C~M~ROLJJR GENERAL OF -i-WE k&J’ wASHIOIGTtJi4. D.C. -8 ~-135058 Dear ii.??. Gross : This is in response to your letter of February 4, 191, in which you asked the General Accounting Office to determine whether, at any , , time since 1$X%, the Institute for Defense'Analyses has made expendi- tures or has provided to its employees fringe benefits similar to those mentioned in a July 1%6 newspaper article forwarded with your request. The source of the information on which the article is based is a report dated February 18, 1966, by the Surveys and Investigations Staff of the House Committee on Appropriations. As a part of our audit, we have reviewed-the Institute's regular fringe benefits--such as retirement and life, disability, and health . insurance--which are funded jointly by deductions from employees* pay and contributions from the Institute, We also screened the miscella- neous reimbursements to Institute officials for entertainment and other out-of-pocket expenses they had incurred on behalf of the Institute, We examined the Institute's policies concerning reimburse- ments for travel eqenses and dislocation and relocation allowances and examined a representative number of these reimbursements. We have found no evidence that the Institute regularly is paying any of the personal expenses of its officers or is authorizing any unusual type of expense allowance for them, but we have noted a few instances where employees have received reimbursements for out-of-the- ordinary expenditures. Details of these reimbursements follow. Special dislocation allowance for outgoing presi&nt The~Institute paid one of it s former presidents approximately $14,475 to cover his cost of moving from Boston, Massachusetts, to Washington, D, C., to assume the Institutess presidency, Approxi- mately $9,000 of this amount -47,000 cash and $2,000 in withholding tax--was paid to him as a special dislocation allowance, and payment was made from funds the Institute had received as management fees. 'Rae authorization approving the allowance mentions,' as justification for the payment, the unusual costs associated with obtaining housing in Washington, renting out the Cambridge, Massachusetts, house, and providing for private schools for the two children to minimize the disruption in their education, The actual costs incurred by the former president were not itemized, however, and the Institute was not able to furnish us with documentation supporting the actual expenditures. ti addition to the $9,000 special dislocation allowance, the former president received $3,600 for.round-trip travel for himself amd his family between Boston and Washington and for the cost of transporting his household goods from Boston to Washington and re- t-. Furthermore he was reimbursed $1,875 in accordance with the InstiB;ute's policy of providing a dislocation allowance of up to one half of a month's salary to incoming staff members. Institute officials informed us that a special dislocation allowance of up to $11,538 was authorized for this individual in 1964 when he assuxed the presidency but that this allowance was settled at $g,OUO in August 1%. Therefore the Institute was committed to the allowance before the House Committee on Appro- priations report was issued in February 1%. Special payment to division director, The Institute tie a special. payment of about $3,900 to the director of its Conxmmications Research Division in November 1970 as reimbursement of expenses for enrolling his daughter in a pri- vate school. The Cmunications Research Division is located on the Princeton Univex.ity campus, ReimPrurseent was made on the basis of 'the director's cl& that, because of his association with the Institute, his daughter 'had become a target of abuse by the children of local radicals and by the radical faculty ne&ers of the public high school that she -attended. Consequently, after consultation with a psychiatrist, the director decided to enroll her in a private school. He then requested reirubursemelat for the tuition and other charges and claimed that the additional expense was a direct consequence of his eiqloy- 2nent at the Institute. The board of trustees approved a reimbursement to net the director $2,175 after taxes in recognition of the unusual and un- zx-peeted nature of the cqenses incurred and in view of the commu- aity situation. The payment was made from funds the'kstitute had received as management fees and did not appear as a direct or imdirect charge against any Government contract. 'IEs director also is continuing to rcceive.reimbursement fro?& management fees for the cost of his annual mem3ership dues at the EBassau Club. This matter ori@KLly was reported by the Surveys and Investigations Staff of the House Committee on Appro- ;?riations in their report of February 18, 19%. The director r:usrently is being reixbursed because he asserts membership in the <:lub is maintained enti;:ely for Institute business pur~scs. -2- Family travel expenses to summer study program The Institute is continuing to reimburse its employees for expenses incurred in transporting their families to summer study programs, For exam@e, the Institute paid approtiately $8,546 to transport employees' fsmilies to ID Jolla, California, for a 1969 summer study program. A similar example, involving the ex- penditure of $6,000 to transport the families of participants for a summer study program held in England, was included in the report of the Surveys and Investigations Staff of the House,Committee on Appropriations. The Institute usually conducts two summer study programs each year. Three Government employees --two from the Navy Ship Systems Command and one from the National.Aeronautics and Space Adminis- tration--took leave of absence from their Government positions and accepted appointments as temporary Institute employees for the l-month duration of the La Jolla study program. As Institute employees they were authorized to receive up to $25 a day for subsistence expenses, as opposed to the $16 maximum then payable to Government employees. One of the Navy employees received $25 a day and the other received $24 a day, In addition, the National Aeronautics and Space AMnistration employee, who had seven children, was paid a subsistence rate of $32 a day to defray the additional expense involved in securing housing for such a large fsmily. 'Two of the three Government employees were accompanied by their families and were reimbursed for the cost of their families' travel to the summer progrm location, We noted that other Government employees and military personnel attended the study program and were not reimbursed by the Institute. Presumably these individuals were reimbursed by their agencies at the normal Government per diem rate. Out-of-the-ordinary relocation allowances The Institute's policy is to reimburse new staff members for relocation expenses. Until recently the Institute has paid a special dislocation allowance, not to exceed one half of a month's salary, for certain nonrecurring costs incident to the relocation. Within this limitation a new employee could be reimbursed for the cost of a house-hunting trip, the storage of household effects, temporary subsistence, or other special moving expenses. There are instances in which the latter included the shipment of a boat, a horse, and special housiqq costs, such as recording fees, transfer taxes, and title search and insurance. Within the limitation, a new employee also could be reimbursed for the tax liability on those relocation costs which were taxable income to him. -3s Our review showed that the Institute occasionaUv had reimbursed incoming employees for expenses in excess of one half-of a month's salary and for other expenses not providkd for specifically in its regulations, We found two instances in which incoming employees had been reimbursed for realty fees incident to disposal of their homes. Reimbursement for this type of expense was not provided for in the? Institute's regulation. Furthermore, the mounts of reim- bursements paid to these employees--$2,0'70 and $2,&O--were in excess of the salary limitation, On the basis of their starting salaries, the employees would have been entitled to reimbursements of $875 and $1,200. In another instance involving reimbursements for housing ex- penses, an employee received $19388 for realty expenses incurred in acquiring a new home and about $&O for house-hunting trips, but, under the limitation., he would have been entitled to a maximum of $950. We noted another instance in which an incoming employee had received $4,680 in temporary subsistence while awa+y from his peri3anent residence. !lhe subsistence was for a period of 358-% days between,Pebruary 1, 1968, and January 25, l$g, and was paid because the employee did not change his permanent residence to the Washington, D.C., area when he accepted a permanent position with the Institute. The employee's temporary subsistence was terminated when he received the l-year maximum alloT~*~ble under the Institute's regulations, In accordance with the Armed Sertices Procurement Regulation, however, only 30 days of such subsistence are allowable contract costs. Therefore the Institute's management fee probably will bear the cost of the remaining 328-$- days, which amounts to appro&mately $4,270. This sme employee received $283 for a house-hunting trip and approximately $2,640 as reimbursement for the income-tax liability he incurred on the subsistence allowance,, The Institute justified payment of realty fees on the basis that the reimbursements had been offered to the prospective em- ployees in lieu of additional salary as an inducement to accept Institute employment, In other instances the Institute elected to reimburse employees in excess of the established limitation, because of misunderstandings between the Institute and the employees as to their entitlements and, in the case of the tax reimbursement, because the emp,loyee had not been told his temporary subsistence payments were taxable income. At the time of our review, the Institute was revising its regu- lation for the special dislocation allowance and was operating under a proposed regulation which appeared to be less liberal and made no specific provision for reimbursement of a number of expenses formerly reimbursed. Probably the most significant of the deletions is the provision for reimbursing new members for income-tax liability on -4- I . those relocation reimbursements which are taxable income. Because the Institute was in the process of revising its regulation, we did not attempt to uncover all the questionable',payments made under the pretious regulation. We believe, however, that we have included the more signifioant instances in this letter. Summary of reimbursements Moat of ths,out-of-the-ordinary reimbursements discussed in this report were madei from funds which the Institute had received as manap,e- merit fees, rather than from those received RS reimbursements under Government contracts, A tabulation showing the nature of the expendi- tures and the sources of the funds used follows. --Out-of-the-ordinary Expenses -~ Amount Raid from Charged to management Government Total fees contracts , Special dislocation allowance for an outgoing president $ 9,000 $ 9,000 $ - E$ee%al payment to a division director for dauggter*s schooling 3,877 3p77 l'~a~9m.u C!lub dues 140 140 Sumner study program: Family travel 8,5M 8,5& Goverrtiraent employee per diem 1,oooa 212 788 Relocation expenses: Realty fee 2,070 2,070 Realty fee 2,460 2,460 .C Realty fee 1,388 1,388 To.mpora.l-y subsistence 4,2;Ob Income-tax liability 2,640 TOLEd. $357 391 $30,333 $59058 aThe amount of the out-of-the-ordinary expense was calculated as the difference between the mount these individuals received and the amouut th:y were entitled to receive as Government employees. bThe .Cnst4tute charged this expenditure to its Government contracts; hox~:~~*:r, the Defense Contract Audit Agency informed us they were que:.i.ioning this a.mount, because only 30 days of temporary subsistence wercf allowable in accordance with the Armed Services Procurement R~~~~%ation. -5- Conclusion The use of management fees by nonprofit organizations, such as the Institute, to pay certain costs and expenses is not subject to control by tEne Government. Further, under current Department of Defense procedures, the manner in which fees are eqended is not a consideration in the negotiation of contracts with nonprofit organizations. These matters, with appropriate recmendations, were reported previously to the Congress in our report entitled “Need For Improved Guidelines in Contracting For Research With Government-Sponsored Nonprofit Contractors” (B-lb-681q, Feb. 10, @PI, a copy of which is enclosed. We trust that this information is responsive to your request, We plan to make no further distrib%t%on of this report unless copies are specifically requested, and then-we shaJ.l make distribu- tion only after youp agreement has been obtained or public announce- ment has been madg by you concerning the contents of the report. Sincerely yours, -A-- w-c4 fi+&gpf~ 1 er General. of the United States Enclosure The Honorab3.e H. R, Gross House of Representatives -6- DEFENSE DlVlSlORB / ~-16 5961 i‘- llllilllllllllllllllllllllllllll~ll LM095604 Dear Mr, Slecretary: On October 22, 1970, we sent you a draft report for comment, which dealt with Navy procurement of publication services for the retision of technical manuals under indefinite-quantity-type con- tracts (OSD case No. 31,96). This report contained the findings from OILYrev3.e~ of five contracts awarded by the Navy and Marine Corps for such services as typing, editing, proofreading, writing, and illustrating, Our findings were that the Navy had followed the practice of awarding an indefinite-quantity-type contract to the contractor who quoted the lowest hourly rate, and then paying the contractor at that rate for the hours bilLed by the contractor without check- ing the records to determine the actual number of hours that had been used to eomplete the work. The Marine Corps had a somewhat different system, but the results were about the same. The Marine Corps made awards of indefinite-quantity-type contracts to several of the most technically qualified contractors who bid the lowest hourly rates. The Lt4arine Corps, however, did not follow its policy of hating the several contractors compete for each order, Instead, it negotiated fixed-price orders ahost exclusively with one contractor using9 as the basis for the price, the hourly rates bid by the contractor and contractor eatbates of the hours that would be needed to perform the work, Therefore, the Marine Corps was not getting competitive prices. Further, because it did not obtain information as to the hours actually expended doing the work, it did not know how the contractorss estimates and actual hours compared, TheNavyand ine Corps' methods of handling these pur- chases made it possible for contractors to charge for a substan- tially larger number of hours than actually had been required to perform the work. Xn this respect our review of $100,000 worth of orders, selected from the $2.1 milLion worth then placed under the five contracts, showed that the contractors had received .L -= . L pa$nnats for 22,000 hours, although only 12,000 hours had been used in perfo During discussions held with Navy and Marine Corps officials, we were advised that, where amropriate, recovery action would be taken against the contractors for over- payments made under the contracts, In view of the substantial overcharges resulting from this method of contracting, we recommended that the Navy issue instructions gov- erning the use of indefinite-quantity-type contracts to provide the safeguards needed to secure reasonable prices for the Government and that the Armed Services Procurement Regulation (ASPS) Ccznmittee con- sider revising ASPS, to require improved control over the use of indefinite-quantity-type contracts, We have received two replies to our report from the Deputy Assis- tant Secretary of Defense (Installations and Logistics), one dated er 16, l$?O, and the other dated April sp 191, In these replies that, with regard to our first recommendation, the g eontraets, to establish a ceiltig price for st these contracts and to limit the contractor's compensation~to the actual hours expended, not to exceed the cefling. Also the contractors wS.3. ma.intain specific and detailed records of the costs incwered, and the Government till have the right to audit the ~~t~~~tor~~ records. In addition, the Havy has issued specific and detailed instructfons regarding the placinzg of orders under indef%n%te-quantity-type contracts where the price is established on the basis of estimated time. The Navy has issued also an appro- priate wx%rning to all contracting officers regarding the use of indeftiite-quantity-type contracts for the procurement of services. With regard to our sgcand recommendation that ASW be revised to r re imDrov& control over the use of indefinite-quantity-type contracts, we were advised that the current guidance in ASPR was considered adequate. We were advised also that it was the opinion of the Deputy Assistant Secretary that the problem identified was mainly one of ensuring the application of current guidance in the regulations governing the administration and payxx& of contracts. The Deputy Assistant Secretary also stated that a s&&Jar situation d3.d not exist in the other setices. The Air Force indi- t its requir~ents for such services usually were obtained ition on a fixed-price-per-page basis* The Army indicated that it buys these services under time-and-material-type contracts and that, on such contracts, an audit is requested from the Defense Contract Audit Agency prior to final bent. We beUeve that the vigorous action taken by the Navy in response to our report is commendmtble. In view of this action, and the %ndii3atS,ons that the Army and Air Force use other pro- curement methods to obtain these types of publication services, -2- we do not plan to pursue this matter further at this time. We plan, however, to review the results of the Navy's corrective action at an appropriate time to determine if the action has been effective. Af%er we have reviewed the results of the Navy's action, we will give further consideration to the need for providing more specific guidance in ASPR. We appreciate the cooperation extend to members of our staff by Navy and Marine Corps personnel during our review. Copies of this letter are being sent to the Secretary of the Navy and the Office of Management and Budget. Sincerely yours, The Honorable The Secretary of Defense -3-
Institute for Defense Analyses Employees Fringe Benefits
Published by the Government Accountability Office on 1971-07-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)