian law. I 
appear as an expert in government contract law in which I have 
had experience over more than four decades. That expertise 
includes Federal funding and cost allowability.
    I think the best I can do in an oral statement to 
supplement my written statement is to point out some analogies 
between Indian contracting as it is seen here, and government 
contracting elsewhere. For example, the Department of Defense 
would never appear before a congressional committee and even 
suggest that its contractors bear some of their overhead costs. 
That is unthinkable. No defense contractor would agree to bear 
a substantial portion of its overhead costs. Government 
contracting under the Federal acquisition regulations actually 
prohibits a contractor from doing so.
    Similarly in civilian contracting, GSA would never go to 
IBM and suggest to IBM that they provide computers partially at 
their own cost by bearing their indirect expenses of 
manufacturing of those computers. That is unthinkable.
    Again, as my written testimony points out, it is not only 
illegal, it is unconstitutional. It is unconstitutional for the 
executive branch to go out and augment appropriations made by 
Congress by forcing its contractors to bear some of those 
expenses.
    A better example yet is Iraq today. Today in Iraq, the 
Department of Defense and the Department of State are 
contracting out infrastructure support services. 
Infrastructure, health care services, schooling services are 
being contracted out to private enterprise. Why? Because it is 
far more effective to do it that way and government cannot 
provide those services in the first place.
    However, no suggestion is ever made that the contractors 
over there in Iraq are going to bear some part of the cost, for 
example, the indirect costs of providing those services. I want 
to tell you, Mr. Chairman, that the indirect costs of providing 
those services are enormous, often amounting to two or three 
times the direct costs. Yet those contractors are being fully 
compensated and are earning a profit on that work, as you can 
see from a lot of the very disparaging statements that are made 
about them in the news media.
    Unless the Chairman has questions?
    [Prepared statement of Mr. Fenster appears in appendix.]
    The Chairman. Yes; several. You mentioned, I believe, it is 
unconstitutional to make contractors bear the over costs. Why 
isn't it unconstitutional to do that when they are forcing 
Indians to bear the over costs? I am not a constitutional 
authority.
    Mr. Fenster. In that area, Mr. Chairman, I am an authority. 
It is unconstitutional because article I, section 9, clause 7 
of the Constitution recites that no funds shall be drawn from 
the Treasury other than by an appropriation. The General 
Accounting Office [GAO] long ago held that to require a 
contractor to pay for part of the costs of contracting for 
government services is to augment the appropriation, in other 
words to go around the congressional opportunity to provide the 
funds.
    The Chairman. If you cannot have the remedy through 
legislation like this bill I think is part of the remedy, what 
option do the tribes have? Do they just have to go to court and 
sue the Federal Government?
    Mr. Fenster. This may not be a popular answer, even among 
the tribes, but the tribes' option is to turn the services back 
to the Government to be performed. The Government is suggesting 
in its testimony today that if that happened, the inference is 
that it would cost less. That is not true. We know from many 
experiences, including my written testimony reference to the 
FAIR Act, that it is far more cost-effective to contract out 
those services. So the Government would achieve no good result 
by receiving the services back to be performed.
    The Chairman. You made reference to what we are doing in 
Iraq, and I support our efforts in Iraq as just one Senator, 
but I recognize the costs, too. It is amazing that there is so 
little accountability in some of these cost overruns in Iraq, 
and yet every dime that potentially goes to American Indians we 
have everybody and their brother around this place looking over 
their shoulders to see how it is being spent.
    Mr. Fenster. Mr. Chairman, I think you raise a good point, 
and that is accountability. There is no suggestion in any of 
the testimony today that these indirect costs are unreasonable. 
As a matter of fact, the inference is that they are very 
reasonable. They are providing the services more cost-
effectively than the Government could do itself.
    Similarly, in Iraq just by analogy, those contracts are all 
audited. They are audited by the Defense Contract Audit Agency, 
by GAO. Although there are a lot of disparaging remarks being 
made, there is no suggestion based on any hard facts that those 
services are being provided in Iraq for some outrageous sum. 
That is not the case.
    The Chairman. That is right.
    Let me, before I ask some questions, Senator Murkowski has 
joined us. Did you have an opening statement, Senator? Or did 
you just want to listen and ask some questions yourself?
    Senator Murkowski. Mr. Chairman, thank you. I do not have 
an opening statement. I do have just one quick question of Mr. 
Miller, and that is it.
    The Chairman. Why don't you go ahead, then I will ask 
several of mine.
    Senator Murkowski. Just very, very briefly, and I apologize 
that I was not here for the previous testimony. Mr. Miller, if 
you could just give me a quick summary, I guess, of the effect 
that the shortfall on the contract support cost has had on the 
tribal programs in Alaska.
    Mr. Miller. Thank you very much, Senator Murkowski.
    The effect of the contract support cost shortfall in Alaska 
is devastating. We are talking about a State where we 
experience third-world conditions, as the Senator knows, in 
many of the villages where there is not enough safe drinking 
water even to assure against communicable diseases. The 
contract support cost shortfall in Alaska is the largest among 
all of the regions of the country in terms of total contract 
support shortfalls, which today are projected at $111 million.
    The Alaska Native Tribal Health Consortium alone is short 
$11 million in its hospital operations in Anchorage. That 
number is duplicated for the Southeast Alaska Regional Health 
Corporation, the Yukon-Kuskokwim Health Corporation, the 
Bristol Bay Area Health Corporation. Virtually all of the 
corporations and tribal programs operating health care in 
Alaska with contracts with the Indian Health Service are 
severely underfunded.
    It absolutely compromises their ability. The reason I say 
that is because contract support costs, being audited, they are 
audited, they have to be audited by a certified public 
accountant and the audit has to be furnished to the government. 
Those audited costs are fixed costs. They are the costs of 
insurance. They are the costs of the audit itself. They are the 
costs of the financial management system the tribe has to have.
    The tribe, when it fails to receive the full amount from 
the agency, cannot go without incurring the costs. They have to 
pay that bill. We heard this in the Cherokee Nation's 
testimony. Since the costs are fixed and the tribe has to pay 
it, there is no choice. It has to come out of the program. 
There is simply no choice. So we have a dollar-for-dollar 
reduction in programs.
    Senator Murkowski. So when you say that it has to come out 
of the program, then, what specifically are we seeing, for 
instance, when you spoke to the effect on the Tribal Health 
Consortium? If it is coming out of the program, where are we 
seeing it?
    Mr. Miller. They have reduced their ability to purchase 
contract health care services. They have reduced the services 
they can provide at the hospital itself. They have reduced 
their physician contracts that they would otherwise enter into. 
It can affect the entire salary scheme of a tribal organization 
such that they cannot attract the same caliber of people to 
work at the institution.
    If the Senator would like, I can certainly provide a 
profile for several of the corporations showing where the 
reductions are felt and how that translates into services, if 
that would assist the committee.
    Senator Murkowski. Thank you. I appreciate that, Mr. 
Chairman.
    Mr. Miller. You are very welcome.
    The Chairman. Thank you.
    Thanks to both of you for your testimony. You heard Ron 
Allen mention how frustrated he is. I think he voiced the 
opinion of an awful lot of Indian people. You, Mr. Fenster, 
said you do not have expertise in certain areas. After being 
here the number of years that I have been here, I am convinced 
we do not need so many people with expertise. We need more 
people with a good heart who have a real commitment to 
fairness. That is what we do not have. We have too many people 
that get frankly totally embroiled in the legalese when they 
ought be reading the good book more than the law books, it 
seems to me, when we are trying to do what is right for people.
    In any event, let me ask both of you, or at least Mr. 
Miller, a couple of questions. As a result of the CSC 
shortfalls, Indian tribes may not find it feasible to take over 
certain programs or services and forego the contracting. Do you 
consider that an acceptable response to the shortfall program, 
just turning it back?
    Mr. Miller. It is not an acceptable response, but it is a 
predictable response.
    The Chairman. Maybe the only one.
    Mr. Miller. It is the only response. In fact, today new 
contracting has stopped dead in its tracks. There is virtually 
no tribe in the country that will take on the operation of a 
new program with IHS or any significant program with the BIA. 
Maybe that is the way the agencies want it, but that is 
certainly what they have achieved.
    The Chairman. I am inclined to think so.
    Mr. Miller. I want to emphasize that it is the agencies 
that have achieved it. We heard this morning Mr. Sinclair 
testify that the BIA budget request for 2005 is $133 million. 
The problem is that it is $50 million short. That is not 
something to be proud about.
    The Chairman. No; I have to plead a little bit guilty 
myself on that because I am on the Appropriations Committee. 
But if I am not mistaken, out of this 15-person committee, I 
think there are three, Senator Inouye and I do not know who 
else, Senator Johnson and myself that are all on 
Appropriations, but I think I am maybe the only one on Interior 
Appropriations, but maybe there are just one or two of us on 
Interior Appropriations. Of course, most Indian money goes 
through there.
    When you think of 100 Senators and then 435 on the other 
side, the numbers do not favor us very well when we try to add 
money. Even people from both sides of the aisle that try and do 
that, we are numerically such a small number that we just 
cannot get everything we want. But we fight the good battle 
every year, as you know. I know we do not come up with either 
the expectations or what is needed to resolve some of the 
problems in Indian country.
    Mr. Miller. This is why I think the reform reflected in the 
bill is so important. We cannot count, and it does not matter 
the Administration, Democratic or Republican, we cannot count 
on the agencies or OMB to submit to the Congress a funding 
request that will include full funding for these contracts, 
although they will always fully fund the Defense Department and 
GSA contracts. We cannot.
    In that environment, it has nothing to do with partisan 
politics; only Congress has the answer. Only Congress can turn 
their hands by enacting legislation that makes it clear that in 
the absence of full appropriations, they will be sued and 
successfully. By golly, under that kind of pressure, the 
agencies and OMB will make a proper request that can be 
considered by the Congress.
    The Chairman. Congress itself is an animal that responds to 
pressure, too, as you probably know. I think the unfortunate 
reality is that Indian country is still very small as a voting 
group. That is the pressure they have to bring to bear sooner 
or later, like everybody else in the country has already 
learned.
    Back in 1999, the GAO noted significant inconsistencies in 
applying its CSC policies at both the Bureau and the IHS. As I 
understand it, the IHS revised its CSC policies in 2001, but it 
is notably different from the BIA. Has that revision helped the 
tribal contractors or not? What problems still remain? Are you 
familiar with that, Mr. Miller?
    Mr. Miller. Very much so, Mr. Chairman.
    The Indian Health Service policy is designed to deal with 
an underfunding situation. The Indian Health Service has 
devised a variety of means of allocating the misery among the 
contractors who are not being fully paid.
    Having said that, the Indian Health Service is doing a 
reasonable job in allocating an insufficient amount. The 
problem, of course, is the insufficient amount, but putting 
that aside. The Bureau of Indian Affairs has devised an 
entirely different means, and the means employed by the Bureau 
of Indian Affairs is such that tribal contractors never know 
until the end of the year how much money they are going to have 
to carry out the contract they have just completed performing. 
That makes no sense.
    So the BIA has been urged by tribes to develop a policy 
that would closely mirror, if not replicate, the Indian Health 
Service policy. The Assistant Secretary for Indian Affairs now 
has under review a draft policy developed by a joint BIA-tribal 
work group. We just met yesterday afternoon to go over that 
policy. We have agreed to meet again in two weeks. So we are 
hopeful that the BIA will improve its system so that at least 
there is predictability in the current situation of 
underfunding until a bill like S. 2172 becomes law.
    The Chairman. I have always been one that believes that 
negotiating is better than litigating if you can avoid it. I 
know sometimes there is no other option. You heard me ask the 
previous panel, what recourse is there? Should they just sue 
the government or what, to try to resolve this impasse? Could 
you tell me what options you think are open to the tribal 
contractor? They have negotiated with the U.S. to carry out a 
program for services and then found out that the CSC component 
of the negotiations turned out not to be mandatory, but 
discretionary by the Government. What options do they have if 
we cannot fix it through a bill that we have before us?
    Mr. Miller. I think we cannot fix it with a bill like this. 
If the appropriations continue heading in the direction they 
have been heading--which is not only flat, but compounding the 
flat appropriations, rescissions that have actually reduced the 
amount of contract support cost in the last 2 years--if we keep 
heading in that direction, I think we are in jeopardy of seeing 
wholesale retrocessions, the return of these contracted 
programs to the Federal Government.
    Then you will have the scenario, Mr. Chairman, you 
described earlier, where instead of one dollar going to the 
tribal community to serve the tribal community, it is one 
dollar going to the BIA to serve the tribal community, out of 
which we would be lucky if 20 cents actually got there. I think 
that would be a terrible setback for the policy of Indian self-
determination and the Congress should not permit that to occur.
    The Chairman. Yes; I have no further questions.
    Senator Murkowski, did you have any further?
    Senator Murkowski. I do not, Mr. Chairman.
    The Chairman. I may submit some in writing, though, because 
I certainly appreciate your testimony and I find it very 
enlightening and certainly helpful to me.
    Senator Murkowski. Thank you. I am fine.
    The Chairman. You have none.
    I thank all the witnesses that appeared today. With that, 
the hearing is adjourned.
    [Whereupon, at 10:55 a.m., the committee was adjourned, to 
reconvene at the call of the Chair.]


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                            A P P E N D I X

                              ----------                              


              Additional Material Submitted for the Record

=======================================================================


Prepared Statement of W. Ron Allen, Chairman, Jamestown S'Klallam Tribe

    Chairman Campbell, Vice Chairman Inouye, and members of the Senate 
Committee on Indian Affairs, my name is W. Ron Allen and I am chairman 
of the Jamestown S'Klallam Tribe in Washington State. I also serve as 
Treasurer for the National Congress of American Indians and Chair of 
the NCAI National Policy Work Group. on Contract Support Costs. It is 
an honor to present testimony in support of S. 2172, a bill to make 
technical amendments to the contract support cost provisions of the 
Indian Self-Determination and Education Assistance Act.
    NCAI is the oldest, largest, and most representative organization 
of American Indian and Alaska Native tribal governments and was founded 
in 1944 in response to Federal termination policies and hostile 
legislation that proved devastating to Indian nations. To this day, 
NCAI remains committed to the restoration and exercise of tribal 
sovereignty and the continued viability of all tribal governments. 
NCAI, representing over 250 member tribes, has been particularly active 
in advancing solutions to the problems created by the chronic under 
funding of contract support costs for those tribes and tribal 
communities that administer Federal Government programs under the 
Indian Self-Determination Act.

Introduction

    For the last 30 years, the promotion of tribal autonomy and self-
governance has been the hallmark of this Nation's Federal Indian 
policy, the cornerstone of which is the Indian Self-Determination and 
Education Assistance Act of 1975. The act authorizes tribes to enter 
into contracts or self-governance compacts to administer Federal 
programs previously administered by the departments of Interior and 
Health and Human Services for the benefit of tribal members. The well-
documented achievements of the self-determination policy for tribal 
communities have consistently improved service delivery, increased 
service levels, and strengthened tribal governments and tribal 
institutions. Every Administration from Nixon to Bush has embraced this 
policy and Congress has repeatedly affirmed it through extensive 
strengthening amendments to the Self-Determination Act enacted in 1988 
and 1994.
    Long recognized by this committee, one of the greatest obstacles to 
the full implementation of the policy has been the consistent failure 
of the Bureau of Indian Affairs and Indian Health Service to fully fund 
the contract support costs required to carryout Federal programs. A 
1999 GAO study\1\ concluded with the finding that failing to fully 
reimburse contract support costs effectively penalizes tribes for 
exercising their self-determination rights, forces cuts to tribal 
programs in order to cover the shortfall, and leads to partial 
termination of the Federal Government's trust responsibility. As a 
matter of Federal contracting principle, tribal contractors, like all 
other government contractors, should be promptly paid in full-payments 
not dependent on the politics of the budget process, the competing 
agency demands in OMB, or the willingness of tribal contractors to 
litigate.
---------------------------------------------------------------------------
    \1\ GAO/RCED-99-150, Indian Self-Determination Act: Shortfalls in 
Indian Contract Support Costs Need to be Addressed, June 1999

---------------------------------------------------------------------------
S. 2172 Contract Support Cost Technical Amendments

    The NCAl Policy Workgroup on Contract Support Costs since its 
inception has offered several key recommendations, some of which we are 
pleased to find reflected in S. 2172 and which are supported by NCAL 
The following summarizes our views.

1. Contract support costs must be fully funded.

    The NCAI Policy Workgroup on Contract Support Costs issued this 
position as its first and most important recommendation in its July 
1999 final report, a recommendation also supported by the GAO June 1999 
study. The shortfall in IHS contract support cost at year-end FY04 is 
$93 million; using the estimated flat. FY05 appropriation, at year-end 
FY05 the shortfall would be $111 million. For BIA, including the 
estimated direct CSC required per Ramah, Oglala, Zuni v. Norton, the 
shortfall in contract support costs for FY03 is $45 million; at year-
end FY04, the BIA shortfall will by $48 million; at year-end FY05, the 
shortfall would be $50 million.
    Contract support costs are a legal and contractual obligation of 
the Federal Government. Under funding contract support treats tribes as 
second-class contractors and is unacceptable. Indian tribes ask nothing 
less than to be treated as other comparable government contractors.
    Section 3 of the bill accomplishes this in two ways. First, the 
bill eliminates ambiguous provisions in the law which have been seized 
upon by the government as a justification for under funding contract 
support costs. Second, section 3 exempts contract support costs from 
the ``subject to availability of appropriations' provisions in the 
Indian Self-Determination Act.

2. Congress should promote financial stability and efficiency in tribal
    operations.

    Section 2 addresses the fact that the indirect costs paid to tribes 
are pooled with other Federal funds administered by a tribal 
contractor, and are spent out of single account. This section of the 
bill reinforces subsection 106(i) and (j) of the Indian Self-
Determination Act by assuring that tribal funds pooled within a tribe's 
indirect cost pool may be spent under the same guidelines that apply to 
self-determination funds. For instance, a tribal contractor can use 
self-determination funds to purchase computer hardware without first 
securing advance agency approval. Once the self-determination funds are 
placed in a tribe's indirect cost pool, however, the Office of 
Inspector General suggests that the pooled funds cannot be used for new 
computer hardware because the pool also includes other Federal funds 
besides Indian Self-Determination Act funds. Section 2 of S. 2172 
clarifies that the self-determination rules regarding expenditure of 
funds set forth in subsections (i) and (j) of the Act apply to the 
tribal expenditure of all other pooled Federal indirect cost funds 
administered by a tribe under any other Federal statute. NCAI applauds 
this clarification that will put an end to a needlessly nonsensical 
approach.

3. Federal agencies other than BIA and IHS must finally conform their 
    practices to the government-wide Federal indirect cost system.

    The failure of other Federal agencies besides the BIA and IHS to 
pay their appropriate share of indirect costs continues to place tribes 
administering Federal programs in a deplorable bind. Many other 
agencies refuse to adhere to the government-wide indirect cost rate set 
by each tribe's Federal cognizant agency under OMB Circular A-87 
(usually, the Department of the Interior's Office of Inspector 
General).
    Historically, the OMB indirect cost system has been the most 
reliable and sound system for fairly determining each tribe's prudent 
requirements for contract support. The NCAI Contract Support Workgroup 
found that past efforts to replace the indirect cost system have failed 
in not accounting for programmatic differences, sizes of tribes, 
geographical locations, and other variations in tribes and contracts. 
Under the OMB indirect cost system, requirements are fixed by the 
tribe's Federal cognizant agency, the agency under which the tribe does 
the most contracting. The accounting principles reflected in that 
agreement should then be binding on all other Federal agencies. All 
branches of the Federal Government must respect the indirect cost 
requirements for the system to work for tribal governments. NCAI 
supports the first provision in section 2 of S. 2172 that will remedy 
this long standing accounting turmoil for tribes.
Conclusion
    The National Congress of American Indians strongly supports S. 2172 
as a means to affirming tribal autonomy, self-governance, as well as 
tribal accountability. We commend the committee for its commitment to 
Indian country, our self-determination and self-governance rights, and 
to legislation that will promote tribes' ability to serve their members 
for generations to come. NCAI and its member tribes firmly believe that 
these proposed amendments are consistent with this Congress' and 
Administration's agenda to enhance more independent and self-reliant 
communities. Thank you for this opportunity to testify before your 
committee and I welcome any questions you may have.

                                 ______
                                 

Prepared Statement of Charles Grim, D.D.S., M.H.S.A., Assistant Surgeon 
                General, Director, Indian Health Service

    Mr. Chairman and members of the committee:
    Good morning. I am Dr. Charles W. Grim, the director of the Indian 
Health Service. Today, I am accompanied by Douglas Black, director of 
the Office of Tribal Programs and Ronald Demaray, director, Self-
Determination Services. The Department of Health and Human Services 
[Department] is pleased to have this opportunity to present testimony 
on S. 2172, the ``Tribal Contract Support Cost Technical Amendments of 
2004.'' The bill before us today, S. 2172 seeks to address some of the 
more significant problems that Tribes and the Administration have 
grappled with for several years--notably, the issue of contract support 
costs [CSC] funding.
    Our position is clear: We believe strongly that CSC funding enables 
tribal governments and other tribal organizations contracting and 
compacting under the Indian Self-Determination and Education Assistance 
Act [ISDEAA or Act] to develop the administrative infrastructure 
critical to their ability to successfully operate their health 
programs.
    As the principal authors of the Indian Self-Determination and 
Education Assistance Act, this committee is well aware that a primary 
goal of the ISDEAA is to maintain the ``. . . Federal Government's 
unique and continuing relationship with, and responsibility to, 
individual Indian Tribes and to the Indian people as a whole through 
the establishment of a meaningful Indian self-determination policy 
which will permit an orderly transition from the Federal domination of 
programs for, and services to, Indians to effective and meaningful 
participation by the Indian people in the planning, conduct, and 
administration of those programs and services. In accordance with this 
policy, the United States is committed to supporting and assisting 
Indian Tribes in the development of strong and stable tribal 
governments, capable of administering quality programs and developing 
the economies of their respective communities.'' [Section 3(b), 
ISDEAA]. One integral tool in carrying out that policy is the provision 
of Tribal contract support costs. We believe the Department has 
implemented this landmark legislation in a manner consistent with the 
intent of the Congress when it passed this authority that reaffirms and 
upholds the government-to-government relationship between federally 
recognized Indian Tribes and the United States.
    At present, the share of the IHS budget allocated to tribally 
operated programs is in excess of 50 percent of total IHS program 
funding. Approximately $1.5 billion annually is now being transferred 
through self-determination agreements to tribes and tribal 
organizations. Contract support cost funding represents approximately 
19 percent\1\ of this amount, providing the average Tribe with 
approximately 81 percent\2\ of its total negotiated CSC amount. The 
assumption of programs by tribes has been accompanied by significant 
downsizing at the IHS headquarters and Area Offices and the transfer of 
these resources to tribes.
---------------------------------------------------------------------------
    \1\ Funding awarded to tribes in fiscal year 2003 exceeded $1.5 
billion while CSC funding provided was $269 million.
    \2\ Total negotiated CSC estimates in fiscal year 2003 were in 
excess of $350 million while funding appropriated for CSC was $269 
million with an additional $16 million of tribal shares available for 
CSC.
---------------------------------------------------------------------------
    Contract support costs are defined under the ISDEAA as an amount 
for the reasonable costs for those activities that must be carried out 
by the tribal contractor to ensure compliance with the terms of the 
contract and prudent management. They include costs that either the 
Secretary never incurred in his direct operation of the program or are 
normally provided by the Secretary in support of the program from 
resources other than those under contract. It is important to 
understand that, by definition, funding for CSC is not automatically 
included in the program amounts contracted by Tribes. The ISDEAA 
directs that funding for tribal CSC be added to the contracted program 
to provide for administrative related functions necessary to support 
the operation of the health program under contract or compact.
    The Department has been an active participant with tribes in 
furthering the Federal Government's administration of CSC by developing 
a comprehensive CSC policy to implement the statutory provisions of the 
ISDEAA. In fact, IHS and tribal representatives met earlier this month 
to further refine that policy and to discuss current issues associated 
with the funding of tribal CSC. Generally, tribes have been supportive 
of the IHS and our efforts to implement the ISDEAA and to distribute 
available CSC funding.
    While we welcome the efforts of this committee to address these CSC 
issues, the Department has serious concerns with this bill. The 
amendments proposed in S. 2172 are not simply ``technical'' amendments. 
These are proposed changes to current law with far-reaching 
consequences for programs subject to the act and for all other Federal 
programs that provide funding for Indian tribes. Because of the 
legislation's potentially far-reaching implications for Federal 
agencies not here today, we respectfully request that the committee 
keep the hearing record open so that such agencies may submit written 
statements about issues relating to the bill.
    At this time, I will share our key concerns with S. 2172.
    Let me begin by stating that from the perspective of the Department 
and, I believe, that of the tribes, the single most significant aspect 
of this legislation is section 3(a)-(e) (Amendments Clarifying Contract 
Support Cost Entitlement). Provisions in titles I, IV, and V of the 
ISDEAA currently provide that funding for contract support costs is 
``subject to the availability of appropriations''. Section 3 strikes 
this ``subject to. . . '' language and adds new language authorizing 
appropriations for CSC. We assume from the section heading that the 
intent of these amendments is to create an entitlement to full funding 
of contract support costs. We do not believe the amendments succeed in 
establishing an entitlement for this funding, though they could be read 
as providing a priority for funding for contract support costs over 
funding for other tribal programs. As a policy matter, we cannot 
support the creation of a CSC entitlement, as it would address only one 
component of health services to tribes and would benefit only those 
tribes that choose to contract. We also believe the lack of clarity in 
this provision would result in further debate and more litigation over 
tribal CSC.
    We believe that section 3, even if it were amended to clearly 
accomplish its intent, would result in significant adverse budget 
implications for IHS, tribes to whom IHS provides health services, and 
other affected Federal programs. Contract support funding, like all IHS 
funding, is categorized as domestic discretionary funding and is, 
therefore, subject to annual appropriations.
    This legislation would authorize the appropriation of full funding 
of CSC but the level of CSC funding would appear to remain part of the 
discretionary budget. We are concerned that additional dollars needed 
to provide full CSC funding would have to come from existing or future 
appropriated IHS funds and supersede other critical priorities for 
budget increases for tribal health programs, including funding for the 
provision of critical health care services and maintenance of the IHS 
service delivery infrastructure.
    We believe that the costs of the funding under section 3, relative 
to the shifting of funding away from other critical healthcare 
initiatives, would be prohibitive. For example, funding the total 
negotiated CSC request in 2003 would have required an additional $65 
million. When Congress authorized the ISDEAA, it wisely directed that 
CSC funding, indeed the funding for all ISDEAA programs, is ``subject 
to the availability of appropriations''. Striking that language from 
the ISDEAA, as proposed in S. 2172 would create budgetary confusion and 
place the provision of direct health care by both the tribes and the 
IHS at great risk. For these reasons, the Department cannot support the 
amendments made by section 3.
    Section 2 of S. 2172 reaches beyond IHS within the Department of 
Health and Human Services and beyond the Departments of Health and 
Human Services and the Interior by proposing a new section 106A(a) to 
the ISDEAA that refers to other Federal agencies' requirements to pay 
indirect costs [IDC]. The intent of this section is to authorize Tribes 
to recover the full funding of their indirect cost need, consistent 
with their indirect cost rate agreement established with the cognizant 
Federal agency. Again, we do not believe this amendment establishes 
this authority. For those other Federal agencies, the intended 
requirement to fully fund CSC for their programs would likely create 
significant budgetary and programmatic limitations by diverting funds 
to pay for administrative costs. For example, non-IHS programs within 
the Department of Health and Human Services would be required to pay 
tribes full CSC at a rate exceeding other non-tribal grantees, and 
these increased expenditures would reduce the amounts available for key 
programs such as the Head Start Program. The Department cannot support 
the intent to establish these requirements under this proposed section.
    We are also concerned about the potential conflict of proposed 
section 106A(a)(2), which provides that additional amounts are not 
authorized to be paid under this authority subject to the ``except as 
otherwise provided by law. . . '' proviso in section 106A(a)(1), and 
section 4(a) which provides that the provisions of this act supersede 
any conflicting provision of law.
    Section 106A(b) again reaches beyond IHS within the Department of 
Health and Human Services and beyond the Departments of Health and 
Human Services and the Interior by authorizing tribes to utilize funds 
provided by other Federal agencies in accordance with section 106(j) of 
the ISDEAA. We ask whether it was the Committee's intent to cite 
section 106(k) as opposed to section 106(j). Section 106(j) pertains to 
the authority of tribes to use funds provided under an ISDEAA award to 
meet matching requirements under other Federal or non-Federal awards. 
Section 106(k) authorizes tribes to use ISDEAA funding, without the 
requirement of prior Secretarial approval, for any of the twelve [12] 
specific costs listed. In any event, the committee may wish to consult 
with the National Business Center in the Department of the Interior 
concerning the necessity or appropriateness of this proposed new 
section.
    Section 4(a) provides that this legislation supersedes conflicting 
law, which raises questions concerning its effect on annual 
appropriation language and the ``[e]xcept as otherwise provided by 
law'' proviso in section 2.
    Section 4(b) provides an exception to section 4(a) to require that 
the implementation of these amendments not be construed to alter the 
ruling of the U.S. Court of Appeals for the Federal Circuit in the 
Thompson v. Cherokee Nation case, notwithstanding conflicting opinions 
in both the 9th and 10th U.S. Circuit Courts of Appeals. The committee 
should be made aware that the Cherokee decision, in the U.S. Court of 
Appeals for the Federal Circuit and a related Cherokee decision in the 
10th Federal Circuit Courts of Appeals are under review by the U.S. 
Supreme Court.
    The IHS is committed to Indian self-determination and we believe 
our record in promoting the intent and spirit of the ISDEAA speaks for 
itself. We enthusiastically support tribes in their varied efforts to 
assume programs under the ISDEAA. Our goal is to work together in 
harmony rather than under the constant possibility of litigation.
    This concludes our comments on S. 2172, the ``Tribal Contract 
Support Cost Amendments of 2004.'' Thank you for this opportunity to 
discuss contract support costs in the IRS. We would be happy to answer 
any questions that you may have.

                                 ______
                                 

   Prepared Statement of William Sinclair, Director, Office of Self-
     Governance and Self-Determination, Department of the Interior

    Good morning, Mr. Chairman and members of the committee. My name is 
William Sinclair, and I am the director of the Office of Self-
Governance and Self-Determination at the Department of the Interior. I 
am pleased to be here today to present the views of the Department of 
the Interior on S. 2172, a bill to amend Public Law 93-638, the Indian 
Self-Determination and Education Assistance Act of 1975 [the act]. 
Although the Department supports funding contract support costs to 
assist federally recognized tribes in developing strong tribal 
governing institutions and to enhance their capacity to administer 
tribal programs, we cannot support this bill.
    Over 90 percent of all federally recognized Indian tribes either 
contract individual programs or compact Federal services pursuant to 
the act. As you stated, Mr. Chairman, upon the introduction of the 
bill, the Congress and the Executive branch have ``embraced and 
expanded'' tribal compacting and contracting. The Act was amended in 
1984, 1988, 1994, and again in 2000.
    The original act required that the tribes receive the full amount 
of Federal funds that the programs would have received had the 
Secretary continued to operate them directly. This amount is often 
called the ``secretarial amount.'' As the program developed, tribes 
were concerned that they were not receiving amounts sufficient to cover 
the full administrative costs of the programs. One of the reasons for 
this deficiency apparently was that the ``secretarial amount'' required 
to be paid by the original statute included only the funds that the 
Secretary would have provided to operate the programs directly, and did 
not include additional administrative costs that the tribes incurred in 
their operation of the programs, which the Secretary would not have 
directly incurred (for example, the cost of annual financial audits, 
liability insurance, and other administrative requirements). These 
additional administrative or other expenses related to the overhead 
incurred in the operation of the programs are considered ``indirect 
costs.''
    Thus, Congress enacted the Indian Self-Determination Amendments of 
1988 requiring that the Secretary provide funds to more accurately 
reflect all administrative costs incurred by contracting and compacting 
tribes. The amended statute provided, ``[t]here shall be added to the 
[secretarial amount] contract support costs which shall consist of an 
amount for the reasonable costs for activities which must be carried on 
by a tribal organization as a contractor to ensure compliance with the 
terms of the contract and prudent management.'' However, there are 
exceptions to this obligation of the government to pay full contract 
support costs. One of these exceptions states that the provision of 
these funds is subject to the availability of appropriations. 25 U.S.C. 
450j-l(b).
    Another exception provides that ``the Secretary is not required to 
reduce funding for programs, projects, or activities serving a tribe to 
make funds available to another tribe or tribal organization.'' 25 
U.S.C. 450j-l(b).
    The issue raised in S. 2172 that is of most concern to the 
Department is in section 3 of the bill. Section 3 attempts to make 
contract support costs similar to an entitlement by eliminating all 
references within the act that make payment of funds ``subject to the 
availability of appropriations.'' It is also unclear if this section is 
also attempting to make all contracted and compacted programs similar 
to an entitlement by also removing ``subject to the availability of 
appropriations'' from Section 105(c)(1) of the act. In essence, if 
section 3 were enacted it would attempt to make all Federal programs 
contracted or compacted, and all contract support costs associated with 
administering these contracted and compacted programs non-
discretionary.
    Implementation of this provision would make the Department 
vulnerable to costly and time consuming litigation as we could not 
fully fund all contracted and compacted programs, and their related 
contract support costs without significantly affecting other equally 
important Federal programs.
    In addition, section 3 also amends the funding provision in section 
408 of the act to read, ``In any case in which contract support costs 
are not provided for, there are authorized to be appropriated such sums 
as are necessary to pay those costs.'' As Congress has recognized, the 
BIA has many competing priorities that provide necessary funding for 
and delivery of important services for federally recognized Indian and 
Alaska Native Communities. Beginning in 1994, Congress has placed a 
legislative ceiling on the amount the Department could use toward 
contract support costs. This ceiling provision has continued to be 
included in each annual Interior Appropriations Act. In fact, for 
fiscal year 2004 the statutorily mandated ceiling for contract support 
costs is $135,315,000. Enactment of this ceiling is important as it 
reflects the need to ensure that all Indian Affairs related programs 
have sufficient resources to carry out their responsibilities and 
functions.
    We believe strongly that contract support cost funding enables 
tribal governments to develop the administrative infrastructure 
critical to their ability to successfully operate programs. However, if 
S. 2172 is enacted the Department will be placed in the difficult 
position of having to reduce funding for other equally important 
Federal programs, most likely those that are either inherently Federal 
functions or services directly offered to Indian tribes. The practical 
reality is that services, such as those administered by the Office of 
Federal Acknowledgement are inherently Federal and cannot be contracted 
or compacted by federally recognized Indian tribes. The Department 
would be forced to reallocate funding and resources away from non 
fiduciary trust programs such as the Federal acknowledgment process to 
fully fund indirect costs for contracting and compacting tribes.
    Section 2 impacts all Federal agencies, including those who are not 
testifying before the committee today. If enacted, this provision would 
attempt to bind all Federal agencies to fully fund indirect contract 
support costs at the level of each agency's negotiated indirect cost 
rate agreement. Again, implementation of this provision would most 
likely create significant budgetary pressures for other agencies, and 
may discourage these agencies from engaging in contracting and 
compacting with Indian tribes in the future.
    In addition, section 2 authorizes tribes to use indirect cost 
funding for other uses, not related to those of indirect administrative 
costs. We are unclear as to the need for this provision. Section 2 
implies that full funding for all indirect costs is not needed, and 
that this funding is for other purposes not related to the indirect 
administrative cost of a specific contract or compact. Also, the 
Department agrees with the Indian Health Service and seeks 
clarification as to whether section 106(k) should have been referenced 
in this section.
    Section 4 attempts to supersede any conflicting provision of law. 
The effects of this provision are unknown as it appears to attempt to 
override all previous appropriations and authorizing statutes and 
Federal regulations governing tribal contracting and compacting of 
Federal services and programs. Finally, S. 2172 attempts to prematurely 
circumvent a case that is currently pending before the Supreme Court, 
Thompson v. Cherokee Nation, 334 F.3d. 1075 (July 3, 2003). The Court 
has also granted certioraris on March 22, 2004, to hear another case on 
this issue from the 10th Circuit, Cherokee Nation of Oklahoma and 
Shoshone-Paiute Tribes of the Duck Valley Reservation v. Thompson, et 
al, 311 F.3d 1054 (10th Cir. 2002). The Court will soon hear oral 
arguments on these cases and deliberate on the important contract 
support cost issues raised in them.
    Mr. Chairman, funding for indirect contract support costs remains a 
serious issue for Congress, the Administration and Indian tribes. We 
would like to continue to work with the committee and the tribes in 
addressing the concerns associated with contract support costs.
    This concludes my statement. I will be happy to answer any 
questions you may have.

                                 ______
                                 

   Prepared Statement of Chad Smith, Principal Chief, Cherokee Nation

    Good morning Mr. Chairman. My name is Chad Smith and I am the 
principal chief of the Cherokee Nation, a federally recognized Indian 
tribe of over 244,000 citizens, nearly one-half of whom live within the 
7,000 square mile Cherokee tribal jurisdictional service area in 
Northeastern Oklahoma. The Cherokee Nation has approximately 1,800 
tribal employees (making it one of the largest employers in Northeast 
Oklahoma), nearly 45 percent of whom work in the Nation's health 
services department.
    The Cherokee Nation was one of the first tribes in the United 
States to execute a self-determination contract under the original 1975 
Indian Self-Determination Act and in 1990 was also the very first tribe 
to execute a self-governance agreement under title III of that act. 
Since 1994 all of our self-determination programs have been 
administered under Self-Governance compacts with the Department of the 
Interior and the Department of Health and Human Services.
    Pursuant to our compact with the Department of the Interior, we 
carryout a wide array of Federal Government programs serving Indian 
people, including credit and finance programs; agricultural, forestry 
and real estate services; tribal courts; social services, Indian child 
welfare and housing improvement programs; a general assistance program; 
Johnson O'Malley education programs; law enforcement services; the 
``TEA-21'' and related roads construction, planning and maintenance 
programs; Individual Indian Money services; higher education and adult 
education services; and child abuse and early childhood wellness 
programs.
    Under our Self-Governance compact with the Department of Health and 
Human Services, the Cherokee Nation operates six rural outpatient 
clinics providing Indians with primary medical care, dental services, 
optometry, radiology, mammography, behavioral health services, medical 
laboratory services, pharmacy services, community nutrition programs, 
and a public health nursing program. The Nation also operates inpatient 
and outpatient ``contract health'' medical referral programs for 
management of specialty care.
    The Cherokee Nation has been able to make tremendous improvements 
to these formerly Federal programs and services. The Self-Determination 
Act has allowed the Nation to step forward, resume responsibility for 
its own affairs and make these programs more responsive and accountable 
to the Cherokee people. This was clearly the intent of the Indian Self-
Determination and Education Assistance Act. Unfortunately, the Nation's 
progress has been severely impeded by the Government's failure to fund 
required contract support costs as mandated by the Self-Determination 
Act. This happened despite the Congress' efforts to prevent such 
systematic underfunding of contract support costs by making several 
strengthening amendments to the act in 1988 and 1994.
    Since the time of our first Self-Governance compact with the 
Department of the Interior in 1990, the Cherokee Nation has never been 
fully funded with contract support costs as mandated by the Indian 
Self-Determination Act. The BIA neglects to fund the Nation about a 
quarter million dollars in indirect costs annually, and fails to pay us 
any ``direct'' contract support costs at all, estimated at $300,000 
annually. As for the Indian Health Service, in 1992 and 1994, 
respectively, the Cherokee Nation began operating the Redbird Smith 
Health Center in Sallisaw, OK, and the Wilma P. Mankiller Health Center 
in Stilwell, OK. In 1995, Cherokee Nation began administering the W.W. 
Hastings Indian Hospital's ``contract health'' medical referral 
outpatient program, and in fiscal year 1997, the Cherokee Nation 
assumed control of that facility's ``contract health'' medical referral 
inpatient program. It may come as a shock to this committee that at no 
time until September 1999 did the Cherokee Nation ever receive any 
contract support funding for the operation of these four multi-million 
dollar programs. Today, the Nation is funded at only 64 percent of its 
requirement for contract support for our IHS programs, a shortage of 
$4.2 million per year. In total, the Nation is not funded for $4.75 
million for these fixed, contract support costs each year.
    Because the Government has grossly underfunded these contracts, the 
Nation has had to forego substantial services to thousands of Indian 
people, simply to cover the shortfall in Government funding. This has 
worked a great hardship on people who must rely on these programs and 
facilities for their basic health care, and that is why I am here 
today.
    Eight years ago Cherokee Nation tried to informally resolve its 
issues with the Indian Health Service. When those efforts failed, in 
September 1996 we filed a formal claim under the Contract Disputes Act. 
More than 1 year later the claim was denied in its entirety by the IHS, 
covering three different annual funding agreements for 1994 through 
1996. We then took an appeal to the Interior Board of Contract Appeals, 
where we prevailed, and the case was upheld on appeal to the Federal 
Circuit Court of Appeals.
    In 1999, we brought a second claim in Federal court in tandem with 
the Shoshone-Paiute Tribes of the Duck Valley Reservation, against the 
IHS for underpayments in 1997. The tribes did not prevail in this suit, 
nor did we prevail in our appeals to the 10th Circuit. Due to the 
inconsistency with the Federal Circuit, these Cherokee cases have been 
recently approved for review by the Supreme Court. Despite the Nation's 
commitment of significant resources to these multi-million dollar 
claims, these efforts have yet to produce any relief for the Nation.
    We do not believe that litigation is an efficient way to resolve 
funding problems. Although litigation may be our only option for 
dealing with the past, the current situation is untenable and cries out 
for attention from Congress.
    The current system simply should not go on any longer. Neither the 
BIA nor IHS pays full contract support costs even though all other 
Government contractors receive their full administrative overhead when 
they deal with the Federal Government. Although we make these 
agreements and take over significant responsibilities from the Federal 
Government, the Nation is consistently treated as a second-class 
contractor--a situation we believe to be unacceptable. Neither agency 
even requests full contract support funding from Congress, at times 
because they haven't the will, and at other times because the 
Department or the Office of Management and Budget stands in the way. 
And, of course, there are other, competing demands on the 
appropriations committees.
    The contract support cost problem has caused severe financial 
strains on the Cherokee Nation's programs and facilities, as it has for 
many other tribes in the country. What it means in real terms is that 
the Nation must reduce these critical health, education and other 
programs to pay for these shortages. This compounds an already deficit 
funding level, requiring us to ration basic health care and other 
services to our citizens.
    Given the conduct of the agencies and recent court decisions, it is 
clear that reforms are needed. Congress intended that tribes would be 
fully paid contract support costs if they agree to take over the 
administration of these Federal programs. But that is not what has 
happened, and the courts have been slow to respond, if at all. For this 
reason, the Cherokee Nation strongly applauds the chairman for his 
leadership in introducing S. 2172.
    S. 2172 addresses the most severe problems in the current contract 
support system in a thoughtful and carefully considered way, without 
demolishing the entire foundation of the Indian Self-Determination Act. 
This is a key point, because the basic contract support processes that 
are in place today-for instance the processes for setting indirect 
costs and direct costs-are functioning well. Indeed, even the General 
Accounting Office has confirmed the integrity of the system. Rather, it 
is the substantial impediments to executing that system that are the 
focus of S. 2172.
    The Cherokee Nation strongly supports the enactment of S. 2172, and 
I would like to pause to comment briefly on a few of the bill's 
provisions.
    First, we strongly support a reform included in section 2 to 
finally resolve the accounting quagmire created when the government-
wide indirect cost rate is not followed by all government agencies. 
This accounting mess has led not only to an under-calculation in 
indirect cost rates, but it has also severely strained the ability of 
tribes to operate all their Federal programs across all agencies within 
OMB's guidelines. For nearly 20 years tribes have called for reform in 
this area, and finally, it appears that real reform is at hand.
    We also applaud the committee for making clear in section 2 that 
existing statutory flexibility in the expenditure of self-governance 
funds, to best meet special or unique local needs, continues when self-
determination funds are pooled with other funds in each tribe's 
``indirect cost pool.'' Obviously, funds in that pool lose their 
individual identity, and we are alarmed that the Office of Inspector 
General of the Department of the Interior has taken the position that 
the flexibility expressed in the Indian Self-Determination Act suddenly 
disappears once self-determination funds are pooled with other Federal 
funds.
    Most importantly, we strongly support the committee for its 
inclusion of provisions in section 3 that are key to strengthening the 
mandate to fully fund contract support costs. The removal of the 
``availability'' clauses will reduce the argument that the Secretary 
lacks the authority to fully fund contracts negotiated under the Act. 
Courts have at times interpreted the ``availability'' clauses to negate 
the mandate to fund contract support costs, an interpretation that 
effectively downgrades our Government contracts, negotiated in good 
faith, to something more akin to a discretionary grant. The reforms in 
section 3 would help to remedy that problem.
    4 It is often repeated in these hearings that the greatest threat 
to the success of the Self-Determination Act is the failure to fully 
fund contract support costs. On behalf of the Cherokee Nation I can 
tell you that contract support funding has, indeed, been one of the 
greatest problems that has impeded our progress. There is so much more 
that we can do, and so much more that we must do, to meet the critical 
health, education, economic and social needs of our citizens and all 
other Indians eligible for our services. We are delighted to be able to 
carryout the Federal Government's trust programs, delighted because 
history shows that we have the capacity and vested interest to do a 
much better job than Federal bureaucracies. But our ability to 
administer these programs successfully and to maximize delivery of high 
quality services to Indian people, depends on having adequate contract 
support cost funding.
    Thank you Mr. Chairman, for the opportunity to testify in support 
of S. 2172.

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