TITLE: B-308026, National Labor Relations Boardï¿½--Improper Obligation of Severable Services Contract, September 14, 2006
BNUMBER: B-308026
DATE: September 14, 2006
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B-308026, National Labor Relations Boardï¿½--Improper Obligation of Severable Services Contract, September 14, 2006

   Decision

   Matter of: National Labor Relations Board--Improper Obligation of
   Severable Services Contract

   File: B-308026

   Date:  September 14, 2006

   DIGEST

   The National Labor Relations Board (NLRB), which improperly obligated its
   fiscal year 2005 appropriation for severable services commencing in fiscal
   year 2006, may not remedy the improper obligation by modifying the
   contract's period of performance to a previous fiscal year. NLRB's expired
   appropriations are available only to adjust obligations properly incurred
   during fiscal year 2005. NLRB must adjust its accounts to record the
   obligation against its fiscal year 2006 appropriation.

   DECISION

   The Inspector General (IG), National Labor Relations Board (NLRB),
   requested our decision on whether NLRB can remedy an improper obligation
   of a severable service contract by modifying the period of performance to
   a previous fiscal year. The contract in question was for performance
   entirely in fiscal year 2006, running from October 1, 2005, through
   September 30, 2006, but NLRB obligated its fiscal year 2005
   appropriation.[1]

   NLRB agrees the obligation is improper but instead of adjusting its
   accounts to record the obligation against its fiscal year 2006
   appropriation, NLRB wants to remedy the improper obligation by modifying
   the contract's performance period in order to charge its, now expired,
   fiscal year 2005 expired appropriations. As explained below, NLRB's fiscal
   year 2005 expired appropriation is not available for this purpose.

   BACKGROUND

   NLRB is an independent federal agency established to administer the
   National Labor Relations Act. 29 U.S.C. sect. 153. Under the Act, it
   conducts secret ballot elections of employees in a bargaining unit and is
   charged with the prevention of unfair labor practices. Letter from Robert
   Battista, Chairman, and Ronald Meisburg, General Counsel, NLRB, to Anthony
   H. Gamboa, General Counsel, GAO, July 7, 2006 (Battista Letter). NLRB
   carries out its duties by acting as a quasi-judicial body that decides
   cases based upon formal records in administrative proceedings. Id.  NLRB
   manages its caseload using its Case Activity Tracking System (CATS), which
   collects, processes, and stores case activity and status information on
   new and closed cases. Id.

   In September 2001, NLRB entered into a contract with Electronic Data
   Systems (EDS) for the acquisition of ongoing support for CATS. Under the
   contract, EDS schedules, produces, tests and deploys software upgrades, as
   well as providing daily operational support. Id.  The contract's initial
   performance period was October 1, 2001, through September 30, 2002, with
   options through September 30, 2015. Letter from Jane E. Altenhofen,
   Inspector General, NLRB, to Anthony H. Gamboa, General Counsel, GAO, June
   27, 2006 (Altenhofen Letter). The period of performance for option three
   ran from October 1, 2004, through September 30, 2005. On September 30,
   2005, NLRB exercised option four, specifying a performance period of
   October 1, 2005, through September 30, 2006. Contract No. GS-35F-0323J,
   sect. 6.0 (Sept. 30, 2005). See also Altenhofen Letter, at 1. NLRB's
   obligation for option four was $758,875. NLRB charged its obligation to
   its fiscal year 2005 appropriation. Altenhofen Letter, at 1.

   In June 2006, the NLRB Office of Inspector General issued a report on its
   evaluation of NLRB's acquisition process for information technology
   related services, including the EDS contract. Information Technology
   Procurement Actions, Report No. OIG-AMR-51-06-02 (June 29, 2006) (IG
   Report). The report concluded that the agency's obligation of fiscal year
   2005 funds for the fourth option violated the bona fide needs rule
   "[b]ecause all services provided by EDS under the FY 2006 contract option
   are for maintenance and support in FY 2006." Id.  at 12. The IG
   recommended that NLRB "[c]orrect the recording of the EDS contract
   obligation so that the $758,875 is recorded against the FY 2006
   appropriation." Id.  at 15.

   In responding to the IG Report, NLRB proposed a different remedy. NLRB
   said, "[W]e believe that switching the funding for the EDS contract from
   FY 2005 to FY 2006 is unwarranted and is not in the best interest of the
   Agency or the Government." Memorandum from Angela Crawford, Chief,
   Procurement and Facilities Branch, NLRB, to Jane Altenhofen, Inspector
   General, NLRB, Subject: Response to Draft IG Report, "Information
   Technology Procurement Activities," June 1, 2006 (NLRB Response), at 5.
   NLRB proposed amending the performance period of option three to terminate
   on September 29, 2005, and the performance period of option four to
   commence on September 30, 2005, and continue through September 29,
   2006.[2] Battista Letter at 3--4; IG Report, at 12.

   NLRB stated that if the fourth option's performance period "bridged"
   fiscal years (beginning in fiscal year 2005 and terminating in fiscal year
   2006), the Federal Acquisition Streamlining Act (FASA) would permit the
   agency to charge its obligation for option four to its fiscal year 2005
   appropriations.[3] NLRB Response, at 4--5. NLRB explained that it had
   intended, in September 2005 when it exercised option four, to enter into a
   contract that crossed fiscal years, but that the agency's contracting
   staff had inadvertently used the wrong start date for the performance
   period.[4] Id.  at 5. NLRB argued,

   "Given that management's intended actions were within the letter of the
   law and the actual actions were within the spirit of the law, it would
   seem to elevate form over substance to insist that a mistake must not be
   corrected, when it is clear that all actions taken in this matter have
   been in the utmost good faith, transparent, well-intentioned, and the
   correction of which is lacking in any harm to either party."

   Id.  (emphasis in original).

   NLRB IG disagreed with the agency's proposed remedy. The IG said, "We
   believe that the Agency cannot modify an expired contract." IG Report, at
   13. The IG argued that "[b]ecause the obligation to furnish the services
   under the FY 2005 EDS contract option [option three] no longer exists, it
   is not possible for the parties . . . to modify an expired obligation of
   EDS to furnish services in FY 2005 . . . ." Id.

   DISCUSSION

   Both NLRB and the IG agree that NLRB, regardless of intent, exercised
   option four for a performance period beginning October 1, 2005, using
   fiscal year 2005 funds. The contract itself provides that "[t]he period of
   performance shall commence on October 1, 2005 and end on September 30,
   2006 for Option Year 4." Contract No. GS-35F-0323J, sect. 6.0. As the IG
   indicated, because NLRB recorded the obligation against its fiscal year
   2005 appropriation instead of its fiscal year 2006 appropriation, NLRB's
   recorded obligations do not accurately reflect its contract action. Fiscal
   year 2005 appropriations were not available to fund severable services
   that did not commence until fiscal year 2006. By the very terms of the
   agreement, these services can only be rendered in fiscal year 2006, and
   the services cannot be said to be a bona fide need of the agency for
   fiscal year 2005. See 60 Comp. Gen. 219, 220-21 (1981). We agree with the
   IG that NLRB must adjust its accounts, removing the obligation from its
   fiscal year 2005 accounts and recording the obligation in the accounts of
   its fiscal year 2006 appropriation. B-224702, Aug. 5, 1987.

   NLRB, however, would prefer to remedy its improper obligation of fiscal
   year 2005 appropriations by adjusting its contract instead of its
   accounts. NLRB asserts that it had intended a performance period
   commencing September 30, 2005, and the fact that the contract does not
   reflect its intent is due to "an inadvertent ministerial error" that it
   can now correct. Battista Letter, at 4. At issue here is whether NLRB can
   modify its contract with EDS to adjust the performance period to run from
   September 30, 2005, through September 29, 2006, so that, relying on FASA,
   it can obligate the contract to its fiscal year 2005 expired
   appropriation.

   Were NLRB to proceed with its proposed remedy, NLRB would need to adjust
   not only the performance period of option four but also the performance
   period of option three. Otherwise, NLRB would be left with two contracts
   (options three and four) acquiring the same severable services from the
   same contractor for the same day, violating the bona fide needs rule. Even
   were the law of contracts to permit reformation of completed contracts,
   and we are not convinced it does,[5] NLRB's proposed remedy fails because
   fiscal law does not permit NLRB to adjust the performance period of option
   four in order to reach fiscal year 2005 appropriations.

   A fiscal year appropriation, such as NLRB's Salaries and Expenses
   appropriation, is available for obligations consistent with the time
   statute (and the bona fide needs rule) and the recording statute. The time
   statute states that an appropriation limited to a definite period is
   available only for payment of expenses properly incurred during the period
   of availability or to complete contracts properly made within that period
   of availability and obligated consistent with the recording statute. 31
   U.S.C. sect. 1502(a). The recording statute provides that an agency may
   record a contractual obligation only when the contract is executed before
   the end of the period of availability of the appropriation being used. 31
   U.S.C. sect. 1501(a)(1)(B). Here, the option as exercised on the last day
   of the fiscal year is for a bona fide need of the next fiscal year that,
   consistent with 31 U.S.C. sections 1501(a)(1) and 1502(a), obligates
   fiscal year 2006 funds.

   It is one thing for an agency to take full advantage of available
   appropriations, maximizing the effectiveness of federal funds entrusted to
   its use; it is quite another thing, however, for an agency to alter
   executed contracts in order to reach expired funds--funds that Congress
   appropriated for agency programs and activities of the previous fiscal
   year. That is what NLRB proposes to do. Were NLRB to adjust the fourth
   option's performance period, its sole reason for doing so would be to
   reach fiscal year 2005 appropriations because, in September 2005, that is
   what NLRB had intended to do. However, NLRB's fiscal year 2005
   appropriation has expired.[6] Conceding that NLRB's error, indeed, may
   have been inadvertent, NLRB's expired appropriation is not available for
   this purpose.

   An expired appropriation is available only for recording and adjusting
   obligations properly chargeable to that appropriation. 31 U.S.C. sect.
   1553(a). NLRB's obligation for option four was not properly chargeable to
   fiscal year 2005 because option four is for severable services to be
   performed entirely in fiscal year 2006. Ordinarily, an adjustment to an
   expired appropriation is instigated by a factual finding that the
   obligational records do not reflect what actually occurred during the
   period of the appropriation's availability. B-272191, Nov. 4, 1997. See
   also B-245856.14, Dec. 12, 1993. Agencies are required to record against
   expired appropriations obligations previously incurred that were not
   recorded when the obligation was incurred and to adjust recorded amounts
   to reflect the amount actually incurred. 73 Comp. Gen. 338, 342 (1994).
   Here, NLRB would not be adjusting its accounts to redress an erroneous
   under-recording, over-recording or failure to record. Instead of adjusting
   its obligations to reflect what actually occurred, NLRB would revise what
   actually occurred so that it can finance option four with fiscal year 2005
   funds. While unfortunate, NLRB's error in this case resulted from a
   failure in NLRB's contracting process.[7] NLRB's contracting staff did not
   exercise the degree of vigilance and oversight to ensure that its actions
   reflected the intent of agency management. The account adjustment
   authority of section 1553(a) is not a palliative for errors of this sort.

   The head of each agency is required to make and preserve records
   containing adequate and proper documentation of its transactions. 44
   U.S.C. sect. 3101. Section 3512 of title 31 of the U.S. Code (commonly
   known as The Financial Managers' Financial Integrity Act) requires
   agencies to establish systems of internal accounting and administrative
   controls to provide agency management with reasonable assurance that
   agency obligations are in compliance with applicable laws and are properly
   accounted for and recorded. The recording statute contemplates that each
   agency will record obligations properly and certify to the accuracy of its
   obligations in its budget submission to the President and Congress. 31
   U.S.C. sect. 1501. See also 31 U.S.C. sect. 1108(c). Obviously, an
   agency's contracting process, where an agency incurs many of its
   obligations, is a critical element of sound funds control. NLRB's cure
   here, rather than altering its contract in an attempt to reach expired
   appropriations, should address its internal administrative controls and
   possible adjustments to its contracting process and oversight.

   CONCLUSION

   NLRB entered into a contract for severable services for fiscal year 2006
   and improperly charged the obligation for that contract to its fiscal year
   2005 appropriation. NLRB must adjust its accounts to reflect its contract
   action, that is, remove the obligation from its fiscal year 2005
   obligation records and record it in its fiscal year 2006 records.

   NLRB may not now remedy its improper obligation by adjusting its
   contract's performance period instead of its accounts in order to reach
   its fiscal year 2005 expired appropriation. Expired appropriations are not
   available for this purpose. Fiscal year 2005 appropriations remain
   available only for adjustments to obligations properly incurred in fiscal
   year 2005.

   While the error of NLRB's contracting staff is unfortunate, NLRB should
   address that error by assessing the need for possible adjustments in its
   internal controls, with a particular eye to its contracting process and
   oversight, rather than altering executed contracts in an attempt to reach
   expired appropriations.

   Gary L. Kepplinger
   General Counsel

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

   [1] NLRB receives a Salaries and Expenses appropriation available for one
   fiscal year. Departments of Labor, Health and Human Services, and
   Education, and Related Agencies Appropriations Act, 2006, Pub. L. No.
   109-149, title IV, 119 Stat. 2833, 2875 (Dec. 30, 2005); Departments of
   Labor, Health and Human Services, and Education, and Related Agencies
   Appropriations Act, 2005, Pub. L. No. 108-447, div. F, title IV, 118 Stat.
   2809, 3159 (Dec. 8, 2004).

   [2] NLRB charged two options to fiscal year 2005: option three for a
   performance period of October 1, 2004, through September 30, 2005 and
   option four for a performance period of October 1, 2005, through September
   30, 2006.

   [3] FASA permits an agency to enter into a contract for severable services
   for a period beginning in one fiscal year and ending in the next fiscal
   year and obligate the appropriation current at the time it entered into
   the contract. 41 U.S.C. sect. 253l. This authority is available only so
   long as the contract period does not exceed 1 year. Id.

   [4] As evidence of its intent to adjust the performance period of option
   four, NLRB referred to various e-mail traffic in late September 2005 among
   agency personnel, including NLRB's Office of General Counsel, as well as
   advice NLRB contracting staff solicited from an attorney of another
   federal agency; the requisition for EDS services (NLRB Form 12), dated
   September 30, 2005; and an OMB Apportionment Schedule (SF 132), date
   illegible, showing a reapportionment of NLRB's fiscal year 2005 Salaries
   and Expenses appropriation of $750,000 for CATS. NLRB Response, at 4.

   [5] "As a general rule, courts are reluctant to reform contracts that have
   been performed." Johns-Manville Corp. v. United States, 12 Cl. Ct. 1, 26
   (1987), citing National Presto Industries, Inc. v. United States, 338 F.2d
   99, 106-07 (Ct. Cl. 1964). Cf. Restatement (Second) of Contracts, ch. 6,
   introductory note (1979) ("The law of contracts supports the finality of
   transactions . . .").

   [6] An appropriation available for a fixed period of time expires at the
   end of that time period. 71 Comp. Gen. 39, 40 (1991). NLRB's fiscal year
   2005 appropriation expired on September 30, 2005.

   [7] The fact that NLRB could have, or even that it actually intended to,
   charge fiscal year 2005 appropriations by use of FASA and amending the
   performance period of option three does not change our views. To ensure
   the reliability and accuracy of the accounting for obligations, the
   emphasis needs to be on what actually happened, not on what one would have
   wished had happened.