oversight

Indian Self-Determination Act: Shortfalls in Indian Contract Support Costs Need To Be Addressed

Published by the Government Accountability Office on 1999-06-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Committees




June 1999
                  INDIAN
                  SELF-DETERMINATION
                  ACT
                  Shortfalls in Indian
                  Contract Support Costs
                  Need to Be Addressed




GAO/RCED-99-150
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-282458

      June 30, 1999

      The Honorable Slade Gorton
      Chairman
      The Honorable Robert C. Byrd
      Ranking Minority Member
      Subcommittee on Interior and Related Agencies
      Committee on Appropriations
      United States Senate

      The Honorable Ben Nighthorse Campbell
      Chairman
      The Honorable Daniel K. Inouye
      Vice-Chairman
      Committee on Indian Affairs
      United States Senate

      As directed in Senate Report 105-227, we are reporting on the Bureau of Indian Affairs’ and the
      Indian Health Service’s management of contract support funding under the Indian
      Self-Determination and Education Assistance Act. Our report contains recommendations to the
      Departments of the Interior and Health and Human Services designed to help ensure that
      contract support costs are paid consistently. The report also describes alternative methods for
      funding contract support costs, which the Congress may consider as it debates how to best
      carry out the provisions of the Indian Self-Determination Act.

      We will send copies of this report to the Secretaries of the Interior and Health and Human
      Services and to the heads of the Bureau of Indian Affairs and the Indian Health Service.

      Please contact me at (202) 512-3841 if you or your staff have any questions. Major contributors
      to this report are listed in appendix VIII.




      Victor S. Rezendes
      Director, Energy, Resources,
        and Science Issues
Executive Summary


             The Indian Self-Determination and Education Assistance Act was passed
Purpose      in 1975 to encourage tribal participation in, and management of, programs
             that for years had been administered on their behalf by the departments of
             the Interior or Health and Human Services. Within the act, title I (referred
             to as the Indian Self-Determination Act) authorizes tribes to take over the
             administration of such programs through contractual arrangements with
             the agencies that previously administered them: Interior’s Bureau of Indian
             Affairs and Health and Human Services’ Indian Health Service.1 For the
             Bureau, the programs that can be contracted include social services, law
             enforcement, road maintenance, and forestry, and for the Health Service,
             the programs include mental health, dental care, hospitals and clinics.
             According to the act, tribal contractors must receive funding equivalent to
             what each of the agencies would have provided if they had operated the
             programs. The act, as amended, also provides that tribal contractors are to
             receive funding for the reasonable costs of activities that they must
             perform to manage a program’s contract.2 These latter costs, referred to in
             the act as contract support costs, have grown considerably over the past
             25 years—so much so that, for the past decade, the appropriations made to
             fund them have fallen short of the amounts required.

             In 1998, a year of concern and controversy over contract support costs
             culminated in a statutorily imposed 1-year moratorium for fiscal year 1999
             on all new contracting under the Indian Self-Determination Act. This
             moratorium was prompted by concerns over sustained increases in tribes’
             allowable contract support costs—that is, their costs that the Bureau and
             the Health Service determine are eligible for reimbursement —increases
             in the shortfalls between these costs and the funding available for them,
             and litigation over such shortfalls. In fiscal year 1998, the shortfall
             between tribes’ costs for contract support and the funding provided for
             them through appropriations to the Bureau of Indian Affairs and the Indian
             Health Service exceeded $95 million.

             1
              Throughout this report, the term “tribes” will refer both to tribes and tribal organizations eligible to
             contract programs under the Indian Self-Determination and Education Assistance Act. Also, the term
             “contracts” will refer to contracts, grants, self-governance agreements, cooperative agreements, or
             annual funding agreements entered into pursuant to the Indian Self-Determination and Education
             Assistance Act, as amended, that receive contract support funds. Title IV of the Indian
             Self-Determination and Education Assistance Act, as amended, authorizes the Department of the
             Interior to enter into annual funding agreements with tribes for self-governance, and provides for
             program funding and contract support costs equivalent to what was provided elsewhere under the act.
             Title III of the act authorizes the Department of Health and Human Services to enter into similar
             agreements annually with a limited number of tribes.
             2
              The act also provides that contract funding is subject to the availability of appropriated funds. Tribal
             contractors and the Indian Health Service are presently litigating the questions of whether this
             provision limits the amount of funding the agencies must provide and whether the failure to provide
             full funding is a breach of contract.



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                   Executive Summary




                   In light of tribes’ increasing allowable contract support costs and the
                   shortfalls between the costs and the funds actually appropriated, GAO was
                   asked to review various aspects of these costs. Specifically, GAO examined
                   the following three questions: (1) To what extent and for what reasons
                   have contract support costs and the associated funding shortfalls changed
                   over the past decade, and what can be expected in the future for these
                   costs? (2) How have the shortfalls in funding for contract support costs
                   affected tribes? (3) Have the act’s provisions for contract support costs
                   been implemented consistently? Additionally, in light of the controversy
                   over increases in contract support costs, GAO describes a number of
                   alternatives that the Congress may wish to consider in its deliberations
                   over contract support funding. As requested, appendixes II and III contain
                   a description of the process by which contract support funding is provided
                   to tribes.


                   Tribes’ allowable contract support costs have tripled from 1989 through
Results in Brief   1998—increasing from about $125 million to about $375 million.3 This
                   increase occurred for two principal reasons. First, the total amount of
                   program dollars contracted by tribes—upon which contract support costs
                   are based—has increased. Second, the total cost of tribes’ administration
                   of contracts has increased. Although the amounts appropriated for
                   contract support costs have increased, the Congress has not funded
                   contract support to keep pace with these increases, resulting in funding
                   shortfalls. In fiscal year 1998, almost $280 million of the about $375 million
                   that was allowable for contract support costs was appropriated, resulting
                   in a shortfall of about $95 million. Projections of future contract support
                   costs are difficult to calculate because the number of programs tribes will
                   elect to contract and the amount of funding they will receive are uncertain.
                   For the foreseeable future, tribes’ allowable contract support costs are
                   unlikely to dip below the fiscal year 1998 level of $375 million and will
                   likely increase, as they have done in the past.

                   According to the 94 tribes that we communicated with during our review,
                   shortfalls in funding for contract support costs have caused financial
                   difficulties and frustration for the tribes administering the programs. They
                   have had to take a number of steps to cope with shortfalls in contract
                   support funding. Reducing their contract support costs to within the
                   amount of funding provided has been one such step. However, the tribes
                   noted that this has decreased the efficiency and productivity of their tribal
                   administrative functions. To make up for the shortfall, the tribes reported

                   3
                    Dollar figures used throughout the report have been adjusted to constant 1998 values.



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Executive Summary




using program funds, which reduced services to tribal members, or using
tribal resources, which precluded the use of those resources to
supplement program funds or to develop tribal business ventures. In
addition, a few tribes reported having to refuse or postpone opportunities
to contract federal programs, which impeded their progress toward
self-determination.

The contract support policies and practices of the Bureau, the Health
Service, and Interior’s Office of Inspector General have been inconsistent,
which may result in some tribes receiving more contract support funding
than they are allowed and in others receiving less. Since 1988, the Bureau
and the Health Service have reimbursed tribes for different categories of
contract support costs. The Bureau has reimbursed tribes for indirect
costs and startup costs; the Health Service has reimbursed tribes for these
two cost categories plus a third one, direct contract support costs.4 This
difference has caused confusion among tribes as well as differences in the
amount of contract support funding paid by the two agencies. GAO also
found some inconsistencies in the calculation and the application of
indirect cost rates that were used to determine tribes’ allowable contract
support costs and makes recommendations to address those
inconsistencies. For example, in some cases, the Bureau and the Health
Service provided funding based on provisional rates and did not make
adjustments to funding when those rates were finalized.

The impasse between providing full funding for contract support costs and
limiting these costs continues in the Congress. The fallout has included
litigation relevant to the issue, as well as a 1-year moratorium on new
contracting under the Indian Self-Determination Act. To assist the
Congress in its deliberations over how to resolve the impasse over
contract support costs, GAO presents four alternative funding approaches,
each of which can be considered individually or which can be combined.
These alternatives range from providing appropriations sufficient to fund
tribes’ allowable contract support costs each year to amending the act to
remove the provision for funding contract support costs over and above
the direct program amount and instead provide a single, consolidated
contract amount. Each of the alternatives has advantages and
disadvantages. Three of the four alternatives, for example, offer the
advantage of better controlling future increases in contract support costs.
The disadvantage of these same three alternatives would be that they


4
 Joint agency regulations request tribal contractors to include direct, indirect, and startup costs in their
initial contract proposals under title I of the Indian Self-Determination and Education Assistance Act,
as amended (25 C.F.R. 900.8.).



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             Executive Summary




             require changes to the funding provisions of the Indian Self-Determination
             Act.


             The Indian Self-Determination and Education Assistance Act of 1975, as
Background   amended, authorizes Indian tribes to take over the administration of
             programs that had been previously administered on their behalf by the
             departments of the Interior or Health and Human Services. In passing the
             act, the Congress recognized that the government’s administration of
             Indian programs prevented tribes from establishing their own policies and
             making their own decisions about program services. The act removes that
             impediment; it allows tribes to contract for a range of Indian programs
             that are managed by the Bureau of Indian Affairs and the Indian Health
             Service on their behalf. Once having contracted a program, a tribe
             assumes responsibility for all aspects of its management, such as hiring
             program personnel, conducting program activities and delivering program
             services, and establishing and maintaining administrative and accounting
             systems. Typical programs that are contracted by tribes include such
             Bureau programs as law enforcement, social services, road maintenance,
             and forestry as well as such Health Service programs as hospitals and
             health clinics; mental health; dental care; and environmental health
             services, such as sanitation.

             The Congress amended the act in 1988 and 1994 to provide that, under
             self-determination contracts, tribes would receive funds for contract
             support costs in addition to the base program amount to manage their
             contracts. Since 1988, the Congress has provided funding for contract
             support costs in annual appropriations acts. The funding available for a
             tribe’s contract is the total of the program funds transferred by either the
             Bureau or the Health Service and the contract support funds provided for
             that tribe’s allowable contract support costs. When a tribe contracts for a
             program under the act—for example, a forestry program with the
             Bureau—the agency identifies the amount of funding in that program’s
             budget for that tribe. In addition, the agency provides contract support
             funding for the costs of that tribe’s management and administration of the
             contract. Each agency has established a separate budget line item
             specifically for this purpose. In fiscal year 1998, appropriations for the
             Bureau and the Health Service totaled about $3.8 billion. Of that amount,
             about half was administered by tribes through contracts. The amount
             contracted includes about $280 million that the Bureau and the Health
             Service provided for contract support costs.




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                            Executive Summary




                            In implementing the act’s provisions for contract support costs, the
                            agencies commonly refer to the following three categories of contract
                            support costs: (1) indirect costs, which are the costs incurred for a tribe’s
                            common services, such as financial management and accounting;
                            (2) direct contract support costs, which are the costs of activities that
                            tribes incur but that are not provided in program funding or indirect
                            funding, such as the cost of program-specific training; and (3) startup
                            costs, which are the one-time costs of beginning a contract, including the
                            purchase of computer hardware and software. In 1996, the Bureau and the
                            Health Service published joint regulations implementing the Indian
                            Self-Determination Act and these regulations allow tribes to request
                            funding for these three categories of costs. The majority of contract
                            support funds paid by both the Bureau and the Health Service are for
                            tribes’ indirect costs, which are based on indirect cost rates established by
                            independent offices. These offices, which are the Department of the
                            Interior’s Office of Inspector General or the Department of Health and
                            Human Services’ Division of Cost Allocation, review tribes’ indirect costs
                            to determine if they are reasonable and allowable.



Principal Findings

Increases in Contract       As the amount of program funds contracted by tribes has increased over
Support Costs Will Likely   the past decade, so has the amount of contract support funding they have
Continue in the Future      used to administer them. In the past decade, the contract volume (total
                            dollars contracted) for programs that tribes have contracted with the
                            Bureau or the Health Service has more than doubled from about
                            $800 million in fiscal year 1989 to about $1.9 billion in fiscal year 1998.5
                            Tribes’ contract support costs have also increased for these programs; the
                            amount of contract support funding for tribes’ administrative and other
                            management costs has increased from about $125 million to about
                            $375 million. Although appropriations from the Congress and the
                            payments from these two agencies for contract support have increased,
                            they have not been sufficient to cover tribes’ allowable costs identified by
                            the Bureau and the Health Service. In fiscal year 1998, the Congress
                            appropriated almost $280 million to fund almost $375 million in tribes’
                            allowable contract support costs, resulting in a shortfall of about
                            $95 million.


                            5
                             Because the Bureau does not have fiscal year 1998 data, this information is fiscal year 1997 data
                            expressed in constant 1998 dollars.



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                            Executive Summary




                            The exact amount of future contract support costs is difficult to predict,
                            but will likely increase in future years beyond the $375 million for fiscal
                            year 1998. The extent of future increases will depend on (1) the amount of
                            future appropriations the Bureau and the Health Service receive for
                            contracted programs, (2) the extent to which tribes choose to contract
                            new programs in the future, and (3) the future changes in tribes’ costs of
                            administering contracts. Currently, only about half of the funding for the
                            Bureau of Indian Affairs and the Indian Health Service is being
                            administered through contracts with tribes; the remaining programs are
                            being administered by the Bureau and the Health Service and most of
                            them could be contracted by tribes. If the amount of funding for programs
                            contracted by tribes were to double in the future and if indirect cost rates
                            were to stay about the same, contract support costs would increase—from
                            the fiscal year 1998 amount of about $375 million to about $750 million.


Tribes Say They Have Been   Over 90 tribes reported to GAO that they have used various methods to
Adversely Affected by       cope with the shortfalls in funding for contract support. For example, they
Shortfalls in Contract      said they have (1) reduced their indirect costs; (2) used either tribal
                            resources, when available, or program funds to offset shortfalls in contract
Support Funding             support costs funding; and (3) in a few cases, refused or postponed
                            opportunities to contract programs. According to the tribes, each of these
                            methods has had negative effects over the years; they could not further
                            reduce their indirect costs and their administrative infrastructures have
                            begun to deteriorate. For example, noncompetitive salaries have
                            prevented them from hiring skilled staff, financial audits have not been
                            done, and computer equipment has not been upgraded. In turn, tribes’ use
                            of their resources or direct program dollars to make up for shortfalls
                            generally has reduced program services. For example, when a tribe uses
                            direct program dollars to compensate for shortfalls in contract support
                            funding, fewer dollars are available for program services. And when a tribe
                            uses its own resources to make up for contract support shortfalls, it loses
                            the opportunity to use those funds for other purposes to help its members.
                            A few tribes said that when they simply cannot afford to take over or
                            continue administration of a federal contract, they forego significant
                            opportunities to advance their self-determination.


Inconsistencies in How      The Bureau of Indian Affairs and the Indian Health Service have
Contract Support Costs      inconsistently calculated payments for contract support costs to tribes.
Are Calculated              Since 1988, the Bureau and the Health Service have reimbursed tribes for
                            different categories of contract support costs. Recently, the Bureau



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                           Executive Summary




                           acknowledged that it is considering providing tribes with funding for
                           direct contract support costs, which it has not funded in the past but
                           which the Health Service has funded. This change could increase the
                           contract support funding for programs contracted from the Bureau. The
                           increase could be about $10 million to $30 million per year more than the
                           over $135 million in funding provided to support programs with the
                           Bureau that are currently contracted by tribes.

                           In addition, inconsistencies in calculating indirect rates have caused
                           confusion among tribes as well as potential differences in how funding has
                           been calculated. Since 1992, two regional offices within Interior’s Office of
                           Inspector General, the primary office responsible for negotiating indirect
                           cost rates with tribes, have calculated adjustments to indirect cost rates
                           differently. In certain circumstances, the tribes negotiating indirect cost
                           rates with the Western Region receive higher indirect cost rates than they
                           would receive if the Eastern Region’s method of calculation had been
                           used. GAO did not calculate the effect this difference would have had on
                           funding, but did note that if lower rates had been used funding
                           requirements would have decreased. Interior’s Office of Inspector General
                           is aware of this problem and is prepared to change how the Western
                           Region calculates rates to make it consistent with the Eastern Region.
                           However, the federal government and tribes are engaged in efforts to
                           reach agreement on the appropriate method for calculating the indirect
                           cost portion of contract support costs. Any agreement will require court
                           approval because the current method of calculation was found to be
                           invalid.6 GAO also found that the Bureau and the Health Service were
                           inappropriately applying one type of indirect cost rate and, as a result,
                           were not making adjustments for over- or underpayments to tribes.


Alternatives for Funding   As contract support costs continue to increase, the tension between
Contract Support Costs     providing full funding for these costs and limiting them will increase as
                           well. The issue has already reached an impasse, with tribes having
                           initiated lawsuits on payment of contract support costs and the Congress
                           having imposed a 1-year moratorium for fiscal year 1999 on new
                           contracting under the Indian Self-Determination Act. GAO presents four
                           possible alternatives that the Congress may wish to consider as it
                           deliberates on how best to provide funding to carry out the intent of the
                           Indian Self-Determination Act and presents estimates of what these
                           alternatives may cost and their major advantages and disadvantages.

                           6
                             Ramah Navajo Chapter v. Lujan, 112 F. 3d 1455 (10th Cir. 1997). In addition to the efforts to reach an
                           agreement in the Ramah case, the Bureau, the Health Service, and the National Congress of American
                           Indians all have work groups studying contract support costs.



                           Page 8                                           GAO/RCED-99-150 Indian Contract Support Costs
                      Executive Summary




                  •   Alternative 1: Provide appropriations sufficient to fully fund tribes’
                      allowable contract support costs each year.
                  •   Alternative 2: Amend the act to remove the requirement that contract
                      support be funded at 100 percent of the allowable costs identified by the
                      Bureau and the Health Service.
                  •   Alternative 3: Amend the act to provide the indirect cost portion of
                      contract support costs by using a flat rate or a ceiling rate.
                  •   Alternative 4: Amend the act to change the current funding mechanism—in
                      which contract support costs are identified and funded apart from
                      program funds—to one consolidated contract amount.


                      To ensure consistent implementation of the Indian Self-Determination Act,
Recommendations       GAO recommends that the Secretary of the Interior and the Secretary of
                      Health and Human Services direct the Assistant Secretary for Indian
                      Affairs and the Director of the Indian Health Service, respectively, to work
                      together, and with the Congress and tribes, to develop a standard policy
                      on funding contract support costs under the act so those agencies can
                      consistently provide funding. An additional recommendation to the
                      Secretary of the Interior and the Secretary of Health and Human Services
                      regarding the use of one type of indirect cost rate is presented in chapter
                      4.


                      The Congress, in its deliberations on how to best provide funding for the
Matters for           Indian Self-Determination Act, may wish to consider a number of
Congressional         alternatives to the current mechanism for funding contract support costs.
Consideration         GAO presents four alternatives in chapter 5 of this report.


                      We provided a draft of this report to the departments of the Interior and
Agency Comments       Health and Human Services for review and comment. In responding, the
                      Department of the Interior and the Department’s Office of Inspector
                      General each provided us with comments. We are handling these
                      comments as separate responses.

                      The departments of the Interior and Health and Human Services agreed
                      with GAO’s recommendations that the Bureau of Indian Affairs and the
                      Indian Health Service should have consistent policies on funding direct
                      contract support costs and that adjustments should be made when
                      provisional-final indirect cost rates are used. The Department of the
                      Interior’s Office of Inspector General did not comment on these two
                      recommendations.



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Executive Summary




GAO’s draft report concluded that having Interior’s Office of Inspector
General negotiate indirect cost rates limited its ability to audit the same
function and recommended that the Secretary of the Interior move the
function from the Office of Inspector General. In separate responses, the
Department of the Interior and its Office of Inspector General differed on
whether the responsibility should be moved. While the Inspector General’s
office agreed with GAO’s recommendation to remove the rate negotiation
function, the Department raised several concerns about moving the
function. Specifically, it stated that sufficient separation of duties exists
within the Inspector General’s office because the office dedicates staff to
indirect cost negotiations who are not assigned to conduct other activities
such as audits. The Department also stated that it has limited ability to
change the current system of negotiating indirect cost rates because of
current litigation related to indirect cost rates. GAO continues to have
concerns about the Inspector General’s role in negotiating cost rates, and
plans to review the issue in more depth in a separate study, taking into
account the differences in the responses to our draft report, the legislative
history of the Inspector General Act, generally accepted government
auditing standards, current litigation, and any other pertinent guidance. As
a result, GAO is not making the recommendation to remove the rate
negotiation function from the Inspector General’s office at this time.

None of the department or agency comments addressed the four
alternatives GAO put forth as a matter for congressional consideration.
Interior’s Office of Inspector General suggested several technical
comments, which we incorporated as appropriate. The comments from the
Department of the Interior, the Department’s Office of Inspector General,
and the Department of Health and Human Services and our specific
responses appear in appendixes V, VI, and VII, respectively.




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Page 11   GAO/RCED-99-150 Indian Contract Support Costs
Contents



Executive Summary                                                                                    2


Chapter 1                                                                                           16
                         The Funding Provisions of the Indian Self-Determination Act                16
Introduction             Funding for Self-Determination Contracts                                   19
                         The Key Players in Implementing the Indian Self-Determination              20
                           Act
                         Objectives, Scope, and Methodology                                         22

Chapter 2                                                                                           25
                         Tribal Contracting and the Funding Shortfalls for Contract                 25
Past Increases in          Support Costs Have Increased in the Last 10 Years
Contract Support         The Future Amount of Increases in Contract Support Costs Is                36
                           Difficult to Predict
Costs Will Likely
Continue
Chapter 3                                                                                           38
                         Shortfalls in Funding for Contract Support Costs Have Adversely            39
Tribes Said They Have      Affected Tribes in Various Ways
Been Adversely           Lack of Adequate Funding From Other Entities Contributes to                44
                           Shortfalls in Funds for Indirect Costs
Affected by Shortfalls
in Funding for
Contract Support
Costs
Chapter 4                                                                                           46
                         BIA and IHS Have Implemented Contract Support Provisions                   46
Federal Policies and       Differently
Practices for Paying     Inconsistencies in Calculating and Using Indirect Cost Rates               48
                         Rate-Setting Function Is Performed by Interior’s Office of                 50
Contract Support           Inspector General
Costs Are                Conclusions                                                                51
Inconsistent             Recommendations to the Secretaries of the Interior and Health              51
                           and Human Services
                         Agency Comments and Our Evaluation                                         51




                         Page 12                          GAO/RCED-99-150 Indian Contract Support Costs
                   Contents




Chapter 5                                                                                       54
                   Alternative 1: Fully Fund Contract Support Costs                             55
Alternatives for   Alternative 2: Amend the Act to Eliminate the Provision for Full             57
Funding Contract     Funding of Contract Support Costs
                   Alternative 3: Amend the Act to Impose Limits on Indirect Cost               58
Support Costs        Rates
                   Alternative 4: Amend the Act to Replace the Current Funding                  61
                     Mechanism With a Consolidated Contract Amount
                   Matters for Congressional Consideration                                      63
                   Agency Comments                                                              63

Appendixes         Appendix I: Contract Support Cost Provisions of the Indian                   64
                     Self-Determination and Education Assistance Act
                   Appendix II: Contract Support Costs and the Process for Setting              70
                     Indirect Cost Rates
                   Appendix III: BIA’s and IHS’ Funding of Contract Support Costs               80
                   Appendix IV: Tribes and Tribal Organizations Contacted                       83
                   Appendix V: Comments From the Department of the Interior                     87
                   Appendix VI: Comments From the Department of the Interior’s                  91
                     Office of Inspector General
                   Appendix VII: Comments From the Department of Health and                     96
                     Human Services
                   Appendix VIII: GAO Contacts and Staff Acknowledgments                        99

Tables             Table 1.1: Categories of Contract Support Costs, Definitions, and            18
                     Examples
                   Table II.1: Examples of Overrecovery and Underrecovery                       75
                     Calculations for Fixed-Carryforward Indirect Cost Rates
                   Table III.1: BIA’s Indian Self-Determination Fund, Fiscal Years              81
                     1995 Through 1999

Figures            Figure 1.1: Formula for Determining the Funding for Indirect                 20
                     Costs
                   Figure 1.2: Key Players in Implementing the Indian                           21
                     Self-Determination Act
                   Figure 2.1: Tribes’ Contracting of BIA’s Programs, Fiscal Years              27
                     1989 Through 1997
                   Figure 2.2: Tribes’ Contracting of IHS’ Programs, Fiscal Years               28
                     1989 Through 1998




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Contents




Figure 2.3: Aggregate Indirect Cost Pool and Direct Cost Base for           29
  Agreements Negotiated by the Department of the Interior’s Office
  of Inspector General, Fiscal Years 1989 Through 1996
Figure 2.4: Aggregate Indirect Cost Rate for Tribes’ Rates                  30
  Negotiated by the Department of the Interior’s Office of Inspector
  General, Fiscal Years 1989 Through 1996
Figure 2.5: BIA’s Shortfalls in Contract Support Costs, Fiscal              32
  Years 1989 Through 1998
Figure 2.6: IHS’ Shortfalls in Contract Support Costs, Fiscal Years         34
  1989 Through 1998
Figure 5.1: Tribes’ Indirect Cost Rates                                     60




Abbreviations

BIA        Bureau of Indian Affairs
GAO        General Accounting Office
HHS        Department of Health and Human Services
IHS        Indian Health Service
OMB        Office of Management and Budget


Page 14                           GAO/RCED-99-150 Indian Contract Support Costs
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Chapter 1

Introduction


                     By late 1998, concern and controversy over the funding of contract
                     support costs had culminated in a statutorily imposed 1-year moratorium
                     (for fiscal year 1999) on all new contracting by tribes and tribal
                     organizations.1 Under the Indian Self-Determination and Education
                     Assistance Act of 1975, as amended, tribes can contract for specific federal
                     programs and receive program funding and contract support funding.
                     Contract support funds—which, as implemented by the Department of the
                     Interior’s Bureau of Indian Affairs (BIA) and the Department of Health and
                     Human Services’ (HHS) Indian Health Service (IHS), include funding for
                     indirect costs, direct contract support costs, and startup costs—are
                     provided to tribes to cover the costs of managing their contracts. Over the
                     25 years since the passage of the act, the amount of funding required by
                     tribes to pay for such contract support costs has steadily increased—so
                     much so that, by the early 1990s, appropriated funds were insufficient to
                     cover them, causing funding shortfalls. The shortfalls have not only caused
                     budgeting and financial difficulties for tribes, they have also led to current
                     litigation about the extent of the U.S. obligation to fund contract support
                     costs when congressional appropriations provide insufficient funding.2


                     Within the act, originally passed in 1975, title I (referred to as the Indian
The Funding          Self-Determination Act) encourages tribal participation in program
Provisions of the    planning and management by allowing tribes to contract programs
Indian               previously administered on their behalf by the Secretaries of the Interior
                     and Health, Education, and Welfare (now Health and Human Services).
Self-Determination   The act also provides that the amount of funding for tribal contracts shall
Act                  cover program costs and contract management costs. In passing the act,
                     the Congress recognized that having the government provide such services
                     on behalf of tribes prevented them from achieving self-determination—that
                     is, becoming involved in planning, conducting, and administering their
                     own programs. When a tribe contracts a program, it assumes responsibility
                     for managing and staffing that program; that is, the tribe makes
                     management decisions about personnel and services, operates and
                     maintains facilities, and accounts for funds. Primarily, the programs
                     contracted are the ones administered by BIA and IHS and include law
                     enforcement, social services, hospitals and clinics, dentist services, and

                     1
                      Throughout this report, the term “tribes” will refer both to tribes and to tribal organizations eligible
                     to contract programs under the Indian Self-Determination and Education Assistance Act. Also, the
                     term “contracts” will refer to contracts, grants, cooperative agreements, self-governance agreements,
                     or annual funding agreements entered into pursuant to the Indian Self-Determination and Education
                     Assistance Act, as amended, that receive contract support funds.
                     2
                      Miccosukee Corp., 98-1457 (Fed. Cir.) and Oglala Sioux Tribal Public Safety Department, 99-1033
                     (Fed. Cir.).



                     Page 16                                          GAO/RCED-99-150 Indian Contract Support Costs
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others. The act and its amendments identify the types of funding to be
provided when tribes contract such programs.

As originally enacted, the Indian Self-Determination Act specified that the
amounts to be provided for tribes’ self-determination contracts would
“not be less than the appropriate Secretary would have otherwise
provided for direct operation of the programs.” This type of funding is
commonly referred to as “direct program” dollars or funds. Shortly after
the act was passed, BIA and IHS began providing tribes with support funds,
in addition to direct program dollars. These funds were to assist tribes in
establishing and maintaining the support systems (e.g., administrative and
accounting systems) needed to administer the contracts.

In 1988 and in 1994, the Congress amended the Indian Self-Determination
Act to require that funding for contract support costs be provided in
addition to direct program dollars. Through these amendments, the
Congress wanted to prevent tribes from having to use their program funds
to pay for contract support activities, a problem that had been identified as
one of the major impediments to self-determination contracting. The
amendments provide for funding the reasonable and allowable costs of a
tribe’s activities to carry out a contracted program—that is, the tribe’s
allowable contract support costs. These costs include both direct program
expenses and administrative and other overhead expenses.3 (See app. I for
the act’s contract support cost provisions.) The 1994 amendments also
added title IV to the Indian Self-Determination and Education Assistance
Act, which authorizes the Department of the Interior to enter into
self-governance funding agreements with tribes. These agreements must
provide funding for direct program costs and contract support costs that is
equivalent to the funding required in other parts of the act.4

BIA and IHS have developed implementing guidelines that specify the types
of costs that will be reimbursed under the act. In policy and practice, the
agencies commonly refer to three categories of contract support costs.
Table 1.1 defines and provides examples of these cost categories.


3
 The act also provides that, not withstanding any other provision of the act, the provision of funds is
subject to the availability of appropriations. The model agreement for self-determination contracts
contains similar language. Tribal contractors and IHS are currently litigating the question of whether,
with regard to Indian self-determination contracts, this phrase limits the funding the act requires the
agencies to provide. Two Interior Board of Contract Appeals cases, which are on appeal to the Court
of Appeals for the Federal Circuit, decided that this phrase does not limit the contractual obligation to
pay tribal contractors for all of their contract support costs.
4
 Title III of the act authorizes HHS to enter into self-governance agreements with tribes as part of a
demonstration program. The title provides for the payment of direct program funds and indirect costs.



Page 17                                          GAO/RCED-99-150 Indian Contract Support Costs
                                    Chapter 1
                                    Introduction




Table 1.1: Categories of Contract
Support Costs, Definitions, and     Cost category                       Definition                         Examples
Examples                            Indirect costs                      Costs incurred for a               Indirect costs (often thought
                                                                        common or joint purpose            of as overhead costs)
                                                                        benefiting more than one           typically include those
                                                                        cost objective and not             incurred for financial and
                                                                        readily assignable to the          personnel management,
                                                                        cost objectives specifically       property and records
                                                                        benefited, without effort          management, data
                                                                        disproportionate to the            processing and office
                                                                        results achieved.a                 services, utilities, janitorial
                                                                                                           services, building and
                                                                                                           grounds maintenance,
                                                                                                           insurance, and legal
                                                                                                           services.b
                                    Direct contract support costsc Costs of activities that are            Direct contract support
                                                                   not contained in either the             costs can include the
                                                                   indirect cost pool or the               training required to maintain
                                                                   direct program funds.                   the certification of direct
                                                                                                           program personnel and the
                                                                                                           costs related to direct
                                                                                                           program salaries, such as
                                                                                                           unemployment taxes,
                                                                                                           workers’ compensation
                                                                                                           insurance, and retirement
                                                                                                           costs.
                                    Startup costs                       Costs incurred St on a             artup costs can include the
                                                                        one-time basis to plan,            costs of purchasing
                                                                        prepare for, and assume            computer hardware and
                                                                        operation of the program,          software, providing required
                                                                        function, service, or activity     training and staff
                                                                        that is the subject of the         development, establishing
                                                                        contract and to ensure             requiredadministrativeand
                                                                        compliance with the terms          management systems,and
                                                                        of the contract.                   purchasing equipmentand
                                                                                                           furniture to supportan
                                                                                                           administrativeunit.

                                    a
                                     A cost objective is a function, contract, grant, or other activity for which cost data are needed
                                    and costs are incurred.
                                    b
                                     Office of Management and Budget Circular A-87, “Cost Principles for State, Local, and Indian
                                    Tribal Governments,” states that “There is no universal rule for classifying certain costs as either
                                    direct or indirect under every accounting system.” The types of costs classified as indirect costs
                                    may vary by tribe depending on its particular circumstances.
                                    c
                                     Chapter 4 discusses the inconsistent policies on the payment of direct contract support costs
                                    between the two agencies.

                                    Source: Office of Management and Budget’s Circular A-87 “Cost Principles for State, Local, and
                                    Indian Tribal Governments,” BIA, and IHS.




                                    Page 18                                         GAO/RCED-99-150 Indian Contract Support Costs
                     Chapter 1
                     Introduction




                     In 1996, BIA and IHS issued joint regulations implementing the act, as
                     amended, with respect to self-determination contracts. These regulations
                     describe the three types of costs in Table 1.1 as costs that tribes can
                     request in their contract proposals.


                     In general, the funding available to a tribe for a self-determination contract
Funding for          is the total of the direct program funds transferred from either BIA or IHS,
Self-Determination   plus any contract support funds as allowed by those agencies. To calculate
Contracts            the full amount allowed a tribe for its contract, the funding agency usually
                     (1) identifies the direct program funds it will transfer to the tribe;
                     (2) identifies, as appropriate, direct contract support costs for the
                     contracted program; (3) multiplies the total direct amount, minus any
                     appropriate exclusions, by the tribe’s indirect cost rate to determine the
                     amount of indirect funds that should be added to the contract; and
                     (4) identifies any additional contract support costs, such as startup costs.
                     Once the funding agency has identified the direct funds to be transferred
                     to the tribe, that amount becomes recurring—that is, the same amount is
                     provided to the tribe in its contract every year unless, among other things,
                     the Congress changes the funding or until the contract is ended. BIA and IHS
                     transfer direct program funds from the budget line items for their
                     programs, such as law enforcement or hospitals, but fund contract support
                     costs from separate budget line items that were established specifically to
                     pay for these costs.

                     In contrast to direct program funding, the amount of contract support
                     funds (predominantly funds for indirect costs) can vary each year as the
                     tribes’ indirect cost rates change. Figure 1.1 shows an equation for the way
                     the agencies calculate the allowable indirect costs for tribes.




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                                            Introduction




Figure 1.1: Formula for Determining the Funding for Indirect Costs


Direct funding base for             Tribe’s indirect cost pool
                            x                                                   =           Indirect costs associated with
BIA’s or IHS’ programs                                                                      BIA’s or IHS’ programs
                                    Tribe’s total direct cost base

                                            Note 1: The direct funding base consists of the contract funding amounts for either BIA’s or IHS’
                                            programs, adjusted to be consistent with the direct cost base. The ratio of a tribe’s indirect cost
                                            pool to its direct cost base is referred to as the tribe’s indirect cost rate. A tribe’s indirect cost
                                            pool consists of all its indirect costs. The total direct cost base consists of all the tribe’s direct
                                            program costs, including those for BIA’s and IHS’ programs as well as those for programs from
                                            other federal agencies, state agencies, private organizations, and tribal programs, if applicable,
                                            less any exclusions.




                                            Tribes negotiate indirect cost rates annually in accordance with federal
                                            cost allocation principles and departmental guidance. In general, an
                                            indirect cost rate is determined by dividing a pool of indirect costs by a
                                            direct cost base. The direct base consists of program costs minus certain
                                            exclusions and can be either based on salaries or on total direct costs. The
                                            purpose of the indirect cost rate is to reasonably allocate a tribe’s indirect
                                            costs to each of its programs (BIA, IHS, other federal agencies, state
                                            agencies, private organizations, and tribal programs). For example, if IHS’
                                            programs represented 30 percent of a tribe’s total direct cost base, then IHS
                                            programs would be allocated 30 percent of that tribe’s indirect cost pool.5


                                            The key players in implementing the Indian Self-Determination Act are
The Key Players in                          (1) those that fund and oversee the contracts, (2) those that calculate
Implementing the                            indirect cost rates, and (3) those that administer the contracts. The Indian
Indian                                      Self-Determination Act applies only to programs under the jurisdiction of
                                            the departments of the Interior or Health and Human Services.
Self-Determination                          Predominantly, these are the programs operated by BIA or IHS. Figure 1.2
Act                                         shows the key players involved in implementing the act.


                                            5
                                             A recent court decision found that this method of allocating a tribe’s indirect cost pool to every
                                            program in the direct cost base was incorrect. Ramah Navajo Chapter v. Lujan, 112 F. 3d 1455 (10th
                                            Cir. 1997). The court concluded that other federal and state programs that do not provide funding for
                                            indirect costs should not be part of the direct cost base. The court ruled that the Department of the
                                            Interior had not paid the indirect costs associated with tribes’ self-determination contracts. On May 14,
                                            1999, the court approved a partial settlement of about $80 million to settle these claims for fiscal years
                                            1989 through 1993. The parties are also engaged in efforts to reach agreement on the appropriate
                                            method for calculating the indirect cost portion of contract support costs. The new methodology will
                                            require the court’s approval. This report does not directly address the issues raised by the court in the
                                            Ramah case. In addition, BIA, IHS, and the National Congress of American Indians all have work
                                            groups studying contract support costs.



                                            Page 20                                          GAO/RCED-99-150 Indian Contract Support Costs
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Figure 1.2: Key Players in Implementing the Indian Self-Determination Act


          Department of the Interior                                      Department of Health and Human Services

     Bureau of              Office of                            Office of           Division of                Indian
   Indian Affairs       Inspector General                    Inspector General      Cost Allocation          Health Service



                                            Audit
                                                                Audit
Funding                Indirect rate proposal,                                     Indirect rate proposal,          Funding
                       negotiations, and rates                                     negotiations, and rates




                                       Recognized Tribes and Tribal Organizations




                                             Source: GAO’s analysis.




                                             In general, the funding agencies are BIA and IHS. Under the act, tribes may
                                             contract for nearly any program managed by BIA or IHS. BIA’s programs
                                             include law enforcement; road maintenance; and such social services as
                                             child protection and welfare assistance, adult education, and housing. IHS’
                                             programs include hospital or clinic administration; preventive care;
                                             alcohol treatment; contract health services; diabetes care; mental health
                                             care; and dental care. BIA and IHS are the agencies with which tribes
                                             contract and the ones that provide the associated funding.

                                             BIA is the primary federal agency with responsibility for administering
                                             Indian policy and discharging the federal government’s trust responsibility
                                             for American Indian tribes and Alaskan Native villages, and IHS is
                                             responsible for delivering health services to American Indians and Alaska
                                             Natives. BIA’s fiscal year 1997 funding was about $1.7 billion, of which over
                                             $1 billion was used for contracted programs, including education and
                                             construction programs. Tribes contracted about $546 million of BIA’s
                                             programs, excluding, among other things, education and




                                             Page 21                                GAO/RCED-99-150 Indian Contract Support Costs
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                     Introduction




                     construction—$450 million for direct program funds and $96 million for
                     contract support costs.6 IHS’ fiscal year 1998 funding was more than $2
                     billion. Of this amount, about $719 million was for program costs of
                     self-determination contracts (including construction contracts), and
                     almost $169 million was for contract support costs for tribes participating
                     in self-determination contracting.

                     Interior’s Office of Inspector General and HHS’ Division of Cost Allocation
                     have responsibility for calculating tribes’ indirect rates. In general,
                     Interior’s Office of Inspector General calculates indirect rates for tribes,
                     and either the Inspector General or the Division of Cost Allocation does so
                     for tribal organizations. During the rate negotiation process, tribes submit
                     indirect cost proposals, which are supported by audited financial
                     statements and supporting documentation that substantiate the propriety
                     of the indirect costs.7 Appendix II contains information on the process to
                     negotiate indirect cost rates.

                     Finally, the entities that administer the contracts are the federally
                     recognized tribes that choose to do so under the provisions of the act. As
                     of December 1998, there were 556 federally recognized tribes. Agency
                     officials estimate that nearly all of the federally recognized tribes
                     administer at least one BIA or IHS contract either directly or as a member of
                     a tribal consortium. Tribes may administer multiple contracts from BIA and
                     IHS.



                     The Subcommittee on Interior and Related Agencies, Senate Committee
Objectives, Scope,   on Appropriations, and the Senate Committee on Indian Affairs asked us
and Methodology      to study issues related to contract support costs for contracts entered into
                     pursuant to the Indian Self-Determination and Education Assistance Act,

                     6
                      Construction and education funds are not included in this discussion because contract support costs
                     for these BIA programs are generally paid from a separate source of funds. For construction contracts,
                     the contractor receives one contract amount, from which indirect costs are recovered. Under the
                     Indian Education Amendments of 1988 (P.L. 100-297, title V), education contracts can receive
                     administrative cost grants, as prescribed by a formula in the act, to cover their indirect costs. For
                     school year 1998-99, $42.16 million was provided for administrative cost grants, which was enough to
                     fund just under 90 percent of the costs calculated using the formula prescribed in the act. In certain
                     circumstances, some contract support funds are also expended for these education contracts in
                     addition to the administrative cost grants.
                     7
                      Tribes make the decision whether or not to request an indirect cost rate. Office of Management and
                     Budget circular A-87 states that “Each Indian tribal government desiring reimbursement of indirect
                     costs must submit its indirect cost proposal to the Department of the Interior (its cognizant federal
                     agency).” Some tribes contracting with BIA have chosen not to seek reimbursement for their indirect
                     costs. However, the circular also permits federal agencies to work with government units that wish to
                     test alternative methods of cost recovery, such as lump sum amounts. Guidance from BIA and IHS
                     provides that a lump sum amount may be negotiated when a tribe does not have an indirect cost rate.



                     Page 22                                        GAO/RCED-99-150 Indian Contract Support Costs
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as amended. As agreed with the committees’ staff, this report addresses
the following questions: (1) To what extent and for what reasons have
contract support costs and the associated funding shortfalls changed over
the past decade, and what can be expected in the future? (2) How have
shortfalls in funding for contract support costs affected tribes? (3) Have
the act’s provisions for contract support costs been implemented
consistently? We also describe alternative ways of funding contract
support costs in the future, and, as requested by the committees’ staff, we
provide a detailed explanation of how contract support costs are
calculated. (See app. II.)

To determine the extent and the reasons for changes in contract support
costs and the associated funding shortfalls, we interviewed various
officials of the departments of the Interior and HHS, including officials of
BIA, IHS, Interior’s Office of Inspector General, and HHS’ Division of Cost
Allocation. We also reviewed and analyzed various reports and data
assembled by BIA and IHS, including budget justifications and reports on
contract support shortfalls to the Congress. To adjust for the effects of
inflation, we used the Department of Commerce’s chain-type price index
for gross domestic product to express all dollar figures in constant 1998
dollars.

To determine how shortfalls in funding for contract support costs have
affected tribes, we visited several reservations and held open forums, at
which tribal representatives were invited to discuss contract support
funding. Two such forums were held during two large Indian conferences:
the annual conference of the National Congress of American Indians, in
October 1998, and the joint BIA/IHS Self-Governance Conference, in
November 1998. Other forums were held in conjunction with GAO staff
visits to various BIA and IHS offices: in Oklahoma City and Anadarko,
Oklahoma; in Albuquerque, New Mexico; and in Portland, Oregon.
Representatives from 77 tribes or tribal organizations attended one or
more of these forums. In addition, 25 of those tribes and tribal
organizations, as well as 17 other tribes or tribal organizations with whom
we did not meet, submitted documents, such as financial statements and
tribal budgets, that described the extent and the effects of funding
shortfalls on program services.

To determine whether the act’s provisions for contract support costs have
been implemented consistently, we reviewed legislative and regulatory
requirements, applicable court cases, and interviewed officials of various
Department of the Interior offices, including BIA, the Office of Inspector



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Introduction




General, and the Office of the Solicitor. We also interviewed officials of
Department of Health and Human Services offices, including IHS and the
Division of Cost Allocation. We also discussed applicable court cases with
the lawyers involved with them. Furthermore, we reviewed the agencies’
documents and gathered and analyzed relevant data from the agencies. As
part of this process, we visited agency offices in several locations around
the country, including Sacramento, California; Albuquerque, New Mexico;
Portland, Oregon; Seattle, Washington; and Washington, D.C.

We conducted our review from July 1998 through April 1999 in accordance
with generally accepted government auditing standards. In conducting our
work, we did not independently verify or test the reliability of the data
provided by agencies or tribes. We used these data for descriptive
purposes only and did not rely on them to make our conclusions and
recommendations. In collecting tribal officials’ views about how they have
been affected by shortfalls in contract support funding and how they have
coped with such shortfalls, we did not use a standardized data collection
instrument, such as a questionnaire. Instead, we invited tribal
representatives to describe their experiences, either orally or in writing,
with contract support shortfalls.




Page 24                            GAO/RCED-99-150 Indian Contract Support Costs
Chapter 2

Past Increases in Contract Support Costs
Will Likely Continue

                         Over the past decade, tribes’ contract support costs and the shortfalls
                         between these costs and the funding provided for them through annual
                         appropriations have increased. Tribes’ allowable contract support costs
                         associated with contracting BIA’s programs have more than doubled and
                         those associated with contracting IHS’ programs have more than
                         quadrupled. These increases have largely been due to an increase in tribes’
                         indirect costs, the primary component of contract support costs.1 The
                         need for funding has increased due to increases in the dollar amounts
                         contracted from BIA and IHS, coupled with increases in tribes’ indirect
                         costs. For fiscal year 1998, BIA reported a shortfall in funding for contract
                         support costs of over $25 million, and IHS reported a shortfall of about
                         $70 million. The future costs for contract support are difficult to estimate
                         because of the unpredictable nature of (1) the levels of future
                         appropriations, (2) the extent to which tribes might elect to contract new
                         programs, and (3) tribes’ indirect cost pools. Currently, however, tribes
                         are only contracting programs worth almost half of BIA’s and IHS’ annual
                         appropriations. Therefore, barring any major changes (e.g., in the
                         circumstances of the tribes or in the law), contract support costs will
                         likely continue to increase in the future.


                         Over the past decade, increases in indirect costs have been responsible for
Tribal Contracting and   the majority of the increase in funding for contract support costs. The
the Funding Shortfalls   need for indirect cost funding has increased due to increases in the dollar
for Contract Support     amounts contracted from BIA and IHS coupled with increases in tribes’
                         indirect cost pools. Across all the indirect cost rates negotiated by
Costs Have Increased     Interior’s Office of Inspector General, the aggregate indirect cost rate has
in the Last 10 Years     remained relatively stable over the past 10 years at just under 25 percent.
                         However, appropriations have not been sufficient to reimburse tribes for
                         their costs of administering BIA’s and IHS’ programs. The most significant
                         funding shortfalls have occurred in the last 5 years. During this period,
                         neither agency has requested full funding for these costs, nor has the
                         Congress appropriated full funding for them.




                         1
                          The legislative history of the 1988 amendments to the Indian Self-Determination and Education
                         Assistance Act discloses that the Congress substituted “contract support costs” for “contract costs”
                         in the provision prescribing funding of reasonable costs to manage the contracts. It specifically chose
                         not to use “direct and indirect” costs when describing what these costs cover. In the 1996 joint
                         agency regulations, contract support costs include direct costs, startup costs, and indirect contract
                         costs. Prior to the regulations, it was the agencies’ practice to use the term indirect costs as the largest
                         component of contract support costs.



                         Page 25                                           GAO/RCED-99-150 Indian Contract Support Costs
                            Chapter 2
                            Past Increases in Contract Support Costs
                            Will Likely Continue




Tribes Are Contracting      Over the past decade, the need for indirect cost funding from BIA and IHS
More, and Their Indirect    has risen due to increases in the dollar amounts contracted, coupled with
Cost Pools Have Increased   increases in tribes’ indirect cost pools. Each agency determines a tribe’s
                            allowable indirect costs by multiplying that tribe’s direct funding base (for
                            programs contracted from that agency) by the same tribe’s indirect cost
                            rate. Although comprehensive data on tribes’ direct funding bases for BIA’s
                            and IHS’ programs for the past 10 years were not readily available, a close
                            approximation is the contracting volume, or the total dollar amounts
                            contracted. Over the past 10 years, tribes have continued to contract new
                            programs and to expand their existing contracts. Generally, some or all of
                            the increases in contracting volume would result in increases in tribes’
                            direct funding bases for BIA’s and IHS’ programs.2 Figures 2.1 and 2.2 show
                            the growth in tribes’ contracting of BIA’s and IHS’ programs, respectively.




                            2
                             Changes in a tribe’s contracting volume for BIA’s and IHS’ programs may not result in dollar-for-dollar
                            changes in its direct funding base. The direct funding base consists of the contract funding amounts
                            for either BIA or IHS programs adjusted to be consistent with its direct cost base. A small number of
                            tribes choose to use a “salaries only” or a “salaries with fringe benefits” direct cost base as opposed
                            to total direct costs. In those cases, a change in the overall contract volume will affect the direct
                            funding base only if the change results in different salaries. Also, for those tribes that use a total direct
                            cost base, that base reflects adjustments for excluded costs and passthrough funds. Generally, when a
                            tribe administers a program for which it incurs little or no administrative expense, that program’s
                            costs are excluded from the direct cost base. For example, programs that a tribe contracts out to
                            another entity are generally excluded, as are passthrough funds, such as scholarships and general
                            assistance.



                            Page 26                                           GAO/RCED-99-150 Indian Contract Support Costs
                                           Chapter 2
                                           Past Increases in Contract Support Costs
                                           Will Likely Continue




Figure 2.1: Tribes’ Contracting of BIA’s
Programs, Fiscal Years 1989 Through        700   Dollars in millions
1997

                                           600



                                           500



                                           400



                                           300



                                           200



                                           100



                                             0

                                                  1989       1990      1991     1992   1993     1994    1995     1996     1997

                                                  Fiscal year


                                                             Contract support funds

                                                             Direct program funds



                                           Note 1: Funds are in constant 1998 dollars.

                                           Note 2: The total amount of funds contracted from BIA for fiscal year 1997 was about $1 billion.
                                           Contracts for construction and education programs, among other things, were generally excluded
                                           from the data presented in the figure. Contract support costs for these programs are generally
                                           paid from a separate source of funds.

                                           Note 3: Data for fiscal year 1990 include additional funding for tribes choosing to convert from
                                           fiscal year to calendar year contracts.

                                           Source: GAO’s analysis of BIA’s data.




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                                          Chapter 2
                                          Past Increases in Contract Support Costs
                                          Will Likely Continue




Figure 2.2: Tribes’ Contracting of IHS’
Programs, Fiscal Years 1989 Through       1,000 Dollars in millions
1998
                                           900

                                           800

                                           700

                                           600

                                           500

                                           400

                                           300

                                           200

                                           100

                                             0

                                                    1989    1990      1991   1992    1993   1994   1995   1996   1997   1998
                                                    Fiscal year


                                                            Contract support funds

                                                             Direct program funds



                                          Note: Funds are in constant 1998 dollars.

                                          Source: GAO’s analysis of IHS data.




                                          Over the past 10 years, contracting has increased primarily due to an
                                          increase in the overall amount of funds available to contract and in new
                                          contracting procedures. Over the 10-year period, BIA’s total appropriation
                                          increased by about $280 million in real terms (i.e., adjusted for inflation),
                                          while IHS’ total appropriation increased by about $730 million (in real
                                          terms). New contracting procedures, such as self-governance agreements,
                                          have also been introduced over the past 10 years through amendments to
                                          the Indian Self-Determination Act.

                                          Tribes’ indirect costs have increased as well. Between fiscal years 1989
                                          and 1996, their indirect cost pools increased by about $250 million (in real
                                          terms). This $250 million increase was allocated to all the programs in the
                                          direct cost base, including BIA’s and IHS’ programs. In aggregate, the



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                                         Past Increases in Contract Support Costs
                                         Will Likely Continue




                                         indirect cost pool for all tribes has increased in proportion to the direct
                                         cost base. Figure 2.3 shows the relationship between the increases in the
                                         aggregate indirect cost pool and increases in the aggregate direct cost
                                         base.


Figure 2.3: Aggregate Indirect Cost
Pool and Direct Cost Base for            1,800 Dollars in millions
Agreements Negotiated by the
Department of the Interior’s Office of   1,600
Inspector General, Fiscal Years 1989
                                         1,400
Through 1996
                                         1,200

                                         1,000

                                          800

                                          600

                                          400

                                          200

                                             0


                                                 1989           1990           1991    1992         1993         1994         1995         1996

                                                 Fiscal year

                                                               Direct cost base

                                                               Indirect cost pool



                                         Note 1: Funds are in constant 1998 dollars.

                                         Note 2: Data on the indirect cost pool represents tribes’ total indirect costs for all rates negotiated
                                         by Interior’s Office of Inspector General. Only a portion of these costs would be allocated to BIA’s
                                         and IHS’ programs. The direct cost base also represents the total direct cost base for all tribes’
                                         indirect rates negotiated by Interior’s Office of Inspector General. The aggregate direct cost base
                                         data include BIA’s and IHS’ programs, as well as programs from other federal agencies, state
                                         agencies, private organizations, and tribes’ programs, if applicable.

                                         Source: GAO’s analysis of data from the Department of the Interior’s Office of Inspector General.




                                         While the aggregate indirect cost pool increased by $250 million, the
                                         aggregate direct cost base increased by about $1 billion (in real terms).
                                         The ratio of the change is 4 to 1; meaning that, in aggregate, for every $4




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                                          Past Increases in Contract Support Costs
                                          Will Likely Continue




                                          increase in the direct cost base, the indirect cost pool increased $1.3
                                          Therefore, as shown in Figure 2.4, the aggregate indirect cost rate among
                                          all the tribes has remained relatively stable at just under 25 percent.


Figure 2.4: Aggregate Indirect Cost
Rate for Tribes’ Rates Negotiated by      30      Percentage
the Department of the Interior’s Office
of Inspector General, Fiscal Years 1989
                                          25
Through 1996

                                          20


                                          15


                                          10


                                              5


                                              0

                                                    1989          1990        1991        1992      1993         1994        1995         1996
                                                    Fiscal year

                                                           Aggregate indirect cost rate



                                          Source: GAO’s analysis of data from the Department of the Interior’s Office of Inspector General.




                                          While the aggregate indirect cost rate has remained relatively steady, the
                                          rates of individual tribes have varied from single to triple digits, depending
                                          on each tribe’s indirect cost pool and direct cost base. This variation in
                                          tribes’ indirect cost rates, which are subject to a thorough approval
                                          process as described in appendix II, does not necessarily mean that tribes
                                          with high rates receive more funding or that tribes with low rates are more
                                          efficient. For example, if one tribe has an indirect cost rate of 50 percent
                                          and a direct funding base of $80,000 in direct salaries, while another tribe
                                          has an indirect cost rate of 20 percent and a total direct funding base of
                                          $200,000, both tribes would receive the same indirect cost funding of
                                          $40,000.

                                          3
                                           This ratio reflects only the indirect cost component of contract support costs. According to IHS
                                          officials, the ratio would be closer to 3 to 1 when direct contract support costs and startup costs are
                                          included.



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                            There are two views about whether an indirect cost pool should rise in
                            proportion to an increase in the direct cost base. The first view is that the
                            indirect cost pool would be expected to increase as a tribe contracts
                            additional programs. For example, if a tribe were to decide to contract a
                            multimillion-dollar health facility with a large staff, it may need to upgrade
                            its centralized accounting system and personnel offices to handle the
                            increased workload. The second view is that a tribe may not always
                            experience increased indirect costs as it expands its direct costs because
                            many of the elements included in indirect cost pools are generally fixed
                            costs and therefore should not increase proportionally to the increases in
                            direct cost bases. For example, two-thirds of the tribes that Interior’s
                            Office of Inspector General negotiates indirect cost rates for each have a
                            total direct cost base greater than $1 million. Under the second view,
                            tribes with large direct bases could generally contract additional programs
                            without upgrading their accounting system and personnel offices.


Appropriations Have Not     Over the past decade, appropriations from the Congress and subsequent
Kept Pace With Increases    funding from federal agencies have not been sufficient to reimburse tribes
in Contract Support Costs   for their costs of administering BIA’s and IHS’ programs. During this period,
                            tribes’ allowable contract support costs have more than doubled for BIA’s
                            programs and have more than quadrupled for IHS’ programs. Over the same
                            timeframe, appropriations for contract support costs did not keep pace,
                            creating shortfalls. The shortfall for fiscal year 1998 alone totaled
                            $95 million for the two agencies. Figure 2.5 shows tribes’ allowable
                            contract support costs for BIA’s programs and the appropriations provided
                            for them.




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Figure 2.5: BIA’s Shortfalls in Contract
Support Costs, Fiscal Years 1989           160   Dollars in millions
Through 1998
                                           140


                                           120


                                           100


                                            80


                                            60


                                            40


                                            20


                                             0


                                                  1989       1990       1991         1992   1993     1994      1995      1996       1997       1998
                                                   Fiscal year


                                                            Contract support costs
                                                            Appropriations



                                           Note 1: Funds are in constant 1998 dollars.

                                           Note 2: Data for fiscal years 1989, 1990, and 1991 include allowable costs and appropriations for
                                           administrative cost grants for education programs as provided by the Indian Education
                                           Amendments of 1988 (P.L. 100-297, title V). During these 3 years, while administrative costs
                                           grants were being phased in, all or a portion of the administrative costs grants were paid out of
                                           BIA’s contract support funds. For example, the allowable costs for fiscal year 1989 include about
                                           $7 million for administrative cost grants, and a portion of the 1989 appropriation for contract
                                           support funds was used to cover those costs.

                                           Note 3: Data for fiscal year 1990 include additional funding for the tribes that chose to convert
                                           from fiscal year to calendar year contracts.

                                           Note 4: The total appropriation for contract support costs for fiscal year 1994 was about
                                           $98 million. The appropriation bill specified that the amount was for fiscal year 1994 and the
                                           shortfalls in funding for contract support costs in previous years. BIA used about $17.5 million of
                                           the 1994 appropriation to cover the shortfalls from previous years.

                                           Note 5: Data for fiscal years 1995, 1996, 1997, and 1998 contain allowable costs and
                                           appropriations for BIA’s Indian Self-Determination fund. The fund was created in 1995 exclusively
                                           to fund contract support costs for new and expanded contracts. Each year, BIA has had a
                                           carryover balance in the fund, meaning that all the funds appropriated were not spent each year,
                                           and some amount was carried over to the next fiscal year. The amounts included in the figure as
                                           the contract support costs and the appropriations are the amounts actually expended each year.
                                           At the end of fiscal year 1998, the available carryover balance in the Indian Self-Determination
                                           fund was $1.88 million.

                                           Source: GAO’s analysis of BIA’s data.




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Although the initial appropriations were less than the allowable contract
support costs for the past 10 years, for fiscal years 1989 through 1993, BIA
was generally able to use other funds to alleviate the shortfalls. In fiscal
years 1989, 1990, 1992, and 1993, BIA used reprogramming—or the transfer
of unobligated funds from other programs at the end of the year—to make
up for shortfalls. In 1994, BIA used fiscal year appropriations for contract
support funds to cover prior shortfalls, predominately from fiscal year
1993. Beginning in 1994, annual appropriations for contract support costs
have been capped in BIA’s annual appropriations acts, and reprogramming
for this purpose has been prohibited.

Figure 2.6 shows tribes’ allowable contract support costs for IHS’ programs
and the appropriations provided for them. Like BIA, IHS experienced
shortfalls in funding, but did not handle them the same way. Since 1992,
IHS has maintained a waiting list called the Indian Self-Determination
queue (queue) of requests for contract support funding.4 (See app. III for
information on IHS’ allocation of funding.)




4
 In a recent decision, Shoshone-Bannock Tribes of the Fort Hall Reservation v. Shalala, 988 Fed. Supp.
1306 (D.C. Or. 1997), a federal district court determined that the use of the queue for new and
expanded contracts is in violation of the Indian Self-Determination Act’s provision on contract support
funding. IHS is currently rewriting its policy on contract support costs to eliminate the queue. Under a
draft policy, IHS plans to continue listing requests for new or expanded contract support funding, but
will distribute funding to all tribes on the list, as funding is available. The funds will be distributed
according to greatest needs. If funds are not available, then the unfunded requests will be considered
part of the year’s shortfall.



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Figure 2.6: IHS’ Shortfalls in Contract
Support Costs, Fiscal Years 1989          300   Dollars in millions
Through 1998

                                          250



                                          200



                                          150



                                          100



                                           50



                                            0

                                                 1989      1990       1991     1992     1993     1994      1995      1996     1997      1998

                                                 Fiscal year

                                                           Contract support costs

                                                           Appropriations



                                          Note 1: Funds are in constant 1998 dollars.

                                          Note 2: The contract support costs for fiscal years 1995 through 1998 may be overstated. The
                                          data for these years include funding requests on the Indian Self-Determination queue, which IHS
                                          did not review and approve until funding became available. In fiscal year 1999, IHS has
                                          undertaken a review of all the requests on the queue. The contract support costs in the figure for
                                          fiscal year 1998 reflect changes through April 30, 1999. Furthermore, the costs may also be
                                          overstated because IHS did not subtract the direct funds it uses to offset contract support costs
                                          from the allowable costs. When a tribe contracts for a share of an area office’s or headquarters’
                                          programs, IHS generally considers 20 percent of the funds to offset contract support costs and
                                          reduces that tribe’s allowable costs accordingly.

                                          Note 3: IHS has had an Indian Self-Determination Fund since 1988, and this funding is reflected in
                                          the data for fiscal years 1991 through 1998. The Indian Self-Determination Fund contained
                                          $2.5 million every year from fiscal years 1988 through 1992, then was increased to $5 million in
                                          fiscal year 1993, and to $7.5 million annually for fiscal years 1994 through 1998.

                                          Note 4: IHS’ funding in 1991 includes $24 million for direct contract support costs for pre-1988
                                          contracts. IHS began paying direct contract support costs to tribes in fiscal year 1988.

                                          Source: GAO’s analysis of IHS’ data and budget requests.




                                          The 1988 amendments to the act require the agencies to provide contract
                                          support costs to tribes for their reasonable costs associated with



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administering BIA’s and IHS’ programs. However, since at least 1993, neither
BIA nor IHS has requested full funding for these costs, nor has the Congress
appropriated full funding for them. The agencies did not request full
funding for two reasons. First, it is difficult for them to predict what the
total need for indirect cost funding will be in advance. The agencies do not
know which tribes will be contracting which programs, at what level the
contracted programs will be funded, and what a tribe’s indirect cost rates
will be. Second, in addition to the difficulty of predicting the future
contract support requirements, the agencies have had other funding
priorities in recent years. For example, BIA’s priorities have been to seek
additional appropriations for law enforcement to reduce crime on the
reservations and for Indian education.

Beginning in fiscal year 1994, through the annual appropriations acts, the
Congress has specifically capped the amount of funds BIA could spend on
reimbursing tribes for their contract support costs. A similar cap was
introduced for IHS in fiscal year 1998. In distributing their limited funds for
contract support costs, BIA and IHS have developed two different
distribution methods. (See app. III for a discussion of funding distribution
methods for BIA and IHS.)

Tribes are engaged in litigation to enforce the act’s full funding language
and to recover funding shortfalls. In one recent case involving fiscal year
1994, the Interior Board of Contract Appeals decided that under both the
Indian Self-Determination Act and the individual contract agreements, a
tribe is entitled to full funding of its contract support costs—i.e., indirect
costs—in spite of a specific limitation on the amount of such funding in the
fiscal year 1994 appropriations act.5 The theory of this case is that both the
act and the contract bind the federal government to fully fund contract
support costs. According to the Board, provisions of the act and the
agreement stating that funding is subject to the availability of appropriated
funds do not eliminate the requirement for full funding. To eliminate that,
the appropriations act would have to clearly reveal congressional intent to
override the statutory requirement for full funding of contract support
costs. BIA has appealed this decision to the Court of Appeals for the




5
  Appeal of Miccosukee Corp., 31 IBCA 389, Dec. 4, 1998, reaffirmed Mar. 2, 1998 98-2 IBCA. The
Miccosukee case is now on appeal to the Court of Appeals for the Federal Circuit. Another IBCA case
involving fiscal year 1995 has been added to the Miccosukee appeal, Oglala Sioux Tribal Public Safety
Department.



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                        Federal Circuit.6 However, recent legislation could affect the court’s
                        decision. In 1998, the Congress enacted legislation to prevent the payment
                        of any shortfall in contract support funding for fiscal years 1994 through
                        1998.7 This provision retroactively establishes that amounts appropriated
                        or earmarked in committee reports are all the funds available to pay for
                        contract support costs for these fiscal years.8 It may affect other cases
                        presently before Interior’s Board of Contract Appeals.


                        Predicting the future amount of increases in contract support costs for
The Future Amount of    BIA’s and IHS’ programs is difficult because of the unpredictable nature of
Increases in Contract   (1) the future levels of appropriations for BIA’s and IHS’ programs, (2) the
Support Costs Is        extent to which tribes will choose to contract new programs from the BIA
                        and IHS, and (3) the changes in tribes’ indirect cost pools. Increases in the
Difficult to Predict    dollar amounts contracted will occur when future increases in program
                        funding are added to existing contracts or when tribes begin contracting
                        new programs. If the tribes’ indirect cost pools also continue to increase
                        and the aggregate indirect cost rate remains at about 25 percent, then as
                        we stated earlier, every $4 increase in the direct cost base for BIA or IHS,
                        either through increasing existing contracts or contracting new programs,
                        will lead to an additional contract support requirement of $1.

                        For fiscal year 1998, tribes’ allowable contract support costs for these
                        programs were about $375 million. In its fiscal year 2000 budget request,
                        BIA estimated, based on the tribes’ current allowable costs, that the
                        contract support requirement for tribes’ existing contracts of BIA’s
                        programs would rise to about $145 million, an increase of $13 million over
                        the fiscal year 1998 level. IHS estimated its fiscal year 2000 requirement for
                        contract support funding for its existing contracts will be almost
                        $295 million. For new contracts, BIA estimated it would need an additional
                        $5 million to fund tribes’ support requirements during fiscal year 2000, and
                        IHS estimated it will need $12.5 million for that year.




                        6
                         By contrast, an earlier federal appellate court decision has described the words of the act as a
                        limitation on the amount of funding BIA had to distribute. This decision did not address the issues in
                        the Miccosukee case. However, the court’s characterization was not essential to the court’s decision in
                        this case. Ramah Navajo School Board, Inc. v. Babbitt, 87 F. 3d 1338, 1341 (Cir. D.C. 1996).
                        7
                         Section 314 of the Omnibus Consolidated and Emergency Supplemental Appropriations Act for fiscal
                        year 1999, P.L. 105-277, 112 Stat. 2681-288, Oct. 21, 1998.
                        8
                         The legality of this provision has been challenged in several proceedings and cases, Seldovia Village
                        Tribe v. Shalala, IBCA Nos. 3782-97, 3862-97, and 3863-97; Cherokee Nation of Oklahoma v. Shalala,
                        IBCA Nos. 3877-98, 3878-98, and 3879-98; California Rural Indian Health Board, Inc. v. Shalala, (D. N.
                        Cal. 1989); and Shoshone-Bannock Tribes of the Fort Hall Reservation v. Shalala, 988 Fed. Supp. 1306
                        (D. Or. 1997).
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Since tribes currently contract programs representing only about half of
all of BIA’s and IHS’ appropriations, the potential exists for significant
increases in tribes’ contracting. If current contracting levels doubled, and
assuming indirect cost rates stay about the same, contract support
requirements would also double from the current requirement of almost
$375 million to about $750 million. However, some of this increase would
likely be offset by decreases in BIA’s and IHS’ administrative costs. For
fiscal year 1997, BIA reported that tribes’ contracts totaled over $1 billion
out of a total appropriation of about $1.7 billion, or about 64 percent. For
fiscal year 1998, IHS reported that about 45 percent of its program funding
was contracted by tribes—almost $892 million out of a total appropriation
of more than $2 billion.




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Tribes Said They Have Been Adversely
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Contract Support Costs
               According to officials of the more than 90 tribes with whom we
               communicated during the course of this review,1 tribes have been
               adversely affected by the shortfalls in contract support funding. The
               effects varied, depending on the number and the type of methods the
               tribes employed to deal with these funding shortfalls. To compensate for
               them, nearly all the tribes have reduced their indirect costs to manage
               programs within the funds provided, thereby lessening administrative
               productivity and efficiency. Furthermore, many tribes have had to cover
               the shortfalls with tribal resources, if available, thereby foregoing the
               opportunity to use those resources to promote the tribes’ economic
               development. Many tribes had to use direct program funds to cover the
               shortfalls, thereby reducing direct program services. In addition, a few
               tribes said they have refused or postponed the opportunity to contract
               programs, thereby stalling their progress toward self-determination.

               As has been reported by various studies over the past 15 years, as well as
               emphasized to us by tribal officials, the problems posed by funding
               shortfalls go beyond BIA’s and IHS’ contracts. That is, many tribes contract
               programs from other federal agencies, as well as from the states and
               private organizations. Although funding entities other than BIA and IHS are
               also allocated their share of a tribe’s indirect costs, as required by federal
               cost-allocation principles, some of these other entities allow the recovery
               of less than their allocated share of costs and others allow none. As has
               been reported by various studies, such situations worsen the shortfalls and
               exacerbate their effects on tribes. The scope of our review did not include
               funding entities that are not subject to the Indian Self-Determination Act.
               Nevertheless, because shortfalls attributed to such entities were an
               important issue for the tribal officials we spoke with, we have included
               their views on the matter.




               1
                Appendix IV lists the tribes we communicated with during our review. As noted in the appendix,
               representatives of 77 tribes and tribal organizations attended one or more of the open forums we held
               to discuss contract support issues, and 42 tribes and tribal organizations (including 17 that had not
               attended a forum) submitted letters or other documents pertaining to shortfalls and their effects. Not
               all of the tribal representatives spoke at the forums, however; in many cases, representatives indicated
               their agreement with the observations of other representatives but contributed no examples of their
               own. Furthermore, we did not use a standardized data collection instrument to gather views of tribal
               officials. Thus, we cannot definitively report how many of the tribes with whom we communicated
               were affected by shortfalls in contract support funding, nor can we report which or how many
               methods each tribe used to cope with shortfalls.



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                          Shortfalls in funding for contract support costs have adversely affected
Shortfalls in Funding     tribes in various ways, depending on the number and the type of methods
for Contract Support      the tribes used to compensate for such shortfalls. Nearly all of the tribes
Costs Have Adversely      we spoke with said they have used not one, but a combination of methods
                          to deal with the shortfalls’ effects. For example, in addition to cutting back
Affected Tribes in        on their indirect expenditures as much as possible, they have also had to
Various Ways              dip into tribal resources and program resources to compensate for the
                          shortfalls. As a result of such measures, the tribes’ administrative
                          infrastructures (e.g., personnel, computer systems, and accounting
                          systems) have deteriorated; opportunities to improve the tribes’ economic
                          conditions have been lost; and program services have been diminished. In
                          only a few cases did the tribes indicate that they have refused contracting
                          activities because they could not afford them, although several tribes
                          mentioned having considered that option.


The Tribes Have Pared     Nearly all of the tribal officials mentioned having had to cut back on their
Their Indirect Costs to   indirect costs to manage programs with the available funding. The tribal
Manage Programs Within    chairman of one Oklahoma tribe said that she and her staff had taken
                          various measures to make up for shortfalls in funding for contract support
Available Funding         costs. For example, they reduced staff salaries, shared job tasks, left
                          vacant positions unfilled, reduced the use of air conditioning in the
                          administrative offices, and turned off the lights when not in use. The
                          chairman refused to accept either a salary or compensation for the use of
                          her personal vehicle for tribal business purposes. Officials of many other
                          tribes reported having to leave critical vacancies unfilled, forego staff
                          salary increases, and postpone or forego equipment purchases or repairs.
                          Furthermore, tribal officials said, at some point it becomes impossible for
                          any more reductions to occur. For example, one Alaska tribe reported that
                          it cannot make any additional cutbacks in administrative activities without
                          risk of being unable to meet the terms and conditions of its funding
                          agreement.

                          According to tribal officials, tribes can reduce their indirect expenditures
                          only so much before the reductions negatively affect their ability to
                          maintain productivity and efficiency. For example, according to a letter
                          submitted by a Washington tribe, the tribe’s need to contain its indirect
                          costs has prevented it from hiring another accountant to assist with its
                          backlog of accounting/bookkeeping work, particularly reconciling its
                          monthly general ledger. Because the tribe cannot afford to pay competitive
                          salaries, it has had to hire untrained or underqualified people instead of a
                          certified public accountant. Similar difficulties in attracting qualified



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                             personnel because of the inability to pay competitive salaries were
                             frequently mentioned by other tribal officials.

                             According to a letter submitted by an organization that represents 11
                             northern tribes, funding shortfalls in contract support costs “make an
                             efficient organization inefficient.” According to the organization’s letter,
                             shortfalls in BIA’s funding for contract support costs have caused delays in
                             upgrading the organization’s financial management system. The planned
                             upgrade included purchasing and installing new accounting software to
                             enable more efficient compliance with OMB’s audit guidelines for nonprofit
                             organizations, leasing new accounting workstations and a network server
                             to ensure year 2000 compliance and adequate computing capacity for the
                             new accounting software, providing training on the use of the new
                             software for all accounting staff, and revising the organization’s
                             accounting manual to reflect system changes and to help ensure that
                             proper checks and balances were maintained during the switch to the new
                             system. Due to shortfalls in BIA’s contract support funding, however, the
                             organization had to delay the planned training and the revision of the
                             accounting manual. These delays, in turn, have compounded problems the
                             organization has experienced in installing and operating the new software
                             and getting the fiscal year accounts ready for the auditors.


Tribes Have Used Their       According to the tribal officials we interviewed, a combination of tribal
Own Resources and            resources and program resources have been used to make up for shortfalls
Program Resources to         in funds for contract support costs. Tribes drew upon their own resources
                             from several sources, including trust funds and tribal businesses. For
Cover Shortfalls in Funds    example, a New Mexico pueblo provided documents showing withdrawals
for Contract Support Costs   of hundreds of thousands of dollars from its trust accounts in fiscal year
                             1998 to pay for indirect costs (the largest portion of contract support
                             costs). The pueblo would otherwise have used its trust funds to purchase
                             land or to improve its infrastructures. A Washington tribe said it has used
                             large amounts of resources from its geoduck-processing enterprise to
                             cover funding shortfalls.2 According to a tribal official, if funding shortfalls
                             did not have to be compensated for, the tribe would have used its tribal
                             resources to expand its processing business or to supplement its federally
                             funded programs.

                             Tribes that are waiting for contract support funds from IHS feel that they
                             are the hardest hit by shortfalls in contract support funding, as they must

                             2
                              A geoduck (pronounced gooey-duck) is a large edible clam, sometimes weighing over 5 pounds, that
                             is found in Pacific coastal waters.



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bear all the costs of administering the contracted programs (or choose to
postpone the contract until the funding can be provided).3 These costs can
be significant, and no provision is in place to reimburse tribes for their
contract support expenditures during their years on the queue. One
Nevada tribe reported that shortfalls in contract support funding have
seriously affected its ability to administer health services and its
administration of BIA’s programs. Specifically, for 2 years the tribe had to
operate the contracted hospital, a “huge and costly undertaking,” without
any contract support funding from IHS. When the tribe contracted to take
over hospital operations in fiscal year 1996, it was to receive about
$7.3 million to do so: more than $5 million for direct costs; over
$1.4 million for indirect costs (in accordance with the tribe’s negotiated
indirect cost rate of 26.6 percent); about $495,000 for other contract
support costs; and about $367,000 for startup costs. The tribe planned to
use the startup funds to hire additional staff and install a new accounting
system to handle the planned expansion of services. Furthermore, the
tribe recognized that the administrative transition would require extensive
development and training and the assistance of specialists and
consultants.

When the tribe subsequently received no funding for contract support
costs for the first 2 years, it said it had to use a significant portion of the
funds designated for direct costs to pay for administrative support. When
the tribe took over hospital operations, 27 of the 66 staff positions were
vacant. The tribe had planned to immediately fill many of the vacancies,
but it had to postpone hiring for all but the most critical ones for the first 2
years. In addition, without contract support costs, the tribe could not
afford to resolve critical deficiencies, including some safety-related ones.
Nor could the tribe afford to replace certain pieces of medical equipment
or refer patients to specialists when needed, except in cases deemed
emergencies or needing acute care. For the first 2 years of tribal operation,
no optometric or podiatric care was available at the hospital, despite the
tribe’s large diabetic population. According to the tribe, program
administration suffered as well, particularly in the areas of personnel,
fiscal management, and accounting. For example, the tribe found it
extremely difficult to properly monitor and reconcile purchases,
disbursements, and the related statistics necessary to efficiently run the
hospital, and numerous budget revisions were necessary.


3
 IHS provides contract support funding only to tribes that have ongoing contracts (see app. III). When
tribes first indicate a desire to contract a program or to expand an existing one, they are put on a
waiting list, or queue, for funding. In some cases, a tribe can wait on the queue for 2 or 3 years before
receiving contract support funds for a new or expanded program. In the Shoshone-Bannock case, the
use of the queue was held to be beyond IHS’ authority.



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According to a number of tribes, drawdowns from tribal resources can
also result in lost opportunities for tribes to advance their social or
economic development. If they had not needed to use tribal resources to
make up for shortfalls in funding for contract support costs, some tribes
said they would have used their resources to supplement program funding;
others said they would have used the resources to “grow” their tribal
businesses or expand their economic development. For example, officials
of an Alaskan Indian community said that they routinely use tribal
resources to make up for shortfalls in contract support funding.
Otherwise, the community would have used its resources to supplement
direct program services (such as law enforcement and emergency
services) and to support community enterprises, community jobs, and
economic development.

The effect on some tribes has been more than one of lost opportunities for
program supplementation or economic development. For example, a letter
from a Maine tribe reported that it “cannot continue to absorb contract
support shortfalls. The tribe’s financial stability is being jeopardized by the
lack of adequate contract support.” The tribe said that, since fiscal year
1991, its accumulated shortfalls of about half a million dollars “have
created a deficit within the tribe’s general fund budget.” Thus, the tribe
has had to use direct program dollars to compensate for the shortfalls; it
has also had to lay off vital tribal employees and reduce expenditures.
Such cutbacks, said the tribe, have made it difficult to develop and
maintain the required management systems necessary to comply with the
requirements of federal contracts and provide direct services to its tribal
members.

Many tribes continue to use their own resources as supplemental funding;
nevertheless, some tribes have had no choice but to use direct program
dollars to cover indirect expenses. For example, according to a letter from
a New Mexico tribal organization, the failure of an agency to meet its
contract support obligations “creates a financial vacuum that can only be
filled through the use of unrestricted funds.” But for nonprofit
organizations, such as this one, unrestricted funds are quite limited, so the
organizations bear “a tremendous burden” when those funds must be
used to make up for unrecovered indirect costs. A reduction in indirect
expenditures is not necessarily an effective solution to the problem. For
example, according to the same New Mexico tribal organization, about
two-thirds of its indirect cost pool consists of expenses for salaries and
fringe benefits. Thus, if meaningful reductions in costs are to take place,
they will surely affect the size or the quality of the staffing. Because its



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                        staff is small in relation to the complexity, the volume, and the diversity of
                        the organization’s operations, the organization’s representative believes
                        that any reduction in staff would significantly impair its ability to provide
                        the necessary program services.


A Few Tribes Have       A few tribes said they have had to postpone or return management of their
Postponed or Refused    contracted programs to the agencies, or are considering doing so, because
Programs Because They   they cannot afford to administer them. For example, in a December 1998
                        letter, a Nevada tribe said that, as a relatively small tribe without many
Cannot Afford to        other economic resources, it has had to postpone for 5 years its
Administer Them         assumption of IHS’ Contract Health Service program. According to IHS
                        officials, some tribes have found themselves in a similar situation.
                        According to these officials, some tribes on the funding queue postponed
                        contracting programs until they reached the top of the funding queue
                        because they could not afford to run the programs without contract
                        support funding.

                        Other tribes have not yet retroceded or returned the management of their
                        contracted programs to the agencies, but have considered doing so or are
                        holding that decision in reserve. For example, by resolution of its
                        legislative council, an Arizona tribe authorized the retrocession of
                        programs for which insufficient or no contract support funding has been
                        provided. Similarly, a Washington tribe said that it coped with its fiscal
                        year 1997 contract support shortfall by not filling five positions that are
                        key to the tribal government infrastructure and that normally would be
                        funded from the indirect cost pool. According to a tribal official, “Each
                        year we receive less and less to administer programs and services to our
                        tribal members and the Indian people living in our service area; and
                        though we work very hard to minimize this negative impact, we fear that
                        the day might come when we may have to retrocede our programs back to
                        BIA and IHS.”


                        Officials of several tribes, however, said that they are reluctant to
                        retrocede programs back to the federal government because they were
                        unhappy with the level of services they received when federal agencies ran
                        the programs. For example, an official of an Oklahoma tribe said that,
                        despite funding shortfalls, his tribe continues to administer contracts
                        because it feels it can provide better services to its members than the
                        federal government had provided.




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                         Tribes Said They Have Been Adversely
                         Affected by Shortfalls in Funding for
                         Contract Support Costs




                         Many of the tribal representatives we interviewed said that much of their
Lack of Adequate         funding shortfalls for contract support costs, as well as the associated
Funding From Other       negative effects, arises from contracting with funding entities other than
Entities Contributes     BIA and IHS, such as other federal agencies, state governments, and private
                         organizations. Frequently, other entities with which tribes contract—under
to Shortfalls in Funds   authorities other than the Indian Self-Determination Act—limit indirect
for Indirect Costs       cost recovery; others allow no recovery of indirect costs. Although these
                         policies and practices, which have existed for years, exacerbate the
                         negative effects of funding shortfalls, many tribes continue to contract
                         such programs.

                         Entities other than BIA and IHS are not subject to the provisions of the
                         Indian Self-Determination Act. Accordingly, they are not required to pay
                         indirect costs over and above the program amount they provide to tribes
                         that contract with them. Nevertheless, under the provisions of OMB
                         Circular A-87, each such entity is allocated its share of the costs that make
                         up a tribe’s indirect cost pool. Thus, when one funding entity does not
                         reimburse its share of the indirect costs incurred, that shortfall may be
                         borne by the tribe. Some of the funding entities that are not subject to the
                         Indian Self-Determination Act and some statutes place a limit on the
                         indirect costs that a tribe can recover. Among the entities and programs
                         that tribal officials mentioned as limiting the recovery of indirect costs
                         were the Department of Health and Human Services’ Head Start program,
                         the Department of Labor’s Job Training Partnership Act program, and
                         various state programs.

                         According to various tribal officials, Department of Justice programs, as
                         well as many programs funded by grants from private sector organizations,
                         do not allow any recovery of indirect costs. For example, the Department
                         of Justice’s Community Oriented Policing Services Universal Hiring
                         Program, which provides grant money for hiring police officers,
                         specifically restricts the use of the grant money to salaries and benefits.
                         No funds can be diverted for such other costs as uniforms or weapons.
                         Despite their need for increased law enforcement, several tribal officials
                         said they avoid contracts and grants that allow little or no recovery of
                         indirect costs. For example, in a 1996 letter to the Department of Justice,
                         an Oklahoma tribe’s police department declined a grant from Justice’s
                         program of about $107,000 for two full-time officers. Citing its inability to
                         fund the indirect costs allocable to such a grant, the tribal police
                         department said it must “respectfully decline on receiving this most
                         important source of funding which would have been a great asset in police
                         operations.”



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The problem posed by funding entities that do not share in funding
indirect costs is not a new one. In discussing the problem of nonrecovery,
a 1997 study of contracting costs cited the following excerpt from a 1983
letter by Interior’s Inspector General to the Deputy Director of the Office
of Management and Budget as going “right to the heart of the matter.”

“The indirect cost guidelines [OMB Circular A-87] require an allocation of allowable costs to
all benefiting programs to establish an indirect cost rate. That would be a fair and equitable
process if every agency honored the established rate; but they do not. Some cite legislative
restrictions; others cite administrative regulations; and a few base their refusal on the
notion that a good administrator is obliged to negotiate a lower rate. What we have here is
a ‘Catch 22’ situation. One set of rules says that you can have an indirect cost rate, but
other rules say you cannot be paid on the basis of that rate . . . .”4


Although the problem of nonrecovery is particularly vexing to tribes and
has been so for many years, its solution has been elusive. The major
challenge with solving the problem is that grants and contracts awarded to
tribes by agencies other than BIA and IHS are not, by their very nature,
intended for the sole or primary use of Indian tribes. Instead, they are
designed for use by an array of institutions, including state and local
governments and nonprofit organizations. The agencies that fund these
grants and contracts have the authority to establish the amount of indirect
costs, if any, that may be recovered from the contract or grant funds. Thus,
in deciding whether to apply for such a contract or grant, any entity—be it
a state or local government or an Indian tribe—must consider its financial
ability to handle any accompanying restrictions on indirect cost recovery.
In some cases, such as with tribes that receive most or all of their funds
from the federal government and with nonprofit organizations, little if any
unrestricted, or disposable, income is available to make up for indirect
costs that are not reimbursed by funding entities. Although we understand
and include in this report tribes’ concerns about their inability to fully
recover their indirect costs from all funding entities with which they
contract, the scope of our review did not include funding entities other
than those specified in the Indian Self-Determination Act. Accordingly, we
present no conclusions or recommendations on this matter.




4
 James M. Sizemore, CPA, Determining the True Cost of Contracting Federal Programs for Indian
Tribes, Sec. Ed. (the Northwest Portland Area Indian Health Board and the Affiliated Tribes of
Northwest Indians, Portland, Oregon, May 1997), p. 32.



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Contract Support Costs Are Inconsistent

                       Inconsistencies in determining and funding contract support costs exist.
                       Since 1988, BIA and IHS have reimbursed tribes for different categories of
                       contract support costs. This difference has caused confusion among tribes
                       and differences in funding from the two agencies. In addition, since 1992,
                       the two regional offices within Interior’s Office of Inspector General that
                       are responsible for negotiating indirect cost rates with tribes have
                       calculated adjustments to indirect cost rates differently. In certain
                       circumstances, tribes negotiating indirect cost rates with the Western
                       Region receive higher indirect cost rates than they would receive if the
                       Eastern Region’s calculations had been used. Furthermore, BIA and IHS
                       have not been making the necessary adjustments when tribes receive a
                       final indirect cost rate after having been initially provided indirect funding
                       based on a provisional indirect cost rate.1 Moreover, having the
                       rate-setting function conducted by Interior’s Office of Inspector General is
                       inconsistent with the audit function of that office.


                       BIA and IHS have implemented the contract support provisions in the Indian
BIA and IHS Have       Self-Determination Act, as amended, differently. Since 1988, IHS has
Implemented Contract   provided additional contract support funding to tribes, for a cost category
Support Provisions     called “direct contract support costs,” but BIA has not. In 1996, the two
                       agencies issued joint regulations implementing the act and its
Differently            amendments, and these regulations identify direct contract support costs
                       as something that tribes should include in their contract proposals for BIA’s
                       and IHS’ programs. Currently, IHS is reconsidering the types of costs it
                       allows as direct contract support costs, while BIA plans to consider
                       requests for funding direct contract support costs.

                       In 1988, IHS began paying direct contract support costs based on its
                       interpretation of the 1988 amendments to the Indian Self-Determination
                       Act. In funding these costs, IHS recognized that certain types of costs
                       contractors incurred were being categorized as direct costs under OMB’s
                       guidance that should be reimbursed by IHS as direct contract support
                       costs. Included in IHS’ justification for the new category of direct contract
                       support costs were such items as equipment repairs and replacement,
                       workers’ compensation, unemployment taxes, and general insurance.
                       These costs are either not incurred by IHS in administering the program
                       (i.e., costs unique to tribes, such as insurance) or costs paid by IHS from
                       resources other than those under contract (i.e., equipment, workers’
                       compensation, and unemployment taxes).

                       1
                        A provisional indirect cost rate is calculated based on a tribe’s estimated direct and indirect costs and
                       is applied until a final rate is calculated based on actual costs, which are typically audited at the end of
                       a fiscal year.



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In determining the amount of direct contract support funding to provide,
IHS’ general practice has been to provide, for such benefits as workers’
compensation and unemployment taxes, an amount equal to 15 percent of
a tribe’s direct salaries, plus an amount to cover the actual costs of other
types of direct contract support costs, such as special training costs.2
However, IHS area offices have discretion to negotiate with tribes the
amount of funding provided for direct contract support costs. IHS
headquarters officials have recently raised some concerns about the
duplicate payment of costs that the agency has allowed as direct contract
support costs. As a result, IHS has proposed a new policy that will make
direct contract support costs subject to negotiations and that will
eliminate the 15 percent rule. According to IHS officials, this policy is more
rigorous; however, it will only apply to new or expanding contracts. The
proposed policy does not provide the opportunity for IHS officials to revise
direct contract support costs for existing contracts unless a tribe asks for
its costs to be reviewed.

After the 1988 amendments to the Indian Self-Determination Act, BIA did
not change its policy regarding the use of contract support funds and has
not requested any funds to pay direct contract support costs over and
above the base amount in a program’s contract. In a 1993 memorandum to
all BIA area directors, contract officers, and budget officers, the acting
Deputy Commissioner of Indian Affairs stated that the payment of certain
direct contract support costs could be justified under the Indian
Self-Determination Act, but that BIA did not have sufficient contract
support funding to pay for these costs. Furthermore, the acting Deputy
Commissioner stated that the use of contract support funds to pay for
direct contract support costs was in “violation of long-standing Bureau
policy.”

The different implementation of direct contract support costs by BIA and
IHS has caused confusion among tribes and funding differences between
the two agencies’ programs. To help standardize the implementation of the
act by BIA and IHS, the Congress directed the two agencies to issue a single
set of regulations on implementing the act. The final joint regulations were
issued in June 1996. Despite BIA’s position on direct contract support costs,
the joint regulations require that contract proposals contain “an
identification of the amount of direct contract support costs . . . .”
Confusion still exists because BIA has not changed its position on direct
contract support costs to follow the new regulations. However, on

2
 In the past, IHS paid direct contract support costs for such items as long-distance telephone service
and postage but has stopped this practice as funds for these functions have been transferred with
direct program funds.



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                            February 24, 1999, in testimony before the U.S. House of Representatives’
                            Committee on Resources, the Assistant Secretary for Indian Affairs stated
                            that BIA is reexamining its position on direct contract support costs and
                            “will evaluate tribal requests for payment of certain direct costs.” Other
                            Interior officials have pointed out that because the Congress has capped
                            BIA’s annual appropriations for contract support costs at less than full
                            funding since 1994, recognizing an additional category of contract support
                            costs may not result in any additional funding to the tribes. Instead, it
                            would only increase the amount of the shortfall, unless the Congress
                            provided additional funding. Estimates of direct contract support costs for
                            BIA’s programs have ranged between about $10 million and about
                            $30 million annually.


                            Inconsistencies exist in the calculation of indirect cost rates by Interior’s
Inconsistencies in          Office of Inspector General and in the use of certain types of rates by BIA
Calculating and Using       and IHS. Since 1992, two regional offices within Interior’s Office of
Indirect Cost Rates         Inspector General, the primary office responsible for negotiating indirect
                            cost rates with tribes, have calculated adjustments to indirect cost rates
                            differently. Under certain circumstances, tribes receive higher indirect
                            cost rates under the Western Region’s calculation method than they would
                            receive under the Eastern Region’s method. Furthermore, for one
                            particular type of indirect cost rate, BIA and IHS are not applying the rate
                            correctly. That is, when a provisional-final rate is used and funding has
                            been provided based on the provisional rate, BIA and IHS are not later
                            adjusting the contract funding as necessary to reflect the final rate.


Interior’s Office of        Since 1992, a significant difference has existed between how the Western
Inspector General Uses      and Eastern Regions of Interior’s Office of Inspector General have
Two Different Calculation   calculated the carryforward adjustment for tribes with “fixed with
                            carryforward” indirect cost rates. Most tribes have a “fixed with
Methods                     carryforward” type of indirect cost rate, which means that the rate is fixed
                            during the year that it is used; after that year has ended and the actual
                            costs have been audited, the rate is recalculated based on the actual costs.
                            If the fixed rate was too high or too low, an adjustment is made to the next
                            year’s rate. Through that adjustment, referred to as the “carryforward”
                            adjustment, any overpayment in indirect costs can be recovered.

                            While the Eastern Region of Interior’s Office of Inspector General requires
                            that all overpayments be recovered through a carryforward adjustment, in
                            certain circumstances, the Western Region allows an overpayment in



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                             Federal Policies and Practices for Paying
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                             indirect costs from one agency to be used to offset an underpayment from
                             another agency. According to officials in the Office of Inspector General,
                             the Western Region’s method of calculating indirect cost rates produces
                             higher rates than the Eastern Region’s method.

                             Although the Western Region’s method helps tribes, it is contrary to
                             Interior’s legal opinions. In a 1990 decision, its Office of the Solicitor
                             determined that one agency’s funds could not be used to offset deficits in
                             funding from another agency. Interior’s Office of Inspector General is
                             aware of the different calculation methods and would like to standardize
                             the process; however, it cannot do so at this time, as any changes to the
                             current process require federal court approval. In its recent decision on
                             the Office of Inspector General’s method to calculate indirect cost rates,
                             the United States Court of Appeals for the Tenth Circuit ruled that the
                             method was invalid.3 Subsequently, court orders were issued allowing the
                             resumption of the negotiation of indirect cost rates for fiscal years 1998
                             and 1999 under the system in place prior to the Tenth Circuit decision.
                             According to the Inspector General’s Office of General Counsel, the orders
                             prevent the Office of Inspector General from changing the process of
                             negotiating indirect cost rates without the approval of the District Court.


BIA and IHS Are Not          When tribes use a provisional-final rate, BIA or IHS must determine whether
Making Necessary             an overpayment was made, and if so, recover it. The Office of Inspector
Adjustments for              General does not adjust the indirect cost rate, as it does with the fixed
                             with carryforward type of rate, to recover any overpayments. The funding
Provisional-Final Indirect   agencies should use the provisional indirect cost rate to determine a
Cost Rates                   tribe’s initial funding for indirect costs. Usually, 2 years later, a final rate
                             will be issued based on a tribe’s actual audited costs. The final rate may be
                             the same as, higher, or lower than the provisional rate. If the final rate is
                             higher, then the tribe’s funding for indirect costs would have increased
                             and if the final rate is lower, then the tribe’s funding for indirect costs
                             would have decreased, in which case an overpayment may have occurred.
                             Several of the BIA and IHS area office officials we talked to during our
                             review told us that they were not making funding adjustments when the
                             final indirect cost rates were issued for tribes using provisional-final
                             indirect cost rates.

                             For example, if a tribe with an IHS direct funding base of $1 million had a
                             provisional rate of 25 percent, the tribe would receive $250,000 in funding
                             for indirect costs allocated to IHS’ programs for that fiscal year. If that

                             3
                              Ramah Navajo Chapter v. Lujan, 112 F. 3d 1455 (10th Cir. 1997).



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                        tribe’s final indirect cost rate for that year was 20 percent, then the tribe
                        actually only needed $200,000 rather than $250,000 and the tribe should
                        return the overpayment of $50,000 to the agency. If the final rate was
                        higher than the provisional rate, the agency should provide additional
                        funding to the tribe.

                        BIA officials noted that because it has not been able to fully fund tribes’
                        indirect costs, it is unlikely that any overpayments have occurred. To
                        continue using the same example, if the tribe received only 80 percent of
                        the required $250,000 to begin with, that would mean the tribe received
                        $200,000. Even with the lower final rate of 20 percent, the tribe therefore,
                        would not have been overpaid. However, based on our discussions with
                        BIA and IHS officials, it appears that neither agency makes this calculation
                        to determine whether, in fact, overpayments have been made to those
                        tribes using provisional-final indirect cost rates.


                        In 1986, the Office of Management and Budget designated the Department
Rate-Setting Function   of the Interior as the cognizant agency for developing indirect cost rates
Is Performed by         for tribes. Within Interior, the Office of Inspector General performs the
Interior’s Office of    rate-setting function.4 That office is also responsible, however, for auditing
                        expenditures by tribes under departmental contracts as well as reviewing
Inspector General       and processing tribes’ audited financial statements on which their indirect
                        cost proposals are based.

                        The inherent conflict between the functions performed by Interior’s Office
                        of Inspector General has long been recognized. In 1989, OMB concluded
                        that having Interior’s Office of Inspector General negotiate indirect cost
                        rates was contrary to the principle of separation of duties under OMB
                        circular A-123, “Internal Controls,” and counter to the intent of the
                        Inspector General Act of 1978. In 1989, recommendations to move the
                        rate-setting function were made, but were not implemented, partly
                        because tribes objected to the transfer. Tribes view Interior’s Office of
                        Inspector General as a fair and impartial representative of the federal
                        government and were concerned that moving the rate-setting function into
                        Interior’s Office of Policy, Management, and Budget (now the Office of
                        Policy, Management, and Budget and Chief Financial Officer) would
                        politicize the process, preventing the office from being impartial and

                        4
                         The Office of Inspector General and its predecessor organizations have been negotiating indirect cost
                        rates with tribes since 1976, approximately 1 year after the enactment of the Indian Self-Determination
                        and Education Assistance Act in 1975. In contrast, at HHS, the rate-setting function is performed by the
                        Division of Cost Allocation within the Department’s Program Support Center, not by the Department’s
                        Office of Inspector General.



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                             neutral in setting indirect cost rates. The rate-setting function was not
                             moved, and it continues to be performed by Interior’s Office of Inspector
                             General.


                             Two inconsistencies in determining funding for contract support costs
Conclusions                  continue to cause confusion for tribes who receive self-determination
                             funds, and, more importantly, cause funding inequities among the tribes.
                             Although BIA and IHS issued joint regulations for implementing the
                             program, the inconsistent payment of direct contract support costs
                             continues because they have not yet changed or coordinated their
                             practices and policies to reflect the regulations.

                             The agencies also do not make proper adjustments in contract support
                             funding based on provisional-final rates. Because they do not make these
                             adjustments, they do not know if they are providing the correct amount of
                             funding to tribes.

                             The importance of making the funding of contract support costs easier to
                             understand and implement extends to the way in which the funds are
                             audited. The calculation and use of indirect rates is a complex process,
                             which varies by tribe, and even though tribes provide independent audited
                             financial statements, the federal government must maintain an
                             independent audit capability over indirect rates. Because the Office of
                             Inspector General is both the rate-setting and audit entity for tribes’
                             indirect rates, a potential conflict of interest exists in ensuring this audit
                             capability.


                             We recommend that the Secretaries of the Interior and of Health and
Recommendations to           Human Services ensure that
the Secretaries of the
Interior and Health      •   BIA and IHS work together, and with the Congress and Indian tribes, to
                             coordinate their current practices and policies governing the payment of
and Human Services           direct contract support costs and to help ensure that their payment is
                             consistent between the two agencies and
                         •   the two agencies correctly adjust funding when tribes use provisional-final
                             indirect cost rates.


                             We provided a copy of a draft of this report to the departments of Interior
Agency Comments              and Health and Human Services for review and comment. Both
and Our Evaluation

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departments provided us with comments, as did the Department of the
Interior’s Office of Inspector General. We are handling the comments from
Interior and its Inspector General as separate responses.

The Department of the Interior agreed with GAO’s recommendations that
its Bureau of Indian Affairs and HHS’ Indian Health Service should have
consistent policies on the payment of direct contract support costs and
that adjustments should be made when provisional-final indirect cost rates
are used. Interior said that although differences in BIA’s and IHS’ budget
structures may continue to make having consistent direct contract support
costs difficult, it will strive to improve the degree of consistency between
its methods and those of IHS. With regard to our recommendation about
adjusting provisional-final indirect cost rates, Interior said that although
the BIA does not believe overpayments have been made, BIA will remind its
awarding officials of the need to compute adjustments when
provisional-final indirect cost rates are used. Comments from the
Department of the Interior and our specific responses appear in appendix
V.

Our draft report concluded that having Interior’s Office of Inspector
General negotiate indirect cost rates limited its ability to audit the same
function and recommended that the Secretary of the Interior move the
function from the Inspector General’s Office. In separate responses, the
Department of the Interior and its Office of Inspector General differed on
whether the responsibility should be removed. While the Inspector
General’s Office agreed with the recommendation to remove the rate
negotiation function from the Office, the Department raised several
concerns about moving the function. Specifically, it stated that sufficient
separation of duties exists within the Inspector General’s Office because
the staff dedicated to indirect cost negotiations are not assigned to
conduct other audits. The Department also stated that it has limited ability
to change the current system of negotiating indirect cost rates because of
current litigation related to these rates. We continue to have concerns
about the ability of the Inspector General’s Office to perform both the rate
negotiation function and audit functions and plan to review the issue in
more depth in a separate study, which will take into account the
differences in the responses to our draft report, the legislative history of
the Inspector General Act, generally accepted government auditing
standards, current litigation, and any other pertinent guidance. As a result,
we are not making the recommendation to remove the rate negotiation
function from the Inspector General’s Office at this time. In its response,
the Office of Inspector General also provided technical comments that we



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have incorporated in the report where appropriate. The Inspector
General’s comments and our specific responses are in appendix VI.

The Department of Health and Human Services agreed with GAO’s
recommendations that its IHS and Interior’s BIA should have consistent
policies on the payment of direct contract support costs and that
adjustments should be made when provisional-final indirect cost rates are
used. The Department stated that IHS has historically paid direct contract
support costs and has met recently with BIA to discuss the development of
a consistent policy. The Department also stated that the issue of
adjustments for provisional-final rates will be covered by IHS in a training
session scheduled for this summer. The Department had no comment on
our recommendation in the draft report to move the responsibility for
negotiating indirect cost rates from Interior’s Office of Inspector General.
The Department’s comments are in appendix VII.




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Chapter 5

Alternatives for Funding Contract Support
Costs

                  The tension between providing full funding for contract support costs and
                  limiting contract support costs will continue to increase as these costs
                  increase. For the past several years, appropriations for contract support
                  costs have been insufficient to fully fund tribes’ allowable contract
                  support costs, and tribes have faced increasing shortfalls in funding for
                  their contract support costs. The Congress’ decision to control increasing
                  contract support costs by limiting annual appropriations has been
                  challenged by tribes through several cases. One of these cases, which is
                  currently being appealed, was decided in favor of the tribes to receive
                  payment for past shortfalls of contract support funding. In late 1998, the
                  Congress enacted a 1-year moratorium on any new contracting under the
                  Indian Self-Determination and Education Assistance Act. In response to
                  the need for a permanent solution to the current impasse, we are offering
                  four alternatives for funding contract support costs.

                  In this chapter, we present the advantages, the disadvantages, and the cost
                  implications of several alternatives that the Congress may wish to consider
                  as it deliberates how best to carry out the Indian Self-Determination Act.
                  These alternatives range from fully funding tribes’ allowable contract
                  support costs to amending the act to remove the funding mechanism that
                  requires the payment of contract support funds over and above a
                  program’s amount. The alternatives discussed are as follows:

              •   Alternative 1: Provide appropriations sufficient to fund 100 percent of
                  allowable contract support costs each year.
              •   Alternative 2: Amend the act to eliminate the provision requiring that
                  contract support costs be funded at 100 percent of the allowable costs
                  identified by BIA and IHS.1
              •   Alternative 3: Amend the act to limit the indirect costs that would be paid
                  by imposing either a flat rate or a ceiling rate.
              •   Alternative 4: Amend the act to eliminate the provision for payment of
                  contract support costs over and above the program base and instead
                  provide a single, consolidated contract amount.

                  We do not consider all the possible alternatives for funding contract
                  support costs, nor do we prescribe which alternative or combination of
                  alternatives should be selected. In discussing the costs of these
                  alternatives, we do not address funding shortfalls for years prior to fiscal
                  year 1998, nor do we address additional funding that would be necessary if

                  1
                   This alternative may not be necessary if federal courts determine that the requirement for contract
                  support funding under the Indian Self-Determination Act is limited to the amount actually
                  appropriated. Cases presently before the Court of Appeals for the Federal Circuit are considering this
                  issue.



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                         changes in determining direct contract support costs are made by BIA and
                         IHS, as discussed in chapter 4.2 The cost estimates we provide are
                         illustrative rather than actual, because they involve two major
                         assumptions. First, using the agencies’ estimated funding level for new
                         contracts for fiscal year 2000, we assume that $17.5 million would be the
                         annual cost of supporting new contracts. Second, using fiscal year 1998
                         appropriations of about $280 million, plus the agencies’ fiscal year 1998
                         shortfall estimate of about $95 million for existing contracts, we assume
                         that $375 million would be the cost of fully funding the existing contracts
                         the first year under an alternative funding method. Finally, we are not able
                         to estimate the costs of changes to existing contract costs because of the
                         ever-changing nature of tribes’ indirect cost rates and direct cost bases.


                         The first alternative for congressional consideration is to make
Alternative 1: Fully     appropriations sufficient to fully fund (i.e., at 100 percent of allowable
Fund Contract            costs) tribes’ allowable contract support costs (this alternative assumes
Support Costs            that BIA and IHS would request the full amount of tribes’ allowable costs).
                         With this alternative, BIA and IHS would continue to identify tribes’
                         allowable costs as they do now, by using tribes’ indirect cost rates, and
                         would pay direct contract support costs in a consistent way, as discussed
                         in chapter 4. The agencies would identify and request the funds necessary
                         to support new contracts.


The Advantages and the   The first alternative has the advantage of fulfilling the provisions of the
Disadvantages            Indian Self-Determination Act that allow tribes to receive funding for their
                         allowable contract support costs. By fully funding these costs, the
                         Congress and the funding agencies would eliminate funding shortfalls as
                         well as the lawsuits that could potentially stem from such shortfalls.

                         This alternative would be advantageous to tribes because it would help
                         ensure that they receive their allowable contract support funds for the
                         federal programs they contract from BIA and IHS. As tribes contract more
                         programs, they may need to build up their administrative systems to
                         properly administer and manage their contracts. The costs of these
                         administrative systems are used in determining tribes’ indirect cost rates,
                         yet tribes do not receive full funding from either BIA or IHS for these costs.


                         2
                          In 1998, the Congress included language in the Omnibus Consolidated and Emergency Supplemental
                         Appropriations Act for fiscal year 1999 (P.L. 105-277, section 314, 112 Stat. 2681-288, Oct. 21, 1998) that
                         limited the obligation to fund contract support costs to the amounts the Congress appropriated for that
                         purpose in fiscal years 1994 through 1998. This would mean that no funding would be provided to pay
                         for any shortfalls for these years.



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                        If this alternative were adopted, tribes that contract with IHS would no
                        longer have to wait several years for contract support funding, and tribes
                        that contract with BIA would no longer receive less than the full amount of
                        their allowable contract support costs.

                        The primary disadvantage of this alternative is that its implementation
                        would require the Congress to fully fund all allowable contract support
                        costs, which may continue to increase each year. As discussed in chapter
                        2, it is difficult to predict future contract support costs for several reasons,
                        including the difficulty of determining the number of tribes that will begin
                        new contracts during the year. However, tribes’ allowable contract
                        support costs could double as tribes continue to contract more of the
                        agencies’ programs. While tribes can contract almost all of the programs
                        and services that BIA and IHS currently provide, according to officials at
                        both agencies, tribes are currently contracting only about half of the
                        agencies’ resources. As BIA and IHS transfer more and more programs to
                        the tribes, the agencies’ administrative costs should decrease, and some of
                        this funding could become available to offset increases in contract support
                        funding. Nevertheless, most of the funding for the increased allowable
                        costs would have to be provided through federal appropriations.

                        Another disadvantage of this alternative, in terms of cost efficiency, is that
                        it does not provide tribes with incentives to limit the growth of contract
                        support costs and, particularly, indirect costs. Although tribes must justify
                        their indirect cost rates through the process discussed in appendix II, and
                        under the law tribes should not receive duplicate funding for the same
                        task from program funding and contract support funding, Interior’s Office
                        of Inspector General and others have noted that the current method of
                        funding indirect costs could encourage tribes to classify as “indirect” as
                        many costs as possible to receive more funding. For example, in a 1983
                        letter to the Deputy Director, Office of Management and Budget, Interior’s
                        Inspector General criticized the funding mechanism for creating this
                        motivation rather than promoting economy and efficiency. Similarly, a
                        1982 study by the American Indian Law Center, Inc., concluded that the
                        funding mechanism encouraged tribes to shift as many expenses as
                        possible to the indirect, rather than direct, cost category.


The Cost of the First   As the need for contract support funding will, in all probability, continue
Alternative             to increase each year, the “full funding” alternative will involve
                        ever-increasing amounts. The cost of this alternative would be as follows:




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                         •   about $375 million the first year, based on the fiscal year 1998 funding for
                             existing contracts (including the fiscal year 1998 funding shortfall);
                         •   about $17.5 million for new and expanded contracts, according to the
                             agencies’ estimates for fiscal year 2000;3 and
                         •   an undetermined amount for changes to existing contracts due to changes
                             in indirect cost rates or program funding.


                             A second alternative is for the Congress to amend the act to eliminate the
Alternative 2: Amend         provision for fully funding allowable contract support costs and, instead,
the Act to Eliminate         provide funding strictly on the basis of annual appropriations. With this
the Provision for Full       alternative, BIA and IHS would continue to identify tribes’ allowable costs,
                             using their indirect cost rates, in the agencies’ budget requests.
Funding of Contract
Support Costs
The Advantages and the       This alternative has the advantage of limiting the growth of contract
Disadvantages                support funding; funding amounts would be established by the amount the
                             Congress appropriates each year. At the same time, this alternative would
                             allow the Congress to fund contract support costs at whatever level it
                             deems appropriate. The Congress has appropriated increased amounts for
                             contract support; in fiscal year 1989, it provided about $100 million; in
                             fiscal year 1998, it provided about $280 million. If adopted, this alternative
                             would eliminate the expectation, created by the 1988 and 1994
                             amendments to the law, that full contract support funding will be
                             available, when, in fact, appropriations and funding have been limited and
                             have caused shortfalls.

                             A disadvantage of this alternative is that it may discourage tribes from
                             entering into new self-determination contracts. The current policy fosters
                             self-determination by encouraging tribes to assume managerial
                             responsibility for federal programs that the government previously
                             managed on their behalf. Yet, as has been explicitly stated by the Senate
                             authorizing committee, tribes’ assumption of responsibility for these
                             programs was not intended to result in a diminution of program resources.4
                              Avoiding this effect was the goal behind providing full funding of the
                             contract support costs that tribes incur in running these programs. Tribes
                             have stated that if they are not able to achieve full funding of their contract

                             3
                              In the second year of contracting under this alternative, we assume that the funding for existing
                             contracts would increase by $17.5 million, and another $17.5 million would fund additional new and
                             expanded contracts.
                             4
                              S. Rep. No. 103-374 at 9 (1994).



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                         support costs, and particularly their indirect costs, they may not continue
                         to contract for federal programs or they may reduce the number of
                         programs they contract. However, several tribes have also stated that they
                         are interested in providing services to their members and that they have
                         continued to provide these services despite shortfalls because they believe
                         they can provide better services than BIA and IHS have provided.

                         Another disadvantage of this alternative for tribes is that funding for their
                         contract support costs would be subject to the uncertainties of the
                         appropriations cycle. Unless the Congress decides to appropriate amounts
                         sufficient to fully fund tribes’ contract support costs every year, this
                         alternative would result in shortfalls between the amounts provided and
                         those identified as allowed for contract support. Although the Congress
                         has not funded allowable contract support costs at the level currently
                         provided by law, it has increased funding for these costs over the past
                         several years. With this alternative, contract support costs might not
                         increase; they could decrease. Appropriations could fluctuate from year to
                         year, and this could negatively affect tribes’ ability to plan and budget for
                         administering their programs.


The Cost of the Second   The cost of this alternative would depend on the annual appropriations
Alternative              provided by the Congress. For fiscal year 1998, the Congress appropriated
                         $280 million for contract support. That amount included funds to support
                         existing contracts as well as an amount for support of new and expanded
                         contracts. With this alternative, the Congress could opt to appropriate
                         more or less than the $280 million.


                         A third alternative would be to amend the law to limit the amount of
Alternative 3: Amend     funding tribes could receive for contract support by limiting the amount of
the Act to Impose        indirect costs tribes can receive. For example, one way to limit funding
Limits on Indirect       would be to establish one indirect cost rate—such as the current aggregate
                         rate of 25 percent—as a flat rate that would apply to all tribes. Another
Cost Rates               method would be to fund tribes’ indirect costs according to their rate, up
                         to a specific limit, or ceiling—such as 25 percent—above which a tribe
                         could recover no more costs.


The Advantages and the   As with the second alternative, this one has the advantage of imposing
Disadvantages            limitations on the growth of contract support funding and of eliminating
                         the expectation created by the law’s current language that full contract



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support funding will be available.5 An advantage of this alternative for
tribes is that their contract support costs would be funded on a consistent
basis and they could better anticipate their annual contract support
funding. All tribes would receive funding, and they would receive funding
at the same rate. As previously stated, because of shortfalls, tribes that
have new contracts with IHS can wait several years to receive contract
support funding, and tribes that contract with BIA do not get the full
amount of funding that the agencies have identified for tribes’ allowable
costs.

However, the disadvantage of this alternative to tribes is that it ignores the
differences among the individual tribes’ actual indirect costs. As discussed
in chapter 2, contract support costs are made up primarily of indirect
costs, which vary widely among tribes. By ignoring these differences, this
alternative could provide a windfall for tribes who have low indirect cost
rates while placing those with high rates at a disadvantage, depending on
the specific rate limitation that would be applied. For example, if the
Congress were to impose a flat 25-percent rate based on total direct costs,
more tribes would receive reduced funding than increased funding for
indirect costs. Specifically, of the 327 tribes for which indirect cost rate
information was available for fiscal years 1995 through 1998, 202 tribes
would receive less funding under a 25-percent rate restriction (because
their rates were higher than 25 percent), and 125 tribes would receive
more funding (because their rates were 25 percent or lower). The 12 tribes
with the highest rates (76 percent or higher) were those with relatively low
levels of program dollars. Figure 5.1 shows the indirect cost rate
categories for the 327 tribes.




5
 The idea of imposing a cap on indirect cost rates is similar to the approach used to limit the growth of
indirect costs at colleges and universities. Beginning in fiscal year 1992, a 26-percent cap was imposed
on federal reimbursements to universities for certain indirect costs associated with the performance of
federally funded research, as we reported in a previous review of such costs. University Research:
Effect of Indirect Cost Revisions and Options for Future Changes (GAO/RCED-95-74, Mar. 6, 1995).



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Figure 5.1: Tribes’ Indirect Cost Rates
                                          160 Number of tribes


                                          140


                                          120


                                          100


                                           80


                                           60


                                           40


                                           20


                                            0

                                                 0 to 25   over     over     over      over 100
                                                           25 to 50 50 to 75 75 to 100

                                                 Indirect cost rate (percentage)



                                          Note: We compiled information on indirect cost rates negotiated by Interior’s Office of Inspector
                                          General and HHS’ Division of Cost Allocation. There are 382 tribes and organizations in the
                                          database; of these, 25 tribes had multiple rates, and 35 had indirect cost rates calculated with
                                          direct cost bases composed of salaries only or salaries and fringe benefits (5 tribes had both of
                                          these). Therefore, these 55 tribes are not included in the data presented in this figure.

                                          Source: GAO’s analysis of data from BIA and HHS’ Division of Cost Allocation.




                                          To implement this change, BIA and IHS would have to redistribute funding
                                          among tribes, which could cause financial and administrative disruption
                                          for tribes that would lose funding. On the other hand, this alternative
                                          would provide an incentive for tribes with high indirect cost rates to lower
                                          their indirect costs.

                                          Furthermore, as with the second alternative, this alternative represents a
                                          change from the current self-determination legislation. Tribes have stated
                                          that if funding shortfalls continue they may not continue to contract BIA’s
                                          and IHS’ programs. Of the tribes we communicated with, none indicated
                                          they had returned the management of their programs to BIA and IHS;
                                          however, there is no way to know how many tribes might stop or reduce
                                          their contracting.



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The Cost of the Third    •   The cost of this alternative would depend on the type of rate limit
Alternative                  established. If, for example, the Congress chose a flat rate of 25 percent,
                             this alternative would cost about the same as the current method costs,
                             about $375 million, for the first year.
                         •   As with the first alternative, if the Congress provided $17.5 million the first
                             year to support new and expanded contracts, then the funding for existing
                             contracts would increase accordingly the second year, and another
                             $17.5 million would support new and expanded contracts.
                         •   If the Congress chose a rate lower than 25 percent, allowable contract
                             support costs would decrease; if the Congress chose a higher rate,
                             allowable contract support costs would increase.


                             A fourth alternative would be to amend the act to eliminate the current
Alternative 4: Amend         funding mechanism, which provides contract support funding over and
the Act to Replace the       above the program funding, and replace it with one that would combine
Current Funding              the current categories of contract costs into one contract amount from
                             which both direct and indirect costs would be recovered. The revised
Mechanism With a             contract amount would consist of the sum of (1) a program’s dollars;
Consolidated Contract        (2) the allowable indirect costs; and (3) any allowable direct contract
                             support costs, as calculated by an agreed-upon method (as recommended
Amount                       in chapter 4). Upon consolidation into a single contract amount, these cost
                             categories would lose their individual identities and would thereafter
                             simply comprise the contract total. BIA’s and IHS’ budget requests, then,
                             would no longer contain a separate line item for contract support; those
                             funds would be contained within the agencies’ program line items. BIA
                             currently uses this funding method for tribes’ contracts of construction
                             programs. Tribes would continue to negotiate an indirect cost rate, for use
                             in cost allocation and recovery, but differences in the rate from year to
                             year would not affect the contract amount. The contract amount would
                             change only as a result of increases appropriated by the Congress (e.g., for
                             inflation or for particular programs). As with the other alternatives, a
                             separate fund would need to be retained to support new contracts.


The Advantages and the       The advantage of this alternative for both the government and tribes is that
Disadvantages                it provides for the full recovery of indirect costs, although the amount of
                             funding provided may not increase. At the same time, this alternative
                             removes any incentive for tribes to increase their indirect costs to receive
                             more funding each year. Funding would no longer be provided over and
                             above a program’s direct funding, so once the consolidated contract
                             amount has been set, any increases in indirect costs would leave less



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                             money for a program’s expenditures. This would create an incentive for
                             tribes to reduce their indirect costs as much as possible, to make more
                             money available for direct program expenditures. In keeping with the
                             purpose of the Indian Self-Determination Act, tribes would make the
                             decisions about how much funding to spend on program costs and how
                             much to spend on administrative, or indirect, activities. With this
                             alternative, the spotlight would no longer be on the sufficiency of contract
                             support funding, but on the sufficiency of direct program funding. That is,
                             funding debates would center on whether the funds provided for a
                             particular program would be sufficient to achieve its intended purpose.

                             A disadvantage of this alternative for tribes is that if their indirect cost
                             rates increased over the years, the contract amounts would not increase.
                             Changes in indirect cost rates—whether upward or downward—would no
                             longer affect the amount of funding a tribe would receive, because
                             contract support would no longer be funded separately from the program
                             amounts. Thus, tribes would bear the responsibility for managing indirect
                             costs prudently, to retain the greatest possible amount of the total contract
                             funds for program services.


The Cost of the Fourth   •   The Congress could fund this alternative in one of two ways. First, when
Alternative                  the existing contract funding is consolidated, the funding could be
                             combined at the current funding level, which would perpetuate the current
                             funding shortfall. This option would cost $280 million annually for existing
                             contracts. Tribes would continue to expect funding for their shortfalls,
                             however, and would view these shortfalls as permanent reductions in
                             funding, which is what happened to a similar effort in 1985.6 Or, second,
                             the contract funding could be consolidated at the level identified by BIA
                             and IHS as the amount of tribes’ allowable contract support costs. Using
                             fiscal year 1998 funding, the consolidated amount would be about
                             $375 million, including almost $280 million for existing contracts and
                             about $95 million for the shortfall. As with the other alternatives, contract
                             support costs would continue to be needed for new contracts. According
                             to BIA’s and IHS’ estimates for fiscal year 2000, the costs of new contracts
                             would be about $17.5 million, annually, and these costs would accumulate
                             as the tribes continued the contracts.
                         •   Under this alternative, future increases in contract support costs would be
                             slowed, because the funding mechanism would no longer provide contract
                             support funding over and above the direct program amounts for existing

                             6
                              BIA consolidated funding for the programs and contract support for fiscal year 1985; however, the
                             total amount was $5 million short of tribes’ allowable costs. For a number of reasons, this process
                             failed and was reversed in fiscal year 1988.



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                  contracts. Thus, if the Congress decided to increase funding for a
                  particular program, this decision would not create a corollary obligation
                  for increased contract support funding.


                  The Congress, in its deliberations on how to best provide funding for the
Matters for       Indian Self-Determination Act, may wish to consider a number of
Congressional     alternatives to the current mechanism for funding Indian contract support
Consideration     costs.

                  We provided copies of a draft of this report to the departments of the
Agency Comments   Interior and Health and Human Services for review and comment. We
                  received comments from both departments and from Interior’s Office of
                  the Inspector General (see app. V, VI, and VII). Neither of the departments
                  nor the Inspector General commented on the alternatives presented in this
                  chapter.




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Appendix I

Contract Support Cost Provisions of the
Indian Self-Determination and Education
Assistance Act
              The following text presents those parts of title I of the law that cover
              contract support costs for Indian Self-Determination and Education
              Assistance Act contracts.1 The provisions in the law apply to both tribal
              governments and organizations (hereafter referred to as tribes). The text is
              found at 25 U.S.C. 450j-1, and is commonly referred to as section 106(a)
              and (b) of the act, as amended.




              1
               The act includes authorization for self-determination contracts and self-governance agreements.



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Indian Self-Determination and Education
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Indian Self-Determination and Education
Assistance Act




Titles III and IV of the act include funding provisions for self-governance
agreements. Title III authorizes a self-governance demonstration program
for HHS and Interior and title IV authorizes a permanent self-governance
program for Interior. The relevant text for title III is found in 25 U.S.C. 450f
Note and for title IV is found in 25 U.S.C. 458cc.




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Indian Self-Determination and Education
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Contract Support Cost Provisions of the
Indian Self-Determination and Education
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Appendix II

Contract Support Costs and the Process for
Setting Indirect Cost Rates

                      The payment of contract support costs has evolved since the Indian
                      Self-Determination and Education Assistance Act (P.L. 93-638) was passed
                      in 1975. Within the act, title I (which is referred to as the Indian
                      Self-Determination Act), allows tribes and tribal organizations (hereafter
                      referred to as tribes) to receive direct funding and contract support costs
                      for contracts.1 The majority of contract support costs are administrative
                      and other expenses related to overhead, which include indirect costs. For
                      this reason, tribes propose indirect cost rates according to federal cost
                      principles in Office of Management and Budget circulars A-87 and A-122
                      and corresponding guidance published by the Department of Health and
                      Human Services (HHS).2 The process for setting an indirect cost rate
                      involves several steps, including negotiations between tribes and the
                      responsible federal agency.


                      The payment by the Bureau of Indian Affairs (BIA) and the Indian Health
History of Contract   Service (IHS) of contract support costs for Indian self-determination
Support Costs         contracts has evolved with amendments to the enabling legislation and to
                      the agencies’ guidelines dealing with contracting. The Indian
                      Self-Determination Act was passed in 1975, and two major amendments to
                      the law were passed in 1988 and 1994. Throughout this time, BIA has
                      maintained essentially the same funding practice for contract support
                      costs, while IHS has changed its policy over time to reflect changes in the
                      act. The agencies issued joint regulations in 1996, but neither BIA nor IHS
                      has changed its contract support funding policies or practices as a result
                      of them. These joint regulations identify three types of contract support
                      costs: direct and indirect contract support costs and startup costs.
                      Currently, BIA funds indirect costs, while IHS pays indirect costs and direct
                      contract support costs. Both agencies fund startup costs, such as costs for
                      computer hardware and software, equipment, furniture, and training, for
                      tribes beginning their first year of contracting a program.



                      1
                       In the 1994 amendment, the Congress created a self-governance project that allowed tribes to sign
                      agreements with BIA to take over a range of programs and funding. These self-governance agreements
                      differ from self-determination contracts in that they allow a tribe to redesign programs and reprogram
                      funding. IHS began signing self-governance agreements with tribes in 1993. Self-governance tribes
                      receive contract support costs in the same way as tribes with self-determination contracts.
                      2
                       OMB circular A-87 is entitled “Cost Principles for State, Local, and Indian Tribal Governments,” and
                      OMB circular A-122 is entitled “Cost Principles for Non-Profit Organizations.” HHS publishes the
                      following guides to each of the circulars: “A Guide for State, Local, and Indian Tribal Governments:
                      Cost Principles and Procedures for Developing Cost Allocation Plans and Indirect Cost Rates for
                      Agreements with the Federal Government,” OASMB-10, Rev. Apr. 1997 and “A Guide for Nonprofit
                      Organizations: Cost Principles and Procedures for Establishing Indirect Cost and Other Rates for
                      Grants and Contracts with the Department of Health and Human Services,” OASMB-5, May 1983.



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Indian Self-Determination   With the passage of the Indian Self-Determination Act in 1975, tribes were
Act, Initial Legislation    allowed to contract for the federal services that the Department of the
                            Interior or the Department of Health, Education, and Welfare (now the
                            Department of Health and Human Services) provided. The act directed the
                            Secretaries of the Interior and HHS, upon the request of any Indian tribe or
                            Indian organization, to contract with that tribe to plan, conduct, and
                            administer programs provided by those departments. The law provided
                            that tribes would receive the same amount of funds that the Secretaries
                            would have otherwise paid, but it did not specifically provide for funding
                            of costs that tribes would incur to manage those contracts.

                            In 1976 and 1977, both BIA and IHS began implementing contracting
                            programs, and began paying tribes for their indirect costs of managing
                            them. In 1977, BIA requested more than $11 million to pay primarily for
                            tribes’ indirect costs of contracting; these funds were part of a separate
                            budget line item called “contract support funds,” which also paid for the
                            costs of federal employees displaced by tribal contracting. In the early
                            years of its program, IHS requested funds—called “93-638 implementation
                            funds”—to pay for program development and training tribal leaders and
                            tribal employees, as well as to pay for indirect costs, including audits,
                            financial management systems, and management. Tribes began getting
                            indirect rates from the Interior’s Office of Inspector General.


Indian Self-Determination   In 1987, the Congress identified contract support costs as the greatest
Act Amendments of 1988      impediment to tribes’ seeking self-determination contracts, and, in 1988, it
and 1994                    amended the act to provide for paying “contract support costs,” which
                            were the reasonable costs for activities a contractor must do to ensure
                            compliance with the contract.3 Specifically, these include activities that
                            (1) would not normally be carried out by the agencies managing the
                            program, such as financial audits or (2) would be done by the agencies,
                            but with funds that are not transferred to the tribes, such as
                            unemployment taxes. After this change in the law, BIA continued to pay for
                            the indirect costs tribes incurred in managing contracts, while in 1992, IHS
                            wrote a new policy on contract support costs stating that it would pay for
                            the indirect costs of a contract, as well as the direct contract support
                            costs. IHS determined that these direct contract support costs included


                            3
                             In amending the act, the Congress selected the term “contract support costs” and rejected the use of
                            the terms “contract costs,” “direct costs,” and “indirect costs.” The apparent reason for its choice is
                            that such terms relate to how costs are to be allocated and are not suitable for describing what
                            categories of costs are to be funded. However, BIA and IHS continue to use the term “indirect costs”
                            when referring to administrative and other expenses and “direct contract support costs” when
                            referring to other kinds of costs, e.g., workers’ compensation.



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                        unemployment taxes, workers’ compensation, postage, and long-distance
                        phone calls. In 1993, BIA issued a memorandum to its area office directors,
                        and others, stating that while the payment of certain direct contract
                        support costs can be justified under the 1988 amendments to the Indian
                        Self-Determination Act, the agency had not requested funding for such
                        costs and the contract support funds could only cover tribes’ indirect
                        expenses.

                        In 1994, the Congress amended the Indian Self-Determination Act to
                        further define the concept of contract support costs. The Congress
                        specified that contract support costs would include (1) direct program
                        expenses for operating the programs and (2) any additional administrative
                        or other expense related to overhead incurred by the contractors in
                        connection with operating the programs. The amendment also provided
                        that, during the initial year that a contract is in effect, the amount paid
                        shall include startup costs, which are the costs incurred on a one-time
                        basis to plan, prepare for, and assume operation of the program using
                        prudent management practices. Joint agency regulations, issued by the
                        Secretaries of the departments of the Interior and HHS in 1996, state that
                        tribes may request three categories of funding in their contracts: (1) direct
                        program; (2) direct contract support costs, including startup costs; and
                        (3) indirect costs. After the 1994 amendment, BIA began paying tribes for
                        their startup costs, in addition to indirect costs. BIA is currently in the
                        process of writing its first formal policy for contract support costs, and the
                        Assistant Secretary for Indian Affairs has stated that the agency will
                        consider paying direct contract support costs. IHS, which updated its policy
                        to include direct contract support and startup costs in 1992, revised and
                        clarified its policy in 1996 primarily to address the prioritization of tribal
                        requests. Presently, IHS is in the process of rewriting its policy on contract
                        support costs, including the section on direct contract support costs.


                        Federal cost principles for Indian tribal governments and organizations are
Federal Cost            found in Office of Management and Budget (OMB) circulars A-87 and A-122
Principles for Indian   and corresponding guidance published by HHS. This guidance is designed
Tribal Governments      to make federal contracts bear their fair share of indirect costs, but it is
                        also based on the presumption that each tribe will have a unique
and Organizations       combination of staff, facilities, and experience in managing their contracts.
                        In some cases, laws or regulations for grants and contracts other than
                        those under the Indian Self-Determination Act may limit the amount of
                        administrative or indirect costs allowed for a program, but OMB’s guidance




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                        Contract Support Costs and the Process for
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                        does not allow the unrecoverable amounts from one federal contract or
                        grant to be shifted to another federal contract or grant.

                        In general, federal contract costs are comprised of direct program costs
                        and a share of a tribe’s indirect costs. Because no universal rule for
                        classifying costs as either direct or indirect exists, OMB’s circulars state
                        that a tribe should treat each cost consistently as direct or indirect in
                        similar circumstances. Generally, direct costs are those that can be
                        identified with a particular cost objective, and indirect costs are those
                        incurred for common or joint objectives benefiting more than one cost
                        objective. Typical examples of direct costs are salaries for employees
                        working in particular programs, such as social service workers or police
                        officers, the supplies and the materials used for particular programs, and
                        any travel expenses related to those employees or programs. Typical
                        indirect costs may include computer services, transportation, accounting,
                        personnel administration, purchasing, depreciation on buildings and
                        equipment, and operation and maintenance of facilities. To fairly distribute
                        indirect expenses to cost objectives, a tribe may need to “pool” its
                        indirect items and costs. The total amount of the indirect cost pool would
                        then be allocated to the direct cost base.


                        A majority of BIA’s and IHS’ contract support costs are administrative and
The Process for         other overhead expenses, and both agencies use indirect cost rates to
Setting Indirect Cost   calculate a tribe’s allowable indirect costs. The indirect cost rates can
Rates                   range from single to triple digit percentages, depending on such factors as
                        the type and the size of the direct cost base used in calculating the indirect
                        rate. For example, a tribe using a direct cost base that includes only
                        salaries and wages can have a rate of 72 percent, while a tribe using a
                        direct cost base that includes total direct costs can have a rate of
                        14 percent. Tribes develop their indirect cost rates following federal
                        guidelines set out in OMB’s circulars and HHS’ guidance, and negotiating
                        with the responsible—or cognizant—federal agency. The process of
                        establishing an indirect cost rate involves five steps:

                        1. The tribe develops a proposed rate for indirect costs.

                        2. The cognizant federal agency reviews the tribe’s indirect cost rate
                        proposal.

                        3. The tribe and the cognizant federal agency negotiate and approve the
                        rate.



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                            4. The funding agencies apply the indirect rate to the direct funds to
                            calculate the indirect costs the tribe will receive for contracting the
                            program.

                            5. Independent auditors reconcile and audit a tribe’s expenditures. The
                            process is repeated each year when a tribe submits a new proposal and its
                            audited financial statements and supporting documents for review and
                            negotiation with the cognizant agency.


Developing the Proposal     In the first step of the rate-setting process, a tribe develops a proposal that
for an Indirect Cost Rate   documents the composition of its indirect and direct costs and calculates
                            the ratio of indirect to direct costs—the indirect rate. For example, a tribe
                            might propose to have indirect costs of $200,000, consisting of financial
                            and administrative services, and direct costs of $1 million, including a
                            social services program costing $300,000, a law enforcement program
                            costing $200,000, and a health program costing $500,000. The tribe would
                            then propose an indirect cost rate of 20 percent ($200,000 ÷ $1,000,000 =
                            0.2). In preparing a proposal, a tribe follows the principles laid out in OMB’s
                            circular A-87 and a tribal organization follows OMB’s circular A-122, and
                            both follow corresponding guidance issued by HHS for these circulars.
                            According to the circulars and guidance, this proposal should list the costs
                            for each of the items in the direct cost base and the indirect cost pool
                            based on the expenditures for each item in the previous fiscal year or on
                            projected costs for the upcoming year.

                            Indirect rates vary by tribe, depending on the size of the indirect pool, the
                            individual tribe’s administrative make-up, and the type of direct base used
                            to calculate the rate. For example, under the cost principles, one tribe can
                            propose an indirect pool of $1 million and another tribe can propose an
                            indirect pool of $100,000, as long as each tribe treats the costs consistently
                            within its proposal. Also, under the cost principles, tribes can use a direct
                            cost base composed of salaries and wages or composed of all total direct
                            costs, excluding capital expenditures, subcontracts, and other large
                            expenditures that can distort the base. For example, one tribe can propose
                            an indirect rate of 50 percent and have a direct base that includes only
                            salaries and wages of $80,000, while a second tribe can have an indirect
                            rate of 20 percent and use a total direct base of about $200,000. In both
                            cases, when the indirect rate is applied for funding purposes, the tribes
                            each get indirect funds of $40,000.




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                                         Appendix II
                                         Contract Support Costs and the Process for
                                         Setting Indirect Cost Rates




                                         Guidance on indirect cost rates describes the three ways they can be
                                         calculated, depending on which method a tribe chooses to estimate its
                                         costs and make adjustments for actual costs. The type of rate used most
                                         frequently by the tribes is a “fixed-carryforward” rate, which is a rate that
                                         is adjusted for any under- or overrecovery of funds in the prior year
                                         (usually 2 years because of the lag time in auditing and closing financial
                                         statements and accounts). An overrecovery occurs when a tribe spends
                                         less than it collected using its rate, and an underrecovery occurs when the
                                         tribe does not collect enough funds to pay for its costs. The adjustment to
                                         the rate is made as shown in Table II.1.

Table II.1: Examples of Overrecovery
and Underrecovery Calculations for                                                            Overrecovery                  Underrecovery
Fixed-Carryforward Indirect Cost Rates                                                          calculation                    calculation
                                         1998 proposal
                                         Direct cost base                                       $1,000,000                        $1,000,000
                                         Indirect cost pool                                        200,000                           200,000
                                         Indirect rate                                                    20%                                 20%
                                         1998 actual costs
                                         Direct cost base                                         1,000,000                        1,000,000
                                         Indirect cost pool                                        100,000                           300,000
                                         Indirect costs recovered                                  200,000                           200,000
                                         Overrecovery/
                                         Underrecovery                                             100,000                           100,000
                                         2000 proposal
                                         Direct cost base                                         1,000,000                        1,000,000
                                         Indirect cost pool                                        200,000                           200,000
                                         Adjustment                                               - 100,000                        + 100,000
                                         New indirect cost pool                                    100,000                           300,000
                                         Indirect rate                                                    10%                                 30%

                                         Note: These examples assume full recovery of proposed costs—this means that the tribes do not
                                         have any shortfall in funding. Some tribes use the fiscal year of October 1 to September 30, while
                                         others use a calendar year.

                                         Source: GAO’s analysis of data provided by tribes.


                                         In the overrecovery example, a tribe proposed to spend $200,000 in
                                         indirect costs and received a rate of 20 percent, given its direct cost base
                                         of $1 million. However, the tribe only spent $100,000 in indirect costs
                                         during the year. Two years later, when the tribe applied to adjust its
                                         indirect rate, it continued to propose spending $200,000 in indirect costs.




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                         Contract Support Costs and the Process for
                         Setting Indirect Cost Rates




                         However, because it had recovered $100,000 that it had not spent 2 years
                         before, the proposal for $200,000 is reduced by this amount to reflect the
                         actual amount to be recovered by charging the indirect rate. As a result,
                         the adjusted indirect rate is only 10 percent, given the tribe’s $1 million
                         direct cost base. In contrast, had the tribe actually spent $300,000 and only
                         recovered $200,000, it would have an underrecovery of $100,000 that
                         would be added to the proposed indirect cost pool to bring it to $300,000.
                         In this case, the tribe’s indirect rate would be 30 percent ($300,000 ÷
                         $1,000,000 = 0.3), given its $1 million direct cost base.

                         Some tribes use “provisional-final” rates. Provisional-final rates are set
                         twice, prior to the beginning of the year (provisional) and after the end of
                         the year (final) when a tribe’s actual costs are audited and a new indirect
                         cost rate proposal is negotiated by the cognizant agency and the tribe. The
                         final rate is issued with a new provisional rate, and any adjustments
                         necessary in funding are made by the funding agency. The funding agency
                         either collects overpayments of funds—if the provisional rate was higher
                         than the final rate—or pays funds to the tribe—if the provisional rate was
                         lower than the final rate. For example, if a tribe had a provisional rate of
                         20 percent and a direct program base of $1 million, then the tribe could
                         have collected $200,000 for indirect costs. If the tribe’s final rate went up
                         to 25 percent and the tribe actually collected $200,000 using its 20 percent
                         rate, then the tribe would be entitled to receive $50,000 more from the
                         funding agency. However, because this adjustment generally does not
                         happen until at least 6 months after the fiscal year has ended, the agencies
                         do not have funding to provide in situations such as these.

                         Few tribes use a predetermined rate. Whereas the previous two ways of
                         establishing an indirect cost rate involve making adjustments for actual
                         costs, the predetermined rate is established by using a fixed amount of
                         indirect costs based on estimated costs. Any differences between the
                         actual and estimated costs—either positive or negative—are absorbed by
                         the tribe. For example, if a tribe has a predetermined rate of 20 percent
                         and a direct base of $1 million, the tribe will receive $200,000 in indirect
                         costs and no adjustments to this amount of funding will be made.4


Reviewing the Proposal   In the second step of the rate-setting process, the cognizant agency
                         reviews the proposal, makes adjustments to it, and verifies or calculates
                         the rate. The Department of the Interior, the cognizant agency for Indian
                         tribal governments, has delegated the task of negotiating rates to its Office

                         4
                          In each example of an indirect cost rate calculation, we assume full funding of indirect costs.



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Contract Support Costs and the Process for
Setting Indirect Cost Rates




of Inspector General. Of the 556 tribes recognized by the federal
government as of December 1998, about 350 negotiate their indirect rates
with Interior’s Office of Inspector General.5 A handful of tribes and about
50 tribal organizations that receive the majority of their funding from HHS
negotiate their indirect rates with its Division of Cost Allocation. Still
other tribes do not have a rate or are part of a larger group that has a rate.
In California, for example, several rancherias have not established indirect
rates and do not receive indirect funds from BIA.6 The responsibility for
getting a rate and seeking funding based on that rate lies with the tribes,
not the federal agencies, and agency officials stated that these rancherias
have not sought funding, nor provided rates to receive funding for which
they are eligible. In Alaska, many of the over 200 communities and groups
fall under organizations that provide services to Native Alaskans. These
organizations have indirect rates rather than the communities and groups.

To prepare for negotiating an indirect cost rate, both Interior’s Office of
Inspector General and HHS’ Division of Cost Allocation review the items in
each proposal and make revisions according to OMB’s circulars A-87 and
A-122 and HHS’ guidance. The circulars and guidance state that allowable
costs must be, among other things, necessary and reasonable for the
proper and efficient performance and administration of contracts and
must be allocable to federal contracts. Reasonable costs, generally, do not
exceed that which would be incurred by a prudent person and should be
the types of costs recognized as ordinary and necessary to operate the
tribal government or perform the contract.

The reviewing agency, either Interior’s Office of Inspector General or HHS’
Division of Cost Allocation, determines whether or not the costs are
allowed based on the reviewer’s judgment about whether the costs appear
reasonable. Officials from both the Office of Inspector General and the
Division of Cost Allocation stated that determining the reasonability of
costs is difficult because the decision often comes down to what the tribe
says that it needs to manage its contracts. The reviewers attempt to use
expenditures from prior years as a benchmark. For example, an Office of
Inspector General official stated that a typical review would verify
proposed salaries against salaries in the surrounding area and salaries paid
in prior years by the same tribe, if available.

If a tribe uses a fixed-carryforward rate, the Office of Inspector General
takes the extra step, at this point, to verify the tribe’s carryforward

5
 The Office of Inspector General also negotiates indirect cost rates for tribal organizations that receive
the majority of their funding from the Department of the Interior.
6
 Rancherias refer to some Indian lands and communities in California.


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                           Contract Support Costs and the Process for
                           Setting Indirect Cost Rates




                           calculation, or the Office of Inspector General will perform the rate
                           calculation if the tribe requests it. The reviewers first compare the costs in
                           the proposed direct base and indirect pool with expenses from 2 years ago
                           that are reported in the audited financial statement and supporting
                           documents. Then, the reviewers use the amount of expenses in the audited
                           financial statements and supporting documents to calculate the amount of
                           indirect expenditures for BIA, IHS, and other contracts, separately. As part
                           of this analysis, the Office of Inspector General identifies shortfall
                           funding—funding that has not been paid by agencies for contract support
                           costs—or surplus funding—funding that is above what the agency owed
                           the tribe.


Negotiating the Indirect   After the cognizant agency has reviewed and adjusted a tribe’s proposal
Cost Rate                  for an indirect cost rate, the tribe and the agency negotiate the final
                           indirect rate. These negotiations center on the reasonableness of the
                           tribe’s proposed direct base and indirect pool, and the agency’s proposed
                           adjustments to these costs. For example, the agency and the tribe may
                           disagree on what programs are included in the direct cost base for the
                           rate. Or, the two parties may disagree on the amount in salaries the tribe
                           proposes to pay. For example, Office of Inspector General officials stated
                           that they use local pay scales to compare with a tribe’s salaries, but tribes
                           justify higher salaries with the fact that reservations are usually more rural
                           and remote than local communities and they need to pay higher salaries to
                           attract qualified personnel. During these negotiations, the agency can
                           request supporting information from the tribe. For example, auditors in
                           the Office of Inspector General have requested floor plans and studies
                           from tribes to determine the appropriate allocation of space and rent to
                           programs. They have also requested time studies for managers whose time
                           is being allocated to different programs. Ultimately, while the agency can
                           request additional supporting documentation, the agency cannot reject
                           costs or items that it cannot prove are unreasonable.

                           Once the cognizant agency and the tribe agree on and approve a rate, the
                           agency issues to the tribe a notice of the results of the rate negotiation.
                           The notice includes the rate, the type of direct base used to calculate that
                           rate, and any exclusions from this base. Exclusions can be passthrough
                           funds, such as general assistance funds or scholarships, or subcontracting
                           amounts. The notice identifies these funds as having been removed from
                           the direct base, which means they cannot be included in the base for
                           funding purposes.




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                             Contract Support Costs and the Process for
                             Setting Indirect Cost Rates




Applying the Indirect Cost   Once an indirect cost rate is established, a tribe provides it to the various
Rate                         federal agencies, such as BIA and IHS, for use in calculating annual funding.
                             Each year, contracting officers with BIA and IHS apply a tribe’s indirect rate
                             to its direct funding base to calculate the amount of indirect funding that
                             tribe should receive. In the last several years, funding has fallen short of
                             the amounts identified as required by the agencies. Both agencies use the
                             amount of indirect funding required for each tribe in shortfall calculations.
                             For BIA, the shortfall computation involves, on an annual basis, comparing
                             each tribe’s allowable indirect costs with the tribe’s actual funding. For
                             IHS, the computation of shortfall involves comparing total allowable
                             contract support cost—both direct and indirect—with funds provided for
                             the fiscal year.


Auditing and Reconciling     The final step in the rate-setting process is the audit and reconciliation of a
Indirect Costs               tribe’s expenditures. As recipients of federal funding, tribes are required
                             by the Single Audit Act of 1984, as amended, to have audited financial
                             statements. The act also requires that the statement include a schedule of
                             federal financial assistance to the tribe. OMB circulars A-87 and A-122 and
                             the corresponding guidance issued by HHS require that the financial
                             statements be submitted with the tribe’s indirect cost proposal. Once a
                             tribe has its audited financial statement, including supporting documents,
                             and its proposed indirect pool, it submits them to Interior’s Office of
                             Inspector General or HHS’ Division of Cost Allocation to begin the process
                             of negotiating a new rate. If a tribe does not have a current indirect cost
                             rate, the funding agencies continue to use the last approved rate.




                             Page 79                                  GAO/RCED-99-150 Indian Contract Support Costs
Appendix III

BIA’s and IHS’ Funding of Contract Support
Costs

                   BIA and IHS have different ways of allocating contract support funding, and,
                   as a result, allocating any funding shortfalls that may exist. Congressional
                   direction to BIA was to treat the tribes equally in the distribution of funds if
                   there is a shortfall. Because no similar language has been provided in IHS’
                   appropriations, it has continued to distribute funds on a historical basis
                   for tribes with existing contracts, while BIA prorates funding for tribes with
                   existing contracts. Both BIA and IHS distribute funding to tribes with new or
                   expanded contracts on a first-come, first-served basis.


                   Each year, BIA identifies the amount of funds each tribe with existing
Bureau of Indian   contracts should receive for contract support costs by applying each
Affairs            tribe’s indirect cost rate to its direct funding base for BIA’s programs.
                   Between fiscal years 1989 and 1993, BIA was generally able to fully fund
                   each tribe’s contract support costs through a combination of
                   appropriations and reprogrammings. Since fiscal year 1994, however, BIA’s
                   appropriations for contract support costs have been capped and
                   reprogramming for this purpose has been prohibited. Since then, BIA has
                   only been able to fund between 77 percent to 92 percent, annually, of a
                   tribe’s contract support costs.

                   As soon as possible after the beginning of each fiscal year, BIA allocates
                   about 75 percent of its contract support funds to tribes. Toward the end of
                   the fiscal year, it makes a second distribution of funds based on their
                   indirect costs, which are calculated by using their indirect cost rates. BIA
                   prorates its available contract support funding evenly across all tribes with
                   ongoing contracts. For example, for fiscal year 1998, BIA’s contract support
                   funding was prorated at about 80 percent of the allowable costs for each
                   tribe. Beginning with fiscal year 1994, BIA has published annual notices in
                   the Federal Register on the distribution of contract support funds.

                   Since fiscal year 1995, when BIA established a separate Indian
                   Self-Determination fund, the agency has provided 100 percent funding for
                   contract support costs for new and expanded contracts during their first
                   year. This fund, which is separate from other contract support funds,
                   enables BIA to assist new or expanding contractors with funding, including
                   startup costs, without decreasing the funding for ongoing contracts. In the
                   second year of a contract, it is grouped with all the other ongoing
                   contracts and receives a reduced prorated share of contract support
                   funding for ongoing contracts. Table III.1 shows the funding history for
                   BIA’s Indian Self-Determination fund.




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                                        Appendix III
                                        BIA’s and IHS’ Funding of Contract Support
                                        Costs




Table III.1: BIA’s Indian
Self-Determination Fund, Fiscal Years                                                        Fiscal year
1995 Through 1999                                                   1995             1996            1997             1998              1999
                                        Appropriation        $7,486,000         $4,967,431    $5,000,000       $5,000,000                $0
                                        Carryover
                                        balance from
                                        prior fiscal year               0         562,641       1,103,392        1,415,644        1,877,406
                                        Total available      $7,486,000         $5,530,072    $6,103,392       $6,415,644       $1,877,406
                                        Funds
                                                                                                                                           a
                                        obligated             6,923,359          4,426,680      4,687,748        4,538,238
                                        Carryover
                                        balance to
                                        next fiscal
                                                                                                                                           a
                                        year                   $562,641         $1,103,392    $1,415,644       $1,877,406
                                        a
                                         As of April 1, 1999, no funds had been obligated from the Indian Self-Determination fund for
                                        fiscal year 1999; therefore the entire $1,877,406 remains available.

                                        Source: GAO’s analysis of BIA’s data.



                                        In fiscal year 1999, no Indian Self-Determination funds for new and
                                        expanded contracts were provided because the Congress imposed a 1-year
                                        moratorium on any new contracting. In its fiscal year 2000 budget request,
                                        BIA is requesting $5 million to continue the Indian Self-Determination fund.



                                        Like BIA, IHS identifies the amount of contract support funds a tribe should
Indian Health Service                   receive each year for ongoing contracts and pays 100 percent of contract
                                        support funding required for a new or expanded contract. IHS calculates
                                        the amount of contract support costs for ongoing contracts by adding a
                                        tribe’s direct contract support costs to the indirect costs required. IHS
                                        calculates the amount of direct contract support cost funding—which can
                                        be provided for workers’ compensation, unemployment taxes, retirement
                                        benefits, and special training—using a tribe’s estimates of what these items
                                        will cost. These are all functions that IHS has determined the tribes do to
                                        manage contracts, but are not included in the direct program funding they
                                        receive. IHS area offices have discretion to negotiate these costs as part of
                                        the overall contract negotiation, and the actual costs that are included in
                                        this category vary accordingly. IHS calculates allowable indirect costs by
                                        multiplying a tribe’s indirect cost rate by its direct cost base for its IHS
                                        programs.

                                        Unlike BIA, IHS does not prorate the amount of contract support funding
                                        available to each tribe after the first year of a contract. IHS places its




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BIA’s and IHS’ Funding of Contract Support
Costs




emphasis on maintaining stable funding and provides ongoing contracts
with the same direct and indirect contract support funds annually unless a
tribe’s requirements have decreased to such an extent that the amount of
funding for indirect costs should be reduced.1 A tribe’s contract support
costs for an ongoing contract may also increase if, for example, its indirect
cost rate increases. However, if additional funds are not available, the tribe
would not get an increase in contract support funds, thus creating a
shortfall for “ongoing contracts.”

In fiscal year 1988, IHS created its Indian Self-Determination fund, from
which the agency paid for the costs of new and expanded contracts.
Initially, the Congress appropriated $2.5 million for the fund, but from
fiscal years 1994 through 1998, the annual amount appropriated was
$7.5 million. Since about 1991, however, the funding has been insufficient
to pay for 100 percent of the contract support costs for any given year. To
deal with this funding shortfall for new and expanded contracts, IHS
created a waiting list to track which new and expanded contract is next in
line for contract support funds. Since 1995, IHS has referred to this waiting
list as the “Indian Self-Determination queue.” Tribes on the queue waiting
for contract support costs may choose to begin a contract without the
funding, or they may defer beginning a contract until contract support
funds are available. The wait for these funds can take several years.

As a result of IHS’ distribution methods for ongoing contracts and contracts
on the queue, the overall contract support funds a tribe receives from IHS
may range from zero (if all a tribe’s contracts are on the queue) to 100
percent. IHS’ total shortfall for fiscal year 1998 was about $70 million. In
fiscal year 1999, the Congress appropriated a $35 million increase in IHS
contract support funds to cover some of the agency’s shortfall. IHS is
currently working on a policy for distributing these funds; it is considering
using the $35 million to increase tribes’ funding to at least 70 percent of
their contract support costs for IHS’ programs.




1
 In 1992, IHS changed its contract support cost policy to pay indirect costs based on a tribe’s annual
indirect rates. Prior to this change, some IHS area offices had been paying the same amount of indirect
costs to tribes each year, regardless of changes in their indirect rates. To allow for a transition to the
new way of providing indirect funds, IHS allowed tribes in these areas to get the same amount of
indirect costs if their rates decreased, and paid the difference if their rates increased.



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Appendix IV

Tribes and Tribal Organizations Contacted


               During the course of this review, we communicated with 94 tribes and
               tribal organizations about contracting under the Indian Self-Determination
               Act. Representatives of 77 tribes and tribal organizations attended one or
               more of the various open forums we held, two in conjunction with large
               Indian conferences and four others in conjunction with our visits to BIA
               and IHS offices. In addition, 42 tribes and tribal organizations (including 17
               that had not attended one of the forums) submitted documents, such as
               letters, financial statements, and other financial or budgetary documents,
               demonstrating the effects of shortfalls in contract support funding.

               Not all of the representatives who attended one of the forums spoke about
               the effects of shortfalls or the methods used to cope with them. In many
               cases, however, representatives indicated—through nods or other
               expressions of agreement—that they shared the experiences or
               observations of other representatives. Thus, although we gained a good
               understanding about the types of concerns tribal representatives generally
               shared regarding shortfalls in contract support funding and the types of
               methods that were typically used to cope with shortfalls, we cannot
               definitively say how many of the tribes represented at the forums were
               affected by shortfalls, nor can we report which or how many methods
               each of them used to cope with shortfalls. Similarly, not every one of the
               documents submitted to us addressed each of the ways a tribe had been
               affected by shortfalls or each of the various methods that a tribe had used
               to deal with shortfalls. When we invited tribes to submit documents, we
               did not specify a particular format, nor did we use a questionnaire or other
               data collection instrument to gather information. Therefore, the
               documents we received varied in length, type, and content.

               Following are the names of the 74 tribes and the 20 tribal organizations
               that were represented at one or more of the open forums or submitted
               documents to GAO.




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         Appendix IV
         Tribes and Tribal Organizations Contacted




         Akiachak Native Community, Alaska
Tribes   Apache Tribe of Oklahoma
         Blackfeet Tribe of the Blackfeet Indian Reservation of Montana
         Cabazon Band of Cahuilla Mission Indians of the Cabozon Reservation,
            California
         Cherokee Nation of Oklahoma
         Cheyenne-Arapaho Tribes of Oklahoma
         Chicasaw Nation, Oklahoma
         Chippewa-Cree Indians of the Rocky Boy’s Reservation, Montana
         Citizen Potawatomi Nation, Oklahoma
         Confederated Tribes of the Grand Ronde Community of Oregon
         Confederated Tribes of the Siletz Reservation, Oregon
         Confederated Tribes of the Umatilla Reservation, Oregon
         Delaware Tribe of Indians, Oklahoma
         Delaware Tribe of Western Oklahoma
         Ely Shoshone Tribe of Nevada
         Fort Sill Apache Tribe of Oklahoma
         Gila River Indian Community of the Gila River Indian Reservation, Arizona
         Hoonah Indian Association, Alaska
         Jamestown S’Klallam Tribe of Washington
         Jicarilla Apache Tribe of the Jicarilla Apache Indian Reservation,
            New Mexico
         Organized Village of Kake, Alaska
         Karuk Tribe of California
         Kaw Nation, Oklahoma
         Kenaitze Indian Tribe, Alaska
         Kickapoo Tribe of Oklahoma
         Kiowa Indian Tribe of Oklahoma
         Lac Courte Oreilles Band of Lake Superior Chippewa Indians of the
            Lac Courte Oreilles Reservation of Wisconsin
         Leech Lake Band of the Minnesota Chippewa Tribe, Minnesota
         Lumbee-Cheraw Tribe of North Carolina (not a federally recognized tribe)
         Lummi Tribe of the Lummi Reservation, Washington
         Menominee Indian Tribe of Wisconsin
         Metlakatla Indian Community, Annette Island Reserve, Alaska
         Miccosukee Tribe of Indians of Florida
         Mille Lacs Band of the Minnesota Chippewa Tribe, Minnesota
         Muscogee (Creek) Nation, Oklahoma
         Native Village of Barrow Inupiat Traditional Government, Alaska
         Navajo Nation of Arizona, New Mexico and Utah
         Northern Cheyenne Tribe of the Northern Cheyenne Indian Reservation,
            Montana



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Appendix IV
Tribes and Tribal Organizations Contacted




Oneida Nation of New York
Paiute-Shoshone Tribe of the Fallon Reservation and Colony, Nevada
Penobscot Tribe of Maine
Pinoleville Rancheria of Pomo Indians of California
Poarch Band of Creek Indians of Alabama
Port Gamble Indian Community of the Port Gamble Reservation,
  Washington
Prairie Band of Potawatomi Indians, Kansas
Pueblo of Acoma, New Mexico
Pueblo of Isleta, New Mexico
Pueblo of Jemez, New Mexico
Pueblo of Laguna, New Mexico
Pueblo of Pojoaque, New Mexico
Pueblo of San Juan, New Mexico
Pueblo of Sandia, New Mexico
Pueblo of Santo Domingo, New Mexico
Pueblo of Taos, New Mexico
Quinault Tribe of the Quinault Reservation, Washington
Ramah Navajo Chapter, New Mexico
Reno-Sparks Indian Colony, Nevada
Sac & Fox Nation, Oklahoma
Seneca Nation of New York
Shoalwater Bay Tribe of the Shoalwater Bay Indian Reservation,
  Washington
Shoshone-Bannock Tribes of the Fort Hall Reservation of Idaho
Shoshone-Paiute Tribes of the Duck Valley Reservation, Nevada
Skokomish Indian Tribe of the Skokomish Reservation, Washington
St. Croix Chippewa Indians of Wisconsin, St. Croix Reservation
Saint Regis Band of Mohawk Indians of New York
Suquamish Indian Tribe of the Port Madison Reservation, Washington
Three Affiliated Tribes of the Fort Berthold Reservation, North Dakota
Tohono O’odham Nation of Arizona
Turtle Mountain Band of Chippewa Indians of North Dakota
Valdez Native Tribe, Alaska (not a federally recognized tribe)
Walker River Paiute Tribe of the Walker River Reservation, Nevada
Wichita and Affiliated Tribes (Wichita, Keechi, Waco & Tawakonie),
  Oklahoma
Yurok Tribe of the Yurok Reservation, California
Zuni Tribe of the Zuni Reservation, New Mexico




Page 85                                     GAO/RCED-99-150 Indian Contract Support Costs
                       Appendix IV
                       Tribes and Tribal Organizations Contacted




                       Alamo Navajo School Board, New Mexico
Tribal Organizations   Alaska Native Tribal Health Consortium, Alaska
                       Albuquerque Area Indian Health Board, Inc., New Mexico
                       All Indian Pueblo Council, Inc., New Mexico
                       California Rural Indian Health Board, Inc., California
                       Eastern Aleutian Tribes, Inc., Alaska
                       Eight Northern Indian Pueblos Council, Inc., New Mexico
                       Five Sandoval Indian Pueblos, Inc., New Mexico
                       Gila River Health Care Corporation, Arizona
                       Great Lakes Indian Fish & Wildlife Commission, Wisconsin
                       Laguna Service Center, New Mexico
                       Lassen Indian Health Center, California
                       Maniilaq Association, Alaska
                       Multi-County Youth Services, Oklahoma
                       Norton Sound Health Corporation, Alaska
                       Ramah Navajo School Board, Inc., New Mexico
                       Southeast Alaska Regional Health Consortium, Alaska
                       United South & Eastern Tribes, Inc., Tennessee
                       United Tribes Technical College, North Dakota
                       Yukon-Kuskokwim Health Corporation, Alaska




                       Page 86                                     GAO/RCED-99-150 Indian Contract Support Costs
Appendix V

Comments From the Department of the
Interior

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




                             Page 87   GAO/RCED-99-150 Indian Contract Support Costs
Appendix V
Comments From the Department of the
Interior




Page 88                               GAO/RCED-99-150 Indian Contract Support Costs
                 Appendix V
                 Comments From the Department of the
                 Interior




See comment 1.




See comment 2.




                 Page 89                               GAO/RCED-99-150 Indian Contract Support Costs
                 Appendix V
                 Comments From the Department of the
                 Interior




                 1. In response to a recommendation in our draft report that the Secretary
GAO’s Comments   of the Interior remove the function of indirect rate negotiation from the
                 Office of Inspector General, Interior commented that the Inspector
                 General’s office has fastidiously adhered to the separation of duties by
                 using a fully dedicated team of cost specialists for negotiating indirect cost
                 rates who are not involved in other audits or reviews. Interior commented
                 that when an occasional need arises for the Office of Inspector General to
                 conduct audits relating to indirect cost rates, the office would typically
                 arrange to have these audits performed by the Defense Contract Audit
                 Agency. In separate comments, however, the Department’s Office of
                 Inspector General agreed with this recommendation in our draft report
                 (see app. VI). We believe that the Office of Inspector General’s staff, as
                 part of the audit arm of the Department, should be available to conduct
                 audits of tribes and tribal organizations and their use of federal funds, as
                 appropriate. We continue to have concerns about the Inspector General’s
                 role in negotiating indirect cost rates and plan to review the issue in more
                 depth in a separate study, which will take into account the differences in
                 the responses to our draft report, the legislative history of the Inspector
                 General Act, generally accepted auditing standards, and any other
                 pertinent guidance. As a result, we are not making the recommendation to
                 remove the rate negotiation function from the Inspector General’s Office
                 at this time.

                 2. We agree that moving the responsibility for negotiation of indirect cost
                 rates out of the Office of Inspector General at the present time may require
                 the approval of the District Court under the Ramah Navajo Chapter v.
                 Lujan case. For the reasons discussed in our first comment, we are not
                 making the recommendation to move this function at this time.




                 Page 90                               GAO/RCED-99-150 Indian Contract Support Costs
Appendix VI

Comments From the Department of the
Interior’s Office of Inspector General

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




Now on pp. 8, 46, and 48.




                             Page 91   GAO/RCED-99-150 Indian Contract Support Costs
                  Appendix VI
                  Comments From the Department of the
                  Interior’s Office of Inspector General




Now page 18.
See comment 2.




Now on page 20.




Now page 31.




                  Page 92                                  GAO/RCED-99-150 Indian Contract Support Costs
                    Appendix VI
                    Comments From the Department of the
                    Interior’s Office of Inspector General




Now page 31.




Now page 49.




Now page 49.




Attachment is not
included.



Now page 50.




                    Page 93                                  GAO/RCED-99-150 Indian Contract Support Costs
                 Appendix VI
                 Comments From the Department of the
                 Interior’s Office of Inspector General




Now page 73.



Now page 31.
See comment 2.




                 Page 94                                  GAO/RCED-99-150 Indian Contract Support Costs
                 Appendix VI
                 Comments From the Department of the
                 Interior’s Office of Inspector General




                 1. As discussed in appendix V, we are not making the recommendation to
GAO’s Comments   move the function of negotiating indirect cost rates from Interior’s Office
                 of Inspector General at this time.

                 2. The Office of Inspector General requested that we remove “office
                 services, utilities, janitorial services, building and grounds maintenance,
                 and insurance” from the list of indirect costs in table 1.1 because there is
                 no universal rule for classifying certain costs as either direct or indirect
                 under every accounting system. We agree that this is the case, but instead
                 of removing the items from the list—which could be misleading—we
                 noted the lack of universal rules for accounting for direct and indirect
                 costs in the indirect cost section of the table.




                 Page 95                                  GAO/RCED-99-150 Indian Contract Support Costs
Appendix VII

Comments From the Department of Health
and Human Services




               Page 96    GAO/RCED-99-150 Indian Contract Support Costs
Appendix VII
Comments From the Department of Health
and Human Services




Page 97                                  GAO/RCED-99-150 Indian Contract Support Costs
Appendix VII
Comments From the Department of Health
and Human Services




Page 98                                  GAO/RCED-99-150 Indian Contract Support Costs
Appendix VIII

GAO Contacts and Staff Acknowledgments


                  Chet Janik, (202) 512-6508
GAO Contacts      Jeff Malcolm, (303) 572-7374
                  Susan Iott, (202) 512-8767


                  In addition to those named above, Len Ellis, Dick Kasdan, and Pam Tumler
Acknowledgments   made key contributions to this report.




(141235)          Page 99                          GAO/RCED-99-150 Indian Contract Support Costs
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