Indian Self-Determination Contracting: Shortfalls in Contract Support
Costs and Alternatives for Funding Them (Testimony, 09/15/1999,
GAO/T-RCED-99-287).

Pursuant to a congressional request, GAO discussed issues surrounding
Indian contract support costs, focusing on: (1) the different categories
of contract support costs; (2) the extent of, and reasons for, increases
in contract support costs over the last several years; and (3) four
alternatives for funding these costs.

GAO noted that: (1) the Bureau of Indian Affairs and the Indian Health
Service commonly refer to three categories of contract support costs:
(a) indirect costs; (b) direct contract support costs; and (c) startup
costs; (2) indirect costs are costs for a tribe's common support
services, such as accounting; (3) direct contract support costs are
costs for activities that are program-related but for which the tribe
does not receive program funds, such as workers' compensation; (4)
finally, startup costs are costs for one-time expenses incurred in
beginning a program, such as the costs of computer hardware and
software; (5) tribes' allowable contract support costs tripled from 1989
through 1998, increasing from about $125 million to about $375 million;
(6) this increase occurred for two principal reasons: (a) the total
costs of tribally contracted programs--upon which contract support costs
are based--have increased; and (b) the total cost to tribes of
administering their self-determination contracts has increased; (7)
although the amounts appropriated for contract support costs have
increased over the past decade, they have not increased as fast as the
support costs, resulting in funding shortfalls; (8) for fiscal year
1998, for example, the shortfall between appropriations (almost $280
million) and allowable contract support costs (about $375 million) was
about $95 million; (9) projections of future contract support costs are
difficult to calculate because the number of programs for which tribes
will choose to contract in the future is uncertain, as is the amount of
funding they will receive; (10) the impasse over whether to provide full
funding for contract support costs or limit these costs continues in
Congress; (11) to assist Congress in its deliberations over how to
resolve the impasse over contract support costs, GAO presented four
alternative funding approaches, each of which can be considered
individually or combined with the others; (12) 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 separately from and in
addition to a program's direct costs and instead provide a single,
consolidated contract amount; (13) each of the alternatives has
advantages and disadvantages; (14) three of the four alternatives have
the advantage of controlling future increases in contract support costs;
and (15) a disadvantage of these same three alternatives is that they
would require legislative changes to the act's funding provisions.

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

 REPORTNUM:  T-RCED-99-287
     TITLE:  Indian Self-Determination Contracting: Shortfalls in
	     Contract Support Costs and Alternatives for Funding Them
      DATE:  09/15/1999
   SUBJECT:  Native Americans
	     Contract administration
	     Administrative costs
	     Funds management
	     Appropriated funds
	     Indian affairs legislation
	     Cost control
	     Allowable costs
	     Contract costs
	     Overhead costs

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Cover
================================================================ COVER

Before the Committee on Indian Affairs,
U.S.  Senate

For Release
on Delivery
Expected at
9:30 a.m.  EDT
Wednesday
September 15, 1999

INDIAN SELF-DETERMINATION
CONTRACTING - SHORTFALLS IN
CONTRACT SUPPORT COSTS AND
ALTERNATIVES FOR FUNDING THEM

Statement of Jim Wells, Director,
Energy, Resources, and Science Issues
Resources, Community, and Economic
Development Division

GAO/T-RCED-99-287

GAO/RCED-99-287T

(141387)

Abbreviations
=============================================================== ABBREV

  BIA -
  IHS -

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

Two months ago, the President of the United States visited the Oglala
Sioux Tribe in South Dakota, stressing Native Americans' need for
economic empowerment.  This historic visit is another stepï¿½the first
of which was taken in 1975 with the passage of the Indian
Self-Determination and Education Assistance Act (the act)ï¿½toward
recognizing the potential for tribes' self-determination through
economic development.  The act, as amended, provides that tribes
shall have the opportunity to assume the management of federal Indian
programs and that they shall receive contract support funds to cover
their costs for contract management and administration.\1 However,
during our review of contract support costs for tribal
self-determination contracts, many tribal officials told us that they
have diverted funds from economic development opportunities to cover
shortfalls in federal funding. 

For example, for fiscal year 1998, the Bureau of Indian Affairs (BIA)
and the Indian Health Service (IHS) calculated that they owed the
Oglala Sioux an additional $1.5 million in contract support funding
that they were unable to provide because of limited appropriations. 
For all tribes with self-determination contracts, the shortfall in
funding for allowable contract support costs totaled $95 million in
fiscal year 1998.\2

Contract support costs are intended to cover the expenses tribes
incur (e.g., for financial management and accounting, some training,
and program startup costs) in managing contracted programs such as
social services, hospitals and clinics, road maintenance, law
enforcement, and forestry. 

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, the tribes' costs that BIA and IHS determine are eligible
for reimbursement), increases in the shortfall between these costs
and the funding available for them, and litigation over such
shortfalls.  Because of a lack of progress in resolving this issue
during 1999, the Senate Committee on Appropriations has proposed
extending the moratorium for another year. 

Because of congressional concerns over ever-increasing contract
support costs and shortfalls in funding these costs, the Subcommittee
on Interior and Related Agencies, Senate Committee on Appropriations,
and the Senate Committee on Indian Affairs asked us to review various
aspects of these costs in our June 1999 report.\3 We testified last
month on our report before the House Committee on Resources.\4 Our
testimony today further discusses the issues surrounding Indian
contract support costs.  In particular, we will discuss (1) the
different categories of contract support costs; (2) the extent of,
and reasons for, increases in contract support costs over the last
several years; and (3) four alternatives for funding these costs.\5

In summary, BIA and IHS commonly refer to three categories of
contract support costs:  (1) indirect costs, (2) direct contract
support costs, and (3) startup costs.  Indirect costs are costs for a
tribe's common support services, such as accounting.  Direct contract
support costs are costs for activities that are program-related but
for which the tribe does not receive program funds, such as workers'
compensation.  Finally, startup costs are costs for one-time expenses
incurred in beginning a program, such as the costs of computer
hardware and software. 

Tribes' allowable contract support costs tripled from 1989 through
1998, increasing from about $125 million to about $375 million.\6
This increase occurred for two principal reasons.  First, the total
costs of tribally contracted programsï¿½upon which contract support
costs are basedï¿½have increased.  Second, the total cost to tribes of
administering their self-determination contracts has increased. 
Although the amounts appropriated for contract support costs have
increased over the past decade, they have not increased as fast as
the support costs, resulting in funding shortfalls.  For fiscal year
1998, for example, the shortfall between appropriations (almost $280
million) and allowable contract support costs (about $375 million)
was about $95 million.  Projections of future contract support costs
are difficult to calculate because the number of programs for which
tribes will choose to contract in the future is uncertain, as is the
amount of funding they will receive. 

The impasse over whether to provide full funding for contract support
costs or limit these costs continues in the Congress.  To assist the
Congress in its deliberations over how to resolve the impasse over
contract support costs, we present four alternative funding
approaches, each of which can be considered individually or combined
with the others.  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 separately from and in addition to a
program's direct costs and instead provide a single, consolidated
contract amount.  Each of the alternatives has advantages and
disadvantages.  Three of the four alternatives have the advantage of
controlling future increases in contract support costs.  A
disadvantage of these same three alternatives is that they would
require legislative changes to the act's funding provisions. 

--------------------
\1 Throughout this testimony, the term ï¿½tribesï¿½ will refer to both
tribes and tribal organizations eligible to contract for programs
under the act.  Also, the term ï¿½contractsï¿½ will refer to contracts,
grants, self-governance agreements, cooperative agreements, or annual
funding agreements that are entered into under the act, as amended,
and receive contract support funds. 

\2 Tribal contractors and IHS are currently engaged in litigation to
determine whether, for Indian self-determination contracts, the
funding for tribal contract support costs is limited to the amount
appropriated. 

\3 Indian Self-Determination Act:  Shortfalls in Indian Contract
Support Costs Need to Be Addressed (GAO/RCED-99-150, June 30, 1999). 

\4 Indian Self-Determination Contracting:  Shortfalls and
Alternatives for Funding Contract Support Costs (GAO/T-RCED-99-271,
August 3, 1999). 

\5 The June 1999 report also addressed how the tribes have been
affected by funding shortfalls for contract support costs and whether
the act's provisions for contract support costs have been implemented
consistently.  The report contained two recommendations to make BIA's
and IHS' payment of contract support costs more consistent. 

\6 Dollar figures used throughout this testimony have been adjusted
to constant 1998 values. 

   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Before 1975, Native Americans and Alaska Natives depended on the
federal government to provide them with such services as law
enforcement, social services, natural resource management, hospital
care, and other health services like dental and mental health care. 
This began to change in 1975 when the government announced a policy
of self-determination for tribal governments.  The federal
government's self-determination policy allows tribes to take over the
management and administration of programs previously managed by the
government on their behalf.  As part of the government's policy,
tribes receive funding for the programs they contract to manage as
well as funding to cover the costs of their contract management and
administration.  These latter costs, referred to as contract support
costs, are the necessary and reasonable costs tribes incur in
establishing and maintaining the support systems needed to administer
their contracts. 

Tribes enter into self-determination contracts with two agencies: 
(1) BIA, which is the primary federal agency with responsibility for
administering Indian policy and discharging the federal government's
trust responsibility for American Indians and Native Alaskan
villages, and (2) IHS, which is responsible for delivering health
services to American Indians and Alaska Natives.  If a tribe chooses
not to contract for a BIA or IHS program, the agencies continue to
provide the service to the tribe.  In fiscal year 1997, tribes
contracted for programs worth about $546 million, excluding such
programs as education and construction; BIA's budget that year
totaled $1.7 billion.  Tribes contracted for IHS programs worth $719
million in fiscal year 1998, and IHS' total budget for that same year
was over $2 billion. 

   CATEGORIES OF CONTRACT SUPPORT
   COSTS
---------------------------------------------------------- Chapter 0:2

BIA and IHS developed implementing guidelines that specified 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 defines and provides examples of these cost
categories. 

                                Table 1
                
                 Categories of Contract Support Costs,
                       Definitions, and Examples

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\a and     those incurred for
                                not readily         financial and
                                assignable to the   personnel
                                cost objectives     management,
                                specifically        property and
                                benefited, without  records
                                effort              management, data
                                disproportionate    processing and
                                to the results      office services,
                                achieved.           utilities,
                                                    janitorial
                                                    services, building
                                                    and grounds
                                                    maintenance,
                                                    insurance, and
                                                    legal services.\ b

Direct contract                 Costs of            Direct contract
support costs\c                 activities that     support costs can
                                are not contained   include training
                                in either the       required to
                                indirect cost pool  maintain the
                                or the direct       certification of
                                program funds.      direct program
                                                    personnel, and
                                                    costs related to
                                                    direct program
                                                    salaries, such as
                                                    unemployment
                                                    taxes, workers'
                                                    compensation
                                                    insurance, and
                                                    retirement costs.

Startup costs                   One-time costs      Startup costs can
                                incurred to plan,   include the costs
                                prepare for, and    of purchasing
                                assume the          computer hardware
                                operation of the    and software,
                                program, function,  providing required
                                service, or         training and staff
                                activity that is    development,
                                the subject of the  establishing
                                contract and to     required
                                ensure compliance   administrative and
                                with the terms of   management
                                the contract.       systems, and
                                                    purchasing
                                                    equipment and
                                                    furniture to
                                                    support the
                                                    administrative
                                                    unit.
----------------------------------------------------------------------
\a A cost objective is a grouping of costs for functions for which
cost data are needed and costs are incurred. 

\b According to the Office of Management and Budget's Circular A-87,
Cost Principles for State, Local, and Indian Tribal Governments,
ï¿½There is no universal rule for classifying certain costs as either
direct or indirect under every accounting system.ï¿½ The types of costs
classified as indirect may vary by tribe depending on each one's
circumstances. 

\c As discussed in ch.  4 of our June 1999 report, the agencies have
inconsistent policies on the payment of direct contract support
costs. 

Sources:  Office of Management and Budget Circular A-87, Cost
Principles for State, Local, and Indian Tribal Governments; BIA; and
IHS. 

In 1996, BIA and IHS issued joint regulations for implementing the
act, as amended, as it applies to self-determination contracts. 
These regulations describe the three types of costs identified in
table 1 as costs for which tribes can request reimbursement in their
contract proposals. 

Tribes' indirect cost rates are negotiated using guidance published
by the Office of Management and Budget.  This is the same guidance
used by other groups, such as state and local governments and
nonprofit agencies.  The Department of the Interior's Office of
Inspector General negotiates the majority of these rates.  The
Department of Health and Human Services' Division of Cost Allocation
also negotiates some rates, predominately for tribal organizations. 
A number of legal challenges have dealt with the rate-setting process
and the funding for contract support costs.  A 1997 court
decisionï¿½Ramah Navajo Chapter v.  Lujanï¿½may require a change in the
Inspector General's method of calculating indirect cost rates; we do
not address this issue in our testimony because the settlement
discussion is ongoing.\7

--------------------
\7 112 F.  3d 1455 (10\th Cir.  1997). 

   PAST INCREASES IN CONTRACT
   SUPPORT COSTS LIKELY TO
   CONTINUE
---------------------------------------------------------- Chapter 0:3

As tribes' funding for contracted programs has increased over the
past decade, so has the funding for contract support costs.  In the
past decade, the total dollars that BIA and IHS have provided to
tribes for self-determination contracts has more than doubled, from
about $800 million in fiscal year 1989 to about $1.9 billion in
fiscal year 1998.\8 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 BIA and
IHS.  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 beyond the $375 million calculated
for fiscal year 1998.  The extent of future increases will depend on
the (1) amount of future appropriations BIA and IHS receive for
contracted programs, (2) extent to which tribes choose to contract
for new programs in the future, and (3) future changes in tribes'
costs of administering contracts.  Currently, tribes receive funding
through self-determination contracts equal to about half of BIA's and
IHS' total appropriations; the other half is being used by BIA and
IHS themselves to provide services to tribes.  If the half now being
used by BIA and IHS were contracted by tribes in the future and if
indirect cost rates were to stay about the same, then contract
support costs could doubleï¿½from the fiscal year 1998 amount of about
$375 million to about $750 million. 

--------------------
\8 Because BIA could not provide us with fiscal year 1998 contracting
data, this information is based on fiscal year 1997 contracting data
expressed in constant 1998 dollars. 

   ALTERNATIVES FOR FUNDING
   CONTRACT SUPPORT COSTS
---------------------------------------------------------- Chapter 0:4

Shortfalls in contract support funding have persisted for the past
decade, with the most dramatic shortfalls occurring in the last 5
years.  Figure 1 shows that funding shortfalls grew from about $22
million in fiscal year 1994 to about $95 million in fiscal year 1998,
peaking at about $120 million in fiscal year 1997. 

   Figure 1:  Shortfalls in
   Contract Support Funding for
   BIA and IHS, Fiscal Years
   1994-98

   (See figure in printed
   edition.)

In response to the need for a permanent solution to the current
funding impasse, we are presenting four alternatives for funding
contract support costs.  We discuss the advantages, disadvantages,
and cost implications of each.  In discussing the costs of each
alternative, we address costs starting in fiscal year 1998.  We do
not address the additional funding that would be necessary if prior
years' shortfalls were to be covered or BIA and IHS were to change
their methods for determining direct contract support costs.\9 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. 

--------------------
\9 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 provision is currently being
challenged by tribal contractors. 

      ALTERNATIVE 1:  FULLY FUND
      CONTRACT SUPPORT COSTS
-------------------------------------------------------- Chapter 0:4.1

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).  Under 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.  The agencies would identify and request
the funds necessary to support new contracts. 

         ADVANTAGES AND
         DISADVANTAGES
------------------------------------------------------ Chapter 0:4.1.1

The first alternative has the advantage of fulfilling the provisions
of the 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 potential for lawsuits stemming from such shortfalls.  This
alternative would be advantageous to tribes because it would help
ensure that they receive the allowable support funds for the BIA and
IHS programs they contract.  As tribes contract for more programs,
they may need to build up their administrative systems to properly
administer and manage their contracts. 

The primary disadvantage of this alternative is that its
implementation would require the Congress to fully fund all allowable
contract support costs, which would likely continue to increase each
year.  It is difficult to predict future contract support costs for
several reasons, including the difficulty of determining how many
tribes will enter into new contracts during a given year.  As BIA and
IHS transfer more and more programs to 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 would not provide tribes with incentives
to limit the growth of contract support costs and, particularly, of
indirect costs.  Although tribes must justify their indirect cost
rates through the standard rate negotiation process and, under the
law, should not receive duplicate funding for the same task from
program funding and contract support funding, the current method of
funding indirect costs could encourage tribes to classify as many
costs as possible as ï¿½indirectï¿½ to receive more funding. 

         COST OF THE FIRST
         ALTERNATIVE
------------------------------------------------------ Chapter 0:4.1.2

Because the need for contract support funding will, in all
probability, continue to increase each year, the ï¿½full fundingï¿½
alternative will involve ever-increasing amounts of funding.  The
cost of this alternative would be about $375 million the first year,
including the fiscal year 1998 funding shortfall, and would increase
by the amount paid for new and expanded contracts and an undetermined
amount for changes to existing contracts due to changes in indirect
cost rates or program funding.\10

The incremental cost of this alternative for the first year would be
$95 million, the amount of the shortfall for fiscal year 1998. 

--------------------
\10 We assume that in the second year of contracting under this
alternative, 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 0:4.2

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.\11 This alternative would eliminate the expectation
of full funding as well as the potential for lawsuits stemming from
funding shortfalls.  Under this alternative, BIA and IHS would
continue to identify tribes' allowable costs, using their indirect
cost rates, in the agencies' budget requests. 

--------------------
\11 This alternative may not be necessary if federal courts determine
that the requirement for contract support funding under the act is
limited to the amount actually appropriated.  Cases presently before
the Court of Appeals for the Federal Circuit are considering this
issue. 

         ADVANTAGES AND
         DISADVANTAGES
------------------------------------------------------ Chapter 0:4.2.1

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 would be available, when,
in fact, appropriations and funding have been limited and shortfalls
have occurred. 

A disadvantage of this alternative is that it might 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 the Senate authorizing
committee has explicitly stated, assuming responsibility for these
programs was not intended to diminish tribes' program resources.\12

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 produce
shortfalls between the amounts provided and those identified as
allowed for contract support.  Appropriations could fluctuate from
year to year, and this could negatively affect tribes' ability to
plan and budget for administering their programs. 

--------------------
\12 S.  Rep.  No.  103-374 at 9 (1994). 

         COST OF THE SECOND
         ALTERNATIVE
------------------------------------------------------ Chapter 0:4.2.2

The cost of this alternative would depend on the annual
appropriations provided by the Congress for contract support.  For
fiscal year 1998, $280 million was provided. 

      ALTERNATIVE 3:  AMEND THE
      ACT TO IMPOSE LIMITS ON
      INDIRECT COST RATES
-------------------------------------------------------- Chapter 0:4.3

A third alternative would be to amend the act to limit the amount of
funding tribes could receive for contract support by limiting the
amount of indirect costs they 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 percentï¿½as a flat rate that would
apply to all tribes. 

         ADVANTAGES AND
         DISADVANTAGES
------------------------------------------------------ Chapter 0:4.3.1

Like the second alternative, this one has the advantage of imposing
limits on the growth of funding for contract support costs and of
eliminating the expectation created by the law's current language
that such costs would be fully funded.\13 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 it at the same rate. 

However, a disadvantage of this alternative to tribes is that it
would ignore differences among individual tribes' actual indirect
costs, which make up the majority of contract support costs and vary
widely among tribes.  By ignoring these differences, this alternative
could provide a windfall for tribes that have low indirect cost rates
while placing those with high rates at a disadvantage, depending on
the specific rate limit that would be applied.  Currently, 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.  For example, if a tribe had a 30-percent
rate before this fixed rate was set, it would receive 5 percent less
for indirect costs each year.  On the other hand, a tribe that had a
15-percent rate before the establishment of a fixed 25-percent rate
would receive 10 percent more each year than it would have done
otherwise.  While this alternative would provide an incentive for
tribes with high indirect cost rates to lower their indirect costs,
BIA and IHS would have to redistribute funding among tribes, which
could cause financial and administrative disruption for those that
would lose funding. 

--------------------
\13 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.  See
University Research:  Effect of Indirect Cost Revisions and Options
for Future Changes (GAO/RCED-95-74, Mar.  6, 1995). 

         COST OF THE THIRD
         ALTERNATIVE
------------------------------------------------------ Chapter 0:4.3.2

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.  This amount
would be higher or lower depending on the rate chosen by the
Congress. 

      ALTERNATIVE 4:  AMEND THE
      ACT TO REPLACE THE CURRENT
      FUNDING MECHANISM WITH A
      CONSOLIDATED CONTRACT AMOUNT
-------------------------------------------------------- Chapter 0:4.4

A fourth alternative would be to amend the act to eliminate the
current funding mechanism, which provides contract support funding
over and above direct funding for the program, 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.  Upon consolidation into
a single contract amount, these cost categories would lose their
individual identities and would thereafter simply make up the
contract total.  This method was tried before but failed because of
funding shortfalls.  BIA tried to create a single contract amount in
the mid-1980s. 

         ADVANTAGES AND
         DISADVANTAGES
------------------------------------------------------ Chapter 0:4.4.1

An advantage of this alternative for both the government and tribes
is that it would provide for the full recovery of indirect costs,
although the amount of funding provided might not increase.  At the
same time, this alternative would remove 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 had been set, any
increases in indirect costs would leave less money to spend for the
program.  Tribes would thus have an incentive 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 act,
tribes would decide how much funding to spend on program costs and
how much to spend on administrative, or indirect, activities.  Under
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 automatically increase.  Changes in indirect cost
ratesï¿½whether upward or downwardï¿½would no longer affect the amount of
funding a tribe would receive because contract support would no
longer be funded separately from program amounts.  Thus, tribes would
bear the responsibility for managing indirect costs prudently, to
retain as much funding as possible for program services. 

         COST OF THE FOURTH
         ALTERNATIVE
------------------------------------------------------ Chapter 0:4.4.2

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 but would not differ from the
previous failed attempt by BIA.  The incremental costs of
consolidating the funding at this amount would be zero.  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.  For fiscal year 1998 funding, the consolidated amount would
be about $375 million, or $95 million more than the $280 million
appropriated.  As under the other alternatives, funding for contract
support costs would continue to be needed for new contracts.  But
under this alternative, future increases in contract support costs
would be slowed for existing contracts because the funding mechanism
would no longer provide amounts for contract support over and above
the amounts for program services.  Thus, if the Congress decided to
increase the funding for a particular program, this decision would
not create a corollary obligation to increase the funding for
contract support. 

-------------------------------------------------------- Chapter 0:4.5

Mr.  Chairman, this concludes my statement.  We would be pleased to
respond to any questions that you or other members of the Committee
may have at this time. 

   CONTACT AND ACKNOWLEDGMENTS
---------------------------------------------------------- Chapter 0:5

For information about this testimony, please contact Chet Janik at
(202) 512-6508.  Individuals making key contributions to this
testimony included Susan Iott and Jeff Malcolm. 

*** End of document. ***