Indian Self-Determination Act: Shortfalls in Indian Contract Support
Costs Need To Be Addressed (Letter Report, 06/30/99, GAO/RCED-99-150).
Pursuant to a legislative requirement, GAO provided information on the
Bureau of Indian Affairs' (BIA) and the Indian Health Service's (IHS)
management of contract support funding under the Indian
Self-Determination and Education Assistance Act, focusing on: (1) to
what extent and for what reasons contract support costs and the
associated funding shortfalls changed over the past decade, and what can
be expected in the future for these costs; (2) how the shortfalls in
funding for contract support costs affected tribes; and (3) whether the
act's provisions for contract support costs have been consistently
implemented.
GAO noted that: (1) tribes' allowable contract support costs have
tripled from 1989 through 1998--increasing from about $125 million to
about $375 million; (2) the total amount of program dollars contracted
by tribes--upon which contract support costs are based--has increased;
(3) the total cost of tribes' administration of contracts has increased;
(4) although the amounts appropriated for contract support costs have
increased, Congress has not funded contract support to keep pace with
these increases, resulting in funding shortfalls; (5) in fiscal year
(FY) 1998, almost $280 million of the about $375 million that was
allowable for contract support costs was appropriated, resulting in a
shortfall of about $95 million; (6) projections of future contract
support costs are difficult to calculate because the number of programs
tribes will elect to contract and the amount of funding they will
receive are uncertain; (7) for the forseeable future, tribes' allowable
contract support costs are unlikely to dip below the FY 1998 level of
$375 million and will likely increase, as they have done in the past;
(8) according to the 94 tribes that GAO communicated with during its
review, shortfalls in funding for contract support costs have caused
financial difficulties and frustration for the tribes administering the
programs; (9) they have had to take a number of steps to cope with
shortfalls in contract support funding; (10) reducing their contract
support costs to within the amount of funding provided has been one such
step; (11) however, the tribes noted that this has decreased the
efficiency and productivity of their tribal administrative functions;
(12) to make up for the shortfall, the tribes reported using program
funds, which reduced services to tribal members, or using tribal
resources, which precluded the use of those resources to supplement
program funds or to develop tribal business ventures; (13) the contract
support policies and practices of the Bureau, the Health Service, and
the Department of the Interior's Office of Inspector General have been
inconsistent, which may result in some tribes receiving more contract
support funding than they are allowed and in others receiving less; (14)
GAO also found some inconsistencies in the calculation and the
application of indirect cost rates that were used to determine tribes'
allowable contract support costs; and (15) the impasse between providing
full funding for contract support costs and limiting these costs
continues in Congress.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-99-150
TITLE: Indian Self-Determination Act: Shortfalls in Indian
Contract Support Costs Need To Be Addressed
DATE: 06/30/99
SUBJECT: Native Americans
Contract administration
Administrative costs
Funds management
Appropriated funds
Indian affairs legislation
IDENTIFIER: IHS Indian Self-Determination Fund
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Cover
================================================================ COVER
Report to Congressional Committees
June 1999
INDIAN SELF-DETERMINATION ACT -
SHORTFALLS IN INDIAN CONTRACT
SUPPORT COSTS NEED TO BE ADDRESSED
GAO/RCED-99-150
Indian Self-Determination Act
(141235)
Abbreviations
=============================================================== ABBREV
Letter
=============================================================== LETTER
B-282458
June 30, 1999
The Honorable Slade Gorton
Chairman
The Honorable Robert C. Byrd
Ranking Minority Member
Subcommittee on Interior and Related Agencies
Committee on Appropriations
United States Senate
The Honorable Ben Nighthorse Campbell
Chairman
The Honorable Daniel K. Inouye
Vice-Chairman
Committee on Indian Affairs
United States Senate
As directed in Senate Report 105-227, we are reporting on the Bureau
of Indian Affairs' and the Indian Health Service's management of
contract support funding under the Indian Self-Determination and
Education Assistance Act. Our report contains recommendations to the
departments of the Interior and Health and Human Services designed to
help ensure that contract support costs are paid consistently. The
report also describes alternative methods for funding contract
support costs, which the Congress may consider as it debates how to
best carry out the provisions of the Self-Determination Act.
As arranged with your offices, unless you publicly announce its
contents earlier, we will make no further distribution of this report
until 14 days after the date of this letter. At that time, we will
send copies to the Secretaries of the Interior and Health and Human
Services and to the heads of the Bureau of Indian Affairs and the
Indian Health Service.
Please contact me at (202) 512-3841 if you or your staff have any
questions. Major contributors to this report are listed in appendix
VIII.
Victor S. Rezendes
Director, Energy, Resources,
and Science Issues
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
The Indian Self-Determination and Education Assistance Act was passed
in 1975 to encourage tribal participation in, and management of,
programs that for years had been administered on their behalf by the
departments of the Interior or Health and Human Services. Within the
act, title I (referred to as the Indian Self-Determination Act)
authorizes tribes to take over the administration of such programs
through contractual arrangements with the agencies that previously
administered them: Interior's Bureau of Indian Affairs and Health
and Human Services' Indian Health Service.\1 For the Bureau, the
programs that can be contracted include social services, law
enforcement, road maintenance, and forestry, and for the Health
Service, the programs include mental health, dental care, hospitals
and clinics. According to the act, tribal contractors must receive
funding equivalent to what each of the agencies would have provided
if they had operated the programs. The act, as amended, also
provides that tribal contractors are to receive funding for the
reasonable costs of activities that they must perform to manage a
program's contract.\2 These latter costs, referred to in the act as
contract support costs, have grown considerably over the past 25
years�so much so that, for the past decade, the appropriations made
to fund them have fallen short of the amounts required.
In 1998, a year of concern and controversy over contract support
costs culminated in a statutorily imposed 1-year moratorium for
fiscal year 1999 on all new contracting under the Indian
Self-Determination Act. This moratorium was prompted by concerns
over sustained increases in tribes' allowable contract support
costs�that is, their costs that the Bureau and the Health Service
determine are eligible for reimbursement---increases in the shortfall
between these costs and the funding available for them, and
litigation over such shortfalls. In fiscal year 1998, the shortfall
between tribes' costs for contract support and the funding provided
for them through appropriations to the Bureau of Indian Affairs and
the Indian Health Service exceeded $95 million.
In light of tribes' increasing allowable contract support costs and
the shortfall between the costs and the funds actually appropriated,
GAO was asked to review various aspects of these costs.
Specifically, GAO examined the following three questions: (1) To
what extent and for what reasons have contract support costs and the
associated funding shortfalls changed over the past decade, and what
can be expected in the future for these costs? (2) How have the
shortfalls in funding for contract support costs affected tribes?
(3) Have the act's provisions for contract support costs been
implemented consistently? Additionally, in light of the controversy
over increases in contract support costs, GAO describes a number of
alternatives that the Congress may wish to consider in its
deliberations over contract support funding. And finally, as
requested, appendixes II and III contain a description of the process
by which contract support funding is provided to tribes.
--------------------
\1 Throughout this report, the term �tribes� will refer both to
tribes and tribal organizations eligible to contract programs under
the Indian Self-Determination and Education Assistance Act. Also,
the term �contracts� will refer to contracts, grants, self-governance
agreements, cooperative agreements, or annual funding agreements
entered into pursuant to the Indian Self-Determination and Education
Assistance Act, as amended, that receive contract support funds.
Title IV of the Indian Self-Determination and Education Assistance
Act, as amended, authorizes the Department of the Interior to enter
into annual funding agreements with tribes for self-governance, and
provides for program funding and contract support costs equivalent to
what was provided elsewhere under the act. Title III of the act
authorizes the Department of Health and Human Services to enter into
similar agreements annually with a limited number of tribes.
\2 The act also provides that contract funding is subject to the
availability of appropriated funds. Tribal contractors and the
Indian Health Service are presently litigating the questions of
whether this provision limits the amount of funding the agencies must
provide and whether the failure to provide full funding is a breach
of contract.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:2
Tribes' allowable contract support costs have tripled from 1989
through 1998�increasing from about $125 million to about $375
million.\3 This increase occurred for two principal reasons. First,
the total amount of program dollars contracted by tribes--upon which
contract support costs are based�has increased. Second, the total
cost of tribes' administration of contracts has increased. Although
the amounts appropriated for contract support costs have increased,
the Congress has not funded contract support to keep pace with these
increases, resulting in funding shortfalls. In fiscal year 1998,
almost $280 million of the about $375 million that was allowable for
contract support costs was appropriated, resulting in a shortfall of
about $95 million. Projections of future contract support costs are
difficult to calculate because the number of programs tribes will
elect to contract is uncertain, as is the amount of funding they will
receive. For the foreseeable future, tribes' allowable contract
support costs are unlikely to dip below the fiscal year 1998 level of
$375 million and may increase, as they have done in the past.
According to the 94 tribes that we communicated with during our
review, shortfalls in funding for contract support costs have caused
financial difficulties and frustration for the tribes administering
the programs. They have had to take a number of steps to cope with
shortfalls in contract support funding. Reducing their contract
support costs to within the amount of funding provided has been one
such step. However, the tribes noted that this has decreased the
efficiency and productivity of their tribal administrative functions.
To make up for the shortfall, the tribes reported using program
funds, which reduced services to tribal members, or using tribal
resources, which precluded the use of those resources to supplement
program funds or to develop tribal business ventures. In addition, a
few tribes reported having to refuse or postpone opportunities to
contract federal programs, which impeded their progress toward
self-determination.
The contract support policies and practices of the Bureau, the Health
Service, and the Office of Inspector General have been inconsistent,
which may result in some tribes receiving more contract support
funding than they are allowed and in others receiving less. Since
1988, the Bureau and the Health Service have reimbursed tribes for
different categories of contract support costs. The Bureau has
reimbursed tribes for indirect costs and startup costs; the Health
Service has reimbursed them for these two cost categories plus a
third one, direct contract support costs.\4 This difference has
caused confusion among tribes as well as differences in the amount of
contract support funding paid by the two agencies. GAO also found
some inconsistencies in the calculation and the application of
indirect cost rates that were used to determine tribes' allowable
contract support costs and makes recommendations to address those
inconsistencies. For example, in some cases, the Bureau and the
Health Service provided funding based on provisional rates and did
not make adjustments to funding when those rates were finalized.
The impasse between providing full funding for contract support costs
and limiting these costs continues in the Congress. The fallout has
included litigation relevant to the issue, as well as a 1-year
moratorium on new contracting under the Indian Self-Determination
Act. To assist the Congress in its deliberations over how to resolve
the impasse over contract support costs, GAO presents four
alternative funding approaches, each of which can be considered
individually or which can be combined. These alternatives range from
providing appropriations sufficient to fund tribes' allowable
contract support costs each year to amending the act to remove the
provision for funding contract support costs over and above the
direct program amount and instead provide a single, consolidated
contract amount. Each of the alternatives has advantages and
disadvantages. Three of the four alternatives, for example, offer
the advantage of controlling future increases in contract support
costs. The disadvantage of these same three alternatives would be
that they require changes to the funding provisions of the Indian
Self-Determination Act.
--------------------
\3 Dollar figures used throughout the report have been adjusted to
constant 1998 values.
\4 Joint agency regulations request tribal contractors to include
direct, indirect, and startup costs in their initial contract
proposals under Title I of the Indian Self-Determination and
Education Assistance Act, as amended (25 C.F.R. 900.8.).
BACKGROUND
---------------------------------------------------------- Chapter 0:3
The Indian Self-Determination and Education Assistance Act of 1975,
as amended, authorizes Indian tribes to take over the administration
of programs that had been previously administered on their behalf by
the departments of the Interior or Health and Human Services. In
passing the act, the Congress recognized that the government's
administration of Indian programs prevented tribes from establishing
their own policies and making their own decisions about program
services. The act removes that impediment; it allows tribes to
contract for a range of Indian programs that are managed by the
Bureau of Indian Affairs and the Indian Health Service on their
behalf. Once having contracted a program, a tribe assumes
responsibility for all aspects of its management, such as hiring
program personnel, conducting program activities and delivering
program services, and establishing and maintaining administrative and
accounting systems. Typical programs that are contracted by tribes
include such Bureau programs as law enforcement, social services,
road maintenance, and forestry as well as such Health Service
programs as hospitals and health clinics; mental health; dental care;
and environmental health services, such as sanitation.
The Congress amended the act in 1988 and 1994 to provide that under
self-determination contracts tribes would receive funds for contract
support costs in addition to the base program amount to manage their
contracts. Since 1988, the Congress has provided funding for
contract support costs in annual appropriations acts. The funding
available for a tribal contract is the total of the program funds
transferred by either the Bureau or the Health Service and the
contract support funds provided for tribes' allowable contract
support costs. When a tribe contracts for a program under the
act�for example, a forestry program with the Bureau--the agency
identifies the amount of funding in that program's budget for that
tribe. In addition, the agency provides contract support funding for
the costs of that tribe's management and administration of the
contract. Each agency has established a separate budget line item
specifically for this purpose. In fiscal year 1998, appropriations
for the Bureau and the Health Service totaled about $3.8 billion. Of
that amount, about half was administered by tribes through contracts.
The amount contracted includes about $280 million that the Bureau and
the Health Service provided for contract support costs.
In implementing the act's provisions for contract support costs, the
agencies commonly refer to the following three categories of contract
support costs: (1) indirect costs, which are the costs incurred for
a tribe's common services, such as financial management and
accounting; (2) direct contract support costs, which are the costs of
activities that tribes incur but that are not provided in program
funding or indirect funding, such as the cost of program-specific
training; and (3) startup costs, which are the one-time costs of
beginning a contract, including the purchase of computer hardware and
software. In 1996, the Bureau and the Health Service published joint
regulations implementing the Indian Self-Determination Act and these
regulations allow tribes to request funding for these three types of
costs. The majority of contract support funds paid by both the
Bureau and the Health Service are for tribes' indirect costs, which
are based on indirect cost rates established by independent offices.
These offices, which are the Department of the Interior's Office of
Inspector General or the Department of Health and Human Services'
Division of Cost Allocation, review tribes' indirect costs to
determine if they are reasonable and allowable.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
INCREASES IN CONTRACT
SUPPORT COSTS COULD CONTINUE
IN THE FUTURE
-------------------------------------------------------- Chapter 0:4.1
As the amount of program funds contracted by tribes has increased
over the past decade, so has the amount of contract support funding
they have used to administer them. In the past decade, the contract
volume (total dollars contracted) for programs that tribes have
contracted with the Bureau and the Health Service has more than
doubled from about $800 million in fiscal year 1989 to about $1.9
billion in fiscal year 1998.\5 Tribes' contract support costs have
also increased for these programs; the amount of contract support
funding for tribes' administrative and other management costs has
increased from about $125 million to about $375 million. Although
appropriations from the Congress and the payments from these two
agencies for contract support have increased, they have not been
sufficient to cover tribes' allowable costs identified by the Bureau
and the Health Service. In fiscal year 1998, the Congress
appropriated almost $280 million to fund almost $375 million in
tribes' allowable contract support costs, resulting in a shortfall of
about $95 million.
The exact amount of future contract support costs is difficult to
predict, but will likely increase in future years beyond the $375
million for fiscal year 1998. The extent of future increases will
depend on (1) the amount of future appropriations the Bureau and the
Health Service receive for contracted programs, (2) the extent to
which tribes choose to contract new programs in the future, and (3)
the future changes in tribes' costs of administering contracts.
Currently, only about half of the funding for the Bureau of Indian
Affairs and the Indian Health Service is being administered through
contracts with tribes; the remaining programs are being administered
by the Bureau and the Health Service and most of them could be
contracted by tribes. If the amount of program funding contracted by
tribes were to double in the future and if indirect cost rates were
to stay about the same, contract support costs could increase�from
the fiscal year 1998 amount of about $375 million to about $750
million.
--------------------
\5 Because the Bureau does not have fiscal year 1998 data, this
information is fiscal year 1997 data expressed in constant 1998
dollars.
TRIBES SAY THEY HAVE BEEN
ADVERSELY AFFECTED BY
SHORTFALLS IN CONTRACT
SUPPORT FUNDING
-------------------------------------------------------- Chapter 0:4.2
Over 90 tribes reported to GAO that they have used various methods to
cope with the shortfalls in funding for contract support. For
example, they said they have (1) reduced their indirect costs; (2)
used either tribal resources, when available, or program funds to
offset shortfalls in contract support costs funding; and (3) in a few
cases, turned back or postponed opportunities to contract programs.
According to the tribes, each of these methods has had negative
effects over the years, they could not further reduce their indirect
costs and their administrative infrastructures have begun to
deteriorate. For example, noncompetitive salaries have prevented
them from hiring skilled staff, financial audits were not done, and
computer equipment was not upgraded. In turn, tribes' use of their
resources or direct program dollars to make up for shortfalls
generally has reduced program services. For example, when a tribe
uses direct program dollars to compensate for shortfalls in contract
support funding, fewer dollars are available for program services.
And when a tribe uses its own resources to make up for contract
support shortfalls, it loses the opportunity to use those funds for
other purposes to help its members. A few tribes said that when they
simply cannot afford to take over or continue administration of a
federal contract, they forego significant opportunities to advance
their self-determination.
INCONSISTENCIES IN HOW
CONTRACT SUPPORT COSTS ARE
CALCULATED
-------------------------------------------------------- Chapter 0:4.3
The Bureau of Indian Affairs and the Indian Health Service have
inconsistently calculated payments for contract support costs to
tribes. Since 1988, the Bureau and the Health Service have
reimbursed tribes for different categories of contract support costs.
Recently, the Bureau acknowledged that it is considering providing
tribes with funding for direct contract support costs, which it has
not funded in the past but which the Health Service has funded. This
change could increase the contract support funding for programs
contracted from the Bureau. The increase could be about $10 million
to $30 million per year more than the over $135 million in funding
provided to support programs with the Bureau that are currently
contracted by tribes.
In addition, inconsistencies in indirect rate calculation and funding
has caused confusion among tribes as well as potential differences in
how funding has been calculated. Since 1992, two regional offices
within Interior's Office of Inspector General, the primary office
responsible for negotiating indirect cost rates with tribes, have
calculated adjustments to indirect cost rates differently. In
certain circumstances, the tribes negotiating indirect cost rates
with the Western Region receive higher indirect cost rates than they
would receive if the Eastern Region's method of calculation had been
used. GAO did not calculate the effect this difference would have
had on funding, but did note that if lower rates had been used
funding requirements would have decreased. Interior's Office of
Inspector General is aware of this problem and is prepared to change
how the Western Region calculates rates to make it consistent with
the Eastern Region. However, the federal government and tribes are
engaged in efforts to reach agreement on the appropriate method for
calculating the indirect cost portion of contract support costs. Any
agreement will require court approval because the current method of
calculation was found to be invalid.\6 GAO also found that the Bureau
and the Health Service were inappropriately applying one type of
indirect cost rate and, as a result, were not making adjustments for
over- or underpayments to tribes.
--------------------
\6 Ramah Navajo Chapter v. Lujan, 112 F. 3d 1455 (10\th Cir.
1997). In addition to the efforts to reach an agreement in the Ramah
case, the Bureau, the Health Service, and the National Congress of
American Indians all have work groups studying contract support
costs.
ALTERNATIVES FOR FUNDING
CONTRACT SUPPORT COSTS
-------------------------------------------------------- Chapter 0:4.4
As contract support costs continue to increase, the tension between
providing full funding for these costs and limiting them will
increase as well. The issue has already reached an impasse, with
tribes having initiated lawsuits on payment of contract support costs
and the Congress having imposed a 1-year moratorium in fiscal year
1999 on new contracting under the Indian Self-Determination Act. GAO
presents four possible alternatives that the Congress may wish to
consider as it deliberates on how best to provide funding to carry
out the intent of the Indian Self-Determination Act, and GAO presents
estimates of what these alternatives may cost and their major
advantages and disadvantages.
-- Alternative 1: Provide appropriations sufficient to fully fund
tribes' allowable contract support costs each year.
-- Alternative 2: Amend the act to remove the requirement that
contract support be funded at 100 percent of the allowable costs
identified by the Bureau and the Health Service.
-- Alternative 3: Amend the act to provide the indirect cost
portion of contract support costs by using a flat rate or a
ceiling rate.
-- Alternative 4: Amend the act to change the current funding
mechanism�in which contract support costs are identified and
funded apart from program funds�to one consolidated contract
amount.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5
To ensure consistent implementation of the Indian Self-Determination
Act, GAO recommends that the Secretary of the Interior and the
Secretary of Health and Human Services direct the Assistant Secretary
for Indian Affairs and the Director of the Indian Health Service,
respectively, to work together, and with the Congress and tribes, to
develop a standard policy on funding contract support costs under the
act so those agencies can consistently provide funding. An
additional recommendation to the Secretary of the Interior and the
Secretary of Health and Human Services regarding the use of one type
of indirect cost rate is presented in chapter 4.
MATTERS FOR CONGRESSIONAL
CONSIDERATION
---------------------------------------------------------- Chapter 0:6
The Congress, in its deliberations on how to best provide funding for
the Indian Self-Determination Act, may wish to consider a number of
alternatives to the current mechanism for funding contract support
costs. GAO presents four alternatives in chapter 5 of this report.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:7
We provided a draft of this report to the departments of the Interior
and Health and Human Services for review and comment. In responding,
the Department of the Interior and the Department's Office of
Inspector General each provided us with comments. We are handling
these comments as separate responses.
The departments of the Interior and Health and Human Services agreed
with GAO's recommendations that the Bureau of Indian Affairs and the
Indian Health Service should have consistent policies on funding
direct contract support costs and that adjustments should be made
when provisional-final indirect cost rates are used. The Department
of the Interior's Office of Inspector General did not comment on
these two recommendations.
GAO's draft report concluded that having Interior's Office of
Inspector General negotiate indirect cost rates limited that office's
ability to audit the same function and recommended that the Secretary
of the Interior move the function from the Inspector General's
office. In separate responses, the Department of the Interior and
its Office of Inspector General differed on whether the
responsibility should be moved. While the Inspector General's office
agreed with GAO's recommendation to remove the rate negotiation
function from the office, the Department raised several concerns
about moving the function. Specifically, it stated that sufficient
separation of duties exists within the Inspector General's office
because the office dedicates staff to indirect cost negotiations who
are not assigned to conduct other activities such as audits. The
Department also stated that it has limited ability to change the
current system of negotiating indirect cost rates because of current
litigation related to indirect cost rates. GAO continues to have
concerns about the Inspector General's role in negotiating cost
rates, and plans to review the issue in more depth in a separate
study, taking into account the differences in the responses to our
draft report, the legislative history of the Inspector General Act,
generally accepted government auditing standards, current litigation,
and any other pertinent guidance. As a result, GAO is not making the
recommendation to remove the rate negotiation function from the
Inspector General's office at this time.
None of the department or agency comments addressed the four
alternatives GAO put forth as a matter for congressional
consideration. Interior's Office of Inspector General suggested
several technical comments, which we incorporated as appropriate.
The comments from the Department of the Interior, the Department's
Office of Inspector General, and the Department of Health and Human
Services and our specific responses appear in appendixes V, VI, and
VII, respectively.
INTRODUCTION
============================================================ Chapter 1
By late 1998, concern and controversy over the funding of contract
support costs had culminated in a statutorily imposed 1-year
moratorium (for fiscal year 1999) on all new contracting by tribes
and tribal organizations.\1 Under the Indian Self-Determination and
Education Assistance Act of 1975, as amended, tribes can contract for
specific federal programs and receive program funding and contract
support funding. Contract support funds�which, as implemented by the
Department of the Interior's Bureau of Indian Affairs (BIA) and the
Department of Health and Human Services' (HHS) Indian Health Service
(IHS), include funding for indirect costs, direct contract support
costs, and startup costs--are provided to tribes to cover the costs
of managing their contracts. Over the 25 years since the passage of
the act, the amount of funding required by tribes to pay for such
contract support costs has steadily increased--so much so that, by
the early 1990s, appropriated funds were insufficient to cover them,
causing funding shortfalls. The shortfalls not only caused budgeting
and financial difficulties for tribes, they also led to current
litigation about the extent of the U.S. obligation to fund contract
support costs when congressional appropriations provide insufficient
funding.\2
--------------------
\1 Throughout this report, the term �tribes� will refer both to
tribes and to tribal organizations eligible to contract programs
under the Indian Self-Determination and Education Assistance Act.
Also, the term �contracts� will refer to contracts, grants,
cooperative agreements, self-governance agreements, or annual funding
agreements entered into pursuant to the Indian Self-Determination and
Education Assistance Act, as amended, that receive contract support
funds.
\2 Miccosukee Corp., 98-1457 (Fed. Cir.) and Oglala Sioux Tribal
Public Safety Department, 99-1033 (Fed. Cir.).
THE FUNDING PROVISIONS OF THE
INDIAN SELF-DETERMINATION ACT
---------------------------------------------------------- Chapter 1:1
Within the act, originally passed in 1975, title I (referred to as
the Indian Self-Determination Act) encourages tribal participation in
program planning and management by allowing tribes to contract
programs previously administered on their behalf by the Secretaries
of the Interior and Health, Education, and Welfare (now Health and
Human Services). The act also provides that the amount of funding
for tribal contracts shall cover program costs and contract
management costs. In passing the act, the Congress recognized that
having the government provide such services on behalf of tribes
prevented them from achieving self-determination�that is, becoming
involved in planning, conducting, and administering their own
programs. When a tribe contracts a program, it assumes
responsibility for managing and staffing that program; that is, the
tribe makes management decisions about personnel and services,
operates and maintains facilities, and accounts for funds.
Primarily, the programs contracted are the ones administered by BIA
and IHS and include law enforcement, social services, hospitals and
clinics, dentist services, and others. The act and its amendments
identify the types of funding to be provided when tribes contract
such programs.
As originally enacted, the Indian Self-Determination Act specified
that the amounts to be provided for tribes' self-determination
contracts would �not be less than the appropriate Secretary would
have otherwise provided for [his] direct operation of the programs.�
This type of funding is commonly referred to as �direct program�
dollars or funds. Shortly after the act was passed, BIA and IHS
began providing tribes with support funds, in addition to direct
program dollars. These funds were to assist tribes in establishing
and maintaining the support systems (e.g., administrative and
accounting systems) needed to administer the contracts.
In 1988 and in 1994, the Congress amended the Indian
Self-Determination Act to require that funding for contract support
costs be provided in addition to direct program dollars. Through
these amendments, the Congress wanted to prevent tribes from having
to use their program funds to pay for contract support activities, a
problem that had been identified as one of the major impediments to
self-determination contracting. The amendments provide for funding
the reasonable and allowable costs of a tribe's activities to carry
out a contracted program�that is, the tribe's allowable contract
support costs. These costs include both direct program expenses and
administrative and other overhead expenses. See appendix I for the
act's contract support cost provisions.\3 The 1994 amendments also
added title IV to the Indian Self-Determination and Education
Assistance Act, which authorizes the Department of the Interior to
enter into self-governance funding agreements with tribes. These
agreements must provide funding for direct program costs and contract
support costs that is equivalent to the funding required in other
parts of the act.\4
BIA and IHS have developed implementing guidelines that specify the
types of costs that will be reimbursed under the act. In policy and
practice, the agencies commonly refer to three categories of contract
support costs. Table 1.1 defines and provides examples of these cost
categories.
Table 1.1
Definitions and Examples, by Category,
of Contract Support Costs
Cost category Definition Examples
------------------------------ ------------------ ------------------
Indirect costs Costs incurred for Indirect costs
a common or joint (often thought of
purpose benefiting as overhead costs)
more than one cost typically include
objective and not those incurred for
readily assignable financial and
to the cost personnel
objectives management,
property and
Direct contract support Costs of Direct contract
costs\c activities that support costs can
are not contained include the
in either the training required
indirect cost pool to maintain the
or the direct certification of
program funds. direct program
personnel and the
costs
Startup costs Costs incurred on Startup costs can
a one-time basis include the costs
to plan, prepare of purchasing
for, and assume computer hardware
operation of the and software,
program, function, providing required
service, or training and staff
activity that is development,
the subject
----------------------------------------------------------------------
\a A cost objective is a function, contract, grant, or other activity
for which cost data are needed and costs are incurred.
\b Office of Management and Budget Circular A-87, �Cost Principles
for State, Local, and Indian Tribal Governments,� states that �There
is no universal rule for classifying certain costs as either direct
or indirect under every accounting system.� The types of costs
classified as indirect costs may vary by tribe depending on its
particular circumstances.
\c Chapter 4 discusses the inconsistent policies on the payment of
direct contract support costs between the two agencies.
Source: Office of Management and Budget's Circular A-87 �Cost
Principles for State, Local, and Indian Tribal Governments,� BIA, and
IHS.
In 1996, BIA and IHS issued joint regulations implementing the act,
as amended, with respect to self-determination contracts. These
regulations describe the three types of costs in Table 1.1 as costs
that tribes can request in their contract proposals.
--------------------
\3 The act also provides that, not withstanding any other provision
of the act, the provision of funds is subject to the availability of
appropriations. The model agreement for self-determination contracts
contains similar language. Tribal contractors and IHS are currently
litigating the question of whether, with regard to Indian
self-determination contracts, this phrase limits the funding the act
requires the agencies to provide. Two Interior Board of Contract
Appeals cases, which are on appeal to the Court of Appeals for the
Federal Circuit, decided that this phrase does not limit the
contractual obligation to pay tribal contractors for all of their
contract support costs.
\4 Title III of the act authorizes the HHS to enter into
self-governance agreements with tribes as part of a demonstration
program. The title provides for the payment of direct program funds
and indirect costs.
MECHANICS OF FUNDING
SELF-DETERMINATION CONTRACTS
---------------------------------------------------------- Chapter 1:2
In general, the funding available to a tribe for a self-determination
contract is the total of the direct program funds transferred from
either BIA or IHS, plus any contract support funds as allowed by
those agencies. To calculate the full amount allowed a tribe for its
contract, the funding agency usually (1) identifies the direct
program funds it will transfer to the tribe, (2) identifies, as
appropriate, direct contract support costs for the contracted
program, (3) multiplies the total direct amount, minus any
appropriate exclusions, by the tribe's indirect cost rate to
determine the amount of indirect funds that should be added to the
contract, and (4) identifies any additional contract support costs,
such as startup costs. Once the funding agency has identified the
direct funds to be transferred to a tribe, that amount becomes
recurring�that is, the same amount is provided to the tribe in its
contract every year unless, among other things, the Congress changes
the funding or until the contract is ended. BIA and IHS transfer
direct program funds from the budget line items for their programs,
such as law enforcement or hospitals, but fund contract support costs
from separate budget line items that were established specifically to
pay for these costs.
In contrast to direct program funding, the amount of contract support
funds (predominantly funds for indirect costs) can vary each year as
the tribes' indirect cost rates change. Figure 1.1 shows an equation
for the way the agencies calculate the allowable indirect costs for
tribes.
Figure 1.1: Formula for Determining the Funding for Indirect Costs
Tribe's indirect cost pool Direct funding base for x
--------------------------------------- = Indirect costs associated
with BIA's or IHS' programs Tribe's total direct cost base BIA's or
IHS' programs
Note 1: The direct funding base consists of the contract funding
amounts for either BIA's or IHS' programs, adjusted to be consistent
with the direct cost base. The ratio of a tribe's indirect cost pool
to its direct cost base is referred to as the tribe's indirect cost
rate. A tribe's indirect cost pool consists of all its indirect
costs. The total direct cost base consists of all the tribe's direct
program costs, including those for BIA's and IHS' programs as well as
those for programs from other federal agencies, state agencies,
private organizations, and tribal programs, if applicable, less any
exclusions.
Tribes negotiate indirect cost rates annually in accordance with
federal cost allocation principles and departmental guidance. In
general, an indirect cost rate is determined by dividing a pool of
indirect costs by a direct cost base. The direct base consists of
program costs minus certain exclusions and can be either based on
salaries or on total direct costs. The purpose of the indirect cost
rate is to reasonably allocate a tribe's indirect costs to each of
its programs (BIA, IHS, other federal agencies, state agencies,
private organizations, and tribal programs). For example, if IHS'
programs represented 30 percent of a tribe's total direct cost base,
then IHS programs would be allocated 30 percent of that tribe's
indirect cost pool.\5
--------------------
\5 A recent court decision found that this method of allocating a
tribe's indirect cost pool to every program in the direct cost base
was incorrect. Ramah Navajo Chapter v. Lujan, 112 F. 3d 1455
(10\th Cir. 1997). The court concluded that other federal and state
programs that do not provide funding for indirect costs should not be
part of the direct cost base. The court ruled that the Department of
the Interior had not paid the indirect costs associated with tribes'
self-determination contracts. On May 14, 1999, the court approved a
partial settlement of about $80 million to settle these claims for
fiscal years 1989 through 1993. The parties are also engaged in
efforts to reach agreement on the appropriate method for calculating
the indirect cost portion of contract support costs. The new
methodology will require the court's approval. This report does not
directly address the issues raised by the court in the Ramah case.
In addition, BIA, IHS, and the National Congress of American Indians
all have work groups studying contract support costs.
THE KEY PLAYERS IN IMPLEMENTING
THE INDIAN SELF-DETERMINATION
ACT
---------------------------------------------------------- Chapter 1:3
The key players in implementing the Indian Self-Determination Act are
(1) those that fund and oversee the contracts, (2) those that
calculate indirect cost rates, and (3) those that administer the
contracts. The Indian Self-Determination Act applies only to
programs under the jurisdiction of the departments of the Interior or
Health and Human Services. Predominantly, these are the programs
operated by BIA or IHS. Figure 1.2 shows the key players involved in
implementing the act.
Figure 1.2 Key Players in
Implementing the Indian
Self-Determination Act
(See figure in printed
edition.)
Source: GAO's analysis.
In general, the funding agencies are BIA and IHS. Under the act,
tribes may contract for nearly any program managed by BIA or IHS.
BIA's programs include law enforcement; road maintenance; and such
social services as child protection and welfare assistance, adult
education, and housing. IHS' programs include hospital or clinic
administration; preventive care; alcohol treatment; contract health
services, diabetes care, mental health care, and dental care. BIA
and IHS are the agencies with which tribes contract and the ones that
provide the associated funding.
BIA is the primary federal agency with responsibility for
administering Indian policy and discharging the federal government's
trust responsibility for American Indian tribes and Alaskan Native
villages, and IHS is responsible for delivering health services to
American Indians and Alaska Natives. BIA's fiscal year 1997 funding
was about $1.7 billion, of which over $1 billion was used for
contracted programs, including education and construction programs.
Tribes contracted about $546 million of BIA's programs, excluding,
among other things, education and construction--$450 million for
direct program funds and $96 million for contract support costs.\6
IHS' fiscal year 1998 funding was more than $2 billion. Of this
amount, about $719 million was for program costs of
self-determination contracts (including construction contracts), and
almost $169 million was for contract support costs for tribes
participating in self-determination contracting.
Interior's Office of Inspector General and HHS' Division of Cost
Allocation have responsibility for calculating tribes' indirect
rates. In general, Interior's Office of Inspector General calculates
indirect rates for tribes, and either the Inspector General or the
Division of Cost Allocation does so for tribal organizations. During
the rate negotiation process, tribes submit indirect cost proposals,
which are supported by audited financial statements and supporting
documentation that substantiate the propriety of the indirect
costs.\7 Appendix II contains information on the process to negotiate
indirect cost rates.
Finally, the entities that administer the contracts are the federally
recognized tribes that choose to do so under the provisions of the
act. As of December 1998, there were 556 federally recognized
tribes. Agency officials estimate that nearly all of the federally
recognized tribes administer at least one BIA or IHS contract either
directly or as a member of a tribal consortium. Tribes may
administer multiple contracts from BIA and IHS.
--------------------
\6 Construction and education funds are not included in this
discussion because contract support costs for these BIA programs are
generally paid from a separate source of funds. For construction
contracts, the contractor receives one contract amount, from which
indirect costs are recovered. Under the Indian Education Amendments
of 1988 (P.L. 100-297, title V) education contracts can receive
administrative cost grants, as prescribed by a formula in the act, to
cover their indirect costs. For school year 1998/1999, $42.16
million was provided for administrative cost grants, which was enough
to fund just under 90 percent of the costs calculated using the
formula prescribed in the act. In certain circumstances, some
contract support funds are also expended for these education
contracts in addition to the administrative cost grants.
\7 Tribes make the decision whether or not to request an indirect
cost rate. Office of Management and Budget Circular A-87 states that
�Each Indian tribal government desiring reimbursement of indirect
costs must submit its indirect cost proposal to the Department of the
Interior (its cognizant Federal agency).� Some tribes contracting
with BIA have chosen not to seek reimbursement for their indirect
costs. However, the circular also permits Federal agencies to work
with government units that wish to test alternative methods of cost
recovery, such as lump sum amounts. Guidance from BIA and IHS
provides that a lump sum amount may be negotiated when a tribe does
not have an indirect cost rate.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:4
The Subcommittee on Interior and Related Agencies, Senate Committee
on Appropriations, and the Senate Committee on Indian Affairs asked
us to study issues related to contract support costs for contracts
entered into pursuant to the Indian Self-Determination and Education
Assistance Act, as amended. As agreed with the committees' staff,
this report addresses the following questions: (1) To what extent,
and for what reasons, have contract support costs and the associated
funding shortfalls changed over the past decade, and what can be
expected in the future? (2) How have shortfalls in funding for
contract support costs affected tribes? (3) Have the act's
provisions for contract support costs been implemented consistently?
We also describe alternative ways of funding contract support costs
in the future, and, as requested by the committees' staff, we provide
a detailed explanation of how contract support costs are calculated.
(See app. II.)
To determine the extent and the reasons for changes in contract
support costs and the associated funding shortfalls, we interviewed
various officials of the departments of the Interior and HHS,
including officials of BIA, IHS, Interior's Office of Inspector
General, and HHS' Division of Cost Allocation. We also reviewed and
analyzed various reports and data assembled by BIA and IHS, including
budget justifications and reports on contract support shortfalls to
the Congress. To adjust for the effects of inflation, we used the
Department of Commerce's chain-type price index for gross domestic
product to express all dollar figures in constant 1998 dollars.
To determine how shortfalls in funding for contract support costs
have affected tribes, we visited several reservations and held open
forums, at which tribal representatives were invited to discuss
contract support funding. Two such forums were held during two large
Indian conferences: the annual conference of the National Congress
of American Indians, in October 1998, and the joint BIA/IHS
Self-Governance Conference, in November 1998. Other forums were held
in conjunction with GAO staff visits to various BIA and IHS offices:
in Oklahoma City and Anadarko, Oklahoma; in Albuquerque, New Mexico;
and in Portland, Oregon. Representatives from 77 tribes or tribal
organizations attended one or more of these forums. In addition, 25
of those tribes and tribal organizations, as well as 17 other tribes
or tribal organizations with whom we did not meet, submitted
documents, such as financial statements and tribal budgets, that
described the extent and the effects of funding shortfalls on program
services.
To determine whether the act's provisions for contract support costs
have been implemented consistently, we reviewed legislative and
regulatory requirements, applicable court cases, and interviewed
officials of various Department of the Interior offices, including
BIA, the Office of Inspector General, and the Office of the
Solicitor. We also interviewed officials of Department of Health and
Human Services offices, including IHS and the Division of Cost
Allocation. We also discussed applicable court cases with the
lawyers involved with them. Furthermore, we reviewed the agencies'
documents and gathered and analyzed relevant data from the agencies.
As part of this process, we visited agency offices in several
locations around the country, including Sacramento, California;
Albuquerque, New Mexico; Portland, Oregon; Seattle, Washington; and
the Washington, D.C., area.
We conducted our review from July 1998 through April 1999 in
accordance with generally accepted government auditing standards. In
conducting our work, we did not independently verify or test the
reliability of the data provided by agencies or tribes. We used
these data for descriptive purposes only and did not rely on them to
make our conclusions and recommendations. In collecting tribal
officials' views about how they have been affected by shortfalls in
contract support funding and how they have coped with such
shortfalls, we did not use a standardized data collection instrument,
such as a questionnaire. Instead, we invited tribal representatives
to describe their experiences, either orally or in writing, with
contract support shortfalls.
PAST INCREASES IN CONTRACT SUPPORT
COSTS WILL LIKELY CONTINUE
============================================================ Chapter 2
Over the past decade, tribes' contract support costs and the
shortfalls between these costs and the funding provided for them
through annual appropriations have increased. Tribes' allowable
contract support costs associated with contracting BIA's programs
have more than doubled and those associated with contracting IHS'
programs have more than quadrupled. These increases have largely
been due to an increase in tribes' indirect costs, the primary
component of contract support costs.\1 The need for funding has
increased due to increases in the dollar amounts contracted from BIA
and IHS, coupled with increases in tribes' indirect costs. For
fiscal year 1998, BIA reported a shortfall in funding for contract
support costs of over $25 million, and IHS reported a shortfall of
about $70 million. The future costs for contract support are
difficult to estimate because of the unpredictable nature of (1) the
levels of future appropriations, (2) the extent to which tribes might
elect to contract new programs, and (3) tribes' indirect cost pools.
Currently, however, tribes are only contracting programs worth almost
half of BIA's and IHS' annual appropriations. Therefore, barring any
major changes (e.g., in the circumstances of the tribes or in the
law), contract support costs will likely continue to increase in the
future.
--------------------
\1 The legislative history of the 1988 amendments to the Indian
Self-Determination and Education Assistance Act discloses that the
Congress substituted �contract support costs� for �contract costs� in
the provision prescribing funding of reasonable costs to manage the
contracts. It specifically chose not to use �direct and indirect�
costs when describing what these costs cover. In the 1996 joint
agency regulations, contract support costs include direct costs,
startup costs, and indirect contract costs. Prior to the
regulations, it was the agencies' practice to use the term indirect
costs as the largest component of contract support costs.
TRIBAL CONTRACTING AND THE
FUNDING SHORTFALLS FOR CONTRACT
SUPPORT COSTS HAVE INCREASED IN
THE LAST 10 YEARS
---------------------------------------------------------- Chapter 2:1
Over the past decade, increases in indirect costs have been
responsible for the majority of the increase in funding for contract
support costs. The need for indirect cost funding has increased due
to increases in the dollar amounts contracted from BIA and IHS
coupled with increases in tribes' indirect cost pools. Across all
the indirect cost rates negotiated by Interior's Office of Inspector
General, the aggregate indirect cost rate has remained relatively
stable over the past 10 years at just under 25 percent. However,
appropriations have not been sufficient to reimburse tribes for their
costs of administering BIA's and IHS' programs. The most significant
funding shortfalls have occurred in the last 5 years. During this
period, neither agency has requested full funding for these costs,
nor has the Congress appropriated full funding for them.
TRIBES ARE CONTRACTING MORE,
AND THEIR INDIRECT COST
POOLS HAVE INCREASED
-------------------------------------------------------- Chapter 2:1.1
Over the past decade, the need for indirect cost funding from BIA and
IHS has risen due to increases in the dollar amounts contracted,
coupled with increases in tribes' indirect cost pools. Each agency
determines a tribe's allowable indirect costs by multiplying that
tribe's direct funding base (for programs contracted from that
agency) by the same tribe's indirect cost rate. Although
comprehensive data on tribes' direct funding bases for BIA's and IHS'
programs for the past 10 years were not readily available, a close
approximation is the contracting volume, or the total dollar amounts
contracted. Over the past 10 years, tribes have continued to
contract new programs and to expand their existing contracts.
Generally, some or all of the increases in contracting volume would
result in increases in tribes' direct funding bases for BIA's and
IHS' programs.\2 Figures 2.1 and 2.2 show the growth in tribes'
contracting of BIA's and IHS' programs, respectively.
Figure 2.1: Tribes'
Contracting of BIA's Programs,
Fiscal Years 1989 Through 1997
(See figure in printed
edition.)
Note 1: Funds are in constant 1998 dollars.
Note 2: The total amount of BIA funds contracted for fiscal year
1997 was about $1 billion. Contracts for construction and education
programs, among other things, were generally excluded from the data
presented in the figure. Contract support costs for these programs
are generally paid from a separate source of funds.
Note 3: Data for fiscal year 1990 include additional funding for
tribes choosing to convert from fiscal year to calendar year
contracts.
Source: GAO's analysis of BIA's data.
Figure 2.2: Tribes'
Contracting of IHS' Programs,
Fiscal Years 1989 Through 1998
(See figure in printed
edition.)
Note: Funds are in constant 1998 dollars.
Source: GAO's analysis of IHS data.
Over the past 10 years, contracting has increased primarily due to an
increase in the overall amount of funds available to contract and in
new contracting procedures. Over the 10-year period, BIA's total
appropriation increased by about $280 million in real terms (i.e.,
adjusted for inflation), while IHS' total appropriation increased by
about $730 million (in real terms). New contracting procedures, such
as self-governance agreements, have also been introduced over the
past 10 years through amendments to the Indian Self-Determination
Act.
Tribes' indirect costs have increased as well. Between fiscal years
1989 and 1996, their indirect cost pools increased by about $250
million (in real terms). This $250 million increase was allocated to
all the programs in the direct cost base, including BIA's and IHS'
programs. In aggregate, the indirect cost pool for all tribes has
increased in proportion to the direct cost base. Figure 2.3 shows
the relationship between the increases in the aggregate indirect cost
pool and increases in the aggregate direct cost base.
Figure 2.3: Aggregate Indirect
Cost Pool and Direct Cost Base
for Agreements Negotiated by
the Department of the
Interior's Office of Inspector
General, Fiscal Years 1989
Through 1996
(See figure in printed
edition.)
Note 1: Funds are in constant 1998 dollars.
Note 2: Data on the indirect cost pool represents tribes' total
indirect costs for all rates negotiated by Interior's Office of
Inspector General. Only a portion of these costs would be allocated
to BIA's and IHS' programs. The direct cost base also represents the
total direct cost base for all tribes' indirect rates negotiated by
Interior's Office of Inspector General. The aggregate direct cost
base data include BIA's and IHS' programs, as well as programs from
other federal agencies, state agencies, private organizations, and
tribes' programs, if applicable.
Source: GAO's analysis of data from the Department of the Interior's
Office of Inspector General.
While the aggregate indirect cost pool increased by $250 million, the
aggregate direct cost base increased by about $1 billion (in real
terms). The ratio of the change is 4 to 1; meaning that, in
aggregate, for every $4 increase in the direct cost base, the
indirect cost pool increased $1.\3
Therefore, as shown in Figure 2.4, the aggregate indirect cost rate
among all the tribes has remained relatively stable at just under 25
percent.
Figure 2.4: Aggregate Indirect
Cost Rate for Tribes' Rates
Negotiated by the Department of
the Interior's Office of
Inspector General, Fiscal Years
1989 Through 1996
(See figure in printed
edition.)
Source: GAO's analysis of data from the Department of the Interior's
Office of Inspector General.
While the aggregate indirect cost rate has remained relatively
steady, the rates of individual tribes have varied from single to
triple digits, depending on each tribe's indirect cost pool and
direct cost base. This variation in tribes' indirect cost rates,
which are subject to a thorough approval process as described in
appendix II, does not necessarily mean that tribes with high rates
receive more funding or that tribes with low rates are more
efficient. For example, if one tribe has an indirect cost rate of 50
percent and a direct funding base of $80,000 in direct salaries,
while another tribe has an indirect cost rate of 20 percent and a
total direct funding base of $200,000, both tribes would receive the
same indirect cost funding of $40,000.
There are two views about whether an indirect cost pool should rise
in proportion to an increase in the direct cost base. The first view
is that the indirect cost pool would be expected to increase as a
tribe contracts additional programs. For example, if a tribe were to
decide to contract a multi-million-dollar health facility with a
large staff, it may need to upgrade its centralized accounting system
and personnel offices to handle the increased workload. The second
view is that a tribe may not always experience increased indirect
costs as it expands its direct costs because many of the elements
included in indirect cost pools are generally fixed costs and
therefore should not increase proportionally to the increases in
direct cost bases. For example, two-thirds of the tribes that
Interior's Office of Inspector General negotiates indirect cost rates
for each have a total direct cost base greater than $1 million.
Under the second view, tribes with large direct bases could generally
contract additional programs without upgrading their accounting
system and personnel offices.
--------------------
\2 Changes in a tribe's contracting volume for BIA's and IHS'
programs may not result in dollar-for-dollar changes in its direct
funding base. The direct funding base consists of the contract
funding amounts for either BIA or IHS programs adjusted to be
consistent with its direct cost base. A small number of tribes
choose to use a �salaries only� or a �salaries with fringe benefits�
direct cost base as opposed to total direct costs. In those cases, a
change in the overall contract volume will affect the direct funding
base only if the change results in different salaries. Also, for
those tribes that use a total direct cost base, that base reflects
adjustments for excluded costs and passthrough funds. Generally,
when a tribe administers a program for which it incurs little or no
administrative expense, that program's costs are excluded from the
direct cost base. For example, programs that a tribe contracts out
to another entity are generally excluded, as are passthrough funds,
such as scholarships and general assistance.
\3 This ratio reflects only the indirect cost component of contract
support costs. According to IHS officials, the ratio would be closer
to 3 to 1 when direct contract support costs and startup costs are
included.
APPROPRIATIONS HAVE NOT KEPT
PACE WITH INCREASES IN
CONTRACT SUPPORT COSTS
-------------------------------------------------------- Chapter 2:1.2
Over the past decade, appropriations from the Congress and subsequent
funding from federal agencies have not been sufficient to reimburse
tribes for their costs of administering BIA's and IHS' programs.
During this period, tribes' allowable contract support costs have
more than doubled for BIA's programs and have more than quadrupled
for IHS' programs. Over the same timeframe, appropriations for
contract support costs did not keep pace, creating shortfalls. The
shortfall for fiscal year 1998 alone totaled $95 million for the two
agencies. Figure 2.5 shows tribes' allowable contract support costs
for BIA's programs and the appropriations provided for them.
Figure 2.5: BIA's Shortfalls
in Contract Support Costs,
Fiscal Years 1989 Through 1998
(See figure in printed
edition.)
Note 1: Funds are in constant 1998 dollars.
Note 2: Data for fiscal years 1989, 1990, and 1991 include allowable
costs and appropriations for administrative cost grants for education
programs as provided by Indian Education Amendments of 1988 (P.L.
100-297, title V). During these 3 years, while administrative costs
grants were being phased in, all or a portion of the administrative
costs grants were paid out of BIA's contract support funds. For
example, the allowable costs for fiscal year 1989 includes about $7
million for administrative cost grants, and a portion of the 1989
appropriation for contract support funds was used to cover those
costs.
Note 3: Data for fiscal year 1990 include additional funding for the
tribes that choose to convert from fiscal year to calendar year
contracts.
Note 4: The total appropriation for contract support costs for
fiscal year 1994 was about $98 million. The appropriation bill
specified that the amount was for fiscal year 1994 and the shortfalls
in funding for contract support costs in previous years. BIA used
about $17.5 million (in 1998 dollars) of the 1994 appropriation to
cover the shortfalls from previous years.
Note 5: Data for fiscal years 1995, 1996, 1997, and 1998 contain
allowable costs and appropriations for BIA's Indian
Self-Determination Fund. The fund was created in 1995 exclusively to
fund contract support costs for new and expanded contracts. Each
year, BIA has had a carryover balance in the fund, meaning that all
the funds appropriated were not spent each year, and some amount was
carried over to the next fiscal year. The amounts included in the
figure as the contract support costs and the appropriations are the
amounts actually expended each year. At the end of fiscal year 1998,
the available carryover balance in the Indian Self-Determination Fund
was $1.88 million.
Source: GAO's analysis of BIA's data.
Although the initial appropriations were less than the allowable
contract support costs for the past 10 years, for fiscal years 1989
through 1993, BIA was generally able to use other funds to alleviate
the shortfall. In fiscal years 1989, 1990, 1992, and 1993, BIA used
reprogramming--or the transfer of unobligated funds from other
programs at the end of the year--to make up for shortfalls. In 1994,
BIA used fiscal year appropriations for contract support funds to
cover prior shortfalls, predominately from fiscal year 1993.
Beginning in 1994, annual appropriations for contract support costs
have been capped in the BIA's annual appropriations acts, and
reprogramming for this purpose has been prohibited.
Figure 2.6 shows tribes' allowable contract support costs for IHS'
programs and the appropriations provided for them. Like BIA, IHS
experienced shortfalls in funding, but did not handle them the same
way. Since 1992, IHS has maintained a waiting list called the Indian
Self-Determination queue (queue) of requests for contract support
funding.\4 (See app. III for information on IHS' allocation of
funding).
Figure 2.6: IHS' Shortfalls in
Contract Support Costs, Fiscal
Years 1989 Through 1998
(See figure in printed
edition.)
Note 1: Funds are in constant 1998 dollars.
Note 2: The contract support costs for fiscal years 1995 through
1998 may be overstated. The data for these years include funding
requests on the Indian Self-Determination queue, which IHS did not
review and approve until funding became available. In fiscal year
1999, IHS has undertaken a review of all the requests on the queue.
The contract support costs in the figure for fiscal year 1998 reflect
changes through April 30, 1999. Furthermore, the costs may also be
overstated because IHS did not subtract the direct funds it uses to
offset contract support costs from the allowable costs. When a tribe
contracts for a share of an area office's or headquarters' programs,
IHS generally considers 20 percent of the funds to offset contract
support costs and reduces that tribes' allowable costs accordingly.
Note 3: IHS has had an Indian Self-Determination Fund since 1988,
and this funding is reflected in the data for fiscal years 1991
through 1998. The Indian Self-Determination Fund contained $2.5
million every year from fiscal years 1988 through 1992, then was
increased to $5 million in fiscal year 1993, and to $7.5 million
annually for fiscal years 1994 through 1998.
Note 4: IHS' funding in 1991 includes $24 million for direct
contract support costs for pre-1988 contracts. IHS began paying
direct contract support costs to tribes in fiscal year 1988.
Source: GAO's analysis of IHS' data and budget requests.
The 1988 amendments to the act require the agencies to provide
contract support costs to tribes for their reasonable costs
associated with administering BIA's and IHS' programs. However,
since at least 1993, neither BIA nor IHS has requested full funding
for these costs, nor has the Congress appropriated full funding for
them. The agencies did not request full funding for two reasons.
First, it is difficult for them to predict what the total need for
indirect cost funding will be in advance. The agencies do not know
which tribes will be contracting which programs, at what level the
contracted programs will be funded, and what a tribe's indirect cost
rates will be. Second, in addition to the difficulty of predicting
the future contract support requirements, the agencies have had other
funding priorities in recent years. For example, BIA's priorities
have been to seek additional appropriations for law enforcement to
reduce crime on the reservations and for Indian education.
Beginning in fiscal year 1994, through the annual appropriations
acts, the Congress has specifically capped the amount of funds BIA
could spend on reimbursing tribes for their contract support costs.
A similar cap was introduced for IHS in fiscal year 1998. In
distributing their limited funds for contract support costs, BIA and
IHS have developed two different distribution methods. (See app.
III for a discussion of funding distribution methods for BIA and
IHS).
Tribes are engaged in litigation to enforce the act's full funding
language and to recover funding shortfalls. In one recent case
involving fiscal year 1994, the Interior Board of Contract Appeals
decided that under both the Indian Self-Determination Act and the
individual contract agreements, a tribe is entitled to full funding
of its contract support costs�i.e., indirect costs�in spite of a
specific limitation on the amount of such funding in the fiscal year
1994 appropriations act.\5 The theory of this case is that both the
act and the contract bind the federal government to fully fund
contract support costs. According to the Board, provisions of the
act and the agreement stating that funding is subject to the
availability of appropriated funds do not eliminate the requirement
for full funding. To eliminate that, the appropriations act would
have to clearly reveal congressional intent to override the statutory
requirement for full funding of contract support costs. BIA has
appealed this decision to the Court of Appeals for the Federal
Circuit.\6
However, recent legislation could affect the court's decision. In
1998, the Congress enacted legislation to prevent the payment of any
shortfall in contract support funding for fiscal years 1994 through
1998.\7 This provision retroactively establishes that amounts
appropriated or earmarked in committee reports are all the funds
available to pay for contract support costs for these fiscal years.\8
It may affect other cases presently before the Board of Contract
Appeals.
--------------------
\4 In a recent decision, Shoshone-Bannock Tribes of the Fort Hall
Reservation v. Shalala, 988 Fed. Supp. 1306 (D.C. Or. 1997), a
federal district court determined that the use of the queue for new
and expanded contracts is in violation of the Indian
Self-Determination Act's provision on contract support funding. IHS
is currently rewriting its policy on contract support costs to
eliminate the queue. Under a draft policy, IHS plans to continue
listing requests for new or expanded contract support funding, but
will distribute funding to all tribes on the list, as funding is
available. The funds will be distributed according to greatest
needs. If funds are not available, then the unfunded requests will
be considered part of the year's shortfall.
\5 Appeal of Miccosukee Corp., 31 IBCA 389, Dec. 4, 1998, reaffirmed
Mar. 2, 1998 98-2 IBCA. The Miccosukee case is now on appeal to the
Court of Appeals for the Federal Circuit. Another IBCA case
involving fiscal year 1995 has been added to the Miccosukee appeal,
Oglala Sioux Tribal Public Safety Department.
\6 By contrast, an earlier federal appellate court decision has
described the words of the act as a limitation on the amount of
funding BIA had to distribute. This decision did not address the
issues in the Miccosukee case. However, the court's characterization
was not essential to the court's decision in this case. Ramah Navajo
School Board, Inc. v. Babbitt, 87 F. 3d 1338, 1341 (Cir. D.C.
1996).
\7 Section 314 of the Omnibus Consolidated and Emergency Supplemental
Appropriations Act for fiscal year 1999, P.L. 105-277, 112 Stat.
2681-288, Oct. 21, 1998.
\8 The legality of this provision has been challenged in several
proceedings and cases, Seldovia Village Tribe v. Shalala, IBCA Nos.
3782-97, 3862-97, and 3863-97; Cherokee Nation of Oklahoma v.
Shalala, IBCA Nos. 3877-98, 3878-98, and 3879-98; California Rural
Indian Health Board, Inc. v. Shalala, (D. N. Cal. 1989); and
Shoshone-Bannock Tribes of the Fort Hall Reservation v. Shalala, 988
Fed. Supp. 1306 (D. Or. 1997).
THE FUTURE AMOUNT OF INCREASES
IN CONTRACT SUPPORT COSTS IS
DIFFICULT TO PREDICT
---------------------------------------------------------- Chapter 2:2
Predicting the future amount of increases in contract support costs
for BIA's and IHS' programs is difficult because of the unpredictable
nature of (1) the future levels of appropriations for BIA's and IHS'
programs, (2) the extent to which tribes will choose to contract new
programs from the BIA and IHS, and (3) the changes in tribes'
indirect cost pools. Increases in the dollar amounts contracted will
occur when future increases in program funding are added to existing
contracts or when tribes begin contracting new programs. If the
tribes' indirect cost pools also continue to increase and the
aggregate indirect cost rate remains at about 25 percent, then as we
stated earlier, every $4 increase in the direct cost base for BIA or
IHS, either through increasing existing contracts or contracting new
programs, will lead to an additional contract support requirement of
$1.
For fiscal year 1998, tribes' allowable contract support costs for
these programs were about $375 million. In its fiscal year 2000
budget request, BIA estimated, based on the tribes' current allowable
costs, that the contract support requirement for tribes' existing
contracts of BIA's programs would rise to about $145 million, an
increase of $13 million over the fiscal year 1998 level. IHS
estimated its fiscal year 2000 requirement for contract support
funding for its existing contracts will be almost $295 million. For
new contracts, BIA estimated it would need an additional $5 million
to fund tribes' support requirements during fiscal year 2000, and IHS
estimated it will need $12.5 million for that year.
Since tribes currently contract programs representing only about half
of all of BIA's and IHS' appropriations, the potential exists for
significant increases in tribes' contracting. If current contracting
levels doubled, and assuming indirect cost rates stay about the same,
contract support requirements could also double from the current
requirement of almost $375 million to about $750 million. However,
some of this increase would likely be offset by decreases in BIA's
and IHS' administrative costs. For fiscal year 1997, BIA reported
that tribes' contracts totaled over $1 billion out of a total
appropriation of about $1.7 billion, or about 64 percent. For fiscal
year 1998, IHS reported that about 45 percent of its program funding
was contracted by tribes�almost $892 million out of a total
appropriation of more than $2 billion.
TRIBES SAID THEY HAVE BEEN
ADVERSELY AFFECTED BY SHORTFALLS
IN FUNDING FOR CONTRACT SUPPORT
COSTS
============================================================ Chapter 3
According to officials of the more than 90 tribes with whom we
communicated during the course of this review,\1 tribes have been
adversely affected by the shortfalls in contract support funding.
The effects varied, depending on the number and the type--or
types--of methods the tribes employed to deal with these funding
shortfalls. To compensate for them, nearly all the tribes have
reduced their indirect costs to manage programs within the funds
provided, thereby lessening administrative productivity and
efficiency. Furthermore, many tribes have had to cover the
shortfalls with tribal resources, if available, thereby foregoing the
opportunity to use those resources to promote the tribes' economic
development. Many tribes had to use direct program funds to cover
the shortfalls, thereby reducing direct program services. In
addition, a few tribes said they have refused or postponed the
opportunity to contract programs, thereby stalling their progress
toward self-determination.
As has been reported by various studies over the past 15 years, as
well as emphasized to us by tribal officials, the problems posed by
funding shortfalls go beyond BIA's and IHS' contracts. That is, many
tribes contract programs from other federal agencies, as well as from
the states and private organizations. Although funding entities
other than BIA and IHS are also allocated their share of a tribe's
indirect costs, as required by federal cost-allocation principles,
some of these other entities allow the recovery of less than their
allocated share of costs and others allow none. As has been reported
by various studies, such situations worsen the shortfalls and
exacerbate their effects on tribes. The scope of our review did not
include funding entities that are not subject to the Indian
Self-Determination Act. Nevertheless, because shortfalls attributed
to such entities were an important issue for the tribal officials we
spoke with, we have included their views on the matter.
--------------------
\1 Appendix IV lists the tribes we communicated with during our
review. As noted in the appendix, representatives of 77 tribes and
tribal organizations attended one or more of the open forums we held
to discuss contract support issues, and 42 tribes and tribal
organizations (including 17 that had not attended a forum) submitted
letters or other documents pertaining to shortfalls and their
effects. Not all of the tribal representatives spoke at the forums,
however; in many cases, representatives indicated their agreement
with the observations of other representatives but contributed no
examples of their own. Furthermore, we did not use a standardized
data collection instrument to gather views of tribal officials.
Thus, we cannot definitively report how many of the tribes with whom
we communicated were affected by shortfalls in contract support
funding, nor can we report which or how many methods each tribe used
to cope with shortfalls.
SHORTFALLS IN FUNDING FOR
CONTRACT SUPPORT COSTS HAVE
ADVERSELY AFFECTED TRIBES IN
VARIOUS WAYS
---------------------------------------------------------- Chapter 3:1
Shortfalls in funding for contract support costs have adversely
affected tribes in various ways, depending on the number and the type
of methods the tribes used to compensate for such shortfalls. Nearly
all of the tribes we spoke with said they have used not one, but a
combination of methods to deal with the shortfalls' effects. For
example, in addition to cutting back on their indirect expenditures
as much as possible, they have also had to dip into tribal resources
and program resources to compensate for the shortfalls. As a result
of such measures, the tribes' administrative infrastructures (e.g.,
personnel, computer systems, and accounting systems) have
deteriorated; opportunities to improve the tribes' economic
conditions have been lost; and program services have been diminished.
In only a few cases did the tribes indicate that they have refused
contracting activities because they could not afford them, although
several tribes mentioned having considered that option.
THE TRIBES HAVE PARED THEIR
INDIRECT COSTS TO MANAGE
PROGRAMS WITHIN AVAILABLE
FUNDING
-------------------------------------------------------- Chapter 3:1.1
Nearly all of the tribal officials mentioned having had to cut back
on their indirect costs to manage programs with the available
funding. The tribal chairman of one Oklahoma tribe said that she and
her staff had taken various measures to make up for shortfalls in
funding for contract support costs. For example, they reduced staff
salaries, shared job tasks, left vacant positions unfilled, reduced
the use of air conditioning in the administrative offices, and turned
off the lights when not in use. The chairman refused to accept
either a salary or compensation for the use of her personal vehicle
for tribal business purposes. Officials of many other tribes
reported having to leave critical vacancies unfilled, forego staff
salary increases, and postpone or forego equipment purchases or
repairs. Furthermore, tribal officials said, at some point it
becomes impossible for any more reductions to occur. For example,
one Alaska tribe reported that it cannot make any additional cutbacks
in administrative activities without risk of being unable to meet the
terms and conditions of its funding agreement.
According to tribal officials, tribes can reduce their indirect
expenditures only so much before the reductions negatively affect
their ability to maintain productivity and efficiency. For example,
according to a letter submitted by a Washington tribe, the tribe's
need to contain its indirect costs has prevented it from hiring
another accountant to assist with its backlog of
accounting/bookkeeping work, particularly reconciling its monthly
general ledger. Because the tribe cannot afford to pay competitive
salaries, it has had to hire untrained or underqualified people
instead of a certified public accountant. Similar difficulties in
attracting qualified personnel because of the inability to pay
competitive salaries were frequently mentioned by other tribal
officials.
According to a letter submitted by an organization that represents 11
northern tribes, funding shortfalls in contract support costs �make
an efficient organization inefficient.� According to the
organization's letter, shortfalls in BIA's funding for contract
support costs have caused delays in upgrading the organization's
financial management system. The planned upgrade included purchasing
and installing new accounting software to enable more efficient
compliance with OMB's audit guidelines for nonprofit organizations;
leasing new accounting workstations and a network server to ensure
year 2000 compliance and adequate computing capacity for the new
accounting software; providing training on the use of the new
software for all accounting staff; and revising the organization's
accounting manual to reflect system changes and to help ensure that
proper checks and balances were maintained during the switch to the
new system. Due to shortfalls in BIA's contract support funding,
however, the organization had to delay the planned training and the
revision of the accounting manual. These delays, in turn, have
compounded problems the organization has experienced in installing
and operating the new software and getting the fiscal year accounts
ready for the auditors.
TRIBES HAVE USED THEIR OWN
RESOURCES AND PROGRAM
RESOURCES TO COVER
SHORTFALLS IN FUNDS FOR
CONTRACT SUPPORT COSTS
-------------------------------------------------------- Chapter 3:1.2
According to the tribal officials we interviewed, a combination of
tribal resources and program resources have been used to make up for
shortfalls in funds for contract support costs. Tribes drew upon
their own resources from several sources, including trust funds and
tribal businesses. For example, a New Mexico tribe provided
documents showing withdrawals of hundreds of thousands of dollars
from its trust accounts in fiscal year 1998 to pay for indirect costs
(the largest portion of contract support costs). The tribe would
otherwise have used its trust funds to purchase land or to improve
its infrastructures. A Washington tribe said it has used large
amounts of resources from its geoduck-processing enterprise to cover
funding shortfalls.\2 According to a tribal official, if funding
shortfalls did not have to be compensated for, the tribe would have
used its tribal resources to expand its processing business or to
supplement its federally funded programs.
Tribes that are waiting for contract support funds from IHS feel that
they are the hardest hit by shortfalls in contract support funding,
as they must bear all the costs of administering the contracted
programs (or choose to postpone the contract until the funding can be
provided).\3
These costs can be significant, and no provision is in place to
reimburse tribes for their contract support expenditures during their
years on the queue. One Nevada tribe reported that shortfalls in
contract support funding have seriously affected its ability to
administer health services and its administration of BIA's programs.
Specifically, for 2 years the tribe had to operate the contracted
hospital, a �huge and costly undertaking,� without any contract
support funding from IHS. When the tribe contracted to take over
hospital operations in fiscal year 1996, it was to receive about $7.3
million to do so: more than $5 million for direct costs; over $1.4
million for indirect costs (in accordance with the tribe's negotiated
indirect cost rate of 26.6 percent); about $495,000 for other
contract support costs; and about $367,000 for startup costs. The
tribe planned to use the startup funds to hire additional staff and
install a new accounting system to handle the planned expansion of
services. Furthermore, the tribe recognized that the administrative
transition would require extensive development and training and the
assistance of specialists and consultants.
When the tribe subsequently received no funding for contract support
costs for the first 2 years, it said it had to use a significant
portion of the funds designated for direct costs to pay for
administrative support. When the tribe took over hospital
operations, 27 of the 66 staff positions were vacant. The tribe had
planned to immediately fill many of the vacancies, but it had to
postpone hiring for all but the most critical ones for the first 2
years. In addition, without contract support costs, the tribe could
not afford to resolve critical deficiencies, including some
safety-related ones. Nor could the tribe afford to replace certain
pieces of medical equipment or refer patients to specialists when
needed, except in cases deemed emergencies or needing acute care.
For the first 2 years of tribal operation, no optometric or podiatric
care was available at the hospital, despite the tribe's large
diabetic population. According to the tribe, program administration
suffered as well, particularly in the areas of personnel, fiscal
management, and accounting. For example, the tribe found it
extremely difficult to properly monitor and reconcile purchases,
disbursements, and the related statistics necessary to efficiently
run the hospital, and numerous budget revisions were necessary.
According to a number of tribes, drawdowns from tribal resources can
also result in lost opportunities for tribes to advance their social
or economic development. If they had not needed to use tribal
resources to make up for shortfalls in funding for contract support
costs, some tribes said they would have used their resources to
supplement program funding; others said they would have used the
resources to �grow� their tribal businesses or expand their economic
development. For example, officials of an Alaskan Indian community
said that they routinely use tribal resources to make up for
shortfalls in contract support funding. Otherwise, the community
would have used its resources to supplement direct program services
(such as law enforcement and emergency services) and to support
community enterprises, community jobs, and economic development.
The effect on some tribes has been more than one of lost
opportunities for program supplementation or economic development.
For example, a letter from a Maine tribe reported that it �cannot
continue to absorb contract support shortfalls. The tribe's
financial stability is being jeopardized by the lack of adequate
contract support.� The tribe said that, since fiscal year 1991, its
accumulated shortfalls of about half a million dollars �have created
a deficit within the tribe's general fund budget.� Thus, the tribe
has had to use direct program dollars to compensate for the
shortfalls; it has also had to lay off vital tribal employees and
reduce expenditures. Such cutbacks, said the tribe, have made it
difficult to develop and maintain the required management systems
necessary to comply with the requirements of federal contracts and
provide direct services to its tribal members.
Many tribes continue to use their own resources as supplemental
funding; nevertheless, some tribes have had no choice but to use
direct program dollars to cover indirect expenses. For example,
according to a letter from a New Mexico tribal organization, the
failure of an agency to meet its contract support obligations
�creates a financial vacuum that can only be filled through the use
of unrestricted funds.� But for nonprofit organizations, such as this
one, unrestricted funds are quite limited, so the organizations bear
�a tremendous burden� when those funds must be used to make up for
unrecovered indirect costs. A reduction in indirect expenditures is
not necessarily an effective solution to the problem. For example,
according to the same New Mexico tribal organization, about
two-thirds of its indirect cost pool consists of expenses for
salaries and fringe benefits. Thus, if meaningful reductions in
costs are to take place, they will surely affect the size or the
quality of the staffing. Because its staff is small in relation to
the complexity, the volume, and the diversity of the organization's
operations, the organization's representative believes that any
reduction in staff would significantly impair it's ability to provide
the necessary program services.
--------------------
\2 A geoduck (pronounced gooey-duck) is a large edible clam,
sometimes weighing over 5 pounds, that is found in Pacific coastal
waters.
\3 IHS provides contract support funding only to tribes that have
ongoing contracts (see app. III). When tribes first indicate a
desire to contract a program or to expand an existing one, they are
put on a waiting list, or queue, for funding. In some cases, a tribe
can wait on the queue for 2 or 3 years before receiving contract
support funds for a new or expanded program. In the Shoshone-Bannock
case, the use of the queue was held to be beyond IHS' authority.
A FEW TRIBES HAVE POSTPONED
OR REFUSED PROGRAMS BECAUSE
THEY CANNOT AFFORD TO
ADMINISTER THEM
-------------------------------------------------------- Chapter 3:1.3
A few tribes said they have had to postpone or return management of
their contracted programs to the agencies, or are considering doing
so, because they cannot afford to administer them. For example, in a
December 1998 letter, a Nevada tribe said that, as a relatively small
tribe without many other economic resources, it has had to postpone
for 5 years its assumption of the IHS' Contract Health Service
program. According to IHS officials, some tribes have found
themselves in a similar situation. According to these officials,
some tribes on the funding queue postponed contracting programs until
they reached the top of the funding queue because they could not
afford to run the programs without contract support funding.
Other tribes have not yet retroceded or returned the management of
their contracted programs to the agencies, but have considered doing
so or are holding that decision in reserve. For example, by
resolution of its legislative council, an Arizona tribe authorized
the retrocession of programs for which insufficient or no contract
support funding has been provided. Similarly, a Washington tribe
said that it coped with its fiscal year 1997 contract support
shortfall by not filling five positions that are key to the tribal
government infrastructure and that normally would be funded from the
indirect cost pool. According to tribal official, �Each year we
receive less and less to administer programs and services to our
tribal members and the Indian people living in our service area; and
though we work very hard to minimize this negative impact, we fear
that the day might come when we may have to retrocede our programs
back to BIA and IHS.�
Officials of several tribes, however, said that they are reluctant to
retrocede programs back to the federal government because they were
unhappy with the level of services they received when federal
agencies ran the programs. For example, an official of an Oklahoma
tribe said that, despite funding shortfalls, his tribe continues to
administer contracts because it feels it can provide better services
to its members than the federal government had provided.
LACK OF ADEQUATE FUNDING FROM
OTHER ENTITIES CONTRIBUTES TO
SHORTFALLS IN FUNDS FOR
INDIRECT COSTS
---------------------------------------------------------- Chapter 3:2
Many of the tribal representatives we interviewed said that much of
their funding shortfalls for contract support costs, as well as the
associated negative effects, arises from contracting with funding
entities other than BIA and IHS, such as other federal agencies,
state governments, and private organizations. Frequently, other
entities with which tribes contract�under authorities other than the
Indian Self-Determination Act--limit indirect cost recovery; others
allow no recovery of indirect costs. Although these policies and
practices, which have existed for years, exacerbate the negative
effects of funding shortfalls, many tribes continue to contract such
programs.
Entities other than BIA and IHS are not subject to the provisions of
the Indian Self-Determination Act. Accordingly, they are not
required to pay indirect costs over and above the program amount they
provide to tribes that contract with them. Nevertheless, under the
provisions of OMB Circular A-87, each such entity is allocated its
share of the costs that make up a tribe's indirect cost pool. Thus,
when one funding entity does not reimburse its share of the indirect
costs incurred, that shortfall may be borne by the tribe. Some of
the funding entities that are not subject to the Indian
Self-Determination Act and some statutes place a limit on the
indirect costs that a tribe can recover. Among the entities and
programs that tribal officials mentioned as limiting the recovery of
indirect costs were the Department of Health and Human Services' Head
Start program, the Department of Labor's Job Training Partnership Act
program, and various state programs.
According to various tribal officials, Department of Justice
programs, as well as many programs funded by grants from private
sector organizations, do not allow any recovery of indirect costs.
For example, the Department of Justice's Community Oriented Policing
Services Universal Hiring Program, which provides grant money for
hiring police officers, specifically restricts the use of the grant
money to salaries and benefits. No funds can be diverted for such
other costs as uniforms or weapons. Despite their need for increased
law enforcement, several tribal officials said they avoid contracts
and grants that allow little or no recovery of indirect costs. For
example, in a 1996 letter to the Department of Justice, an Oklahoma
tribe's police department declined a grant from Justice's program of
about $107,000 for two full-time officers. Citing its inability to
fund the indirect costs allocable to such a grant, the tribal police
department said it must �respectfully decline on receiving this most
important source of funding which would have been a great asset in
police operations.�
The problem posed by funding entities that do not share in funding
indirect costs is not a new one. In discussing the problem of
nonrecovery, a 1997 study of contracting costs cited the following
excerpt from a 1983 letter by Interior's Inspector General to the
Deputy Director of the Office of Management and Budget as going
�right to the heart of the matter.�
�The indirect cost guidelines [OMB Circular A-87] require an
allocation of allowable costs to all benefiting programs to establish
an indirect cost rate. That would be a fair and equitable process if
every agency honored the established rate; but they do not. Some
cite legislative restrictions; others cite administrative
regulations; and a few base their refusal on the notion that a good
administrator is obliged to negotiate a lower rate. What we have
here is a �Catch 22' situation. One set of rules says that you can
have an indirect cost rate, but other rules say you cannot be paid on
the basis of that rate . . .�\4
Although the problem of nonrecovery is particularly vexing to tribes
and has been so for many years, its solution has been elusive. The
major challenge with solving the problem is that grants and contracts
awarded to tribes by agencies other than BIA and IHS are not, by
their very nature, intended for the sole or primary use of Indian
tribes. Instead, they are designed for use by an array of
institutions, including state and local governments and nonprofit
organizations. The agencies that fund these grants and contracts
have the authority to establish the amount of indirect costs, if any,
that may be recovered from the contract or grant funds. Thus, in
deciding whether to apply for such a contract or grant, any entity�be
it a state or local government or an Indian tribe�must consider its
financial ability to handle any accompanying restrictions on indirect
cost recovery. In some cases, such as with tribes that receive most
or all of their funds from the federal government and with nonprofit
organizations, little if any unrestricted, or disposable, income is
available to make up for indirect costs that are not reimbursed by
funding entities. Although we understand and include in this report
tribes' concerns about their inability to fully recover their
indirect costs from all funding entities with which they contract,
the scope of our review did not include funding entities other than
those specified in the Indian Self-Determination Act. Accordingly,
we present no conclusions or recommendations on this matter.
--------------------
\4 James M. Sizemore, CPA, Determining the True Cost of Contracting
Federal Programs for Indian Tribes, Sec. Ed. (the Northwest
Portland Area Indian Health Board and the Affiliated Tribes of
Northwest Indians, Portland, Oregon, May 1997), p. 32.
FEDERAL POLICIES AND PRACTICES FOR
PAYING CONTRACT SUPPORT COSTS ARE
INCONSISTENT
============================================================ Chapter 4
Inconsistencies in determining and funding contract support costs
exist. Since 1988, BIA and IHS have reimbursed tribes for different
categories of contract support costs. This difference has caused
confusion among tribes and differences in funding from the two
agencies. In addition, since 1992, the two regional offices within
Interior's Office of Inspector General that are responsible for
negotiating indirect cost rates with tribes have calculated
adjustments to indirect cost rates differently. In certain
circumstances, tribes negotiating indirect cost rates with the
Western Region receive higher indirect cost rates than they would
receive if the Eastern Region's calculations had been used.
Furthermore, BIA and IHS have not been making the necessary
adjustments when tribes receive a final indirect cost rate after
having been initially provided indirect funding based on a
provisional indirect cost rate.\1
Moreover, having the rate-setting function conducted by Interior's
Office of Inspector General is inconsistent with the audit function
of that office.
--------------------
\1 A provisional indirect cost rate is calculated based on a tribe's
estimated direct and indirect costs and is applied until a final rate
is calculated based on actual costs, which are typically audited at
the end of a fiscal year.
BIA AND IHS HAVE IMPLEMENTED
CONTRACT SUPPORT PROVISIONS
DIFFERENTLY
---------------------------------------------------------- Chapter 4:1
BIA and IHS have implemented the contract support provisions in the
Indian Self-Determination Act, as amended, differently. Since 1988,
IHS has provided additional contract support funding to tribes, for a
cost category called �direct contract support costs,� but BIA has
not. In 1996, the two agencies issued joint regulations implementing
the act and its amendments, and these regulations identify direct
contract support costs as something that tribes should include in
their contract proposals for BIA's and IHS' programs. Currently, IHS
is reconsidering the types of costs it allows as direct contract
support costs, while BIA plans to consider requests for funding
direct contract support costs.
In 1988, IHS began paying direct contract support costs based on its
interpretation of the 1988 amendments to the Indian
Self-Determination Act. In funding these costs, IHS recognized that
certain types of costs contractors incurred were being categorized as
direct costs under OMB's guidance that should be reimbursed by IHS as
direct contract support costs. Included in IHS' justification for
the new category of direct contract support costs were such items as
equipment repairs and replacement, workers' compensation,
unemployment taxes, and general insurance. These costs are either
not incurred by IHS in administering the program (i.e., costs unique
to tribes, such as insurance) or costs paid by IHS from resources
other than those under contract (i.e., equipment, workers'
compensation, and unemployment taxes).
In determining the amount of direct contract support funding to
provide, IHS' general practice has been to provide, for such benefits
as workers' compensation and unemployment taxes, an amount equal to
15 percent of a tribe's direct salaries, plus an amount to cover the
actual costs of other types of direct contract support costs, such as
special training costs.\2 However, IHS area offices have discretion
to negotiate with tribes the amount of funding provided for direct
contract support costs. IHS headquarters officials have recently
raised some concerns about the duplicate payment of costs that the
agency has allowed as direct contract support costs. As a result,
IHS has proposed a new policy that will make direct contract support
costs subject to negotiations and that will eliminate the 15 percent
rule. According to IHS officials, this policy is more rigorous;
however, it will only apply to new or expanding contracts. The
proposed policy does not provide the opportunity for IHS officials to
revise direct contract support costs for existing contracts unless a
tribe asks for its costs to be reviewed.
After the 1988 amendments to the Indian Self-Determination Act, BIA
did not change its policy regarding the use of contract support funds
and has not requested any funds to pay direct contract support costs
over and above the base amount in a program's contract. In a 1993
memorandum to all BIA area directors, contract officers, and budget
officers, the acting Deputy Commissioner of Indian Affairs stated
that the payment of certain direct contract support costs could be
justified under the Indian Self-Determination Act, but that BIA did
not have sufficient contract support funding to pay for these costs.
Furthermore, the acting Deputy Commissioner stated that the use of
contract support funds to pay for direct contract support costs was
in �violation of long-standing Bureau policy.�
The different implementation of direct contract support costs by BIA
and IHS has caused confusion among tribes and funding differences
between the two agencies' programs. To help standardize the
implementation of the act by BIA and IHS, the Congress directed the
two agencies to issue a single set of regulations on implementing the
act. The final joint regulations were issued in June 1996. Despite
BIA's position on direct contract support costs, the joint
regulations require that contract proposals contain �an
identification of the amount of direct contract support costs . . .
.� Confusion still exists because BIA has not changed its position on
direct contract support costs to follow the new regulations.
However, on February 24, 1999, in testimony before the U.S. House of
Representatives' Committee on Resources, the Assistant Secretary for
Indian Affairs stated that BIA is reexamining its position on direct
contract support costs and �will evaluate tribal requests for payment
of certain direct costs.� Other Interior officials have pointed out
that because the Congress has capped BIA's annual appropriations for
contract support costs at less than full funding since 1994,
recognizing an additional category of contract support costs may not
result in any additional funding to the tribes. Instead, it would
only increase the amount of the shortfall, unless the Congress
provided additional funding. Estimates of direct contract support
costs for BIA's programs have ranged between about $10 million and
about $30 million annually.
--------------------
\2 In the past, IHS paid direct contract support costs for such items
as long-distance telephone service and postage but has stopped this
practice as funds for these functions have been transferred with
direct program funds.
INCONSISTENCIES IN CALCULATING
AND USING INDIRECT COST RATES
---------------------------------------------------------- Chapter 4:2
Inconsistencies exist in the calculation of indirect cost rates by
Interior's Office of Inspector General and in the use of certain
types of rates by BIA and IHS. Since 1992, two regional offices
within Interior's Office of Inspector General, the primary office
responsible for negotiating indirect cost rates with tribes, have
calculated adjustments to indirect cost rates differently. Under
certain circumstances, tribes receive higher indirect cost rates
under the Western Region's calculation method than they would receive
under the Eastern Region's method. Furthermore, for one particular
type of indirect cost rate, BIA and IHS are not applying the rate
correctly. That is, when a provisional-final rate is used and
funding has been provided based on the provisional rate, BIA and IHS
are not later adjusting the contract funding as necessary to reflect
the final rate.
INTERIOR'S OFFICE OF
INSPECTOR GENERAL USES TWO
DIFFERENT CALCULATION
METHODS
-------------------------------------------------------- Chapter 4:2.1
Since 1992, a significant difference has existed between how the
Western and Eastern Regions of Interior's Office of Inspector General
have calculated the carryforward adjustment for tribes with �fixed
with carryforward� indirect cost rates. Most tribes have a �fixed
with carryforward� type of indirect cost rate, which means that the
rate is fixed during the year that it is used; after that year has
ended and the actual costs have been audited, the rate is
recalculated based on the actual costs. If the fixed rate was too
high or too low, an adjustment is made to the next year's rate.
Through that adjustment, referred to as the �carryforward�
adjustment, any overpayment in indirect costs can be recovered.
While the Eastern Region of Interior's Office of Inspector General
requires that all overpayments be recovered through a carryforward
adjustment, in certain circumstances, the Western Region allows an
overpayment in indirect costs from one agency to be used to offset an
underpayment from another agency. According to officials in the
Office of Inspector General, the Western Region's method of
calculating indirect cost rates produces higher rates than the
Eastern Region's method.
Although the Western Region's method helps tribes, it is contrary to
Interior's legal opinions. In a 1990 decision, its Office of the
Solicitor determined that one agency's funds could not be used to
offset deficits in funding from another agency. Interior's Office of
Inspector General is aware of the different calculation methods and
would like to standardize the process; however, it cannot do so at
this time, as any changes to the current process require federal
court approval. In its recent decision on the Office of Inspector
General's method to calculate indirect cost rates, the United States
Court of Appeals for the Tenth Circuit ruled that the method was
invalid.\3 Subsequently, court orders were issued allowing the
resumption of the negotiation of indirect cost rates for fiscal years
1998 and 1999 under the system in place prior to the Tenth Circuit
decision. According to the Inspector General's Office of General
Counsel, the orders prevent the Office of Inspector General from
changing the process of negotiating indirect cost rates without the
approval of the District Court.
--------------------
\3 Ramah Navajo Chapter v. Lujan, 112 F. 3d 1455 (10\th Cir.
1997).
BIA AND IHS ARE NOT MAKING
NECESSARY ADJUSTMENTS FOR
PROVISIONAL-FINAL INDIRECT
COST RATES
-------------------------------------------------------- Chapter 4:2.2
When tribes use a provisional-final rate, BIA or IHS must determine
whether an overpayment was made, and if so, recover it. The Office
of Inspector General does not adjust the indirect cost rate, as it
does with the fixed with carryforward type of rate, to recover any
overpayments. The funding agencies should use the provisional
indirect cost rate to determine a tribe's initial funding for
indirect costs. Usually, 2 years later, a final rate will be issued
based on a tribe's actual audited costs. The final rate may be the
same as, higher, or lower than the provisional rate. If the final
rate is higher, then the tribe's funding for indirect costs would
have increased and if the final rate is lower, then the tribe's
funding for indirect costs would have decreased, in which case an
overpayment may have occurred. Several of the BIA and IHS area
office officials we talked to during our review told us that they
were not making funding adjustments when the final indirect cost
rates were issued for tribes using provisional-final indirect cost
rates.
For example, if a tribe with an IHS direct funding base of $1 million
had a provisional rate of 25 percent, the tribe would receive
$250,000 in funding for indirect costs allocated to IHS' program for
that fiscal year. If that tribe's final indirect cost rate for that
year was 20 percent, then the tribe actually only needed $200,000
rather than $250,000 and the tribe should return the overpayment of
$50,000 to the agency. If the final rate was higher than the
provisional rate, the agency should provide additional funding to the
tribe.
BIA officials noted that because it has not been able to fully fund
tribes' indirect costs, it is unlikely that any overpayments have
occurred. To continue using the same example, if the tribe received
only 80 percent of the required $250,000 to begin with, that would
mean the tribe received $200,000. Even with the lower final rate of
20 percent, the tribe therefore, would not have been overpaid.
However, based on our discussions with BIA and IHS officials, it
appears that neither agency makes this calculation to determine
whether, in fact, overpayments have been made to those tribes using
provisional-final indirect cost rates.
RATE-SETTING FUNCTION IS
PERFORMED BY INTERIOR'S OFFICE
OF INSPECTOR GENERAL
---------------------------------------------------------- Chapter 4:3
In 1986, the Office of Management and Budget designated the
Department of the Interior as the cognizant agency for developing
indirect cost rates for tribes. Within Interior, the Office of
Inspector General performs the rate-setting function.\4 That office
is also responsible, however, for auditing expenditures by tribes
under departmental contracts as well as reviewing and processing
tribes' audited financial statements on which their indirect cost
proposals are based.
The inherent conflict between the functions performed by Interior's
Office of Inspector General has long been recognized. In 1989, OMB
concluded that having Interior's Office of Inspector General
negotiate indirect cost rates was contrary to the principle of
separation of duties under OMB Circular A-123, �Internal Controls,�
and counter to the intent of the Inspector General Act of 1978. In
1989, recommendations to move the rate-setting function were made,
but were not implemented, partly because tribes objected to the
transfer. Tribes view Interior's Office of Inspector General as a
fair and impartial representative of the federal government and were
concerned that moving the rate-setting function into Interior's
Office of Policy, Management, and Budget (now the Office of Policy,
Management, and Budget and Chief Financial Officer) would politicize
the process, preventing the office from being impartial and neutral
in setting indirect cost rates. The rate-setting function was not
moved, and it continues to be performed by Interior's Office of
Inspector General.
--------------------
\4 The Office of Inspector General and its predecessor organizations
have been negotiating indirect cost rates with tribes since 1976,
approximately 1 year after the enactment of the Indian
Self-Determination and Education Assistance Act in 1975. In
contrast, at HHS, the rate-setting function is performed by the
Division of Cost Allocation within the Department's Program Support
Center, not by the department's Office of Inspector General.
CONCLUSIONS
---------------------------------------------------------- Chapter 4:4
Two inconsistencies in determining funding for contract support costs
continue to cause confusion for tribes who receive self-determination
funds, and, more importantly, cause funding inequities among the
tribes. Although BIA and IHS issued joint regulations for
implementing the program, the inconsistent payment of direct contract
support costs continues because they have not yet changed or
coordinated their practices and policies to reflect the regulations.
The agencies also do not make proper adjustments in contract support
funding based on provisional-final rates. Because they do not make
these adjustments, they do not know if they are providing the correct
amount of funding to tribes.
The importance of making the funding of contract support costs easier
to understand and implement extends to the way in which the funds are
audited. The calculation and use of indirect rates is a complex
process, which varies by tribe, and even though tribes provide
independent audited financial statements, the federal government must
maintain an independent audit capability over indirect rates.
Because the Office of Inspector General is both the rate-setting and
audit entity for tribes' indirect rates, a potential conflict of
interest exists in ensuring this audit capability.
RECOMMENDATIONS TO THE
SECRETARIES OF THE INTERIOR AND
HEALTH AND HUMAN SERVICES
---------------------------------------------------------- Chapter 4:5
We recommend that the Secretaries of the Interior and of Health and
Human Services ensure that
-- BIA and IHS work together, and with the Congress and Indian
tribes, to coordinate their current practices and policies
governing the payment of direct contract support costs and to
help ensure that their payment is consistent between the two
agencies and
-- the two agencies correctly adjust funding when tribes use
provisional-final indirect cost rates.
AGENCY COMMENTS AND OUR
EVALUATION
---------------------------------------------------------- Chapter 4:6
We provided a copy of a draft of this report to the departments of
Interior and Health and Human Services for review and comment. Both
departments provided us with comments, as did the Department of the
Interior's Office of Inspector General. We are handling the comments
from Interior and its Inspector General as separate responses.
The Department of the Interior agreed with GAO's recommendations that
its Bureau of Indian Affairs and HHS' Indian Health Service should
have consistent policies on the payment of direct contract support
costs and that adjustments should be made when provisional-final
indirect cost rates are used. Interior said that although
differences in BIA's and IHS' budget structures may continue to make
having consistent direct contract support costs difficult, it will
strive to improve the degree of consistency between its methods and
those of IHS. With regard to our recommendation about adjusting
provisional-final indirect cost rates, Interior said that although
the BIA does not believe overpayments have been made, BIA will remind
its awarding officials of the need to compute adjustments when
provisional-final indirect cost rates are used. Comments from the
Department of the Interior and our specific responses appear in
appendix V.
Our draft report concluded that having Interior's Office of Inspector
General negotiate indirect cost rates limited its ability to audit
the same function and recommended that the Secretary of the Interior
move the function from the Inspector General's Office. In separate
responses, the Department of the Interior and the its Office of
Inspector General differed on whether the responsibility should be
removed. While the Inspector General's Office agreed with the
recommendation to remove the rate negotiation function from the
Office, the Department raised several concerns about moving the
function. Specifically, it stated that sufficient separation of
duties exists within the Inspector General's Office because the staff
dedicated to indirect cost negotiations are not assigned to conduct
other audits. The Department also stated that it has limited ability
to change the current system of negotiating indirect cost rates
because of current litigation related to these rates. We continue to
have concerns about the ability of the Inspector General's Office to
perform both the rate negotiation function and audit functions and
plan to review the issue in more depth in a separate study, which
will take into account the differences in the responses to our draft
report, the legislative history of the Inspector General Act,
generally accepted government auditing standards, current litigation,
and any other pertinent guidance. As a result, we are not making the
recommendation to remove the rate negotiation function from the
Inspector General's Office at this time. In its response, the Office
of Inspector General also provided technical comments that we have
incorporated in the report where appropriate. The Inspector
General's comments and our specific responses are in appendix VI.
The Department of Health and Human Services agreed with GAO's
recommendations that its IHS and Interior's BIA should have
consistent policies on the payment of direct contract support costs
and that adjustments should be made when provisional-final indirect
cost rates are used. The Department stated that IHS has historically
paid direct contract support costs and has met recently with BIA to
discuss the development of a consistent policy. The Department also
stated that the issue of adjustments for provisional-final rates will
be covered by IHS in a training session scheduled for this summer.
The Department had no comment on our recommendation in the draft
report to move the responsibility for negotiating indirect cost rates
from Interior's Office of Inspector General. The Department's
comments are in appendix VII.
ALTERNATIVES FOR FUNDING CONTRACT
SUPPORT COSTS
============================================================ Chapter 5
The tension between providing full funding for contract support costs
and limiting contract support costs will continue to increase as
these costs increase. For the past several years, appropriations for
contract support costs have been insufficient to fully fund tribes'
allowable contract support costs, and tribes have faced increasing
shortfalls in funding for their contract support costs. The
Congress' decision to control increasing contract support costs by
limiting annual appropriations has been challenged by tribes through
several cases. One of these cases, which is currently being
appealed, was decided in favor of tribes to receive payment for past
shortfalls of contract support funding. In late 1998, the Congress
enacted a 1-year moratorium on any new contracting under the Indian
Self-Determination and Education Assistance Act. In response to the
need for a permanent solution to the current impasse, we are offering
four alternatives for funding contract support costs.
In this chapter, we present the advantages, the disadvantages, and
the cost implications of several alternatives that the Congress may
wish to consider as it deliberates how best to carry out the Indian
Self-Determination Act. These alternatives range from fully funding
tribes' allowable contract support costs to amending the act to
remove the funding mechanism that requires the payment of contract
support funds over and above a program's amount. The alternatives
discussed are as follows:
-- Alternative 1: Provide appropriations sufficient to fund 100
percent of allowable contract support costs each year.
-- Alternative 2: Amend the act to eliminate the provision
requiring that contract support costs be funded at 100 percent
of the allowable costs identified by BIA and IHS.\1
-- Alternative 3: Amend the act to limit the indirect costs that
would be paid by imposing either a flat rate or a ceiling rate.
-- Alternative 4: Amend the act to eliminate the provision for
payment of contract support costs over and above the program
base and instead provide a single, consolidated contract amount.
We do not consider all the possible alternatives for funding contract
support costs, nor do we prescribe which alternative or combination
of alternatives should be selected. In discussing the costs of these
alternatives, we do not address funding shortfalls for years prior to
fiscal year 1998, nor do we address additional funding that would be
necessary if changes in determining direct contract support costs are
made by BIA and IHS, as discussed in chapter 4.\2 The cost estimates
we provide are illustrative rather than actual, because they involve
two major assumptions. First, using the agencies' estimated funding
level for new contracts for fiscal year 2000, we assume that $17.5
million would be the annual cost of supporting new contracts.
Second, using fiscal year 1998 appropriations of about $280 million,
plus the agencies' fiscal year 1998 shortfall estimate of about $95
million for existing contracts, we assume that $375 million would be
the cost of fully funding the existing contracts the first year under
an alternative funding method. Finally, we are not able to estimate
the costs of changes to existing contract costs because of the
ever-changing nature of tribes' indirect cost rates and direct cost
bases.
--------------------
\1 This alternative may not be necessary if federal courts determine
that the requirement for contract support funding under the Indian
Self-Determination Act is limited to the amount actually
appropriated. Cases presently before the Court of Appeals for the
Federal Circuit are considering this issue.
\2 In 1998, the Congress included language in the Omnibus
Consolidated and Emergency Supplemental Appropriations Act for fiscal
year 1999 (P.L. 105-277, section 314, 112 Stat. 2681-288, Oct. 21,
1998) that limited the obligation to fund contract support costs to
the amounts the Congress appropriated for that purpose in fiscal
years 1994 through 1998. This would mean that no funding would be
provided to pay for any shortfalls for these years.
ALTERNATIVE 1: FULLY FUND
CONTRACT SUPPORT COSTS
---------------------------------------------------------- Chapter 5:1
The first alternative for congressional consideration is to make
appropriations sufficient to fully fund (i.e., at 100 percent of
allowable costs) tribes' allowable contract support costs (this
alternative assumes that BIA and IHS would request the full amount of
tribes' allowable costs). With this alternative, BIA and IHS would
continue to identify tribes' allowable costs as they do now, by using
tribes' indirect cost rates, and would pay direct contract support
costs in a consistent way, as discussed in chapter 4. The agencies
would identify and request the funds necessary to support new
contracts.
THE ADVANTAGES AND THE
DISADVANTAGES
-------------------------------------------------------- Chapter 5:1.1
The first alternative has the advantage of fulfilling the provisions
of the Indian Self-Determination Act that allow tribes to receive
funding for their allowable contract support costs. By fully funding
these costs, the Congress and the funding agencies would eliminate
funding shortfalls as well as the lawsuits that could potentially
stem from such shortfalls.
This alternative would be advantageous to tribes because it would
help ensure that they receive their allowable contract support funds
for the federal programs they contract from BIA and IHS. As tribes
contract more programs, they may need to build up their
administrative systems to properly administer and manage their
contracts. The costs of these administrative systems are used in
determining tribes' indirect cost rates, yet tribes do not receive
full funding from either BIA or IHS for these costs. If this
alternative were adopted, tribes that contract with IHS would no
longer have to wait several years for contract support funding, and
tribes that contract with BIA would no longer receive less than the
full amount of their allowable contract support costs.
The primary disadvantage of this alternative is that its
implementation would require the Congress to fully fund all allowable
contract support costs, which may continue to increase each year. As
discussed in chapter 2, it is difficult to predict future contract
support costs for several reasons, including the difficulty of
determining the number of tribes that will begin new contracts during
the year. However, tribes' allowable contract support costs could
double as tribes continue to contract more of the agencies' programs.
While tribes can contract almost all of the programs and services
that BIA and IHS currently provide, according to officials at both
agencies, tribes are currently contracting only about half of the
agencies' resources. As BIA and IHS transfer more and more programs
to the tribes, the agencies' administrative costs should decrease,
and some of this funding could become available to offset increases
in contract support funding. Nevertheless, most of the funding for
the increased allowable costs would have to be provided through
federal appropriations.
Another disadvantage of this alternative, in terms of cost
efficiency, is that it does not provide tribes with incentives to
limit the growth of contract support costs and, particularly,
indirect costs. Although tribes must justify their indirect cost
rates through the process discussed in appendix II, and under the law
tribes should not receive duplicate funding for the same task from
program funding and contract support funding, Interior's Office of
Inspector General and others have noted that the current method of
funding indirect costs could encourage tribes to classify as
�indirect� as many costs as possible to receive more funding. For
example, in a 1983 letter to the Deputy Director, Office of
Management and Budget, Interior's Inspector General criticized the
funding mechanism for creating this motivation rather than promoting
economy and efficiency. Similarly, a 1982 study by the American
Indian Law Center, Inc., concluded that the funding mechanism
encouraged tribes to shift as many expenses as possible to the
indirect, rather than direct, cost category.
THE COST OF THE FIRST
ALTERNATIVE
-------------------------------------------------------- Chapter 5:1.2
As the need for contract support funding will, in all probability,
continue to increase each year, the �full funding� alternative will
involve ever-increasing amounts. The cost of this alternative would
be as follows:
-- about $375 million the first year, based on the fiscal year 1998
funding for existing contracts (including the fiscal year 1998
funding shortfall);
-- about $17.5 million for new and expanded contracts, according to
the agencies' estimates for fiscal year 2000;\3 and an
undetermined amount for changes to existing contracts due to
changes in indirect cost rates or program funding.
--------------------
\3 In the second year of contracting under this alternative, we
assume that the funding for existing contracts would increase by
$17.5 million, and another $17.5 million would fund additional new
and expanded contracts.
ALTERNATIVE 2: AMEND THE ACT
TO ELIMINATE THE PROVISION FOR
FULL FUNDING OF CONTRACT
SUPPORT COSTS
---------------------------------------------------------- Chapter 5:2
A second alternative is for the Congress to amend the act to
eliminate the provision for fully funding allowable contract support
costs and, instead, provide funding strictly on the basis of annual
appropriations. With this alternative, BIA and IHS would continue to
identify tribes' allowable costs, using their indirect cost rates, in
the agencies' budget requests.
THE ADVANTAGES AND THE
DISADVANTAGES
-------------------------------------------------------- Chapter 5:2.1
This alternative has the advantage of limiting the growth of contract
support funding; funding amounts would be established by the amount
the Congress appropriates each year. At the same time, this
alternative would allow the Congress to fund contract support costs
at whatever level it deems appropriate. The Congress has
appropriated increased amounts for contract support; in fiscal year
1989, it provided about $100 million; in fiscal year 1998, it
provided about $280 million. If adopted, this alternative would
eliminate the expectation, created by the 1988 and 1994 amendments to
the law, that full contract support funding will be available, when,
in fact, appropriations and funding have been limited and have caused
shortfalls.
A disadvantage of this alternative is that it may discourage tribes
from entering into new self-determination contracts. The current
policy fosters self-determination by encouraging tribes to assume
managerial responsibility for federal programs that the government
previously managed on their behalf. Yet, as has been explicitly
stated by the Senate authorizing committee, tribes' assumption of
responsibility for these programs was not intended to result in a
diminution of program resources.\4
Avoiding this effect was the goal behind providing full funding of
the contract support costs that tribes incur in running these
programs. Tribes have stated that if they are not able to achieve
full funding of their contract support costs, and particularly their
indirect costs, they may not continue to contract for federal
programs or they may reduce the number of programs they contract.
However, several tribes have also stated that they are interested in
providing services to their members and that they have continued to
provide these services despite shortfalls because they believe they
can provide better services than BIA and IHS have provided.
Another disadvantage of this alternative for tribes is that funding
for their contract support costs would be subject to the
uncertainties of the appropriations cycle. Unless the Congress
decides to appropriate amounts sufficient to fully fund tribes'
contract support costs every year, this alternative would result in
shortfalls between the amounts provided and those identified as
allowed for contract support. Although the Congress has not funded
allowable contract support costs at the level currently provided by
law, it has increased funding for these costs over the past several
years. With this alternative, contract support costs might not
increase; they could decrease. Appropriations could fluctuate from
year to year, and this could negatively affect tribes' ability to
plan and budget for administering their programs.
--------------------
\4 S. Rep No. 103-374 at 9 (1994).
THE COST OF THE SECOND
ALTERNATIVE
-------------------------------------------------------- Chapter 5:2.2
The cost of this alternative would depend on the annual
appropriations provided by the Congress. For fiscal year 1998, the
Congress appropriated $280 million for contract support. That amount
included funds to support existing contracts as well as an amount for
support of new and expanded contracts. With this alternative, the
Congress could opt to appropriate more or less than the $280 million.
ALTERNATIVE 3: AMEND THE ACT
TO IMPOSE LIMITS ON INDIRECT
COST RATES
---------------------------------------------------------- Chapter 5:3
A third alternative would be to amend the law to limit the amount of
funding tribes could receive for contract support by limiting the
amount of indirect costs tribes can receive. For example, one way to
limit funding would be to establish one indirect cost rate--such as
the current aggregate rate of 25 percent--as a flat rate that would
apply to all tribes. Another method would be to fund tribes'
indirect costs according to their rate, up to a specific limit, or
ceiling--such as 25 percent--above which a tribe could recover no
more costs.
THE ADVANTAGES AND THE
DISADVANTAGES
-------------------------------------------------------- Chapter 5:3.1
As with the second alternative, this one has the advantage of
imposing limitations on the growth of contract support funding and of
eliminating the expectation created by the law's current language
that full contract support funding will be available.\5 An advantage
of this alternative for tribes is that their contract support costs
would be funded on a consistent basis and they could better
anticipate their annual contract support funding. All tribes would
receive funding, and they would receive funding at the same rate. As
previously stated, because of shortfalls, tribes that have new
contracts with IHS can wait several years to receive contract support
funding, and tribes that contract with BIA do not get the full amount
of funding that the agencies have identified for tribes' allowable
costs.
However, the disadvantage of this alternative to tribes is that it
ignores the differences among the individual tribes' actual indirect
costs. As discussed in chapter 2, contract support costs are made up
primarily of indirect costs, which vary widely among tribes. By
ignoring these differences, this alternative could provide a windfall
for tribes who have low indirect cost rates while placing those with
high rates at a disadvantage, depending on the specific rate
limitation that would be applied. For example, if the Congress were
to impose a flat 25-percent rate based on total direct costs, more
tribes would receive reduced funding than increased funding for
indirect costs. Specifically, of the 327 tribes for which indirect
cost rate information was available for fiscal years 1995 through
1998, 202 tribes would receive less funding under a 25-percent rate
restriction (because their rates were higher than 25 percent), and
125 tribes would receive more funding (because their rates were 25
percent or lower). The 12 tribes with the highest rates (76 percent
or higher) were those with relatively low levels of program dollars.
Figure 5.1 shows the indirect cost rate categories for the 327
tribes.
Figure 5.1: Tribes' Indirect
Cost Rates
(See figure in printed
edition.)
Note: We compiled information on indirect cost rates negotiated by
Interior's Office of Inspector General and HHS' Division of Cost
Allocation. There are 382 tribes and organizations in the database;
of these, 25 tribes had multiple rates, and 35 had indirect cost
rates calculated with direct cost bases composed of salaries only or
salaries and fringe benefits (5 tribes had both of these).
Therefore, these 55 tribes are not included in the data presented in
this figure.
Source: GAO's analysis of data from BIA and HHS' Division of Cost
Allocation.
To implement this change, BIA and IHS would have to redistribute
funding among tribes, which could cause financial and administrative
disruption for tribes that would lose funding. On the other hand,
this alternative would provide an incentive for tribes with high
indirect cost rates to lower their indirect costs.
Furthermore, as with the second alternative, this alternative
represents a change from the current self-determination legislation.
Tribes have stated that if funding shortfalls continue they may not
continue to contract BIA's and IHS' programs. Of the tribes we
communicated with, none indicated they had returned the management of
their programs to BIA and IHS; however, there is no way to know how
many tribes might stop or reduce their contracting.
--------------------
\5 The idea of imposing a cap on indirect cost rates is similar to
the approach used to limit the growth of indirect costs at colleges
and universities. Beginning in fiscal year 1992, a 26-percent cap
was imposed on federal reimbursements to universities for certain
indirect costs associated with the performance of federally funded
research, as we reported in a previous review of such costs.
University Research: Effect of Indirect Cost Revisions and Options
for Future Changes (GAO/RCED-95-74, Mar. 6, 1995).
THE COST OF THE THIRD
ALTERNATIVE
-------------------------------------------------------- Chapter 5:3.2
-- The cost of this alternative would depend on the type of rate
limit established. If, for example, the Congress chose a flat
rate of 25 percent, this alternative would cost about the same
as the current method costs, about $375 million, for the first
year.
-- As with the first alternative, if the Congress provided $17.5
million the first year to support new and expanded contracts,
then the funding for existing contracts would increase
accordingly the second year, and another $17.5 million would
support new and expanded contracts.
-- If the Congress chose a rate lower than 25 percent, allowable
contract support costs would decrease; if the Congress chose a
higher rate, allowable contract support costs would increase.
ALTERNATIVE 4: AMEND THE ACT
TO REPLACE THE CURRENT FUNDING
MECHANISM WITH A CONSOLIDATED
CONTRACT AMOUNT
---------------------------------------------------------- Chapter 5:4
A fourth alternative would be to amend the act to eliminate the
current funding mechanism, which provides contract support funding
over and above the program funding, and replace it with one that
would combine the current categories of contract costs into one
contract amount from which both direct and indirect costs would be
recovered. The revised contract amount would consist of the sum of
(1) a program's dollars; (2) the allowable indirect costs; and (3)
any allowable direct contract support costs, as calculated by an
agreed-upon method (as recommended in chapter 4). Upon consolidation
into a single contract amount, these cost categories would lose their
individual identities and would thereafter simply comprise the
contract total. BIA's and IHS' budget requests, then, would no
longer contain a separate line item for contract support; those funds
would be contained within the agencies' program line items. BIA
currently uses this funding method for tribes' contracts of
construction programs. Tribes would continue to negotiate an
indirect cost rate, for use in cost allocation and recovery, but
differences in the rate from year to year would not affect the
contract amount. The contract amount would change only as a result
of increases appropriated by the Congress (e.g., for inflation or for
particular programs). As with the other alternatives, a separate
fund would need to be retained to support new contracts.
THE ADVANTAGES AND THE
DISADVANTAGES
-------------------------------------------------------- Chapter 5:4.1
The advantage of this alternative for both the government and tribes
is that it provides for the full recovery of indirect costs, although
the amount of funding provided may not increase. At the same time,
this alternative removes any incentive for tribes to increase their
indirect costs to receive more funding each year. Funding would no
longer be provided over and above a program's direct funding, so once
the consolidated contract amount has been set, any increases in
indirect costs would leave less money for a program's expenditures.
This would create an incentive for tribes to reduce their indirect
costs as much as possible, to make more money available for direct
program expenditures. In keeping with the purpose of the Indian
Self-Determination Act, tribes would make the decisions about how
much funding to spend on program costs and how much to spend on
administrative, or indirect, activities. With this alternative, the
spotlight would no longer be on the sufficiency of contract support
funding, but on the sufficiency of direct program funding. That is,
funding debates would center on whether the funds provided for a
particular program would be sufficient to achieve its intended
purpose.
A disadvantage of this alternative for tribes is that if their
indirect cost rates increased over the years, the contract amounts
would not increase. Changes in indirect cost rates�whether upward or
downward�would no longer affect the amount of funding a tribe would
receive, because contract support would no longer be funded
separately from the program amounts. Thus, tribes would bear the
responsibility for managing indirect costs prudently, to retain the
greatest possible amount of the total contract funds for program
services.
THE COST OF THE FOURTH
ALTERNATIVE
-------------------------------------------------------- Chapter 5:4.2
-- The Congress could fund this alternative in one of two ways.
First, when the existing contract funding is consolidated, the
funding could be combined at the current funding level, which
would perpetuate the current funding shortfall. This option
would cost $280 million annually for existing contracts. Tribes
would continue to expect funding for their shortfalls, however,
and would view these shortfalls as permanent reductions in
funding, which is what happened to a similar effort in 1985.\6
Or, second, the contract funding could be consolidated at the
level identified by BIA and IHS as the amount of tribes'
allowable contract support costs. Using fiscal year 1998
funding, the consolidated amount would be about $375 million,
including almost $280 million for existing contracts and about
$95 million for the shortfall. As with the other alternatives,
contract support costs would continue to be needed for new
contracts. According to BIA's and IHS' estimates for fiscal
year 2000, the costs of new contracts would be about $17.5
million, annually, and these costs would accumulate as the
tribes continued the contracts.
-- Under this alternative, future increases in contract support
costs would be slowed, because the funding mechanism would no
longer provide contract support funding over and above the
direct program amounts for existing contracts. Thus, if the
Congress decided to increase funding for a particular program,
this decision would not create a corollary obligation for
increased contract support funding.
--------------------
\6 BIA consolidated funding for the programs and contract support for
fiscal year 1985; however, the total amount was $5 million short of
tribes' allowable costs. For a number of reasons, this process
failed and was reversed in fiscal year 1988.
MATTERS FOR CONGRESSIONAL
CONSIDERATION
---------------------------------------------------------- Chapter 5:5
The Congress, in its deliberations on how to best provide funding for
the Indian Self-Determination Act, may wish to consider a number of
alternatives to the current mechanism for funding Indian contract
support costs.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 5:6
We provided copies of a draft of this report to the departments of
the Interior and Health and Human Services for review and comment.
We received comments from both departments and from Interior's Office
of the Inspector General (see app. V, VI, and VII). Neither of the
departments nor the Inspector General commented on the alternatives
presented in this chapter.
CONTRACT SUPPORT COST PROVISIONS
OF THE INDIAN SELF-DETERMINATION
AND EDUCATION ASSISTANCE ACT
=========================================================== Appendix I
The following text presents those parts of the law that cover
contract support costs for Indian Self-Determination and Education
Assistance Act contracts.
\\36 The provisions in the law apply to both
tribal governments and organizations (hereafter referred to as
tribes). The text is found at 25 U.S.C. 450j-1, and is commonly
referred to as section 106(a) and (b) of the act, as amended.
Section 450j-1. Contract funding and indirect costs
(a) Amount of funds provided (1) The amount of funds provided under
the terms of self-determination contracts entered into pursuant to
this subchapter shall not be less than the appropriate Secretary
would have otherwise provided for the operation of the programs or
portions thereof for the period covered by the contract, without
regard to any organizational level within the Department of the
Interior or the Department of Health and Human Services, as
appropriate, at which the program, function, service, or activity or
portion thereof, including supportive administrative functions that
are otherwise contractable, is operated.
(2) There shall be added to the amount required by paragraph (1)
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, but which�
(A) normally are not carried on by the respective Secretary in his
direct operation of the program; or
(B) are provided by the Secretary in support of the contracted
program from resources other than those under contract.
(3)(A) The contract support costs that are eligible costs for the
purposes of receiving funding under this subchapter shall include the
costs of reimbursing each tribal contractor for reasonable and
allowable costs of�
(i) direct program expenses for the operation of the Federal
program that is the subject of the contract, and
(ii) any additional administrative or other expense related to
the overhead incurred by the tribal contractor in connection with the
operation of the Federal program, function, service, or activity
pursuant to the contract, except that such funding shall not
duplicate any funding provided under subsection (a)(1) of this
section.
(B) On an annual basis, during such period as a tribe or tribal
organization operates a Federal program, function, service, or
activity pursuant to a contract entered into under this subchapter,
the tribe or tribal organization shall have the option to negotiate
with the Secretary the amount of funds that the tribe or tribal
organization is entitled to receive under such contract pursuant to
this paragraph.
(4) For each fiscal year during which a self-determination contract
is in effect, any savings attributable to the operation of a Federal
program, function, service, or activity under a self-determination
contract by a tribe or tribal organization (including a cost
reimbursement construction contract) shall�
(A) be used to provide additional services or benefits under the
contract: or
(B) be expended by the tribe or tribal organization in the succeeding
fiscal year, as provided in section 13a of this title.
(5) Subject to paragraph (6), during the initial year that a
self-determination contract is in effect, the amount required to be
paid under paragraph (2) shall include startup costs consisting of
the reasonable costs that have been incurred or will be incurred on a
one-time basis pursuant to the contract necessary�
(A) to plan, prepare for, and assume operation of the program,
function, service, or activity that is the subject of the contract;
and
(B) to ensure compliance with the terms of the contract and prudent
management.
(6) Costs incurred before the initial year that a self-determination
contract is in effect may not be included in the amount required to
be paid under paragraph (2) if the Secretary does not receive a
written notification of the nature and extent of the costs prior to
the date on which such costs are incurred.
(b) Reductions and increases in amount of funds provided The amount
of funds required by subsection (a) of this section� (1) shall not be
reduced to make funding available for contract monitoring or
administration by the Secretary; (2) shall not be reduced by the
Secretary in subsequent years except pursuant to� (A) a reduction in
appropriations from the previous fiscal year for the program or
function to be contracted; (B) a directive in the statement of the
managers accompanying a conference report on an appropriation bill or
continuing resolution; (C) a tribal authorization; (D) a change in
the amount of pass-through funds needed under a contract; or (E)
completion of a contracted project, activity, or program; (3) shall
not be reduced by the Secretary to pay for Federal functions,
including, but not limited to, Federal pay costs, Federal employee
retirement benefits, automated data processing, contract technical
assistance or contract monitoring; (4) shall not be reduced by the
Secretary to pay for the costs of Federal personnel displaced by a
self-determination contract; and (5) may, at the request of the
tribal organization, be increased by the Secretary if necessary to
carry out this subchapter or as provided in section 450j(c) of this
title. Notwithstanding any other provision in this subchapter, the
provision of funds under this subchapter is subject to the
availability of appropriations and 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 under
this chapter.
Treatment of shortfalls in indirect and cost recoveries Where a
tribal organization's allowable indirect cost recoveries are below
the level of indirect costs that the tribal organizations should have
received for any given year pursuant to its approved indirect cost
rate, and such shortfall is the result of lack of full indirect cost
funding by any Federal, State, or other agency, such shortfall in
recoveries shall not form the basis for any theoretical over-recovery
or other adverse adjustment to any future years' indirect cost rate
or amount for such tribal organization, nor shall any agency seek to
collect such shortfall from the tribal organization. Nothing in this
subsection shall be construed to authorize the Secretary to fund less
than the full amount of need for indirect costs associated with a
self-determination contract. . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . Addition to contract of full amount contractor
entitled; adjustment Upon the approval of a self-determination
contract, the Secretary shall add to the contract the full amount of
funds to which the contractor is entitled under subsection (a) of
this section, subject to adjustments for each subsequent year that
such tribe or tribal organization administers a Federal program,
function, service, or activity under such contract.
Title III of the act refers to the funding provisions for
self-governance funding agreements as part of a demonstration program
within the departments of the Interior and Health and Human Services.
The text is found in 25 U.S.C. 450f note and is as follows:
Section 450f Note Sec. 303(a) The Secretaries is [sic] directed to
negotiate, and to enter into, an annual written funding agreement
with the governing body of a participating tribal government that
successfully completes its Self-Governance Planning Grant. Such
annual written funding agreement� shall authorize the tribe to plan,
conduct, consolidate, and administer programs, services, and
functions of the Department of the Interior and the Indian Health
Service of the Department of Health and Human Services that are
otherwise available to Indian tribes or Indians . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . shall . . . provide for
payment by the Secretaries to the tribe of funds from one or more
programs, services, functions, or activities in an amount equal to
that which the tribe would have been eligible to receive under
contracts and grants under this Act, including direct program costs
and indirect costs, and for any funds which are specifically related
to the provision by the Secretaries of services and benefits to the
tribe and its members . . .
Title IV of the act refers to the funding provisions for
self-governance funding agreements authorized by the Department of
the Interior. The text is found in 25 U.S.C. 458cc and is as
follows:
Section 458cc. Funding Agreements Authorization The Secretary shall
negotiate and enter into an annual written funding agreement with the
governing body of each participating tribal government in a manner
consistent with the Federal Government's laws and trust relationship
to and responsibility for the Indian people.
Contents Each funding agreement shall� (1) authorize the tribe to
plan, conduct, consolidate, and administer programs, services,
functions, and activities, or portions thereof, administered by the
Department of the Interior through the Bureau of Indian Affairs,
without regard to the agency or office of the Bureau of Indian
Affairs within which the program, service, function, and activity, or
portion thereof, is performed, including funding for agency, area,
and central office functions in accordance with subsection (g)(3) of
this section . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . (g) Payment (3) . . . the Secretary shall
provide funds to the tribe under an agreement under this part for
programs, services, functions, and activities, or portions thereof,
in an amount equal to the amount that the tribe would have been
eligible to receive under contracts and grants under this subchapter,
including amounts for direct program and contract support costs and,
in addition, any funds that are specifically or functionally related
to the provision by the Secretary of services and benefits to the
tribe or its members, without regard to the organization level within
the Department where such functions are carried out. (underlining
added)
--------------------
\36 The act includes authorization for
self-determination contracts and self-governance compacts.
CONTRACT SUPPORT COSTS AND THE
PROCESS FOR SETTING INDIRECT COST
RATES
========================================================== Appendix II
The payment of contract support costs has evolved since the Indian
Self-Determination and Education Assistance Act (P.L. 93-638) was
passed in 1975. Within the act, title I (which is referred to as the
Indian Self-Determination Act), allows tribes and tribal
organizations (hereafter referred to as tribes) to receive direct
funding and contract support costs for contracts.\1 The majority of
contract support costs are administrative and other expenses related
to overhead, which include indirect costs. For this reason, tribes
propose indirect cost rates according to federal cost principles in
Office of Management and Budget circulars A-87 and A-122 and
corresponding guidance published by the Department of Health and
Human Services (HHS).\2 The process for setting an indirect cost rate
involves several steps, including negotiations between tribes and the
responsible federal agency.
--------------------
\1 In the 1994 amendment, the Congress created a self-governance
project that allowed tribes to sign agreements with BIA to take over
a range of programs and funding. These self-governance agreements
differ from self-determination contracts in that they allow a tribe
to redesign programs and reprogram funding. IHS began signing
self-governance agreements with tribes in 1993. Self-governance
tribes receive contract support costs in the same way as tribes with
self-determination contracts.
\2 OMB circular A-87 is entitled �Cost Principles for State, Local,
and Indian Tribal Governments,� and OMB Circular A-122 is entitled
�Cost Principles for Non-Profit Organizations.� HHS publishes the
following guides to each of the circulars: �A Guide for State,
Local, and Indian Tribal Governments: Cost Principles and Procedures
for Developing Cost Allocation Plans and Indirect Cost Rates for
Agreements with the Federal Government,� OASMB-10, Rev. Apr. 1997
and �A Guide for Nonprofit Organizations: Cost Principles and
Procedures for Establishing Indirect Cost and Other Rates for Grants
and Contracts with the Department of Health and Human Services,�
OASMB-5, May 1983.
HISTORY OF CONTRACT SUPPORT
COSTS
-------------------------------------------------------- Appendix II:1
The payment by the Bureau of Indian Affairs (BIA) and the Indian
Health Service (IHS) of contract support costs for Indian
self-determination contracts has evolved with amendments to the
enabling legislation and to the agencies' guidelines dealing with
contracting. The Indian Self-Determination Act was passed in 1975,
and two major amendments to the law were passed in 1988 and 1994.
Throughout this time, BIA has maintained essentially the same funding
practice for contract support costs, while IHS has changed its policy
over time to reflect changes in the act. The agencies issued joint
regulations in 1996, but neither BIA nor IHS has changed its contract
support funding policies or practices as a result of them. These
joint regulations identify three types of contract support costs:
direct and indirect contract support costs and startup costs.
Currently, BIA funds indirect costs, while IHS pays indirect costs
and direct contract support costs. Both agencies fund startup costs,
such as costs for computer hardware and software, equipment,
furniture, and training, for tribes beginning their first year of
contracting a program.
INDIAN SELF-DETERMINATION
ACT, INITIAL LEGISLATION
------------------------------------------------------ Appendix II:1.1
With the passage of the Indian Self-Determination Act in 1975, tribes
were allowed to contract for the federal services that the Department
of the Interior's Bureau of Indian Affairs and the Department of
Health, Education, and Welfare (now the Department of Health and
Human Services) provided. The act directed the Secretaries of the
Interior and HHS, upon the request of any Indian tribe or Indian
organization, to contract with that tribe to plan, conduct, and
administer programs provided by those departments. The law provided
that tribes would receive the same amount of funds that the
Secretaries would have otherwise paid, but it did not specifically
provide for funding of costs that tribes would incur to manage those
contracts.
In 1976 and 1977, both BIA and IHS began implementing contracting
programs, and began paying tribes for their indirect costs of
managing them. In 1977, BIA requested more than $11 million to pay
primarily for tribes' indirect costs of contracting; these funds were
part of a separate budget line item called �contract support funds,�
which also paid for the costs of federal employees displaced by
tribal contracting. In the early years of its program, IHS requested
funds�called �93-638 implementation funds�--to pay for program
development and training tribal leaders and tribal employees, as well
as to pay for indirect costs, including audits, financial management
systems, and management. Tribes began getting indirect rates from
the Interior's Office of Inspector General.
INDIAN SELF-DETERMINATION
ACT AMENDMENTS OF 1988 AND
1994
------------------------------------------------------ Appendix II:1.2
In 1987, the Congress identified contract support costs as the
greatest impediment to tribes' seeking self-determination contracts,
and, in 1988, it amended the act to provide for paying �contract
support costs,� which were the reasonable costs for activities a
contractor must do to ensure compliance with the contract.\3
Specifically, these include activities that (1) would not normally be
carried out by the agencies managing the program, such as financial
audits or (2) would be done by the agencies, but with funds that are
not transferred to the tribes, such as unemployment taxes. After
this change in the law, BIA continued to pay for the indirect costs
tribes incurred in managing contracts, while in 1992, IHS wrote a new
policy on contract support costs stating that it would pay for the
indirect costs of a contract, as well as the direct contract support
costs. IHS determined that these direct contract support costs
included unemployment taxes, workers' compensation, postage, and
long-distance phone calls. In 1993, BIA issued a memorandum to its
area office directors, and others, stating that while the payment of
certain direct contract support costs can be justified under the 1988
amendments to the Indian Self-Determination Act, the agency had not
requested funding for such costs and the contract support funds could
only cover tribes' indirect expenses.
In 1994, the Congress amended the Indian Self-Determination Act to
further define the concept of contract support costs. The Congress
specified that contract support costs would include (1) direct
program expenses for operating the programs and (2) any additional
administrative or other expense related to overhead incurred by the
contractors in connection with operating the programs. The amendment
also provided that, during the initial year that a contract is in
effect, the amount paid shall include startup costs, which are the
costs incurred on a one-time basis to plan, prepare for, and assume
operation of the program using prudent management practices. Joint
agency regulations, issued by the Secretaries of the departments of
the Interior and HHS in 1996, state that tribes may request three
categories of funding in their contracts: (1) direct program; (2)
direct contract support costs, including startup costs; and (3)
indirect costs. After the 1994 amendment, BIA began paying tribes
for their startup costs, in addition to indirect costs. BIA is
currently in the process of writing its first formal policy for
contract support costs, and the Assistant Secretary for Indian
Affairs has stated that the agency will consider paying direct
contract support costs. IHS, which updated its policy to include
direct contract support and startup costs in 1992, revised and
clarified its policy in 1996 primarily to address the prioritization
of tribal requests. Presently, IHS is in the process of rewriting
its policy on contract support costs, including the section on direct
contract support costs.
--------------------
\3 In amending the act, the Congress selected the term �contract
support costs� and rejected the use of the terms �contract costs,�
�direct costs,� and �indirect costs.� The apparent reason for its
choice is that such terms relate to how costs are to be allocated and
are not suitable for describing what categories of costs are to be
funded. However, IHS and BIA continue to use the term �indirect
costs� when referring to administrative and other expenses and
�direct contract support costs� when referring to other kinds of
costs, e.g., workers' compensation.
FEDERAL COST PRINCIPLES FOR
INDIAN TRIBAL GOVERNMENTS AND
ORGANIZATIONS
-------------------------------------------------------- Appendix II:2
Federal cost principles for Indian tribal governments and
organizations are found in Office of Management and Budget (OMB)
circulars A-87 and A-122 and corresponding guidance published by HHS.
This guidance is designed to make federal contracts bear their fair
share of indirect costs, but it is also based on the presumption that
each tribe will have a unique combination of staff, facilities, and
experience in managing their contracts. In some cases, laws or
regulations for grants and contracts other than those under the
Indian Self-Determination Act may limit the amount of administrative
or indirect costs allowed for a program, but OMB's guidance does not
allow the unrecoverable amounts from one federal contract or grant to
be shifted to another federal contract or grant.
In general, federal contract costs are comprised of direct program
costs and a share of a tribe's indirect costs. Because no universal
rule for classifying costs as either direct or indirect exists, OMB's
circulars state that a tribe should treat each cost consistently as
direct or indirect in similar circumstances. Generally, direct costs
are those that can be identified with a particular cost objective,
and indirect costs are those incurred for common or joint objectives
benefiting more than one cost objective. Typical examples of direct
costs are salaries for employees working in particular programs, such
as social service workers or police officers, the supplies and the
materials used for particular programs, and any travel expenses
related to those employees or programs. Typical indirect costs may
include computer services, transportation, accounting, personnel
administration, purchasing, depreciation on buildings and equipment,
and operation and maintenance of facilities. To fairly distribute
indirect expenses to cost objectives, a tribe may need to �pool� its
indirect items and costs. The total amount of the indirect cost pool
would then be allocated to the direct cost base.
THE PROCESS FOR SETTING
INDIRECT COST RATES
-------------------------------------------------------- Appendix II:3
A majority of BIA's and IHS' contract support costs are
administrative and other overhead expenses, and both agencies use
indirect cost rates to calculate a tribe's allowable indirect costs.
The indirect cost rates can range from single to triple digit
percentages, depending on such factors as the type and the size of
the direct cost base used in calculating the indirect rate. For
example, a tribe using a direct cost base that includes only salaries
and wages can have a rate of 72 percent, while a tribe using a direct
cost base that includes total direct costs can have a rate of 14
percent. Tribes develop their indirect cost rates following federal
guidelines set out in OMB's circulars and HHS' guidance, and
negotiating with the responsible�or cognizant--federal agency. The
process of establishing an indirect cost rate involves five steps:
1. The tribe develops a proposed rate for indirect costs.
2. The cognizant federal agency reviews the tribe's indirect cost
rate proposal.
3. The tribe and the cognizant federal agency negotiate and approve
the rate.
4. The funding agencies apply the indirect rate to the direct funds
to calculate the indirect costs the tribe will receive for
contracting the program.
5. Independent auditors reconcile and audit a tribe's expenditures.
The process is repeated each year when a tribe submits a new proposal
and its audited financial statements and supporting documents for
review and negotiation with the cognizant agency.
DEVELOPING THE PROPOSAL FOR
AN INDIRECT COST RATE
------------------------------------------------------ Appendix II:3.1
In the first step of the rate-setting process, a tribe develops a
proposal that documents the composition of its indirect and direct
costs and calculates the ratio of indirect to direct costs�the
indirect rate. For example, a tribe might propose to have indirect
costs of $200,000, consisting of financial and administrative
services, and direct costs of $1 million, including a social services
program costing $300,000, a law enforcement program costing $200,000,
and a health program costing $500,000. The tribe would then propose
an indirect cost rate of 20 percent ($200,000 � $1,000,000 = .2). In
preparing a proposal, a tribe follows the principles laid out in
OMB's circular A-87 and a tribal organization follows OMB's circular
A-122, and both follow corresponding guidance issued by HHS for these
circulars. According to the circulars and guidance, this proposal
should list the costs for each of the items in the direct cost base
and the indirect cost pool based on the expenditures for each item in
the previous fiscal year or on projected costs for the upcoming year.
Indirect rates vary by tribe, depending on the size of the indirect
pool, the individual tribe's administrative make-up, and the type of
direct base used to calculate the rate. For example, under the cost
principles, one tribe can propose an indirect pool of $1 million and
another tribe can propose an indirect pool of $100,000, as long as
each tribe treats the costs consistently within its proposal. Also,
under the cost principles, tribes can use a direct cost base composed
of salaries and wages or composed of all total direct costs,
excluding capital expenditures, subcontracts, and other large
expenditures that can distort the base. For example, one tribe can
propose an indirect rate of 50 percent and have a direct base that
includes only salaries and wages of $80,000, while a second tribe can
have an indirect rate of 20 percent and use a total direct base of
about $200,000. In both cases, when the indirect rate is applied for
funding purposes, the tribes each get indirect funds of $40,000.
Guidance on indirect cost rates describes the three ways they can be
calculated, depending on which method a tribe chooses to estimate its
costs and make adjustments for actual costs. The type of rate used
most frequently by the tribes is a �fixed-carryforward� rate, which
is a rate that is adjusted for any under- or overrecovery of funds in
the prior year (usually 2 years because of the lag time in auditing
and closing financial statements and accounts). An overrecovery
occurs when a tribe spends less than it collected using its rate, and
an underrecovery occurs when the tribe does not collect enough funds
to pay for its costs. The adjustment to the rate is made as shown in
Table II.1:
Table II.1
Examples of Overrecovery and
Underrecovery Calculations for Fixed-
Carryforward Indirect Cost Rates
Overrecovery Underrecovery
calculation calculation
------------------------------ ------------------ ------------------
1998 Proposal Direct cost base
----------------------------------------------------------------------
Indirect cost pool 200,000 200,000
1998 Actual Costs Direct cost base
----------------------------------------------------------------------
Indirect cost pool 100,000 300,000
Indirect costs recovered 200,000 200,000
Overrecovery/Underrecovery 100,000 100,000
2000 Proposal
----------------------------------------------------------------------
Direct cost base 1,000,000 1,000,000
Indirect cost pool 200,000 200,000
Adjustment -100,000 + 100,000
======================================================================
New indirect cost pool 100,000 300,000
======================================================================
Indirect rate 10% 30%
----------------------------------------------------------------------
Note: These examples assume full recovery of proposed costs�this
means that the tribes do not have any shortfall in funding. Some
tribes use the fiscal year of October 1 to September 30, while others
use a calendar year.
Source: GAO's analysis of data provided by tribes.
In the overrecovery example, a tribe proposed to spend $200,000 in
indirect costs and received a rate of 20 percent, given its direct
cost base of $1 million. However, the tribe only spent $100,000 in
indirect costs during the year. Two years later, when the tribe
applied to adjust its indirect rate, it continued to propose spending
$200,000 in indirect costs. However, because it had recovered
$100,000 that it had not spent 2 years before, the proposal for
$200,000 is reduced by this amount to reflect the actual amount to be
recovered by charging the indirect rate. As a result, the adjusted
indirect rate is only 10 percent, given the tribe's $1 million direct
cost base. In contrast, had the tribe actually spent $300,000 and
only recovered $200,000, it would have an underrecovery of $100,000
that would be added to the proposed indirect cost pool to bring it to
$300,000. In this case, the tribe's indirect rate would be 30
percent ($300,000 � $1,000,000 = .3), given its $1 million direct
cost base.
Some tribes use �provisional-final� rates. Provisional-final rates
are set twice, prior to the beginning of the year (provisional) and
after the end of the year (final) when a tribe's actual costs are
audited and a new indirect cost rate proposal is negotiated by the
cognizant agency and the tribe. The final rate is issued with a new
provisional rate, and any adjustments necessary in funding are made
by the funding agency and not by the cognizant agency. The funding
agency either collects overpayments of funds--if the provisional rate
was higher than the final rate--or pays funds to the tribe--if the
provisional rate was lower than the final rate. For example, if a
tribe had a provisional rate of 20 percent and a direct program base
of $1 million, then the tribe could have collected $200,000 for
indirect costs. If the tribe's final rate went up to 25 percent and
the tribe actually collected $200,000 using its 20 percent rate, then
the tribe would be entitled to receive $50,000 more from the funding
agency. However, because this adjustment generally does not happen
until at least 6 months after the fiscal year has ended, the agencies
do not have funding to provide in situations such as these.
Few tribes use a predetermined rate. Whereas the previous two ways
of establishing an indirect cost rate involve making adjustments for
actual costs, the predetermined rate is established by using a fixed
amount of indirect costs based on estimated costs. Any differences
between the actual and estimated costs�either positive or
negative--are absorbed by the tribe. For example, if a tribe has a
predetermined rate of 20 percent and a direct base of $1 million, the
tribe will receive $200,000 in indirect costs and no adjustments to
this amount of funding will be made.\4
--------------------
\4 In each example of an indirect cost rate calculation, we assume
full funding of indirect costs.
REVIEWING THE PROPOSAL
------------------------------------------------------ Appendix II:3.2
In the second step of the rate-setting process, the cognizant agency
reviews the proposal, makes adjustments to it, and verifies or
calculates the rate. The Department of the Interior, the cognizant
agency for Indian tribal governments, has delegated the task of
negotiating rates to its Office of Inspector General. Of the 556
tribes recognized by the federal government as of December 1998,
about 350 negotiate their indirect rates with Interior's Office of
Inspector General.\5 A handful of tribes and about 50 tribal
organizations that receive the majority of their funding from HHS
negotiate their indirect rates with its Division of Cost Allocation.
Still other tribes do not have a rate or are part of a larger group
that has a rate. In California, for example, several rancherias have
not established indirect rates and do not receive indirect funds from
BIA.\6
The responsibility for getting a rate and seeking funding based on
that rate lies with the tribes, not the federal agencies, and agency
officials stated that these rancherias have not sought funding, nor
provided rates to receive funding for which they are eligible. In
Alaska, many of the over 200 communities and groups fall under
organizations that provide services to Native Alaskans. These
organizations have indirect rates rather than the communities and
groups.
To prepare for negotiating an indirect cost rate, both Interior's
Office of Inspector General and HHS' Division of Cost Allocation
review the items in each proposal and make revisions according to
OMB's circulars A-87 and A-122 and HHS' guidance. The circulars and
guidance state that allowable costs must be, among other things,
necessary and reasonable for the proper and efficient performance and
administration of contracts and must be allocable to federal
contracts. Reasonable costs, generally, do not exceed that which
would be incurred by a prudent person and should be the types of
costs recognized as ordinary and necessary to operate the tribal
government or perform the contract.
The reviewing agency, either Interior's Office of Inspector General
or HHS' Division of Cost Allocation, determines whether or not the
costs are allowed based on the reviewer's judgment about whether the
costs appear reasonable. Officials from both the Office of Inspector
General and the Division of Cost Allocation stated that determining
the reasonability of costs is difficult because the decision often
comes down to what the tribe says that it needs to manage its
contracts. The reviewers attempt to use expenditures from prior
years as a benchmark. For example, an Office of Inspector General
official stated that a typical review would verify proposed salaries
against salaries in the surrounding area and salaries paid in prior
years to the same tribe, if available.
If a tribe uses a fixed-carryforward rate, the Office of Inspector
General takes the extra step, at this point, to verify the tribe's
carryforward calculation, or the Office of Inspector General will
perform the rate calculation if the tribe requests it. The reviewers
first compare the costs in the proposed direct base and indirect pool
with expenses from 2 years ago that are reported in the audited
financial statement and supporting documents. Then, the reviewers
use the amount of expenses in the audited financial statements and
supporting documents to calculate the amount of indirect expenditures
for BIA, IHS, and other contracts, separately. As part of this
analysis, the Office of Inspector General identifies shortfall
funding�funding that has not been paid by agencies for contract
support costs--or surplus funding�funding that is above what the
agency owed the tribe.
--------------------
\5 The Office of Inspector General also negotiates indirect cost
rates for tribal organizations that receive the majority of their
funding from the Department of the Interior.
\6 Rancherias refer to some Indian lands and communities in
California.
NEGOTIATING THE INDIRECT
COST RATE
------------------------------------------------------ Appendix II:3.3
After the cognizant agency has reviewed and adjusted a tribe's
proposal for an indirect cost rate, the tribe and the agency
negotiate the final indirect rate. These negotiations center on the
reasonableness of the tribe's proposed direct base and indirect pool,
and the agency's proposed adjustments to these costs. For example,
the agency and the tribe may disagree on what programs are included
in the direct cost base for the rate. Or, the two parties may
disagree on the amount in salaries the tribe proposes to pay. For
example, Office of Inspector General officials stated that they use
local pay scales to compare with a tribe's salaries, but tribes
justify higher salaries with the fact that reservations are usually
more rural and remote than local communities and they need to pay
higher salaries to attract qualified personnel. During these
negotiations, the agency can request supporting information from the
tribe. For example, auditors in the Office of Inspector General have
requested floor plans and studies from tribes to determine the
appropriate allocation of space and rent to programs. They have also
requested time studies for managers whose time is being allocated to
different programs. Ultimately, while the agency can request
additional supporting documentation, the agency cannot reject costs
or items that it cannot prove are unreasonable.
Once the cognizant agency and the tribe agree on and approve a rate,
the agency issues to the tribe a notice of the results of the rate
negotiation. The notice includes the rate, the type of direct base
used to calculate that rate, and any exclusions from this base.
Exclusions can be passthrough funds, such as general assistance funds
or scholarships, or subcontracting amounts. The notice identifies
these funds as having been removed from the direct base, which means
they cannot be included in the base for funding purposes.
APPLYING THE INDIRECT COST
RATE
------------------------------------------------------ Appendix II:3.4
Once an indirect cost rate is established, a tribe provides it to the
various federal agencies, such as BIA and IHS, for use in calculating
annual funding. Each year, contracting officers with BIA and IHS
apply a tribe's indirect rate to its direct funding base to calculate
the amount of indirect funding that tribe should receive. In the
last several years, funding has fallen short of the amounts
identified as required by the agencies. BIA and IHS are required by
the Indian Self-Determination Act to report funding shortfalls each
year to the Congress. Both agencies use the amount of indirect
funding required for each tribe in the shortfall calculations. For
BIA, the shortfall computation involves, on an annual basis,
comparing each tribe's allowable indirect costs with the tribe's
actual funding. For IHS, the computation of shortfall involves
comparing total allowable contract support cost�both direct and
indirect�with funds provided for the fiscal year.
AUDITING AND RECONCILING
INDIRECT COSTS
------------------------------------------------------ Appendix II:3.5
The final step in the rate-setting process is the audit and
reconciliation of a tribe's expenditures. As recipients of federal
funding, tribes are required by the Single Audit Act of 1984, as
amended, to have audited financial statements. The act also requires
that the statement include a schedule of federal financial assistance
to the tribe. OMB Circulars A-87 and A-122 and the corresponding
guidance issued by HHS require that the financial statements be
submitted with the tribe's indirect cost proposal. Once a tribe has
its audited financial statement, including supporting documents, and
its proposed indirect pool, it submits them to Interior's Office of
Inspector General or HHS' Division of Cost Allocation to begin the
process of negotiating a new rate. If a tribe does not have a
current indirect cost rate, the funding agencies continue to use the
last approved rate.
BIA'S AND IHS' FUNDING OF CONTRACT
SUPPORT COSTS
========================================================= Appendix III
The BIA and IHS have different ways of allocating contract support
funding, and, as a result, allocating any funding shortfalls that may
exist. Congressional direction to BIA was to treat the tribes
equally in the distribution of funds if there is a shortfall.
Because no similar language has been provided in IHS' appropriations,
it has continued to distribute funds on a historical basis for tribes
with existing contracts, while BIA prorates funding for tribes with
existing contracts. Both BIA and IHS distribute funding to tribes
with new or expanded contracts on a first-come, first-served basis.
BUREAU OF INDIAN AFFAIRS
------------------------------------------------------- Appendix III:1
Each year, BIA identifies the amount of funds each tribe with
existing contracts should receive for contract support costs by
applying each tribe's indirect cost rate to its direct funding base
for BIA's programs. Between fiscal years 1989 and 1993, BIA was
generally able to fully fund each tribe's contract support costs
through a combination of appropriations and reprogrammings. Since
fiscal year 1994, however, BIA's appropriations for contract support
costs have been capped and reprogramming for this purpose has been
prohibited. Since then, BIA has only been able to fund between 77
percent to 92 percent, annually, of a tribe's contract support costs.
As soon as possible after the beginning of each fiscal year, BIA
allocates about 75 percent of its contract support funds to tribes.
Toward the end of the fiscal year, it makes a second distribution of
funds based on their indirect costs, which are calculated by using
their indirect cost rates. BIA prorates its available contract
support funding evenly across all tribes with ongoing contracts. For
example, for fiscal year 1998, BIA's contract support funding was
prorated at about 80 percent of the allowable costs for each tribe.
Beginning with fiscal year 1994, BIA has published annual notices in
the Federal Register on the distribution of contract support funds.
Since fiscal year 1995, when BIA established a separate Indian
Self-Determination Fund, the agency has provided 100 percent funding
for contract support costs for new and expanded contracts during
their first year. This fund, which is separate from other contract
support funds, enables BIA to assist new or expanding contractors
with funding, including startup costs, without decreasing the funding
for ongoing contracts. In the second year of a contract, it is
grouped with all the other ongoing contracts and receives a reduced
prorated share of contract support funding for ongoing contracts.
Table III.1 shows the funding history for BIA's Indian
Self-Determination fund.
Table III.1
BIA's Indian Self-Determination Fund,
Fiscal Years 1995 Through 1999
Fiscal year
--------------------------------------
1995 1996 1997 1998 1999
------------------------------ ------ ------ ------ ------ ------
Appropriation $7,486 $4,967 $5,000 $5,000 $0
,000 ,431 ,000 ,000
Carryover balance from prior 0 562,64 1,103, 1,415, 1,877,
fiscal year 1 392 644 406
Total Available $7,486 $5,530 $6,103 $6,415 $1,877
,000 ,072 ,392 ,644 ,406
Funds obligated 6,923, 4,426, 4,687, 4,538, \a
359 680 748 238
Carryover balance to next $562,6 $1,103 $1,415 $1,877 \a
fiscal year 41 ,392 ,644 ,406
----------------------------------------------------------------------
\a As of April 1, 1999, no funds had been obligated from the Indian
Self-Determination fund for fiscal year 1999; therefore the entire
$1,877,406 remains available.
Source: GAO's analysis of BIA' data.
In fiscal year 1999, no Indian Self-Determination funds for new and
expanded contracts were provided because the Congress imposed a
1-year moratorium on any new contracting. In its fiscal year 2000
budget request, BIA is requesting $5 million to continue the Indian
Self-Determination fund.
INDIAN HEALTH SERVICE
------------------------------------------------------- Appendix III:2
Like BIA, IHS identifies the amount of contract support funds a tribe
should receive each year for ongoing contracts and pays 100 percent
of contract support funding required for a new or expanded contract.
IHS calculates the amount of contract support costs for ongoing
contracts by adding a tribe's direct contract support costs to the
indirect costs required. IHS calculates the amount of direct
contract support cost funding�which can be provided for workers'
compensation, unemployment taxes, retirement benefits, and special
training�using a tribe's estimates of what these items will cost.
These are all functions that IHS has determined the tribes do to
manage contracts, but are not included in the direct program funding
they receive. IHS area offices have discretion to negotiate these
costs as part of the overall contract negotiation, and the actual
costs that are included in this category vary accordingly. IHS
calculates allowable indirect costs by multiplying a tribe's indirect
cost rate by its direct cost base for its IHS programs.
Unlike BIA, IHS does not prorate the amount of contract support
funding available to each tribe after the first year of a contract.
IHS places its emphasis on maintaining stable funding and provides
ongoing contracts with the same direct and indirect contract support
funds annually unless a tribe's requirements have decreased to such
an extent that the amount of funding for indirect costs should be
reduced.\1 A tribe's contract support costs for an ongoing contract
may also increase if, for example, its indirect cost rate increases.
However, if additional funds are not available, the tribe would not
get an increase in contract support funds, thus creating a shortfall
for �ongoing contracts.�
In fiscal year 1988, IHS created its Indian Self-Determination Fund,
from which the agency paid for the costs of new and expanded
contracts. Initially, the Congress appropriated $2.5 million for the
fund, but from fiscal years 1994 through 1998, the annual amount
appropriated was $7.5 million. Since about 1991, however, the
funding has been insufficient to pay for 100 percent of the contract
support costs for any given year. To deal with this funding
shortfall for new and expanded contracts, IHS created a waiting list
to track which new and expanded contract is next in line for contract
support funds. Since 1995, IHS has referred to this waiting list as
the �Indian Self-Determination queue.� Tribes on the queue waiting
for contract support costs may choose to begin a contract without the
funding, or they may defer beginning a contract until contract
support funds are available. The wait for these funds can take
several years.
As a result of IHS' distribution methods for ongoing contracts and
contracts on the queue, the overall contract support funds a tribe
receives from IHS may range from zero (if all a tribe's contracts are
on the queue) to 100 percent. IHS' total shortfall for fiscal year
1998 was about $70 million. In fiscal year 1999, the Congress
appropriated a $35 million increase in IHS contract support funds to
cover some of the agency's shortfall. IHS is currently working on a
policy for distributing these funds; it is considering using the $35
million to increase tribes' funding to at least 70 percent of their
contract support costs for IHS' programs.
--------------------
\1 In 1992, IHS changed its contract support cost policy to pay
indirect costs based on a tribe's annual indirect rates. Prior to
this change, some IHS area offices had been paying the same amount of
indirect costs to tribes each year, regardless of changes in their
indirect rates. To allow for a transition to the new way of
providing indirect funds, IHS allowed tribes in these areas to get
the same amount of indirect costs if their rates decreased, and paid
the difference if their rates were higher.
TRIBES AND TRIBAL ORGANIZATIONS
CONTACTED
========================================================== Appendix IV
During the course of this review, we communicated with 94 tribes and
tribal organizations about contracting under the Indian
Self-Determination Act. Representatives of 77 tribes and tribal
organizations attended one or more of the various open forums we
held, two in conjunction with large Indian conferences and four
others in conjunction with our visits to BIA and IHS offices. In
addition, 42 tribes and tribal organizations (including 17 that had
not attended one of the forums) submitted documents, such as letters,
financial statements, and other financial or budgetary documents,
demonstrating the effects of shortfalls in contract support funding.
Not all of the representatives who attended one of the forums spoke
about the effects of shortfalls or the methods used to cope with
them. In many cases, however, representatives indicated�through nods
or other expressions of agreement�that they shared the experiences or
observations of other representatives. Thus, although we gained a
good understanding about the types of concerns tribal representatives
generally shared regarding shortfalls in contract support funding and
the types of methods that were typically used to cope with
shortfalls, we cannot definitively say how many of the tribes
represented at the forums were affected by shortfalls, nor can we
report which or how many methods each of them used to cope with
shortfalls. Similarly, not every one of the documents submitted to
us addressed each of the ways a tribe had been affected by shortfalls
or each of the various methods that tribe had used to deal with
shortfalls. When we invited tribes to submit documents, we did not
specify a particular format, nor did we use a questionnaire or other
data collection instrument to gather information. Therefore, the
documents we received varied in length, type, and content.
Following are the names of the 73 tribes and the 21 tribal
organizations that were represented at one or more of the open forums
or submitted documents to GAO.
TRIBES
-------------------------------------------------------- Appendix IV:1
Akiachak Native Community, Alaska
Apache Tribe of Oklahoma
Blackfeet Tribe of the Blackfeet Indian Reservation of Montana
Cabazon Band of Cahuilla Mission Indians of the Cabozon Reservation,
California
Cherokee Nation of Oklahoma
Cheyenne-Arapaho Tribes of Oklahoma
Chicasaw Nation, Oklahoma
Chippewa-Cree Indians of the Rocky Boy's Reservation, Montana
Citizen Potawatomi Nation, Oklahoma
Confederated Tribes of the Grand Ronde Community of Oregon
Confederated Tribes of the Siletz Reservation, Oregon
Confederated Tribes of the Umatilla Reservation, Oregon
Delaware Tribe of Indians, Oklahoma
Delaware Tribe of Western Oklahoma
Ely Shoshone Tribe of Nevada
Fort Sill Apache Tribe of Oklahoma
Gila River Indian Community of the Gila River Indian Reservation,
Arizona
Hoonah Indian Association, Alaska
Jamestown S'Klallam Tribe of Washington
Jicarilla Apache Tribe of the Jicarilla Apache Indian Reservation,
New Mexico
Organized Village of Kake, Alaska
Karuk Tribe of California
Kaw Nation, Oklahoma
Kenaitze Indian Tribe, Alaska
Kickapoo Tribe of Oklahoma
Kiowa Indian Tribe of Oklahoma
Lac Courte Oreilles Band of Lake Superior Chippewa Indians of the Lac
Courte Oreilles Reservation of Wisconsin
Leech Lake Band of the Minnesota Chippewa Tribe, Minnesota
Lumbee-Cheraw Tribe of North Carolina (not a federally recognized
tribe)
Lummi Tribe of the Lummi Reservation, Washington
Menominee Indian Tribe of Wisconsin
Metlakatla Indian Community, Annette Island Reserve, Alaska
Miccosukee Tribe of Indians of Florida
Mille Lacs Band of the Minnesota Chippewa Tribe, Minnesota
Muscogee (Creek) Nation, Oklahoma
Native Village of Barrow Inupiat Traditional Government, Alaska
Navajo Nation of Arizona, New Mexico and Utah
Northern Cheyenne Tribe of the Northern Cheyenne Indian Reservation,
Montana
Oneida Nation of New York
Paiute-Shoshone Tribe of the Fallon Reservation and Colony, Nevada
Penobscot Tribe of Maine
Pinoleville Rancheria of Pomo Indians of California
Poarch Band of Creek Indians of Alabama
Port Gamble Indian Community of the Port Gamble Reservation,
Washington
Prairie Band of Potawatomi Indians, Kansas
Pueblo of Acoma, New Mexico
Pueblo of Isleta, New Mexico
Pueblo of Jemez, New Mexico
Pueblo of Laguna, New Mexico
Pueblo of Pojoaque, New Mexico
Pueblo of San Juan, New Mexico
Pueblo of Sandia, New Mexico
Pueblo of Santo Domingo, New Mexico
Quinault Tribe of the Quinault Reservation, Washington
Ramah Navajo Chapter, New Mexico
Reno-Sparks Indian Colony, Nevada
Sac & Fox Nation, Oklahoma
Seneca Nation of New York
Shoalwater Bay Tribe of the Shoalwater Bay Indian Reservation,
Washington
Shoshone-Bannock Tribes of the Fort Hall Reservation of Idaho
Shoshone-Paiute Tribes of the Duck Valley Reservation, Nevada
Skokomish Indian Tribe of the Skokomish Reservation, Washington
St. Croix Chippewa Indians of Wisconsin, St. Croix Reservation
Saint Regis Band of Mohawk Indians of New York
Suquamish Indian Tribe of the Port Madison Reservation, Washington
Three Affiliated Tribes of the Fort Berthold Reservation, North
Dakota
Tohono O'odham Nation of Arizona
Turtle Mountain Band of Chippewa Indians of North Dakota
Valdez Native Tribe, Alaska (not a federally recognized tribe)
Walker River Paiute Tribe of the Walker River Reservation, Nevada
Wichita and Affiliated Tribes (Wichita, Keechi, Waco & Tawakonie),
Oklahoma
Yurok Tribe of the Yurok Reservation, California
Zuni Tribe of the Zuni Reservation, New Mexico
TRIBAL ORGANIZATIONS
-------------------------------------------------------- Appendix IV:2
Alamo Navajo School Board, New Mexico
Alaska Native Tribal Health Consortium, Alaska
Albuquerque Area Indian Health Board, Inc., New Mexico
All Indian Pueblo Council, Inc., New Mexico
California Rural Indian Health Board, Inc., California
Eastern Aleutian Tribes, Inc., Alaska
Eight Northern Indian Pueblos Council, Inc., New Mexico
Five Sandoval Indian Pueblos, Inc., New Mexico
Gila River Health Care Corporation, Arizona
Great Lakes Indian Fish & Wildlife Commission, Wisconsin
Laguna Service Center, New Mexico
Lassen Indian Health Center, California
Maniilaq Association, Alaska
Multi-County Youth Services, Oklahoma
Norton Sound Health Corporation, Alaska
Pueblo of Taos CMS, New Mexico
Ramah Navajo School Board, Inc., New Mexico
Southeast Alaska Regional Health Consortium, Alaska
United South & Eastern Tribes, Inc., Tennessee
United Tribes Technical College, North Dakota
Yukon-Kuskokwim Health Corporation, Alaska
(See figure in printed edition.)Appendix V
COMMENTS FROM THE DEPARTMENT OF
THE INTERIOR
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)
GAO'S COMMENTS
-------------------------------------------------------- Appendix IV:3
1. In response to a recommendation in our draft report that the
Secretary of the Interior remove the function of indirect rate
negotiation from the Office of Inspector General, Interior commented
that the Inspector General's office has fastidiously adhered to the
separation of duties by using a fully dedicated team of cost
specialists for negotiating indirect cost rates who are not involved
in other audits or reviews. Interior commented that when an
occasional need arises for the Office of Inspector General to conduct
audits relating to indirect cost rates, the office would typically
arrange to have these audits performed by the Defense Contract Audit
Agency. In separate comments, however, the Department's Office of
Inspector General agreed with this recommendation in our draft report
(see app. VI). We believe that the Office of Inspector General's
staff, as part of the audit arm of the Department, should be
available to conduct audits of tribes and tribal organizations and
their use of federal funds, as appropriate. We continue to have
concerns about the Inspector General's role in negotiating indirect
cost rates and plan to review the issue in more depth in a separate
study, which will take into account the differences in the responses
to our draft report, the legislative history of the Inspector General
Act, generally accepted auditing standards, and any other pertinent
guidance. As a result, we are not making the recommendation to
remove the rate negotiation function from the Inspector General's
Office at this time.
2. We agree that moving the responsibility for negotiation of
indirect cost rates out of the Office of Inspector General at the
present time may require the approval of the District Court under the
Ramah Navajo Chapter v. Lujan case. For the reasons discussed in
our first comment, we are not making the recommendation to move this
function at this time.
(See figure in printed edition.)Appendix VI
>COMMENTS FROM THE DEPARTMENT OF
THE INTERIOR'S OFFICE OF INSPECTOR
GENERAL
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
Now page xx.
GAO'S COMMENTS
-------------------------------------------------------- Appendix IV:4
1. As discussed in appendix V, we are not making the recommendation
to move the function of negotiating indirect cost rates from
Interior's Office of Inspector General at this time.
2. The Office of Inspector General requested that we remove �office
services, utilities, janitorial services, building and grounds
maintenance, and insurance� from the list of indirect costs in table
1.1 because there is no universal rule for classifying certain costs
as either direct or indirect under every accounting system. We agree
that this is the case, but instead of removing the items from the
list--which could be misleading--we noted the lack of universal rules
for accounting for direct and indirect costs in the indirect cost
section of the table.
(See figure in printed edition.)Appendix VII
COMMENTS FROM THE DEPARTMENT OF
HEALTH AND HUMAN SERVICES
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)
GAO CONTACTS AND STAFF
ACKNOWLEDGMENTS
======================================================== Appendix VIII
GAO CONTACTS
Chet Janik, (202) 512-6508
Jeff Malcolm, (303) 572-7374
Susan Iott, (202) 512-8767
ACKNOWLEDGMENTS
------------------------------------------------------ Appendix VIII:1
In addition to those named above, Len Ellis, Dick Kasdan, and Pam
Tumler made key contributions to this report.
*** End of document. ***