Competitive Contracting: Preliminary Issues Regarding FAIR Act
Implementation (Testimony, 10/28/1999, GAO/T-GGD-00-34).

The Federal Activities Inventory Reform Act of 1998 requires federal
agencies to identify their activities that are not inherently
governmental and make this information publicly available. The
implementation of the act is in the early stages. Many agencies have
only recently released their inventories. Many other agencies'
inventories still have not been made available to the public. This
testimony focuses on agencies' progress so far in compiling and
releasing their inventories. GAO briefly describes the status of the
initial steps taken to implement the act. GAO also highlights some of
the questions that are being raised by its examination of inventories at
the Department of Commerce, the Environmental Protection Agency, and the
General Services Administration.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-00-34
     TITLE:  Competitive Contracting: Preliminary Issues Regarding FAIR
	     Act Implementation
      DATE:  10/28/1999
   SUBJECT:  Agency missions
	     Administrative law
	     Reporting requirements
	     Government information dissemination
	     Privatization
	     Agency proceedings

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GAO/T-GGD-00-34

COMPETITIVE CONTRACTING: Preliminary Issues Regarding FAIR Act Implementation (GAO/T-GGD-00-34)
COMPETITIVE CONTRACTING
Preliminary Issues Regarding FAIR Act Implementation
Statement of J. Christopher Mihm Associate Director, Federal Management and Workforce Issues General Government Division
United States General Accounting Office
GAO Testimony Before the Subcommittee on Government Management,
Information and Technology Committee on Government Reform House of Representatives
For Release on Delivery 2: 00 p. m. EDT Thursday October 28, 1999

GAO/T-GGD-00-34

Statement Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 1 GAO/ T- GGD- 00- 34
Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss our observations on the initial implementation of the Federal Activities Inventory Reform (FAIR) Act of 1998. 1 As you know, as a first step, the FAIR Act requires executive agencies 2 to identify their activities that are not inherently governmental and make this information publicly available. 3 The implementation of the FAIR Act is in the early stages many agencies have only recently released their inventories. Many other agencies' FAIR Act inventories still have not been made available to the public including 14 of the 24 agencies covered by the Chief Financial Officers (CFO) Act.
At the request of this Subcommittee we are beginning a body of work to assess agencies' efforts under the FAIR Act. As agreed, my statement today will discuss the progress to date in developing and releasing agencies' FAIR Act inventories. I will briefly describe the status of the initial steps taken to implement the FAIR Act. Then I will highlight some of the questions that are being raised by our examination of the Department of Commerce, the Environmental Protection Agency (EPA), and the General Services Administration (GSA) FAIR Act inventories. We are examining FAIR Act efforts at these and selected other agencies at the request of the Chairwoman, Subcommittee on Oversight, Investigations, and Emergency Management, House Committee on Transportation and Infrastructure.
The FAIR Act requires executive agencies to submit each year to the Office of Management and Budget (OMB) inventories of activities that, in the judgment of the head of the agency, are not inherently governmental functions. The first FAIR Act inventories were due to OMB by June 30, 1999. According to an OMB official, most agencies met this requirement.
OMB, after a period of review and consultation with the agencies about their inventories, is to publish a notice in the Federal Register stating that the agencies' lists are available to the public. The agency heads are responsible for promptly transmitting a copy of the FAIR Act inventory to Congress and making the list available to the public. The FAIR Act requires 1 Public Law No. 105- 270, 112 Stat. 2382, 31 U. S. C. 501 note (1998). 2 Executive agencies are broadly defined in the FAIR Act to include civilian or military departments, or independent establishments within the meaning of 5 U. S. C. 101, 102, and 104 respectively, with certain specified exceptions.
3 Inherently governmental functions are those functions so intimately related to the public interest as to mandate performance by government employees. An inherently governmental function includes activities that require either the exercise of discretion in applying government authority, or the making of value judgments in making decisions for the government. Initial Steps to
Implement the FAIR Act
Statement Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 2 GAO/ T- GGD- 00- 34
these inventories to include information about (1) the fiscal year the activity first appeared on the FAIR Act list, (2) the number of full- timeequivalent (FTE) staff years necessary to perform the activity by a federal government source; 4 and (3) the name of a federal government employee responsible for the activity from whom additional information about the activity may be obtained. It is important to note that the FAIR Act does not require an agency to list activities that the agency determines are inherently governmental and therefore not commercial.
OMB published draft guidance in March 1999 and issued final guidance on the implementation of the FAIR Act on June 24 about a week before the first inventories were due. OMB implemented the FAIR Act by revising its Circular A- 76, Performance of Commercial Activities, and the A- 76 Supplemental Handbook. Under Circular A- 76, executive agencies are to conduct cost comparison studies of commercial activities performed by government personnel to determine whether it would be more cost efficient to maintain them in- house or contract with the private sector for their performance.
Under OMB's revised guidance, agencies were expected to list the activities the agency determined are not inherently governmental using specific codes established for A- 76. These include both reason and function codes. The reason codes are used to show whether the agency believes that an activity determined to be commercial should be subject to an A- 76 cost comparison or not, including identifying those commercial activities that cannot be competed because of a legislative or other exemption.
The function codes are to characterize the types of activities that the agency performs. The function codes range from fairly broad categories, such as family services, to much more specific (and defense- related) activities, such as Intermediate, Direct, or General Repair and Maintenance of Equipment Missiles.
OMB's implementation guidance stated that OMB could not set a firm timetable for its review and consultation about agencies' FAIR Act inventories but estimated that it would take about 60 days after receiving an agency's inventory and any requested supplemental information. Because of the staggered submission of agencies' inventories and the workload involved with reviewing the inventories, OMB officials said they
4 FTEs are used to measure civilian employment. 1 FTE is equal to 1 work year of 2,080 hours.
Statement Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 3 GAO/ T- GGD- 00- 34
would group a set of inventories for release together, rather than releasing them on a rolling, agency- by- agency schedule.
In a September 30, 1999, Federal Register announcement, OMB listed the first group of FAIR Act inventories from 52 agencies that were made available to the public. Of these 52 inventories, 10 were from CFO Act agencies. Five of these were from cabinet agencies (Agriculture, Commerce, Education, Health and Human Services, and Housing and Urban Development) and the other five were from EPA, GSA, the National Aeronautics and Space Administration, the Social Security Administration, and the Agency for International Development. The remaining 42 inventories released in September 1999 were from smaller executive agencies such as the Marine Mammal Commission and the Office of National Drug Control Policy.
The next step in implementing the FAIR Act includes potential challenges to the lists. According to the FAIR Act, within 30 days after publication of the notice of the public availability of the list, an interested party may challenge the omission of a particular activity from, or an inclusion of a particular activity on, the FAIR Act inventory. Within 28 days after an executive agency receives a challenge, it must decide the challenge and provide written notification, including a discussion of the rationale for the decision, to the challenger. This decision can be appealed to the head of the agency within 10 days after the challenger receives written notification of the decision.
Clearly, executive agencies and OMB still have plenty of work ahead to implement even the first step of the FAIR Act the public release of inventories. Nevertheless, our initial review of selected inventories that have been released raise a number of important questions about the efforts thus far. On behalf of the Subcommittee, we will be seeking answers to these and related questions over the coming months in order to assess agencies' efforts and to develop a body of best practices, as efforts under the FAIR Act move forward. Initial Implementation
of the FAIR Act Raises Important Questions
Statement Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 4 GAO/ T- GGD- 00- 34
A major area of interest during the initial implementation of the FAIR Act concerns the decisions agencies made about whether or not activities were eligible for competition and the reasons for those decisions. The FAIR Act provides that when an agency considers contracting with a private sector source for a commercial activity on its list, the agency shall use a competitive process to select the source unless it is exempted from doing so. A commercial activity in an agency can be exempted from competition for a variety of reasons. These reasons include legislative restrictions, other actions by Congress, Executive Orders, OMB decisions, or separate decisions by the relevant agency. Our initial review of the selected inventories suggests that questions can be raised about how agencies decided whether or not a commercial activity could be subject to competition, particularly when an agency reports that relatively few of its commercial activities could be considered for competition.
Out of a total of 829 FTEs performing commercial activities listed in EPA's FAIR Act inventory, about 30 FTEs (about 3.6 percent) were listed in commercial activities that could be considered for competition. These activities were listed under six function codes, including (1) nonmanufacturing operations (such as mapping and charting or printing and reproduction activities); (2) maintenance, repair, alteration, and minor construction of real property; (3) regulatory management and support services; (4) installation services; (5) administrative support for environmental activities; and (6) other selected functions.
EPA listed about 24 FTEs, or about 3 percent of the total of the commercial activities listed, as performing activities that are exempt from competition because of actions by Congress, Executive Order, or OMB. Most of these FTEs provide support for two function codes research, development, testing, and evaluation; or administrative support for environmental activities.
Overall, however, EPA's inventory shows that EPA has decided that most of its commercial activities are exempt from competition. This includes about 775 FTEs or over 93 percent of the total number of FTEs performing commercial activities at EPA. The function codes with FTEs listed as exempt include environmental activities; research, development, testing, and evaluation support; automated data processing; and finance and accounting. According to EPA, it has exempted a number of FTEs from competition because it needs to retain a core staff capability. In its July 1, 1999, letter to OMB, EPA stated that the majority of the functions on its FAIR Act inventory represent commercial core capability that should be retained in house. EPA's letter cited its need to maintain appropriate in What Decisions Did
Agencies Make About Whether or Not Activities Were Eligible For Competition and What Were The Reasons For Those Decisions?
EPA's Activities
Statement Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 5 GAO/ T- GGD- 00- 34
house expertise to effectively apply and enforce the nation's environmental laws in fulfilling its mission and meeting emergency requirements. For example, EPA's Deputy CFO told us that the agency exempted selected positions requiring scientific expertise in its research and development office in order to oversee the work produced by laboratories run by contractors.
Out of a total of 7,249 FTEs GSA determined were providing commercial activities, it listed 4,556 FTEs (63 percent) who perform commercial activities that could be subject to competition. Almost half of these FTEs were involved in the maintenance, repair, or minor construction of real property. GSA also listed 874 FTEs (12 percent of the total commercial activities identified) as exempt from competition more than half of these FTEs also perform activities involved with the maintenance, repair, or minor construction of real property.
According to GSA's FAIR Act inventory, 1,819 FTEs (25 percent of its FTEs performing commercial activities) should be retained in- house because the activities are being reinvented. 5 GSA plans to reassess the activities for possible recategorization once reinvention efforts are completed. The FTEs are devoted to various activities, including financial and payment services, information and telecommunication program management, and security and protection.
Agencies used a variety of approaches to develop their FAIR Act inventories. For example, a number of agencies used their Raines inventories as a basis for their FAIR Act inventories. 6 The Raines inventories were developed as part of a 1998 effort led by OMB under which agencies were to identify commercial and other activities and provide that information to OMB. Specifically, agencies were asked to list agency functions and positions supporting activities that were
 inherently governmental;
 commercial, but specifically exempt from the cost comparison requirements of OMB Circular A- 76;
 commercial and should be competed; and
 commercial, but must be retained in- house (including the reason why). 5 GSA's FAIR Act inventory also reported that 7,029 FTEs performed inherently governmental activities. 6 Then- OMB Director Franklin D. Raines issued a memorandum on May 12, 1998, requesting agencies review their full time and part time positions and develop a preliminary inventory. According to the memorandum, agencies were to use their inventories to establish opportunities for generating reinvention and competition savings. GSA's Activities
What Processes Did Agencies Use to Develop Their FAIR Act Inventories?
Statement Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 6 GAO/ T- GGD- 00- 34
Officials from the Department of Commerce said that Commerce based its FAIR Act inventory almost entirely on the information from its Raines inventory. The Department asked its component organizations to update the information that previously had been prepared for OMB as part of its Raines inventory. According to Commerce officials, these organizations made only minor changes for the FAIR Act inventory.
GSA described its approach as starting from the top and working down, with agency management forming a team to develop its FAIR Act inventory. GSA's team was composed of one or two staff members from each of GSA's service divisions and regional offices. GSA officials said that this team held lengthy discussions about GSA's core mission and about which of its functions should be considered inherently governmental. In addition, a contractor was hired to train staff and to facilitate discussions on the topic of inherently governmental activities. GSA officials said that making the training as inclusive as possible was important to address the staff's apprehensions about privatization.
EPA delegated the responsibility for developing its inventory to its 10 regional offices because it decided that the regional officials closest to the work should make determinations about specific activities. EPA headquarters reviewed and compared the submissions from its regions and offices and worked to resolve any discrepancies. EPA's Deputy CFO said that he does not expect the percentage of activities EPA identifies as commercial to remain static. He predicted that it would increase in the future, although he also emphasized that EPA is already very reliant on contractor support to fulfill its mission.
The inventories now being released represent the first time that agencies have produced inventories under the FAIR Act. Thus, it is not surprising that a variety of different reporting formats are being used. It will likely take several reporting cycles before a documented set of best practices emerges that meets the needs of Congress and other interested parties. Also, it is not surprising that these inventories will become more useful as they become clearer and more complete.
The Department of Commerce's list provides an example of a submission that could be clearer and more complete. The Department used the format of its Raines list with the reason codes to be used for the FAIR Act inventory. As a result, many of the inventory's entries are contradictory or ambiguous. In one case, five different entries, totaling 177 FTEs involved in mapping and charting activities, are listed as commercial competitive that is, commercial activities that could be subject to How Useful Are the FAIR
Act Inventories?
Statement Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 7 GAO/ T- GGD- 00- 34
competition. However, Commerce also assigned these same entries a reason code indicating that these activities are prohibited from conversion to contract because of legislation. Thus, the information reported does not appear to be consistent. In addition, Commerce did not assign any reason codes for a substantial number of FTEs listed throughout its FAIR Act inventory, so it is not clear how Commerce is characterizing these commercial activities.
Officials in agencies we spoke to generally found that the A- 76 codes needed additional refinement. Officials from the Department of Commerce noted that the function codes were oriented toward military activities and needed to be augmented to more fully capture the range of activities undertaken by civilian agencies. In response to concerns such as Commerce's, OMB allows agencies to develop new function codes to better meet their needs. Commerce, EPA, and GSA are among the agencies that are using additional function codes. While such flexibility is important to accurately reflect the diversity of the types of specific activities that individual agencies perform, it also needs to be balanced against the need for comparisons of the types of activities that are common across agencies.
Beyond the requirements of the FAIR Act, some agencies are including information with their inventories that can provide additional perspective on the contracting and management issues confronting agencies. In the inventories that we have examined, we found that, in some cases, the agencies included supplemental information that was helpful, such as
 listing inherently governmental activities,
 describing the scope of activities currently under contract, and
 discussing how listed activities contribute to agencies' strategic and annual performance.
Including information about an agency's inherently governmental activities (such as was provided to OMB as part of the Raines inventories) helps provide a fuller perspective about all of an agency's activities, not just those the agency considers commercial. For example, although not required to do so, GSA's FAIR Act inventory included inherently governmental activities. Such information can help provide Congress and other interested parties with a more complete picture of GSA's activities and allows for more informed judgments about whether an activity currently characterized as inherently governmental should be considered commercial. What Supplemental
Information Can Be Included to Increase the Usefulness of Inventories?
Statement Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 8 GAO/ T- GGD- 00- 34
Similarly, describing the scope of activities that an agency has already outsourced can provide an important perspective on and context for the agency's operations. In their letters or other documents submitting their FAIR Act inventories to OMB, for example, GSA, EPA, and Commerce all describe their current levels of contracting. Commerce's letter said that its service contracting outlays increased by 36 percent from 1996 through 1998. GSA stated that nearly 94 percent of its budget is spent for contractors. EPA's letter estimates the amount of resources currently contracted outside of EPA translates into 11,000 to15, 000 FTE had it retained the work inside of the agency.
Finally, it is important to recognize how an agency's strategies, including any plans to contract for services, contributes to the achievement of the agency's mission and its programmatic goals. In its introduction to its FAIR Act inventory, GSA states that its strategic plan provides the road map for achieving its mission and the context within which it developed this inventory, citing four goals, such as one to create loyal customers by providing excellence in customer service. EPA's FAIR Act inventory links each commercial activity with 1 or more of EPA's 10 strategic goals such as linking the administrative support activities in the Office of Water with EPA's strategic goal of ensuring clean and safe water.
The FAIR Act inventories, then, can provide valuable information about the role of contracting in an agency's efforts to provide cost- effective products and services. OMB has encouraged agencies to understand and use a variety of tools and strategies to make sound business decisions and enhance federal performance through competition and choice. Efforts under the FAIR Act can best be understood within the context of other initiatives, such as the Government Performance and Results Act, performance- based organizations, and franchise funds, as part of a package of ways agencies can improve services and reduce costs. FAIR Act inventories that provide information and perspective on how various initiatives are being used together can be helpful to congressional and other decisionmakers in assessing the economy, efficiency, and effectiveness of an agency.
In summary, Mr. Chairman, most agencies' FAIR Act inventories have been submitted to OMB for review and consultation, and the first group of inventories is now publicly available. Clearly, executive agencies and OMB still have plenty of work ahead to implement the FAIR Act, including the public release of more inventories and the resolution of any challenges. Nevertheless, our initial review of selected inventories raise some
Statement Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 9 GAO/ T- GGD- 00- 34
questions about the efforts thus far which we will be reviewing for the Subcommittee. These questions include the following:
 What decisions did agencies make about whether or not activities were eligible for competition and what were the reasons for those decisions?
 What processes did agencies use to develop their FAIR Act inventories?
 How useful are the FAIR Act inventories?
 What supplemental information can be included to increase the usefulness of inventories?
By enacting the FAIR Act, Congress has increased the visibility of agencies' commercial activities. Continuing congressional interest in the FAIR Act process is needed in order to maintain serious agency attention to developing and using the FAIR Act inventories. Oversight hearings, such as today's hearing, send clear messages to agencies that Congress is serious about improving the efficiency and effectiveness of government operations and the effective implementation of the FAIR Act. We look forward to continuing to work with you and other Members of Congress as your oversight efforts continue.
Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have.
Contacts and Acknowledgements
For further contacts regarding this testimony, please contact J. Christopher Mihm at (202) 512- 8676. Individuals making key contributions to this testimony included Steven G. Lozano, Thomas M. Beall, Susan Michal- Smith, Susan Ragland, and Jerome T. Sandau.
Page 10 GAO/ T- GGD- 00- 34
Page 11 GAO/ T- GGD- 00- 34
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COMPETITIVE CONTRACTING: Preliminary Issues Regarding FAIR Act
Implementation (GAO/T-GGD-00-34) COMPETITIVE CONTRACTING
Preliminary Issues Regarding FAIR Act Implementation Statement of
J. Christopher Mihm Associate Director, Federal Management and
Workforce Issues General Government Division United States General
Accounting Office GAO Testimony Before the Subcommittee on
Government Management, Information and Technology Committee on
Government Reform House of Representatives For Release on Delivery
2: 00 p. m. EDT Thursday October 28, 1999   GAO/T-GGD-00-34
Statement Competitive Contracting: Preliminary Issues Regarding
FAIR Act Implementation Page 1 GAO/T-GGD-00-34 Mr. Chairman and
Members of the Subcommittee: I am pleased to be here today to
discuss our observations on the initial implementation of the
Federal Activities Inventory Reform (FAIR) Act of 1998. 1 As you
know, as a first step, the FAIR Act requires executive agencies 2
to identify their activities that are not inherently governmental
and make this information publicly available. 3 The implementation
of the FAIR Act is in the early stages many agencies have only
recently released their inventories. Many other agencies' FAIR Act
inventories still have not been made available to the public
including 14 of the 24 agencies covered by the Chief Financial
Officers (CFO) Act. At the request of this Subcommittee we are
beginning a body of work to assess agencies' efforts under the
FAIR Act. As agreed, my statement today will discuss the progress
to date in developing and releasing agencies' FAIR Act
inventories. I will briefly describe the status of the initial
steps taken to implement the FAIR Act. Then I will highlight some
of the questions that are being raised by our examination of the
Department of Commerce, the Environmental Protection Agency (EPA),
and the General Services Administration (GSA) FAIR Act
inventories. We are examining FAIR Act efforts at these and
selected other agencies at the request of the Chairwoman,
Subcommittee on Oversight, Investigations, and Emergency
Management, House Committee on Transportation and Infrastructure.
The FAIR Act requires executive agencies to submit each year to
the Office of Management and Budget (OMB) inventories of
activities that, in the judgment of the head of the agency, are
not inherently governmental functions. The first FAIR Act
inventories were due to OMB by June 30, 1999. According to an OMB
official, most agencies met this requirement. OMB, after a period
of review and consultation with the agencies about their
inventories, is to publish a notice in the Federal Register
stating that the agencies' lists are available to the public. The
agency heads are responsible for promptly transmitting a copy of
the FAIR Act inventory to Congress and making the list available
to the public. The FAIR Act requires 1 Public Law No. 105- 270,
112 Stat. 2382, 31 U. S. C. 501 note (1998). 2 Executive agencies
are broadly defined in the FAIR Act to include civilian or
military departments, or independent establishments within the
meaning of 5 U. S. C. 101, 102, and 104 respectively, with certain
specified exceptions. 3 Inherently governmental functions are
those functions so intimately related to the public interest as to
mandate performance by government employees. An inherently
governmental function includes activities that require either the
exercise of discretion in applying government authority, or the
making of value judgments in making decisions for the government.
Initial Steps to Implement the FAIR Act Statement Competitive
Contracting: Preliminary Issues Regarding FAIR Act Implementation
Page 2 GAO/T-GGD-00-34 these inventories to include information
about (1) the fiscal year the activity first appeared on the FAIR
Act list, (2) the number of full- timeequivalent (FTE) staff years
necessary to perform the activity by a federal government source;
4 and (3) the name of a federal government employee responsible
for the activity from whom additional information about the
activity may be obtained. It is important to note that the FAIR
Act does not require an agency to list activities that the agency
determines are inherently governmental and therefore not
commercial. OMB published draft guidance in March 1999 and issued
final guidance on the implementation of the FAIR Act on June 24
about a week before the first inventories were due. OMB
implemented the FAIR Act by revising its Circular A- 76,
Performance of Commercial Activities, and the A- 76 Supplemental
Handbook. Under Circular A- 76, executive agencies are to conduct
cost comparison studies of commercial activities performed by
government personnel to determine whether it would be more cost
efficient to maintain them in- house or contract with the private
sector for their performance. Under OMB's revised guidance,
agencies were expected to list the activities the agency
determined are not inherently governmental using specific codes
established for A- 76. These include both reason and function
codes. The reason codes are used to show whether the agency
believes that an activity determined to be commercial should be
subject to an A- 76 cost comparison or not, including identifying
those commercial activities that cannot be competed because of a
legislative or other exemption. The function codes are to
characterize the types of activities that the agency performs. The
function codes range from fairly broad categories, such as family
services, to much more specific (and defense- related) activities,
such as Intermediate, Direct, or General Repair and Maintenance of
Equipment Missiles. OMB's implementation guidance stated that OMB
could not set a firm timetable for its review and consultation
about agencies' FAIR Act inventories but estimated that it would
take about 60 days after receiving an agency's inventory and any
requested supplemental information. Because of the staggered
submission of agencies' inventories and the workload involved with
reviewing the inventories, OMB officials said they 4 FTEs are used
to measure civilian employment. 1 FTE is equal to 1 work year of
2,080 hours. Statement Competitive Contracting: Preliminary Issues
Regarding FAIR Act Implementation Page 3 GAO/T-GGD-00-34 would
group a set of inventories for release together, rather than
releasing them on a rolling, agency- by- agency schedule. In a
September 30, 1999, Federal Register announcement, OMB listed the
first group of FAIR Act inventories from 52 agencies that were
made available to the public. Of these 52 inventories, 10 were
from CFO Act agencies. Five of these were from cabinet agencies
(Agriculture, Commerce, Education, Health and Human Services, and
Housing and Urban Development) and the other five were from EPA,
GSA, the National Aeronautics and Space Administration, the Social
Security Administration, and the Agency for International
Development. The remaining 42 inventories released in September
1999 were from smaller executive agencies such as the Marine
Mammal Commission and the Office of National Drug Control Policy.
The next step in implementing the FAIR Act includes potential
challenges to the lists. According to the FAIR Act, within 30 days
after publication of the notice of the public availability of the
list, an interested party may challenge the omission of a
particular activity from, or an inclusion of a particular activity
on, the FAIR Act inventory. Within 28 days after an executive
agency receives a challenge, it must decide the challenge and
provide written notification, including a discussion of the
rationale for the decision, to the challenger. This decision can
be appealed to the head of the agency within 10 days after the
challenger receives written notification of the decision. Clearly,
executive agencies and OMB still have plenty of work ahead to
implement even the first step of the FAIR Act the public release
of inventories. Nevertheless, our initial review of selected
inventories that have been released raise a number of important
questions about the efforts thus far. On behalf of the
Subcommittee, we will be seeking answers to these and related
questions over the coming months in order to assess agencies'
efforts and to develop a body of best practices, as efforts under
the FAIR Act move forward. Initial Implementation of the FAIR Act
Raises Important Questions Statement Competitive Contracting:
Preliminary Issues Regarding FAIR Act Implementation Page 4 GAO/T-
GGD-00-34 A major area of interest during the initial
implementation of the FAIR Act concerns the decisions agencies
made about whether or not activities were eligible for competition
and the reasons for those decisions. The FAIR Act provides that
when an agency considers contracting with a private sector source
for a commercial activity on its list, the agency shall use a
competitive process to select the source unless it is exempted
from doing so. A commercial activity in an agency can be exempted
from competition for a variety of reasons. These reasons include
legislative restrictions, other actions by Congress, Executive
Orders, OMB decisions, or separate decisions by the relevant
agency. Our initial review of the selected inventories suggests
that questions can be raised about how agencies decided whether or
not a commercial activity could be subject to competition,
particularly when an agency reports that relatively few of its
commercial activities could be considered for competition. Out of
a total of 829 FTEs performing commercial activities listed in
EPA's FAIR Act inventory, about 30 FTEs (about 3.6 percent) were
listed in commercial activities that could be considered for
competition. These activities were listed under six function
codes, including (1) nonmanufacturing operations (such as mapping
and charting or printing and reproduction activities); (2)
maintenance, repair, alteration, and minor construction of real
property; (3) regulatory management and support services; (4)
installation services; (5) administrative support for
environmental activities; and (6) other selected functions. EPA
listed about 24 FTEs, or about 3 percent of the total of the
commercial activities listed, as performing activities that are
exempt from competition because of actions by Congress, Executive
Order, or OMB. Most of these FTEs provide support for two function
codes research, development, testing, and evaluation; or
administrative support for environmental activities. Overall,
however, EPA's inventory shows that EPA has decided that most of
its commercial activities are exempt from competition. This
includes about 775 FTEs or over 93 percent of the total number of
FTEs performing commercial activities at EPA. The function codes
with FTEs listed as exempt include environmental activities;
research, development, testing, and evaluation support; automated
data processing; and finance and accounting. According to EPA, it
has exempted a number of FTEs from competition because it needs to
retain a core staff capability. In its July 1, 1999, letter to
OMB, EPA stated that the majority of the functions on its FAIR Act
inventory represent commercial core capability that should be
retained in house. EPA's letter cited its need to maintain
appropriate in What Decisions Did Agencies Make About Whether or
Not Activities Were Eligible For Competition and What Were The
Reasons For Those Decisions? EPA's Activities Statement
Competitive Contracting: Preliminary Issues Regarding FAIR Act
Implementation Page 5 GAO/T-GGD-00-34 house expertise to
effectively apply and enforce the nation's environmental laws in
fulfilling its mission and meeting emergency requirements. For
example, EPA's Deputy CFO told us that the agency exempted
selected positions requiring scientific expertise in its research
and development office in order to oversee the work produced by
laboratories run by contractors. Out of a total of 7,249 FTEs GSA
determined were providing commercial activities, it listed 4,556
FTEs (63 percent) who perform commercial activities that could be
subject to competition. Almost half of these FTEs were involved in
the maintenance, repair, or minor construction of real property.
GSA also listed 874 FTEs (12 percent of the total commercial
activities identified) as exempt from competition more than half
of these FTEs also perform activities involved with the
maintenance, repair, or minor construction of real property.
According to GSA's FAIR Act inventory, 1,819 FTEs (25 percent of
its FTEs performing commercial activities) should be retained in-
house because the activities are being reinvented. 5 GSA plans to
reassess the activities for possible recategorization once
reinvention efforts are completed. The FTEs are devoted to various
activities, including financial and payment services, information
and telecommunication program management, and security and
protection. Agencies used a variety of approaches to develop their
FAIR Act inventories. For example, a number of agencies used their
Raines inventories as a basis for their FAIR Act inventories. 6
The Raines inventories were developed as part of a 1998 effort led
by OMB under which agencies were to identify commercial and other
activities and provide that information to OMB. Specifically,
agencies were asked to list agency functions and positions
supporting activities that were  inherently governmental;
commercial, but specifically exempt from the cost comparison
requirements of OMB Circular A- 76;  commercial and should be
competed; and  commercial, but must be retained in- house
(including the reason why). 5 GSA's FAIR Act inventory also
reported that 7,029 FTEs performed inherently governmental
activities. 6 Then- OMB Director Franklin D. Raines issued a
memorandum on May 12, 1998, requesting agencies review their full
time and part time positions and develop a preliminary inventory.
According to the memorandum, agencies were to use their
inventories to establish opportunities for generating reinvention
and competition savings. GSA's Activities What Processes Did
Agencies Use to Develop Their FAIR Act Inventories? Statement
Competitive Contracting: Preliminary Issues Regarding FAIR Act
Implementation Page 6 GAO/T-GGD-00-34 Officials from the
Department of Commerce said that Commerce based its FAIR Act
inventory almost entirely on the information from its Raines
inventory. The Department asked its component organizations to
update the information that previously had been prepared for OMB
as part of its Raines inventory. According to Commerce officials,
these organizations made only minor changes for the FAIR Act
inventory. GSA described its approach as starting from the top and
working down, with agency management forming a team to develop its
FAIR Act inventory. GSA's team was composed of one or two staff
members from each of GSA's service divisions and regional offices.
GSA officials said that this team held lengthy discussions about
GSA's core mission and about which of its functions should be
considered inherently governmental. In addition, a contractor was
hired to train staff and to facilitate discussions on the topic of
inherently governmental activities. GSA officials said that making
the training as inclusive as possible was important to address the
staff's apprehensions about privatization. EPA delegated the
responsibility for developing its inventory to its 10 regional
offices because it decided that the regional officials closest to
the work should make determinations about specific activities. EPA
headquarters reviewed and compared the submissions from its
regions and offices and worked to resolve any discrepancies. EPA's
Deputy CFO said that he does not expect the percentage of
activities EPA identifies as commercial to remain static. He
predicted that it would increase in the future, although he also
emphasized that EPA is already very reliant on contractor support
to fulfill its mission. The inventories now being released
represent the first time that agencies have produced inventories
under the FAIR Act. Thus, it is not surprising that a variety of
different reporting formats are being used. It will likely take
several reporting cycles before a documented set of best practices
emerges that meets the needs of Congress and other interested
parties. Also, it is not surprising that these inventories will
become more useful as they become clearer and more complete. The
Department of Commerce's list provides an example of a submission
that could be clearer and more complete. The Department used the
format of its Raines list with the reason codes to be used for the
FAIR Act inventory. As a result, many of the inventory's entries
are contradictory or ambiguous. In one case, five different
entries, totaling 177 FTEs involved in mapping and charting
activities, are listed as commercial competitive that is,
commercial activities that could be subject to How Useful Are the
FAIR Act Inventories? Statement Competitive Contracting:
Preliminary Issues Regarding FAIR Act Implementation Page 7 GAO/T-
GGD-00-34 competition. However, Commerce also assigned these same
entries a reason code indicating that these activities are
prohibited from conversion to contract because of legislation.
Thus, the information reported does not appear to be consistent.
In addition, Commerce did not assign any reason codes for a
substantial number of FTEs listed throughout its FAIR Act
inventory, so it is not clear how Commerce is characterizing these
commercial activities. Officials in agencies we spoke to generally
found that the A- 76 codes needed additional refinement. Officials
from the Department of Commerce noted that the function codes were
oriented toward military activities and needed to be augmented to
more fully capture the range of activities undertaken by civilian
agencies. In response to concerns such as Commerce's, OMB allows
agencies to develop new function codes to better meet their needs.
Commerce, EPA, and GSA are among the agencies that are using
additional function codes. While such flexibility is important to
accurately reflect the diversity of the types of specific
activities that individual agencies perform, it also needs to be
balanced against the need for comparisons of the types of
activities that are common across agencies. Beyond the
requirements of the FAIR Act, some agencies are including
information with their inventories that can provide additional
perspective on the contracting and management issues confronting
agencies. In the inventories that we have examined, we found that,
in some cases, the agencies included supplemental information that
was helpful, such as  listing inherently governmental activities,
describing the scope of activities currently under contract, and
discussing how listed activities contribute to agencies' strategic
and annual performance. Including information about an agency's
inherently governmental activities (such as was provided to OMB as
part of the Raines inventories) helps provide a fuller perspective
about all of an agency's activities, not just those the agency
considers commercial. For example, although not required to do so,
GSA's FAIR Act inventory included inherently governmental
activities. Such information can help provide Congress and other
interested parties with a more complete picture of GSA's
activities and allows for more informed judgments about whether an
activity currently characterized as inherently governmental should
be considered commercial. What Supplemental Information Can Be
Included to Increase the Usefulness of Inventories? Statement
Competitive Contracting: Preliminary Issues Regarding FAIR Act
Implementation Page 8 GAO/T-GGD-00-34 Similarly, describing the
scope of activities that an agency has already outsourced can
provide an important perspective on and context for the agency's
operations. In their letters or other documents submitting their
FAIR Act inventories to OMB, for example, GSA, EPA, and Commerce
all describe their current levels of contracting. Commerce's
letter said that its service contracting outlays increased by 36
percent from 1996 through 1998. GSA stated that nearly 94 percent
of its budget is spent for contractors. EPA's letter estimates the
amount of resources currently contracted outside of EPA translates
into 11,000 to15, 000 FTE had it retained the work inside of the
agency. Finally, it is important to recognize how an agency's
strategies, including any plans to contract for services,
contributes to the achievement of the agency's mission and its
programmatic goals. In its introduction to its FAIR Act inventory,
GSA states that its strategic plan provides the road map for
achieving its mission and the context within which it developed
this inventory, citing four goals, such as one to create loyal
customers by providing excellence in customer service. EPA's FAIR
Act inventory links each commercial activity with 1 or more of
EPA's 10 strategic goals such as linking the administrative
support activities in the Office of Water with EPA's strategic
goal of ensuring clean and safe water. The FAIR Act inventories,
then, can provide valuable information about the role of
contracting in an agency's efforts to provide cost- effective
products and services. OMB has encouraged agencies to understand
and use a variety of tools and strategies to make sound business
decisions and enhance federal performance through competition and
choice. Efforts under the FAIR Act can best be understood within
the context of other initiatives, such as the Government
Performance and Results Act, performance- based organizations, and
franchise funds, as part of a package of ways agencies can improve
services and reduce costs. FAIR Act inventories that provide
information and perspective on how various initiatives are being
used together can be helpful to congressional and other
decisionmakers in assessing the economy, efficiency, and
effectiveness of an agency. In summary, Mr. Chairman, most
agencies' FAIR Act inventories have been submitted to OMB for
review and consultation, and the first group of inventories is now
publicly available. Clearly, executive agencies and OMB still have
plenty of work ahead to implement the FAIR Act, including the
public release of more inventories and the resolution of any
challenges. Nevertheless, our initial review of selected
inventories raise some Statement Competitive Contracting:
Preliminary Issues Regarding FAIR Act Implementation Page 9 GAO/T-
GGD-00-34 questions about the efforts thus far which we will be
reviewing for the Subcommittee. These questions include the
following:  What decisions did agencies make about whether or not
activities were eligible for competition and what were the reasons
for those decisions?  What processes did agencies use to develop
their FAIR Act inventories?  How useful are the FAIR Act
inventories?  What supplemental information can be included to
increase the usefulness of inventories? By enacting the FAIR Act,
Congress has increased the visibility of agencies' commercial
activities. Continuing congressional interest in the FAIR Act
process is needed in order to maintain serious agency attention to
developing and using the FAIR Act inventories. Oversight hearings,
such as today's hearing, send clear messages to agencies that
Congress is serious about improving the efficiency and
effectiveness of government operations and the effective
implementation of the FAIR Act. We look forward to continuing to
work with you and other Members of Congress as your oversight
efforts continue. Mr. Chairman, this concludes my prepared
statement. I would be pleased to respond to any questions you or
other Members of the Subcommittee may have. Contacts and
Acknowledgements For further contacts regarding this testimony,
please contact J. Christopher Mihm at (202) 512- 8676. Individuals
making key contributions to this testimony included Steven G.
Lozano, Thomas M. Beall, Susan Michal- Smith, Susan Ragland, and
Jerome T. Sandau. Page 10 GAO/T-GGD-00-34 Page 11 GAO/T-GGD-00-34
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