Indian Self-Determination Contracting: Shortfalls and Alternatives for Funding Contract Support Costs

Published by the Government Accountability Office on 1999-08-03.

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

                    United States General Accounting Office

GAO                 Testimony
                    Before the Committee on Resources, House of

For Release
on Delivery
Expected at
11:00 a.m. EDT
August 3, 1999

                    Shortfalls and Alternatives for
                    Funding Contract Support Costs

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

Mr. Chairman and Members of the Committee:

Just a month ago, the President of the United States visited the Oglala
Sioux Tribe in South Dakota, stressing Native Americans’ need for
economic empowerment. This historic visit is another step—the first of
which was taken in 1975 with the passage of the Indian Self-Determination
and Education Assistance Act (the act)—toward recognizing the potential
for tribes’ self-determination through economic development. The act, as
amended, provides that tribes shall have the opportunity to assume the
management of federal Indian programs, and that they shall receive
contract support funds to cover their costs of contract management and
administration.1 Yet during our review of contract support costs for tribal
self-determination contracts, many tribal officials told us that they have
diverted funds from economic development opportunities to cover
shortfalls in federal funding. For example, for fiscal year 1998, the Bureau
of Indian Affairs (BIA) and Indian Health Service (IHS) calculated that they
owed the Oglala Sioux an additional $1.5 million in contract support
funding that they were unable to provide because of limited
appropriations. For all tribes with self-determination contracts, the
shortfall in funding for allowable contract support costs totaled
$95 million in fiscal year 1998.2 Contract support costs are intended to
cover the expenses tribes incur—for financial management and
accounting, some training, and program startup costs—in managing
contracted programs such as social services, hospitals and clinics, road
maintenance, law enforcement, and forestry.

Because of congressional concerns over ever-increasing contract support
costs and shortfalls in funding these costs, the Subcommittee on Interior
and Related Agencies, Senate Committee on Appropriations, and the
Senate Committee on Indian Affairs asked us to review various aspects of
these costs in our June 1999 report.3 Our testimony today will focus on the

 Throughout this testimony, the term “tribes” will refer to both tribes and tribal organizations eligible
to contract for programs under the act. Also, the term “contracts” will refer to contracts, grants,
self-governance agreements, cooperative agreements, or annual funding agreements that are entered
into under to the act, as amended, that receive contract support funds.
 Tribal contractors and IHS are currently engaged in litigation to determine whether, for Indian
self-determination contracts, the funding for tribal contract support costs is limited to the amount
 Indian Self-Determination Act: Shortfalls in Indian Contract Support Costs Need to Be Addressed
(GAO/RCED-99-150, June 30, 1999).

Page 1                                                                             GAO/T-RCED-99-271
extent of, and reasons for, increases in contract support costs over the last
several years and four alternatives for funding these costs.4

In summary, tribes’ allowable contract support costs tripled from 1989
through 1998—increasing from about $125 million to about $375 million.5
This increase occurred for two principal reasons. First, the total costs of
tribally contracted programs—upon which contract support costs are
based—have increased. Second, the total cost to tribes of administering
their self-determination contracts has increased. Although the amounts
appropriated for contract support costs have increased over the past
decade, they have not increased at as great a rate as the support costs,
resulting in funding shortfalls. For fiscal year 1998, for example, the
shortfall between appropriations (almost $280 million) and allowable
contract support costs (about $375 million) was about $95 million.
Projections of future contract support costs are difficult to calculate
because the number of programs for which tribes will choose to contract
in the future is uncertain, as is the amount of funding they will receive.
However, the tribes’ allowable contract support costs could double in the
future if tribes were to contract for all the available programs from BIA and

The impasse over whether to provide full funding for contract support
costs or limit these costs continues in the Congress. The fallout has
included litigation relevant to the issue, as well as a 1-year moratorium for
fiscal year 1999 on new contracting. Because of a lack of progress in
resolving this issue during 1999, the Senate Committee on Appropriations
has proposed extending the moratorium for another year. 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 combined with the others.
These alternatives range from providing appropriations sufficient to fund
the tribes’ allowable contract support costs each year to amending the act
to remove the provision for funding contract support costs separately from
and in addition to a program’s direct costs and instead provide a single,
consolidated contract amount. Each of the alternatives has advantages and
disadvantages. Three of the four alternatives have the advantage of
controlling future increases in contract support costs. A disadvantage of

 The June 1999 report also addressed how the tribes have been affected by funding shortfalls for
contract support costs, and whether the act’s provisions for contract support costs have been
implemented consistently. The report contained two recommendations to make BIA’s and IHS’
payment of contract support costs more consistent.
 Dollar figures used throughout this testimony have been adjusted to constant 1998 values.

Page 2                                                                         GAO/T-RCED-99-271
             these same three alternatives is that they would require legislative changes
             to the funding provisions of the act.

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

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

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

             Tribes’ indirect cost rates are negotiated using guidance published by the
             Office of Management and Budget. This is the same guidance used by

             Page 3                                                     GAO/T-RCED-99-271
                         other groups such as state and local governments and nonprofit agencies.
                         The Department of the Interior’s Office of Inspector General negotiates the
                         majority of these rates. The Department of Health and Human Services’
                         Division of Cost Allocation also negotiates some rates, predominately for
                         tribal organizations. There have been a number of legal challenges dealing
                         within the rate setting process and the funding for contract support costs.
                         A 1997 court decision—Ramah Navajo Chapter v. Lujan—may require a
                         change in the Inspector General’s method of calculating indirect cost
                         rates; we do not address this issue in our testimony because the settlement
                         discussion is ongoing.6

                         As the tribes’ funding for contracted programs has increased over the past
Increases in Contract    decade, so has the funding for contract support costs. In the past decade,
Support Costs Will       the total dollars that BIA and IHS have provided to tribes for
Likely Continue in the   self-determination contracts has more than doubled, from about
                         $800 million in fiscal year 1989 to about $1.9 billion in fiscal year 1998.7
Future                   Tribes’ contract support costs have also increased for these programs; the
                         amount of contract support funding for tribes’ administrative and other
                         management costs has increased from about $125 million to about
                         $375 million. Although appropriations from the Congress and the
                         payments from these two agencies for contract support have increased,
                         they have not been sufficient to cover tribes’ allowable costs identified by
                         BIA and IHS. In fiscal year 1998, the Congress appropriated almost
                         $280 million to fund almost $375 million in tribes’ allowable contract
                         support costs, resulting in a shortfall of about $95 million.

                         There are two views about whether contract support costs should rise in
                         proportion to overall contracting levels. The first view is that most
                         contract support costs would be expected to increase as a tribe contracts
                         for additional programs. With more contracted programs, more money is
                         needed for contract management and administration. The second view is
                         that contract support costs should not automatically increase when
                         additional programs are contracted. For example, if a tribe has already
                         developed an accounting system then it could, up to a point, contract for
                         additional programs without spending additional resources on the
                         accounting system.

                          112 F. 3d 1455 (10th Cir. 1997).
                          Because BIA could not provide us with fiscal year 1998 contracting data, this information is fiscal year
                         1997 contracting data expressed in constant 1998 dollars.

                         Page 4                                                                           GAO/T-RCED-99-271
                                   The exact amount of future contract support costs is difficult to predict,
                                   but will likely increase beyond the $375 million for fiscal year 1998. The
                                   extent of future increases will depend on the (1) amount of future
                                   appropriations BIA and IHS receive for contracted programs, (2) extent to
                                   which tribes choose to contract for new programs in the future, and
                                   (3) future changes in tribes’ costs of administering contracts. Currently,
                                   tribes receive funding through self-determination contracts equal to about
                                   half of BIA’s and IHS’ total appropriations; the other half is being used by BIA
                                   and IHS themselves to provide services to the tribes. If the half now being
                                   used by BIA and IHS were contracted by the tribes in the future and if
                                   indirect cost rates were to stay about the same, then contract support
                                   costs could double—from the fiscal year 1998 amount of about
                                   $375 million to about $750 million.

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

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

                                   In response to the need for a permanent solution to the current funding
                                   impasse, we are presenting four alternatives for funding contract support

                                   Page 5                                                        GAO/T-RCED-99-271
                       costs. We discuss the advantages, the disadvantages, and the cost
                       implications of each. We do not consider all the possible alternatives for
                       funding contract support costs. In discussing the costs of each alternative,
                       we address costs starting in fiscal year 1998. However, we do not address
                       the additional funding that would be necessary for prior years’ shortfalls
                       or if BIA and IHS change their methods for determining direct contract
                       support costs.8 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. The agencies
                       would identify and request the funds necessary to support new contracts.

Advantages and         The first alternative has the advantage of fulfilling the provisions of the act
Disadvantages          that allow tribes to receive funding for their allowable contract support
                       costs. By fully funding these costs, the Congress and the funding agencies
                       would eliminate funding shortfalls as well as the potential for lawsuits
                       stemming from such shortfalls. This alternative would be advantageous to
                       tribes because it would help ensure that they receive the allowable
                       support funds for the BIA and IHS programs they contract. As tribes
                       contract for more programs, they may need to build up their
                       administrative systems to properly administer and manage their contracts.

                        In 1998, the Congress included language in the Omnibus Consolidated and Emergency Supplemental
                       Appropriations Act for fiscal year 1999 (P.L. 105-277, section 314, 112 Stat. 2681-288, Oct. 21, 1998) that
                       limited the obligation to fund contract support costs to the amounts the Congress appropriated for that
                       purpose in fiscal years 1994 through 1998. This provision is currently being challenged by tribal

                       Page 6                                                                             GAO/T-RCED-99-271
                         The primary disadvantage of this alternative is that its implementation
                         would require the Congress to fully fund all allowable contract support
                         costs, which will likely continue to increase each year. It is difficult to
                         predict future contract support costs for several reasons, including the
                         difficulty of determining how many tribes will enter into new contracts
                         during the year. 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, of indirect costs. Although tribes must
                         justify their indirect cost rates through the standard rate negotiation
                         process and, under the law, should not receive duplicate funding for the
                         same task from program funding and contract support funding, the current
                         method of funding indirect costs could encourage tribes to classify as
                         many costs as possible as “indirect” to receive more funding.

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 of funding. The cost of this alternative would be
                         about $375 million the first year, including the fiscal year 1998 funding
                         shortfall, and would increase by the amount paid for new and expanded
                         contracts and an undetermined amount for changes to existing contracts
                         due to changes in indirect cost rates or program funding.9

                         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.10 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
                          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.
                           This alternative may not be necessary if federal courts determine that the requirement for contract
                         support funding under the act is limited to the amount actually appropriated. Cases presently before
                         the Court of Appeals for the Federal Circuit are considering this issue.

                         Page 7                                                                          GAO/T-RCED-99-271
Advantages and         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 the Senate authorizing committee has
                       explicitly stated, assuming responsibility for these programs was not
                       intended to diminish the tribes’ program resources.11

                       Another disadvantage of this alternative for tribes is that funding for their
                       contract support costs would be subject to the uncertainties of the
                       appropriations cycle. Unless the Congress decides to appropriate amounts
                       sufficient to fully fund tribes’ contract support costs every year, this
                       alternative would produce shortfalls between the amounts provided and
                       those identified as allowed for contract support. Appropriations could
                       fluctuate from year to year, and this could negatively affect tribes’ ability
                       to plan and budget for administering their programs.

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

                       A third alternative would be to amend the act 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 they 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.
Cost Rates
                         S. Rep. No. 103-374 at 9 (1994).

                       Page 8                                                       GAO/T-RCED-99-271
Advantages and      Like 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
                    support funding will be available.12 An advantage of this alternative for
                    tribes is that their contract support costs would be funded on a consistent
                    basis and they could better anticipate their annual contract support
                    funding. All tribes would receive funding, and they would receive it at the
                    same rate.

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

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

                     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).

                    Page 9                                                                           GAO/T-RCED-99-271
                         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 direct funding for the program, and replace it with one that would
Current Funding          combine 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. Upon consolidation into a single contract amount, these
Amount                   cost categories would lose their individual identities and would thereafter
                         simply make up the contract total. This method has been tried before, but
                         failed because of funding shortfalls. BIA tried to create a single contract
                         amount in the mid-1980s.

Advantages and           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
                         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 act, tribes would make 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
                         automatically 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 as much funding as possible
                         for program services.

                         Page 10                                                    GAO/T-RCED-99-271
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, but would not differ from the previous failed attempt by BIA. 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. As with the other alternatives, contract support costs would
                     continue to be needed for new contracts. But under this alternative, future
                     increases in contract support costs would be slowed, because the funding
                     mechanism would no longer provide contract support funding over and
                     above the direct program amounts for existing contracts. Thus, if the
                     Congress decided to increase funding for a particular program, this
                     decision would not create a corollary obligation for increased contract
                     support funding.

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

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

(141361)             Page 11                                                    GAO/T-RCED-99-271
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:


or visit GAO’s World Wide Web Home Page at:


United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested