oversight

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

Published by the Government Accountability Office on 1999-09-15.

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

                     United States General Accounting Office

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




For Release
on Delivery
Expected at
                     INDIAN
9:30 a.m. EDT
Wednesday
                     SELF-DETERMINATION
September 15, 1999
                     CONTRACTING

                     Shortfalls in Contract Support
                     Costs and Alternatives for
                     Funding Them

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




GAO/T-RCED-99-287
Mr. Chairman and Members of the Committee:

Two months ago, the President of the United States visited the Oglala
Sioux Tribe in South Dakota, stressing Native Americans’ need for
economic empowerment. This historic visit is another 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 for contract management and
administration.1 However, during our review of contract support costs for
tribal self-determination contracts, many tribal officials told us that they
have diverted funds from economic development opportunities to cover
shortfalls in federal funding.

For example, for fiscal year 1998, the Bureau of Indian Affairs (BIA) and the
Indian Health Service (IHS) calculated that they owed the Oglala Sioux an
additional $1.5 million in contract support funding that they were unable
to provide because of limited appropriations. For all tribes with
self-determination contracts, the shortfall in funding for allowable
contract support costs totaled $95 million in fiscal year 1998.2 Contract
support costs are intended to cover the expenses tribes incur (e.g., for
financial management and accounting, some training, and program startup
costs) in managing contracted programs such as social services, hospitals
and clinics, road maintenance, law enforcement, and forestry.

In 1998, a year of concern and controversy over contract support costs
culminated in a statutorily imposed 1-year moratorium for fiscal year 1999
on all new contracting under the Indian Self-Determination Act. This
moratorium was prompted by concerns over sustained increases in tribes’
allowable contract support costs (that is, the tribes’ costs that BIA and IHS
determine are eligible for reimbursement), increases in the shortfall
between these costs and the funding available for them, and litigation over
such shortfalls. Because of a lack of progress in resolving this issue during


1
 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 the act, as amended, and receive contract support funds.
2
 Tribal contractors and IHS are currently engaged in litigation to determine whether, for Indian
self-determination contracts, the funding for tribal contract support costs is limited to the amount
appropriated.



Page 1                                                                             GAO/T-RCED-99-287
1999, the Senate Committee on Appropriations has proposed extending
the moratorium for another year.

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

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

Tribes’ allowable contract support costs tripled from 1989 through 1998,
increasing from about $125 million to about $375 million.6 This increase
occurred for two principal reasons. First, the total costs of tribally
contracted 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 as fast as the support costs, resulting in
funding shortfalls. For fiscal year 1998, for example, the shortfall between


3
 Indian Self-Determination Act: Shortfalls in Indian Contract Support Costs Need to Be Addressed
(GAO/RCED-99-150, June 30, 1999).
4
Indian Self-Determination Contracting: Shortfalls and Alternatives for Funding Contract Support
Costs (GAO/T-RCED-99-271, August 3, 1999).
5
 The June 1999 report also addressed how the tribes have been affected by funding shortfalls for
contract support costs and whether the act’s provisions for contract support costs have been
implemented consistently. The report contained two recommendations to make BIA’s and IHS’
payment of contract support costs more consistent.
6
 Dollar figures used throughout this testimony have been adjusted to constant 1998 values.



Page 2                                                                         GAO/T-RCED-99-287
             appropriations (almost $280 million) and allowable contract support costs
             (about $375 million) was about $95 million. Projections of future contract
             support costs are difficult to calculate because the number of programs
             for which tribes will choose to contract in the future is uncertain, as is the
             amount of funding they will receive.

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


             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



             Page 3                                                       GAO/T-RCED-99-287
                   Natives. If a tribe chooses not to contract for a BIA or IHS program, the
                   agencies continue to provide the service to the tribe. In fiscal year 1997,
                   tribes contracted for programs worth about $546 million, excluding such
                   programs as education and construction; BIA’s budget that year totaled $1.7
                   billion. Tribes contracted for IHS programs worth $719 million in fiscal year
                   1998, and IHS’ total budget for that same year was over $2 billion.


                   BIA and IHS developed implementing guidelines that specified the types of
Categories of      costs that will be reimbursed under the act. In policy and practice, the
Contract Support   agencies commonly refer to three categories of contract support costs.
Costs              Table 1 defines and provides examples of these cost categories.




                   Page 4                                                     GAO/T-RCED-99-287
Table 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 objectivea 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.                 services, utilities, janitorial
                                                                                                        services, building and
                                                                                                        grounds maintenance,
                                                                                                        insurance, and legal
                                                                                                        services. b
                                  Direct contract                     Costs of activities that are      Direct contract support
                                  support costsc                      not contained in either the       costs can include training
                                                                      indirect cost pool or the         required to maintain the
                                                                      direct program funds.             certification of direct
                                                                                                        program personnel, and
                                                                                                        costs related to direct
                                                                                                        program salaries, such as
                                                                                                        unemployment taxes,
                                                                                                        workers’ compensation
                                                                                                        insurance, and retirement
                                                                                                        costs.
                                  Startup costs                       One-time costs incurred to        Startup costs can include
                                                                      plan, prepare for, and            the costs of purchasing
                                                                      assume the operation of the       computer hardware and
                                                                      program, function, service,       software, providing required
                                                                      or activity that is the subject   training and staff
                                                                      of the contract and to            development, establishing
                                                                      ensure compliance with the        required administrative and
                                                                      terms of the contract.            management systems, and
                                                                                                        purchasing equipment and
                                                                                                        furniture to support the
                                                                                                        administrative unit.
                                  a
                                   A cost objective is a grouping of costs for functions for which cost data are needed and costs
                                  are incurred.
                                  b
                                   According to the Office of Management and Budget’s Circular A-87, Cost Principles for State,
                                  Local, and Indian Tribal Governments, “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
                                  may vary by tribe depending on each one’s circumstances.
                                  c
                                   As discussed in ch. 4 of our June 1999 report, the agencies have inconsistent policies on the
                                  payment of direct contract support costs.

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




                                  Page 5                                                                          GAO/T-RCED-99-287
                    In 1996, BIA and IHS issued joint regulations for implementing the act, as
                    amended, as it applies to self-determination contracts. These regulations
                    describe the three types of costs identified in table 1 as costs for which
                    tribes can request reimbursement in their contract proposals.

                    Tribes’ indirect cost rates are negotiated using guidance published by the
                    Office of Management and Budget. This is the same guidance used by
                    other groups, such as state and local governments and nonprofit agencies.
                    The Department of the Interior’s Office of Inspector General negotiates the
                    majority of these rates. The Department of Health and Human Services’
                    Division of Cost Allocation also negotiates some rates, predominately for
                    tribal organizations. A number of legal challenges have dealt with the
                    rate-setting process and the funding for contract support costs. A 1997
                    court 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.7


                    As tribes’ funding for contracted programs has increased over the past
Past Increases in   decade, so has the funding for contract support costs. In the past decade,
Contract Support    the total dollars that BIA and IHS have provided to tribes for
Costs Likely to     self-determination contracts has more than doubled, from about
                    $800 million in fiscal year 1989 to about $1.9 billion in fiscal year 1998.8
Continue            Tribes’ contract support costs have also increased for these programs; the
                    amount of contract support funding for tribes’ administrative and other
                    management costs has increased from about $125 million to about
                    $375 million. Although appropriations from the Congress and the
                    payments from these two agencies for contract support have increased,
                    they have not been sufficient to cover tribes’ allowable costs identified by
                    BIA and IHS. In fiscal year 1998, the Congress appropriated almost
                    $280 million to fund almost $375 million in tribes’ allowable contract
                    support costs, resulting in a shortfall of about $95 million.

                    The exact amount of future contract support costs is difficult to predict
                    but will likely increase beyond the $375 million calculated for fiscal year
                    1998. The extent of future increases will depend on the (1) amount of
                    future appropriations BIA and IHS receive for contracted programs,
                    (2) extent to which tribes choose to contract for new programs in the

                    7
                     112 F. 3d 1455 (10th Cir. 1997).
                    8
                     Because BIA could not provide us with fiscal year 1998 contracting data, this information is based on
                    fiscal year 1997 contracting data expressed in constant 1998 dollars.



                    Page 6                                                                          GAO/T-RCED-99-287
                                   future, and (3) future changes in tribes’ costs of administering contracts.
                                   Currently, tribes receive funding through self-determination contracts
                                   equal to about half of BIA’s and IHS’ total appropriations; the other half is
                                   being used by BIA and IHS themselves to provide services to tribes. If the
                                   half now being used by BIA and IHS were contracted by tribes in the future
                                   and if indirect cost rates were to stay about the same, then contract
                                   support costs could 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
                                   costs. We discuss the advantages, disadvantages, and cost implications of
                                   each. In discussing the costs of each alternative, we address costs starting
                                   in fiscal year 1998. We do not address the additional funding that would be
                                   necessary if prior years’ shortfalls were to be covered or BIA and IHS were




                                   Page 7                                                       GAO/T-RCED-99-287
                               to change their methods for determining direct contract support costs.9
                               The cost estimates we provide are illustrative rather than actual because
                               they involve two major assumptions. First, using the agencies’ estimated
                               funding level for new contracts for fiscal year 2000, we assume that
                               $17.5 million would be the annual cost of supporting new contracts.
                               Second, using fiscal year 1998 appropriations of about $280 million, plus
                               the agencies’ fiscal year 1998 shortfall estimate of about $95 million for
                               existing contracts, we assume that $375 million would be the cost of fully
                               funding the existing contracts the first year under an alternative funding
                               method. Finally, we are not able to estimate the costs of changes to
                               existing contract costs because of the ever-changing nature of tribes’
                               indirect cost rates and direct cost bases.


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

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

                               The primary disadvantage of this alternative is that its implementation
                               would require the Congress to fully fund all allowable contract support
                               costs, which would likely continue to increase each year. It is difficult to
                               predict future contract support costs for several reasons, including the
                               difficulty of determining how many tribes will enter into new contracts


                               9
                                In 1998, the Congress included language in the Omnibus Consolidated and Emergency Supplemental
                               Appropriations Act for fiscal year 1999 (P.L. 105-277, section 314, 112 Stat. 2681-288, Oct. 21, 1998) that
                               limited the obligation to fund contract support costs to the amounts the Congress appropriated for that
                               purpose in fiscal years 1994 through 1998. This provision is currently being challenged by tribal
                               contractors.



                               Page 8                                                                             GAO/T-RCED-99-287
                                during a given year. As BIA and IHS transfer more and more programs to
                                tribes, the agencies’ administrative costs should decrease, and some of this
                                funding could become available to offset increases in contract support
                                funding. Nevertheless, most of the funding for the increased allowable
                                costs would have to be provided through federal appropriations.

                                Another disadvantage of this alternative, in terms of cost-efficiency, is that
                                it would not provide tribes with incentives to limit the growth of contract
                                support costs and, particularly, of indirect costs. Although tribes must
                                justify their indirect cost rates through the standard rate negotiation
                                process and, under the law, should not receive duplicate funding for the
                                same task from program funding and contract support funding, the current
                                method of funding indirect costs could encourage tribes to classify as
                                many costs as possible as “indirect” to receive more funding.

Cost of the First Alternative   Because the need for contract support funding will, in all probability,
                                continue 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.10 The
                                incremental cost of this alternative for the first year would be $95 million,
                                the amount of the shortfall for fiscal year 1998.


Alternative 2: Amend the        A second alternative is for the Congress to amend the act to eliminate the
Act to Eliminate the            provision for fully funding allowable contract support costs and, instead,
Provision for Full Funding      provide funding strictly on the basis of annual appropriations.11 This
                                alternative would eliminate the expectation of full funding as well as the
of Contract Support Costs       potential for lawsuits stemming from funding shortfalls. Under this
                                alternative, BIA and IHS would continue to identify tribes’ allowable costs,
                                using their indirect cost rates, in the agencies’ budget requests.

Advantages and Disadvantages    This alternative has the advantage of limiting the growth of contract
                                support funding; funding amounts would be established by the amount the
                                Congress appropriates each year. At the same time, this alternative would

                                10
                                 We assume that in the second year of contracting under this alternative, the funding for existing
                                contracts would increase by $17.5 million and another $17.5 million would fund additional new and
                                expanded contracts.
                                11
                                  This alternative may not be necessary if federal courts determine that the requirement for contract
                                support funding under the act is limited to the amount actually appropriated. Cases presently before
                                the Court of Appeals for the Federal Circuit are considering this issue.



                                Page 9                                                                          GAO/T-RCED-99-287
                                 allow the Congress to fund contract support costs at whatever level it
                                 deems appropriate. The Congress has appropriated increased amounts for
                                 contract support; in fiscal year 1989, it provided about $100 million; in
                                 fiscal year 1998, it provided about $280 million. If adopted, this alternative
                                 would eliminate the expectation, created by the 1988 and 1994
                                 amendments to the law, that full contract support funding would be
                                 available, when, in fact, appropriations and funding have been limited and
                                 shortfalls have occurred.

                                 A disadvantage of this alternative is that it might discourage tribes from
                                 entering into new self-determination contracts. The current policy fosters
                                 self-determination by encouraging tribes to assume managerial
                                 responsibility for federal programs that the government previously
                                 managed on their behalf. Yet, as the Senate authorizing committee has
                                 explicitly stated, assuming responsibility for these programs was not
                                 intended to diminish tribes’ program resources.12

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

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


Alternative 3: Amend the         A third alternative would be to amend the act to limit the amount of
Act to Impose Limits on          funding tribes could receive for contract support by limiting the amount of
Indirect Cost Rates              indirect costs they can receive. For example, one way to limit funding
                                 would be to establish one indirect cost rate—such as the current aggregate
                                 rate of 25 percent—as a flat rate that would apply to all tribes.

Advantages and Disadvantages     Like the second alternative, this one has the advantage of imposing limits
                                 on the growth of funding for contract support costs and of eliminating the
                                 expectation created by the law’s current language that such costs would


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



                                 Page 10                                                      GAO/T-RCED-99-287
                                be fully funded.13 An advantage of this alternative for tribes is that their
                                contract support costs would be funded on a consistent basis and they
                                could better anticipate their annual contract support funding. All tribes
                                would receive funding, and they would receive it at the same rate.

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

Cost of the Third Alternative   The cost of this alternative would depend on the type of rate limit
                                established. If, for example, the Congress chose a flat rate of 25 percent,
                                this alternative would cost about the same as the current method costs,
                                about $375 million, for the first year. This amount would be higher or
                                lower depending on the rate chosen by the Congress.


Alternative 4: Amend the        A fourth alternative would be to amend the act to eliminate the current
Act to Replace the Current      funding mechanism, which provides contract support funding over and
Funding Mechanism With a        above direct funding for the program, and replace it with one that would
                                combine the current categories of contract costs into one contract amount
Consolidated Contract           from which both direct and indirect costs would be recovered. The revised
Amount                          contract amount would consist of the sum of (1) a program’s dollars;
                                (2) the allowable indirect costs; and (3) any allowable direct contract
                                support costs. Upon consolidation into a single contract amount, these

                                13
                                 The idea of imposing a cap on indirect cost rates is similar to the approach used to limit the growth
                                of indirect costs at colleges and universities. Beginning in fiscal year 1992, a 26-percent cap was
                                imposed on federal reimbursements to universities for certain indirect costs associated with the
                                performance of federally funded research, as we reported in a previous review of such costs. See
                                University Research: Effect of Indirect Cost Revisions and Options for Future Changes
                                (GAO/RCED-95-74, Mar. 6, 1995).



                                Page 11                                                                          GAO/T-RCED-99-287
                                 cost categories would lose their individual identities and would thereafter
                                 simply make up the contract total. This method was tried before but failed
                                 because of funding shortfalls. BIA tried to create a single contract amount
                                 in the mid-1980s.

Advantages and Disadvantages     An advantage of this alternative for both the government and tribes is that
                                 it would provide for the full recovery of indirect costs, although the
                                 amount of funding provided might not increase. At the same time, this
                                 alternative would remove any incentive for tribes to increase their indirect
                                 costs to receive more funding each year. Funding would no longer be
                                 provided over and above a program’s direct funding, so once the
                                 consolidated contract amount had been set, any increases in indirect costs
                                 would leave less money to spend for the program. Tribes would thus have
                                 an incentive to reduce their indirect costs as much as possible to make
                                 more money available for direct program expenditures. In keeping with
                                 the purpose of the act, tribes would decide how much funding to spend on
                                 program costs and how much to spend on administrative, or indirect,
                                 activities. Under this alternative, the spotlight would no longer be on the
                                 sufficiency of contract support funding but on the sufficiency of direct
                                 program funding. That is, funding debates would center on whether the
                                 funds provided for a particular program would be sufficient to achieve its
                                 intended purpose.

                                 A disadvantage of this alternative for tribes is that if their indirect cost
                                 rates increased over the years, the contract amounts would not
                                 automatically increase. Changes in indirect cost 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 program amounts. Thus, tribes would bear the responsibility for
                                 managing indirect costs prudently, to retain as much funding as possible
                                 for program services.

Cost of the Fourth Alternative   The Congress could fund this alternative in one of two ways. First, when
                                 the existing contract funding is consolidated, the funding could be
                                 combined at the current funding level, which would perpetuate the current
                                 funding shortfall. This option would cost $280 million annually for existing
                                 contracts but would not differ from the previous failed attempt by BIA. The
                                 incremental costs of consolidating the funding at this amount would be
                                 zero. Or, second, the contract funding could be consolidated at the level
                                 identified by BIA and IHS as the amount of tribes’ allowable contract
                                 support costs. For fiscal year 1998 funding, the consolidated amount
                                 would be about $375 million, or $95 million more than the $280 million



                                 Page 12                                                    GAO/T-RCED-99-287
                  appropriated. As under the other alternatives, funding for contract support
                  costs would continue to be needed for new contracts. But under this
                  alternative, future increases in contract support costs would be slowed for
                  existing contracts because the funding mechanism would no longer
                  provide amounts for contract support over and above the amounts for
                  program services. Thus, if the Congress decided to increase the funding
                  for a particular program, this decision would not create a corollary
                  obligation to increase the funding for contract support.


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


                  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.




(141387)          Page 13                                                   GAO/T-RCED-99-287
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:

info@www.gao.gov

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

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
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