TITLE:  Assignment of Losses Incurred by the Library of Congress FEDLINK Revolving Fund, B-301714, January 30, 2004
BNUMBER:  B-301714
DATE:  January 30, 2004
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Assignment of Losses Incurred by the Library of Congress FEDLINK Revolving Fund,
B-301714, January 30, 2004

   Decision
    
    
Matter of:   Assignment of Losses Incurred by the Library of Congress
FEDLINK Revolving Fund
    
File:            B-301714
    
Date:           January 30, 2004
    
DIGEST
    
The Library of Congress has incurred losses as a result of advance
payments made for the acquisition of subscriptions by the Federal Library
and Information Network (FEDLINK) revolving fund to a contractor who
subsequently defaulted and declared bankruptcy.  The Library should use
the administrative fees that it has collected from all of FEDLINK*s
customers to cover this loss, rather than assign the loss to the specific
agencies whose orders were placed with the contractor. 
    
DECISION
    

   The Library of Congress has requested our decision concerning the
assignment of losses incurred by the Federal Library and Information
Network (FEDLINK) revolving fund as a result of advance payments made to a
defaulting contractor. Letter from Elizabeth Pugh, General Counsel, The
Library of Congress, to Anthony Gamboa, General Counsel, General
Accounting Office, August 15, 2003 (Pugh Letter). Specifically, the
Library asks whether the revolving fund or the specific agencies on whose
behalf the Library had placed orders with the defaulting contractor should
bear the cost of the losses associated with the default. If the revolving
fund, as opposed to the specific customer agencies, bears the losses, the
Library would use the fund*s reserve accumulated through the assessment of
administrative fees to all of FEDLINK*s customers. As explained below, we
conclude that the FEDLINK revolving fund should cover the losses.
    
    
BACKGROUND
    
The Library of Congress operates the FEDLINK intragovernmental revolving
fund pursuant to 2 U.S.C. S: 182c.  FEDLINK is a cooperative procurement,
accounting, and training program designed to provide access to online
databases, periodical subscriptions, books, and other library and
information support services from commercial suppliers with which the
Library has negotiated contracts.  2 U.S.C.
S: 182c(f)(1).  Federal agencies place orders for these products and
services with FEDLINK and are able to take advantage of volume discounts. 
    
At issue here are orders for periodical subscriptions that agencies sought
to acquire through FEDLINK.  Once a federal agency customer executes an
interagency agreement with FEDLINK, the Library issues a purchase order to
a subscription vendor authorizing the vendor to place the agency*s
subscription orders with the appropriate publishers.  Section 182c(c)(2)
authorizes the Library to collect advance payments from its customer
agencies, and the Library forwards the advance payments to the
subscription vendor, pursuant to 31 U.S.C. S: 3324(d)(2).[1]
    
In fiscal year 2003, the Library became aware that RoweCom, a subscription
vendor to which it had made advance payments, had neither placed
subscription orders nor made the required payments to publishers.  Pugh
Letter.  Since RoweCom was not fulfilling the terms of its FEDLINK
contracts, the Library terminated the contracts for default under Federal
Acquisition Regulation procedures.[2]  Id.  Subsequently, RoweCom filed
for Chapter 11 bankruptcy protection. 
    
FEDLINK filed a claim of approximately $3.5 million in the bankruptcy
proceeding.  Of that amount, the Library expects approximately $3 million
will be satisfied by the delivery of subscriptions by RoweCom or by
publishers to whom a corresponding portion of the claim will be
subrogated.  Id.  Although RoweCom*s creditors will ultimately receive
some payment from the bankruptcy estate, FEDLINK is unlikely to be
reimbursed the full amount of the remaining $500,000 of its claim.  Id. 
    
Since the interagency agreements between FEDLINK and its customer agencies
do not address issues associated with contractor defaults, the Library has
asked us whether the subscribing federal agencies or the FEDLINK revolving
fund should bear the loss associated with RoweCom*s bankruptcy.   The
Library has found no precedent on this issue.  Pugh Letter.   Advance
payments to contractors are generally prohibited by 31 U.S.C. S: 3324. 
However, there is an exception to this general prohibition for
publications.  31 U.S.C. S: 3324(d)(2). 
ANALYSIS
    
The FEDLINK statute does not directly address the issue of whether losses
incurred as a result of a contractor*s bankruptcy should be charged to the
FEDLINK revolving fund or to the federal library customers whose orders
FEDLINK placed with the bankrupt contractor.  The statute simply creates
FEDLINK as a revolving fund and permits the Library to charge *fees* to
federal libraries for *the procurement of commercial information services,
publications in any format, and library support services; related
accounting services; [and] related education, information, and support
services.*  2 U.S.C. S: 182c(c)(1), (f)(1). 
    
Since the statute does not directly address the issue of whether the
FEDLINK revolving fund or its customer agencies should bear the losses
associated with RoweCom*s bankruptcy, we turn to the legislative history
behind the creation of the FEDLINK revolving fund.  This legislative
history indicates that FEDLINK was designed to function like a
self-sustaining business.  For example, in discussing the legislation that
created the FEDLINK fund (H.R. 5410) shortly before its passage by the
House of Representatives, sponsor Representative Bill Thomas stated that
the legislation would allow FEDLINK to operate as a private enterprise,
*[in] that monies garnered from various activities could be retained by
the Library to be reinvested in those areas.*  146 Cong. Rec. H10016
(daily ed. Oct. 17, 2000).[3]  In addition, when introducing a
substantially similar bill (H.R. 4180), Representative Steny Hoyer, then
Ranking Minority Member of the House Administration Committee, stated that
the purpose of the legislation was to place the Library*s service program
operations *on a more business-like foundation.*  146 Cong. Rec. H1822
(daily ed. Apr. 5, 2000).  Representative Hoyer repeatedly referred to the
need to turn FEDLINK and other similar Library programs into a more
*business-type* structure.  Id. 
    
The history of revolving funds in the federal government demonstrates that
they are intended to behave like a private sector business.[4] 
Intragovernmental revolving funds are designed to collect funds from other
agencies and accounts *to finance a continuing cycle of business-type
operations.*  A Glossary of Terms Used in the Federal Budget Process
(Exposure Draft), GAO/AFMD-2.1.1, at 5, Jan. 1993.[5]
    
Considering the FEDLINK statute, its legislative history, and the history
of revolving funds generally, we believe it is instructive to look at how
the private sector would deal with a contractor default.  Generally, the
default of a subcontractor or supplier is a *risk*allocated to the seller
absent a specific provision to the contrary in the contract.*  Barbarossa
& Sons, Inc. v. Iten Chevrolet, Inc.  265 N.W.2d 655, 659 (1978).[6]  The
failure of a contractor to perform is a *foreseeable* risk that the seller
must be prepared to handle.  Lee Russ, Annotation, Impracticability of
Performance of Sales Contract Under UCC S: 2-615, 55 A.L.R.5th 1 (1998). 
Under this approach, FEDLINK, like a seller in the private sector, should
cover the losses sustained from RoweCom*s bankruptcy, as there appears to
be no basis under the interagency agreements for FEDLINK to allocate this
loss to its customers.   
    
The FEDLINK fund has two components: (1) advance payments made by agencies
to cover their order for goods and services, which the Library refers to
as *service dollars;* and (2) administrative fees to reimburse the Library
for its administrative costs, both direct and indirect, of operating the
program.  B-288142, Sept. 6, 2001.  Service dollars, as advances from
customer agencies, are available to the Library only for defraying the
direct cost of providing the customer*s order.  Id.  They are not
available to cover the losses incurred as a result of RoweCom*s default. 
On the other hand, the administrative fees charged to each customer
agency, which are based on a percentage of that customer*s order, are used
by the Library to fund the administrative and accounting staff and
activities that support the FEDLINK program.[7]  Additionally, the Library
uses these fees to build a reserve in the revolving fund to finance future
improvements and to replace outdated equipment.  Id.  In our earlier
FEDLINK decision, we endorsed the Library*s decision to build a reserve in
the revolving fund.  We agreed that it was prudent for the Library to
reserve some of the administrative fees, not spending all of them in the
same fiscal year in which they were collected, so that they might be used
for *legitimate business costs* which arise in subsequent years.  Id. 
    
We consider the losses associated with RoweCom*s bankruptcy to be
*legitimate business costs* of the FEDLINK fund.  Therefore, the
administrative fees the Library has collected and deposited in the
revolving fund*s administrative reserve are available to cover these
losses.  Faced with similar circumstances, a private business would have
to absorb the losses resulting from a defaulting contractor.  This
conclusion is bolstered by the practices of several other federal
revolving and franchise funds.  An informal survey of several
intragovernmental funds confirmed that there is an explicit agreement with
the fund*s customers or it is an accepted practice that the fund will bear
any increased costs resulting from contractor defaults or other causes.[8]
    
    
CONCLUSION
    
The loss resulting from RoweCom*s bankruptcy is related to the operation
of the FEDLINK program, and is an appropriate expense of the revolving
fund.  The history of revolving funds in the federal government and the
legislative history of the statute creating the FEDLINK fund reveal a
clear intent for FEDLINK to operate similar to private enterprise.  In the
private sector, losses associated with a defaulting contractor are
legitimate business costs of the enterprise, not costs to individual
customers.  The revolving fund, rather than the subscribing agency
customers, should bear the loss associated with RoweCom*s default, and the
Library should utilize FEDLINK*s administrative reserve to cover this
deficit.  If the Library wishes to allocate the costs differently in the
future, it should add a clause dealing with contractor defaults to the
interagency agreements.   
    
    
    
Anthony H. Gamboa
General Counsel
    

   ------------------------

   [1] Title 31 of the U.S. Code, section 3324(d)(2), permits agencies to
make advance payments for *charges for a publication printed or recorded
in any way for the auditory or visual use of the agency.*
[2] The Library relied upon 48 C.F.R. S: 49.401 to terminate RoweCom*s
contract. 
[3] H.R. 5410 was agreed to by voice vote in the House of Representatives
on October 17, 2000.   146 Cong. Rec. H10017 (daily ed. Oct. 17, 2000). 
It passed the Senate without amendment by unanimous consent on October 31,
2000.  146 Cong. Rec. S11436 (daily ed. Oct. 31, 2000).  Neither the House
nor the Senate generated a committee report on the legislation. 
[4] *In concept, expenditures from the revolving fund generate receipts
which, in turn, are earmarked for new expenditures, thereby making the
Government activity a self-sustaining enterprise. The concept is aimed at
selected Government programs in which a buyer/seller relationship exists
to foster an awareness of receipts versus outlays through business-like
programming, planning, and budgeting. Such a market atmosphere is intended
to create incentives for customers and managers of revolving funds to
protect their self-interest through cost control and economic restraint,
similar to those that exist in the private business sector.*  Revolving
Funds: Full Disclosure Needed for Better Congressional Control,
GAO/PAD-77-25, at 2, Aug. 30, 1977.
[5] See also Office of Management and Budget Circular A-11, S: 20 (2003) 
(defining a revolving fund as *a fund that conducts continuing cycles of
business-like activity, in which the fund charges for the sale of products
or services and uses the proceeds to finance its spending*).
[6] See also Lambert v. City of Columbus, 496 N.W.2d 540 (1993); Center
Garment Co., Inc. v. United Refrigerator Co., 341 N.E.2d 669 (1976);
Canadian Industrial Alcohol Co. v. Dunbar Molasses Co., 179 N.E. 383
(1932). 
[7] We have long viewed it appropriate for agencies to assess
administrative fees to other agencies in the course of providing goods and
services, in order to recover overhead and other indirect costs.  See 72
Comp. Gen 159 (1993); 38 Comp. Gen. 734 (1959); 22 Comp. Gen. 74 (1942). 
[8]Fund managers at the Departments of Treasury, Commerce, Interior, and
Health and Human Services and the Environmental Protection Agency
informally advised us that for each of their funds, if a situation arose
where increased costs resulted from either a contractor default or
unexpected expenses, the loss would be made up from the revolving fund*s
corpus, in the absence of a cost-reimbursable clause in its agreements
with its customer agencies.