NCAI

NATIONAL POLICY WORKGROUP ON
CONTRACT SUPPORT COST|
FIRST INTERIM REPORT

September 1998

In April 1998 the National Congress of American Indians (NCAI) hosted an open forum in Las Vegas for tribal leaders from throughout the United States and officials of the Bureau of Indian Affairs (BIA), U.S. Department of the Interior (DOI), and of the Indian Health Service (IHS), U.S. Department of Health and Human Services (DHHS). The attendees at the meeting included Assistant Secretary of Indian Affairs Kevin Gover, Deputy Director of the Indian Health Service Luana Reyes and NCAI President W. Ron Allen.

The purpose of this open forum was two-fold: first, to explore changes and reforms in the contract support cost system in light of recent developments in the federal courts and in the Interior Board of Contract Appeals (including such cases as Shoshone-Bannock Tribes v. Shalala, Ramah Navajo School Board v. Babbitt, Ramah Navajo Chapter v. Babbitt, and Micosukee, et al. v. Bureau of Indian Affairs); second, to explore more broadly the evolution of the contract support cost system within each Department over the past twenty years, and to explore possible reforms and other measures that could help close the funding shortfall presently experienced by all tribes involved in contracting or compacting under the Indian Self-Determination Act.

The Las Vegas open forum led to the formal establishment of the NCAI National Policy Workgroup on Contract Support Cost. In organizing the Workgroup, the Las Vegas participants determined to seek the participation not only of tribal governments, the BIA and IHS, but also representation from the DHHS Office of the Secretary and the DHHS Division of Cost Allocation (DCA), the DOI Assistant Secretary for Policy Management and Budget, the DOI Office of Inspector General (OIG), and the Office of Management and Budget (OMB).

In June 1998, a small tribal working group developed a first set of research requests for IHS, DHHS-DCA, BIA and DOI-OIG. The data and research requests were then confirmed in letters from NCAI President W. Ron Allen. On July 24, 1998 the full Workgroup convened in Washington, D.C. This First Interim Report summarizes some of the high points and key findings that have emerged thus far in the Workgroup deliberations. In setting forth these preliminary findings and highlights, readers are cautioned that research into a wide range of issues pertaining to contract support costs is ongoing. In some instances, data collected thus far is incomplete or requires additional analysis. For these reasons, the findings set forth below are tentative, only, and subject to change as additional research proceeds. They should not be interpreted as reflecting the final view of the Workgroup or of the participating members. However, the current data is useful in forming some initial conclusions and providing a basis for the Congress to delay action until both the General Accounting Office (GAO) and the Workgroup can complete their tasks.

In the weeks immediately preceding the July 24 Workgroup meeting, the House and Senate Appropriations Committees have simultaneously developed alternative approaches for addressing a variety of contract support cost issues. The more significant of these includes (1) a House-proposed $26 million increase in CSC for the Indian Health Service, (2) a statutory directive proposed in the House and the Senate that the Indian Health Service prorate proportionately all contract support costs, (3) a moratorium proposed in the House on any additional contracting or self-governance compacting in Fiscal Year (FY) 1999 (section 329), and (4) a measure proposed by both the House and the Senate that seeks to retroactively limit BIA and IHS liability in prior years for payment of contract support costs (section 314).

As indicated below, in two instances (the House-proposed moratorium, and the House and Senate proposed IHS proration instruction), both federal (other than DOI-OIG which did not comment on the proposals) and many tribal Workgroup participants expressed strong opposition (provided substantial additional amounts are appropriated in FY 1999 and prorated over the queue). With respect to the proposed Section 314 retroactive limitation of liability requested by the Administration, Tribal Workgroup members voiced strong opposition and concern over both the questionable constitutionality and policy implications of such a measure.

The first set of interim findings and highlights of the Workgroup deliberations to date are organized to directly respond to some of the issues raised by CSC-related provisions proposed by the House and Senate Appropriations Committees for FY 1999 and are the following:

With respect to the Indian Health Service, it is estimated that by the end of FY 1998 there will be a total contract support cost requirement of approximately $300 million. If (as proposed by the Senate) CSC appropriations are capped at $170 million, there will be a shortfall of an additional $130 million. If (as proposed by the House) CSC appropriations are capped at $194 million, there will be a shortfall of $106 million.

The CSC "shortfall" suffered by IHS contracting and self-governance tribes is a combination of (1) shortfalls in CSC funding for programs long ago transferred to tribal operation, and (2) shortfalls in CSC funding for more recently transferred programs that have to date not yet received any CSC support at all. (The recent House floor debate appears to have only considered the second type of shortfall, and only as of the beginning of FY 1998.)

In general, the distribution of CSC among IHS tribal contractors and self-governance compactors has not produced a system of "haves" and "have nots." This is because the overwhelming majority of tribes whose programs are listed on the IHS "queue" list (the list which sets forth all recently transferred programs that are still awaiting receipt of CSC funding) also operate a substantial number of other programs that are receiving CSC funding because they were long ago transferred to tribal operation. No data is yet available regarding the "blended" shortfall being experienced by each tribe if contract support cost needs for ongoing programs are combined with the contract support cost needs for programs listed on the "queue."

The IHS and the BIA have for many years used an identical system for funding contract support associated with newly transferred programs. In both agencies, newly transferred programs receive funding on a first-come/first-served basis from each agency's Indian Self-Determination Fund. In recent years, the BIA Indian Self-Determination Fund has been generally sufficient to cover all such needs, avoiding a large accumulated backlog. The IHS Indian self-determination fund has not been similarly sufficient to keep pace with new contracting and self-governance activities.

The Indian Health Service and a majority of tribes oppose an immediate transition to an across-the-board pro rata system. Using the proposed Senate funding levels, such a system would fund total contract support cost needs at approximately 57 percent. Using the proposed House-funding levels, such a system would fund total contract support cost needs at approximately 64 percent. Such an across-the-board funding rule would cause substantial (and for some tribes, devastating) dislocations and impacts for programs that are currently funded at substantially greater percentages of need. Further, many tribes have constructed or acquired health care facilities and incurred fixed costs (debt service) in reliance on the CSC funding provisions of the Indian Self-Determination Act and the current IHS CSC distribution policy. At a time when the federal government is unable to address much needed facilities, an imposed pro-rata distribution would discourage tribes from developing their own alternative financing by disrupting stability of financing options.

The Administration's decision not to request increased CSC funding in FY 1998 must be viewed against a backdrop of congressional rejection of prior Administration requests for substantial increases in contract support for IHS.

• Recognizing the considerable gap that has developed over the past four years between CSC needs for IHS contractors and self-governance tribes, and the level of funding distributed by IHS for such purposes (particularly for tribal programs listed on the IHS "queue"), the Workgroup supports as an interim measure substantially increased funding for FY 1999, in the neighborhood of $50 million, with such sum to be distributed proportionately to all programs listed on the IHS "queue." This proposal would leave all other tribal programs at the FY 1997 - FY 1998 funding levels.

The Workgroup supports the proposed Senate approach that rejects a moratorium on new program contracting activities in FY 1999.

The tribal participants in the NCAI Workgroup strongly oppose the section 314 proposed retroactive extinguishment of IHS and BIA liability for contract damage claims. These Tribes urge Congress to relieve Tribes from years of litigation over the constitutionality of such a provision by deleting it from the final FY 1999 appropriation bill.

IHS has received one tribal notification of an intent to "retrocede" its contracted programs back to IHS operation, in the event the tribe's contract support costs are prorated down as contemplated in currently pending appropriation bills. IHS is concerned that other tribes may similarly announce their intent to transfer contracted or compacted programs back to IHS. IHS is not prepared to take back direct operation of a substantial number of such programs.

The next set of findings or highlights are geared toward an historical review of self-determination and self-governance activities:

The Indian Self-Determination Act provides for three types of contract support costs: (1) start-up and pre-award costs, (2) recurring direct contract support costs and (3) indirect costs.

Start-up and pre-award costs are "start-up" costs as defined by Congress in 25 U.S.C. § 450j-1(a)(5). Direct contract support costs include insurance and other forms of fringe benefits on top of salary costs (such "fringe" benefit resources are generally not transferred from federal control to tribal control). Indirect costs pay for each program's proportionate share of the financial management and audit systems, personnel management and payroll systems, procurement systems, facility support activities, and other administrative activities that must be carried out by a tribal contractor. (In general, the comparable federal functions associated with indirect costs are not transferred to tribal control because they are situated either outside the particular agencies and elsewhere within the Departments, or are situated in other departments, such as the Office of Personnel Management, the General Services Administration, etc.)

The IHS CSC system endeavors to pay all three forms of CSC specified in the Indian Self-Determination Act, and both the CSC need amounts and the CSC shortfall amounts are reflective of this policy. In contrast, the BIA CSC system only funds both start-up and indirect costs but has never direct contract support. The Workgroup will endeavor to determine the financial impact of the differences between the BIA system and the IHS system in these respects.

The total contract support costs required by tribes to fully support IHS programs transferred to tribal operation has ranged between 31 percent and 36 percent of the total program costs. The ratio between total contract support costs required and the size of the IHS programs transferred to tribal operation appears to have remained steady over the past three fiscal years. Additional research regarding FY 1997 and FY 1998 is underway.

Of the total contract support required by tribes in connection with IHS programs transferred to tribal operation, on average 79 percent of the contract support reflects indirect costs, and 21 percent reflects direct contract support. The ratio of these two types of contract support does not vary substantially regardless of the size of the IHS programs under tribal operation (looking at six break points from tribes operating fewer than $500,000 in IHS programs to tribes operating more than $20 million in IHS programs).

Over one-half of the 396 tribally-operated IHS programs involve tribal health care programs totaling less than $500,000. Another one-quarter involve programs ranging between $1 million and $5 million. Only 27 programs are in excess of $5 million (of which only seven are in excess of $20 million).

The total aggregate contract support costs required by tribes operating IHS programs does not appear to vary substantially according to the size of the contracted programs. For contracts under $500,000 the average contract support amount is 35 percent of the total program funding, while the average for contracts in excess of $10 million is 33 percent. (The average is 26 percent for tribal contracts in excess of $20 million in IHS programs.) Further research is necessary to better understand the low and high range of 20 percent to 41 percent, since this range does not initially appear to be directly related to the size of the contracted programs.

The rate of growth in the transfer of IHS programs to tribal operation is slowing. Earlier IHS forecasts that contract support costs associated with such program transfers would total $15 million are now being adjusted down, and IHS expects a similar downward trend in FY 1999.

The only "spikes" IHS anticipates in connection with future CSC needs would be associated with the transfer of certain programs presently under IHS operation to the Navajo Nation and the Cherokee Nation. Total program funding for IHS-operated programs for these two tribes is approximately $300 million, leading IHS to forecast a potential contract support demand associated with these two programs of between $60 million and $75 million. The Cherokee Nation has not indicated any intent to take over all or portions of those programs presently under IHS operation. The Navajo Nation has indicated an interest in commencing operation of a portion of the IHS programs serving the Nation in FY 2000.

IHS staffing has changed dramatically from FY 1994 through FY 1997. Overall, IHS staffing (expressed as full-time-equivalent employees, or FTEs) has declined six percent. Significantly, substantial FTEs have been transferred from IHS Headquarters to IHS Service Units, a trend that is partly responsible for a 30 percent reduction in Headquarters FTEs, and an offsetting increase in service unit staffing. FTE reductions over the past four years have in some instances been offset by the staffing of new clinics and hospitals, including the Alaska Native Medical Center. IHS is continuing to assess the degree to which FTE reductions have occurred as a result of contracting or self-governance compacting activities.

Forty percent of the IHS budget is being administered by tribes. Total program funding for these transferred programs is approximately $765 million.

CSC funding covers a variety of fixed costs related to the administration of programs and facilities, and certain personnel expenses. To the extent CSC is insufficiently funded, a contracting or self-governance tribe may be forced to divert health care and social service funding and to reduce services, since for many contractors, especially smaller contractors, the cost of functions paid for by contract support are stable and cannot be prudently reduced (i.e., a bookkeeper, for example).

The underfunding of contract support has in recent years caused at least two tribes to announce to IHS that they will suspend plans to contract for the operation of IHS programs. The IHS thinks that it is significant that only a few tribes have opted not to contract in the face of the ISD queue backlog and CSC shortfall.

Observations, conclusions and judgments regarding indirect cost rates are treacherous, because the indirect cost rate system is exceedingly complex. Moreover, the flexibility built into the system for negotiating indirect costs can lead to tribal-specific indirect cost rate agreements that cannot be compared on an "apples-to-apples" basis, where a similarly-situated neighboring tribe has negotiated a different type of agreement using a different type of accounting and cost recovery system.

According to Office of Management and Budget Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, indirect cost rates are computed by dividing the indirect cost pool by a direct cost base (normally either total direct salaries and wages or total direct costs). However, the total direct costs must be adjusted to eliminate any extraordinary or distorting expenditures such as subcontracted construction. As most tribes negotiate an indirect-cost rate against a "direct cost" base, the "direct cost" base is typically smaller than the total program base that is transferred to tribal operation. Accordingly, generally speaking indirect costs as a percentage of the "direct cost" base are an even smaller percentage of the total transferred program.

For indirect cost rates covering FY 1997, the average indirect rate for tribes that negotiate indirect costs based on a "direct cost" base (which is the method used by most, but not all, tribes) goes down as the total size of the program increases. For example, tribes whose direct-cost base is under $500,000 have an average indirect rate of 49.5 percent, whereas tribes with a direct-cost base in excess of $20 million have an indirect cost rate of 22.7 percent. The single largest category of tribes, those with a direct-cost base of between $1 million and $5 million have an average rate of 31 percent. In each instance, however, the average rate represents an average of a large range of rates.

There has been little overall variation in the average indirect cost rate negotiated for all tribes during the period 1988 through 1997. In most of these years, the average rate was between 32.1 percent and 35.6 percent.

Each year a small number of tribes negotiates its indirect cost rate based not on its total "direct costs" but instead based only on "direct labor" costs. Given the much smaller base used in such calculations, the indirect rate for such tribes is necessarily higher than would be the case if the rate were negotiated based on total direct costs. The indirect rate for such tribes can be between 15 percent to 25 percent higher than the indirect rate that would be determined under a "direct cost" methodology. This does not necessarily mean, however, that the tribe receives any more total funding than it would were it using a different methodology for determining its indirect rate because the indirect cost rates are applied to the appropriate bases to determine the contract support requirement.

The BIA has experienced a substantial reduction in FTEs during the period 1981 to the present (estimated), from a high of 16,868 FTEs to an estimated FY 1999 level of 10,251 FTEs. Additional analysis is necessary to permit an assessment of the extent to which FTEs have been reduced as a result of self-determination contracting or self-governance compacting activities.

The Office of Inspector General computed, for the rates it negotiates with tribal organizations, that the average indirect cost rate for the period from 1987 through 1997 is approximately 25 percent. The OIG computed the overall average rate by dividing the total indirect cost pools by the total direct cost bases. This results in a different average than the averages discussed on Page 8, which were computed by dividing the sum of all rates by the total number of rates.
 

• The BIA reports that, according to "A Guide for Nonprofit Organizations", the following agencies have indirect cost rates in excess of 50 percent: the U.S. Information Agency, the Department of Health and Human Services, the Department of Agriculture, state service delivery agencies, private foundations and fundraising organizations
  
• Similarly, the BIA reports that during the period 1991 through 1995, 105 universities examined had an average indirect rate of between 52 percent and 53.1 percent.
   

The NCAI National Policy Workgroup on Contract Support Cost has scheduled its next meeting for September 18, 1998, again in Washington, D.C. At that time, the Workgroup will be receiving additional research, data requests and analyses requested from the Department of the Interior and the Department of Health and Human Services.

IHS reports that the DHHS Division of Cost Allocation (DHHS-DCA) has thus far declined to provide assistance to the NCAI Workgroup. The DHHS-DCA is the office within the Department that is responsible for negotiating indirect cost rates with tribes and tribal organizations whose cognizant agency is DHHS. In this sense, it is the counterpart to the Office of Inspector General of the Department of the Interior. A significant number of tribes, although not a majority, negotiate their indirect rates through the Division of Cost Allocation. Since many contractors, whose primary source of funding is the Indian Health Service, negotiate indirect cost rates with DHSS-DCA, it is essential to have input from and the cooperation of that agency in arriving at an improved mechanism for determining contact support costs which may be applied to IHS as well as BIA . Nor has the Workgroup received DHHS-DCA data regarding rate computations and trend analysis. The DHHS-DCA lack of participation may severely impede the work of the Workgroup. NCAI President W. Ron Allen has been requested to call upon Secretary Shalala and the relevant committees in Congress to urge participation by DHHS-DCA in the work of the Workgroup.

The Workgroup wishes to greatly acknowledge participation by a representative of the GAO. Based upon the instruction of the Senate Appropriations Committee in connection with the FY 1999 appropriation, GAO plans to undertake a study of contract support cost issues. The GAO representative reported that GAO planned to coordinate its activities with those of the Workgroup, so that the GAO would receive the benefit of all the research and analysis being undertaken by the Workgroup and might be able to share the results of its research with the Workgroup.

The NCAI Workgroup meeting of July 24, 1998 was not attended by any representative from the Office of Management and Budget (OMB), nor any representative from the DHHS Office of the Secretary or the DOI Office of the Assistant Secretary for Policy Management and Budget. The Workgroup hopes that representatives from these important agencies will participate in the Workgroup, and NCAI President W. Ron Allen will be sending new requests to these agencies urging their participation.

The NCAI National Policy Workgroup on Contract Support Cost appreciates that Congress will be looking both to the GAO and to the Workgroup for guidance and recommendations for improving the contract support cost system-a system upon which the Self-Determination Policy vitally depends. The NCAI Workgroup is fully committed to meeting this objective in a timely manner, and within the same schedule being chartered by the GAO. With the exception of increasing current funding, the NCAI Workgroup respectfully urges Congress not to make any substantial changes to any aspect of the contract support cost system pending the completion of the work of the Workgroup and of the GAO. Regardless of the reforms that may ultimately be made to the contract support cost system, it is clear that increased appropriations to IHS for contract support are essential to sustain the policy of self-determination. Congress is respectfully urged to use FY 1999 as an opportunity to substantially close the gap in the current CSC shortfall.