NATIONAL CONGRESS OF AMERICAN INDIANS
NATIONAL POLICY WORKGROUP ON
CONTRACT SUPPORT COSTS
SECOND INTERIM REPORT
February 1, 1999
INTRODUCTION
Since the inception of the Indian Self-Determination Act of 1975, the Administration
and the Congress have each failed to meet their legal obligations to fully fund tribal
contract support cost needs associated with tribally-operated Bureau of Indian Affairs and
Indian Health Service programs. The result, as frequently documented, has been to penalize
tribes by forcing reductions in direct program operations, in order to support the
administrative overhead associated with those programs. In essence, contracting tribes
(and, more recently, self-governance tribes) have been punished for exercising their
Self-Determination rights, as they have been compelled to reduce essential governmental
programs in order to compensate for these failures.
The crisis in the Nation's Tribal Self-Determination
Policy created by the consistent failure to fully fund contract support costs has been the
subject of considerable congressional attention. In comprehensively revamping the Indian
Self-Determination Act in 1988 -- primarily to remedy this problem -- Congress observed
that the failure to fully fund contract support costs constituted the single greatest
impediment to the success of the Tribal Self-Determination Policy. But despite the 1988
reforms, and a second round of comprehensive congressional reforms in 1994, the
Administration and the Congress have to this day continued to force upon Tribes the duty
to reduce direct program services in order to cover the failure to fully fund contract
support. By 1998, it was estimated that the combined BIA and IHS contract support
shortfall resulting from this failure exceeded $200 million, and courts began to award
Tribes damages against the agencies.
It is in this environment that in May 1998, the National
Congress of American Indians formed the National Policy Workgroup on Contract Support
Costs. The goals of the Workgroup were to explore the evolution of the contract support
cost system within the Department of the Interior and the Department of Health and Human
Services, to identify the problems that had developed in the system since the enactment of
the Indian Self-Determination Act, to review recent judicial and administrative
developments pertaining to contract support costs, and to explore possible changes and
reforms in the funding and administration of contract support costs.
Following an initial phase of exploratory meetings, the
Workgroup on September 1, 1998 issued a First Interim Report. The First Interim Report was
developed at a time when Congress was revisiting issues pertaining to contract support
costs through the appropriations process. Among other things, the First Interim Report
summarized available data relevant to the several proposals then under consideration by
Congress. The Report also explained various aspects of the contract support cost system as
implemented by the Bureau of Indian Affairs and the Indian Health Service over the years.
With respect to the IHS system, the Report summarized Tribal and IHS opposition to a
proposed immediate shift to a flat "pro rata" approach as 'robbing from the poor
to pay the poorer,' and instead championed a substantial increase to begin addressing the
shortfall.
More generally, the Report detailed at considerable
length how the contract support cost system works; the trends in contract support cost
ratios and related indirect cost rates; the rate of growth in self-determination and
self-governance activities; the extent to which IHS and the BIA have been reduced as a
consequence of self-determination and self-governance activities; relative indirect cost
rates for government organizations, tribal foundations and universities; and other
detailed information pertaining to contract support costs. The reader is urged to review
these preliminary findings in considering this Second Interim Report.
The NCAI National Policy Workgroup on Contract Support
Costs has now convened seven national meetings and several additional smaller committee
meetings, including a special technical workgroup created to explore alternatives in the
determination of tribal contract support cost needs. In the meantime, Congress has taken
important new steps to address contract support cost issues as part of the FY 1999
appropriations cycle. This Second Interim Report is intended to summarize for the reader
the developments which have occurred since September 1998, and to report on the progress
of the NCAI Workgroup since that time. As of this writing (February 1999) the Workgroup
anticipates completing its work by April 1999 with the issuance of a Final Report.
Admittedly, this schedule is ambitious
given the complexity of the contract support cost system, the vital need to continue
consulting with Indian country, and the need to thoroughly study the implications of any
changes to the CSC system prior to their implementation. Within these constraints, the
Workgroup intends to adhere to this schedule so that Congress has the benefit of this
effort in deliberating over contract support cost issues in the course of the FY 2000
appropriations cycle, and in related oversight hearings to be convened by the House
Resources Committee and the Senate Indian Affairs Committee.
REVIEW OF RECENT CSC-RELATED LEGISLATION
The Omnibus Consolidated and Emergency Supplemental Appropriations Act for FY 1998
contained several provisions relevant to contract support costs.
First, for the Indian Health Service Congress
appropriated $203,781,000 as a special earmark, representing an unprecedented $35 million
increase over the amount appropriated for contract support costs in the preceding year.
Second, for the Bureau of Indian Affairs Congress
appropriated $114,871,000 in a special earmark for contract support costs, an increase of
$4 million over the prior year.
Third, Congress imposed an unprecedented one-year
moratorium on any further transfers of BIA or IHS functions to tribal operation, under
either the self-determination laws or the self-governance laws (section 328).
Fourth, Congress eliminated funding for each of the BIA's
and IHS's so-called "ISD Funds," special accounts which in years passed had been
used to fully fund the first year of contract support costs associated with a limited
number of new contracts and compacts.
Fifth, Congress included identical provisions in the IHS
and BIA portions of the Appropriations Act stating that contract support costs "may
be expended only for costs directly attributable to contracts, grants and compacts
pursuant to the Indian Self-Determination Act" and stating that such funds are not
available "for any contract support costs or indirect costs associated with any
[contract, compact or funding agreement] entered into between an Indian Tribe or tribal
organization and any entity other than [the Indian Health Service or the Bureau of Indian
Affairs]." See, e.g., section 114 (BIA).
Sixth, Congress included a measure (section 314) stating
that "amounts appropriated to or earmarked in committee reports for the Bureau of
Indian Affairs and the Indian Health Service" by the Appropriations Acts for FYs 1994
through 1998 for contract support costs "are the total amounts available" for
those years for such purposes. The measure also makes an exception for the BIA, stating
that "tribes and tribal organizations may use their tribal priority allocations for
unmet indirect costs of ongoing contracts, grants, self-governance compacts or annual
funding agreements."
Finally, Congress deleted a controversial proposal from
the House and Senate appropriations bills which would have required IHS to reallocate all
of its contract support costs on an equal pro-rata basis among all tribes and tribal
organizations, rather than the historic basis used to date. Nonetheless, the conference
committee expressed its view that IHS's "current distribution methodology . . . is
inequitable and fiscally unsound." The conference committee directed IHS to work with
Tribes "to remedy this inequity in the fiscal year 2000 budget request," but
cautioned against any demand for "a large infusion of additional funding for contract
support costs at the expense of either critical health programs or critical construction
needs." The committee also noted that the temporary one-year moratorium "cannot
be extended indefinitely."
BIA CONTRACT SUPPORT COST-RELATED
ACTIONS IN FY 1999
Initially, the BIA considered not funding contracts and self-governance agreements
which had been executed prior to enactment of the FY 1999 Appropriations Act, due to the
section 328 moratorium. In light of the moratorium, the Bureau also considered not
entering into any new funding agreements, even those that were revenue neutral with
respect to contract support costs (such as conversions from self-determination contracts
to self-governance compacts). And, agencies within the Department of the Interior other
than the BIA (which likewise have contracting and self-governance obligations to Tribes),
were initially viewing the moratorium to prohibit those agencies from entering into new
funding agreements with Tribes, notwithstanding that such other agencies' contract support
cost needs are not funded through the contract support earmark described here.
Following consultation with the House and Senate
Appropriations staff, the Bureau abandoned these interpretations. Accordingly, the BIA is
now proceeding in a manner identical to the Indian Health Service: honoring all funding
agreements executed prior to the enactment of the appropriations act, and executing new
funding agreements that are revenue neutral. The non-BIA agencies are also entering into
funding agreements to the extent authorized under the self-determination and
self-governance laws.
As in the past, in FY 1999 the BIA will not be paying
Tribes any direct contract support costs associated with programs transferred to tribal
operation (above and beyond the contract support costs paid as part of indirect costs).
Such costs are administrative costs which, according to the DOI Office of Inspector
General, are not properly placed within a Tribe's indirect cost pool (since they benefit
specific BIA programs, rather than generally benefitting all tribally-administered
programs). IHS historically has paid direct contract support costs separate from indirect
costs, and as discussed further below the BIA is currently reviewing its position in
advance of FY 2000.
The Workgroup roughly estimates that the total
direct contract support cost burden not paid by the BIA may well be in the range
of $28 million.(1)
Putting aside this omission, the BIA anticipates that appropriations in FY 1999
will only be sufficient to fund 83% of all tribal needs for indirect costs associated
with BIA programs transferred to self-determination and self-governance tribes
($115 million in funding distributed across $139 million in need). But, when
the excluded direct contract support costs are factored in ($167 million in
need), the total BIA FY 1999 funding for contract support drops to 69% of need,
with a $52 million shortfall. Further, if the law enforcement programs added
by Congress in FY 1999 are factored in (under the current moratorium the BIA
is unable to turn these programs over to tribal operation), the shortfall increases
substantially.(2)
As a result (and as long authorized by the appropriations committees), Tribes
will continue being compelled to divert their already severely underfunded Tribal
Priority Allocation (TPA) programs to cover the Bureau's shortfall.
The NCAI Workgroup strongly urges Congress to close this
tremendous gap in FY 2000, and thus relieve TPA programs of the burden of paying BIA's
contract support obligation.
BIA CONTRACT SUPPORT COST-RELATED
INITIATIVES IN FY 2000
The President's FY 2000 budget request for contract support costs includes a very
modest increase of $6.4 million to address the Bureau's continuing contract support cost
shortfall, plus $5 million for the ISD Fund to address the contract support cost needs of
Tribes taking on new BIA programs.
These sums are woefully insufficient to make any
meaningful inroad into a shortfall that continues to penalize Tribes which elect to
operate BIA programs under the Self-Determination Policy. As noted earlier, they are also
insufficient to cover the contract support costs associated with the new FY 1999 tribal
law enforcement initiatives to be transferred to Tribes in FY 2000.
Congress and the Administration are respectfully urged to
revise these sums in FY 2000 to finally close the gap in contract support cost funding.
In planning for FY 2000, the Bureau is consulting with
the NCAI Workgroup and the Indian Health Service in the development of a formal contract
support cost policy. Among other matters, the Bureau is reviewing the issue of direct
contract support costs, and how such costs might be recognized and paid in the future. One
element under consideration in this regard is the possibility of moving such costs to an
appropriate program activity in the budget, rather than lumping them in with other
contracts, since such costs are directly associated with the programs under contract.
IHS CONTRACT SUPPORT COST-RELATED
ACTIONS IN FY 1999
During the first third of FY 1999, IHS has been engaged in an intensive effort to
improve the accuracy of its data on tribal contract support needs and funding levels. In
the course of this work IHS has been able to eliminate a large number of financial
reporting errors caused by a variety of problems. As a result of these efforts, IHS has
determined that the ongoing shortfall for older tribally-operated IHS programs is $27
million, rather than the $35 million previously reported to Congress.
IHS has also engaged in an aggressive process to finally
negotiate all contract support cost requests relating to "new" programs,
requests that have, until now, simply been placed without any scrutiny on IHS's
"queue" (or priority list) for deferred contract support cost funding in future
years. The process of finalizing the "queue" amounts with Tribes involved
serious arms-length negotiations leading to substantial reductions in the size of the
queue, from an initial estimate in excess of $70 million down to $59.9 million.
In the course of its analysis, IHS has also uncovered and
sought to correct inconsistencies with the way in which IHS's Area Offices have previously
carried out internal IHS policies regarding the re-distribution of contract support cost
funds when individual tribal indirect cost rates move up or down.
As of this writing, IHS is reportedly three weeks away
from completing its analysis and making a final decision regarding the distribution of its
FY 1999 contract support cost funds. Going into the FY 1999 distribution process, IHS
reports that contract support funding for individual Tribes presently ranges between zero
for some tribes and very low percentages for others, up to 90 and 100 percent for others.
Assuming IHS's remaining audits and negotiations are consistent with the work undertaken
thus far, and assuming IHS follows the FY 1999 distribution plan recommended by NCAI and
the IHS Contract Support Cost Work Group (CSCWG), IHS will be able to narrow the range in
contract support cost funding in FY 1999 to between 70% and 100% for all
tribally-administered IHS programs.
Significant work went into determining how to equitably
spread the limited $35 million increase in contract support across the $59.9 million worth
of recent tribal programs carried on the IHS "queue." Initially, it was
suggested that IHS would only be able to substantially narrow the gap in contract support
funding by disregarding the statutory category of contract support costs known as one-time
"startup" costs (and then paying all "queue" programs an equal share
of the increase). Tribes objected strongly to disregarding this statutory entitlement,
particularly since Tribes had relied on the Act and on past IHS policies recognizing such
costs. Instead, NCAI and the CSCWG urged IHS to look beyond the "queue" amounts,
and to examine each Tribe's total contract support cost funding shortfall (including
shortfalls associated with older programs not waiting on the "queue" for
contract support). (Most Tribes operating programs on the IHS "queue" also
operate older programs that are not on the "queue.") NCAI urged that this full
picture be considered in deciding whether and how much to fund each Tribe's
"queue" entitlement.
IHS tentatively reports that if the NCAI approach is
taken in FY 1999, no Tribe will receive a partial payment on its contract support
entitlement lower than approximately 70% of statutory need. Further, no Tribe's contract
support will be reduced (except to the extent of a reduction in a Tribe's indirect rate)
-- a major source of wide-spread Tribal and IHS opposition to the abandoned proposal to
reallocate all contract support costs nationally on a flat pro-rata basis. If this
analysis holds, IHS will also be able to avoid any different treatment for Tribes that
only began operating IHS programs in FY 1999; rather, all Tribes will receive
between 70% and 100% of their need, with the overall weighted average at 80.35%.
Despite the substantial improvements achieved
this year, in FY 1999 IHS reports that there will still be a combined contract
support cost shortfall of $52.3 million as of October 1, 1998.(3)
If inflation is included for FY 1999 and FY 2000 ($26 million at 5% per annum),
and if $15 million is added for anticipated new contracting activities, the
total need going into FY 2000 will be $93.4 million. Even still, this figure
disregards unpaid inflation associated with direct contract support costs for
FY 1994 through FY 1998.
IHS CONTRACT SUPPORT COST INITIATIVES IN FY 2000
The President's budget request includes a $35 million increase in contract support
associated with IHS programs under tribal operation. Based on current levels of
contracting, such an increase would certainly boost the levels of contract support
payments to many Tribes. But even if inflation is disregarded, it would still leave scores
of the least funded Tribes underfunded in the range of between 10% and 20%, depending upon
which of several possible methodologies is used to distribute such an increase. (Possible
methodologies include helping all underfunded Tribes cover varying shares of their
shortfall, as well as methodologies directing all such new funds only to the most severely
underfunded Tribes.)
As of this writing Congress has not begun to consider the
FY 2000 budget. It is unknown whether Congress will lift the section 328 moratorium in
whole or in part. For its part, IHS is now actively exploring with Indian country possible
alternatives, including approaches which view FY 2000 as a second "transition"
or "correction" year in which the lion's share of any effort continues to go
toward addressing the ongoing contract support crisis faced by existing tribal programs.
These and other reform issues are being actively explored as part of IHS's initiative to
revise the agency's contract support cost circular for FY 2000 by April 1999.
As with the BIA shortfall, the NCAI
Workgroup strongly urges Congress to fully close the gap in the current IHS shortfall for
FY 2000, estimated by IHS to be $93.4 million plus unfunded pre-1999 inflation. As part of
this effort Congress should restore the ISD Fund to at least $12.5 million in FY 2000, and
IHS should immediately begin canvassing Indian country to secure an assessment of new
contracting requirements needed for FY 2000 and FY 2001.
DETERMINING CONTRACT SUPPORT COST NEEDS
The Indian Self-Determination Act mandates that, as part of the Federal-Tribal
partnership embodied in the Indian Self-Determination Policy, the IHS, BIA and other
federal agencies must transfer, to the extent possible, all of their administrative
functions associated with carrying out a program. But it is not always possible to
transfer such programs, either because Congress has prohibited it (as is the case with
transferring tribal shares of the BIA Central Office), the agency has resisted it (as is
the case with many BIA and IHS Area Office operations), or the function is lodged at a
location within the Department (or other federal agencies such as the GSA, OPM, Treasury,
DOJ, DOL, EPA, etc.) not accessible to Tribes.
To bridge the gap, the agencies and Congress
have endorsed an approach in which most contract support cost needs are determined
through the arms-length negotiation of an indirect cost rate (usually with the
DOI Office of Inspector General, or "OIG").(4)
Additional one-time start-up costs and (in the case of IHS only) recurring direct
contract support costs, are negotiated directly with the funding agency. (As
noted earlier, the BIA has not recognized a separate entitlement to such costs.)
This system has been closely scrutinized time and again
throughout the life of the self-determination initiative. In each instance it has been
reaffirmed. Nonetheless, the Workgroup has spent considerable effort exploring whether any
reforms in this system are warranted to provide additional assurances of fairness, equity
and efficiency. In doing so, the Workgroup has operated under a set of key governing
principles, providing that changes in the current contract support cost system must:
maintain and promote the fundamental right of Tribes to
self-determination, as specified in the self-determination and self-governance laws;
protect each Tribe against any reduction in contract
support costs that a Tribe currently receives;
promote equity among Tribes while respecting tribal
choice, local flexibility and varying circumstances;
promote sound management practices that encourage
efficiency; and
maximize simplicity in application wherever possible,
consistent with the other governing principles.
As of this writing, work on possible reforms to the
system for determining contract support cost needs is still underway, and a number of
reforms are under active consideration. While some are minor and relatively simple, others
will require a level of intense study and casework application that may well be beyond the
scope and resources of the Workgroup (such as reforms requiring research and field
testimony of a "benchmarking" system that might establish consistent but
non-binding funding guides for certain categories of contract support).
One possible reform recommendation already being tested
by many self-governance Tribes is the negotiation of firm "base budget" amounts
for a period of years, including a set amount of contract support. This approach holds
some promise for promoting longer term stability, while rewarding tribal management
efficiencies. This and other possible reforms are intended to maximize incentives for
efficiency in Tribal operations consistent with generally accepted management principles
for non-profit health and social service institutions.
Although some short-term reforms may ultimately be
recommended, together with longer-term studies on other reforms, the Workgroup's
conclusion thus far is that determining the bulk of contract support cost needs through
arms-length Tribal-OIG and Tribal-DCA negotiations continues to be the best means for
safeguarding the public fisc while assuring that tribal contract support cost needs are
covered for all "reasonable and necessary" amounts required for
"prudent" administration of transferred programs, as specified in the Act. At
the same time, Tribal-specific negotiations also respect tribal flexibility and choice,
recognizing that Tribes of varying size, location, circumstance, history and tradition
operate in a variety of ways, representing a diversity to be accommodated, respected and
encouraged.
FUNDING CONTRACT SUPPORT COST NEEDS:
PAST, PRESENT AND FUTURE
For past years, the Workgroup has concluded there is little Congress can or ought to do
to address the government's past liability for IHS and BIA failures to meet their
statutory contract support obligations. To the extent Tribes incurred damages, it is for
the judiciary or other adjudicative bodies to determine the appropriate relief. Indeed, in
cases such as Winstar the Supreme Court has time and again cautioned about the
grave contractual and constitutional problems posed by Congressional efforts to repudiate
past government contract obligations.
As for the present, the Workgroup calls upon all
interested parties to once again embrace the Federal-Tribal partnership embodied in the
self-determination and self-governance initiatives. Contracting and self-governance Tribes
must not be penalized relative to other "direct service" Tribes by being
compelled to "rob Peter to pay Paul," to reduce health and social service
programs already underfunded at 40% to 60% of need, in order to cover the federal
commitment to sustain contract support. An immediate and aggressive effort must be made now
to close the current gap and thus keep faith with Indian country.
Turning to the future, Congress is already witnessing a
significant slowing down in the rate at which IHS and BIA programs are being transferred
to tribal operation, notwithstanding that the bulk of each agency's programs remain today
under federal operation. There are many reasons for this leveling off in
self-determination and self-governance activities. In some parts of the country Tribes
remain deeply suspicious of the self-determination initiative, viewing it as a poorly
disguised move toward outright termination of the Federal-Tribal trust relationship. Other
Tribes see the local agency operations as terribly underfunded and are loath to step into
the federal government's shoes under such circumstances. Still other Tribes are satisfied
with the agencies continuing to operate various programs, particularly where the Tribes
feel they have secured substantial involvement in how each agency carries out its
responsibilities. Finally, some Tribes do not feel they possess the resources or
capabilities to operate certain programs on their own. Whatever the reasons, it is clear
that a certain equipoise is being reached between the level of contracting activities and
the level of agency direct operations.
This is not to say that new contracting and compacting
is about to stop in 1999. For one thing, Congress's moratorium is no doubt producing
somewhat of an artificial backlog that will now have to be addressed, with two
years' growth being dealt with instead in one year. In addition, as Congress
moves forward to remedy the greatest problems in Indian country, new programs
will demand new contract support since self-determination and self-governance
Tribes will fold those programs into their existing operations. Finally, from
time to time there are likely to be contract support "spikes" that
occur when Tribes such as the Navajo Nation or the Cherokee Nation move forward
to take over the operation of large agency programs not presently under tribal
operation.(5)
With these caveats in mind, overall the rate of increase
in contracting activities across the country is reducing. While the Final Report will
explore further the causes of this trend, the fact is that the BIA in recent years has
never exhausted its $5 million annual ISD Fund, and the IHS is now tentatively estimating
that its own growth will drop close to approximately $12.5 million per year (a marked
decrease from years past).
1. The amount stated is an estimate only. The Bureau is presently studying the issue of contract support costs and expects to have more accurate estimates shortly.
2. The BIA is presently calculating the precise amount. Also, the figures set forth here do not include any further adjustments that may become necessary to accommodate the rulings of the Tenth Circuit Court of Appeals in Ramah Navajo Chapter v. Babbitt.
3. For the most part, IHS calculations are based on a snapshot taken at the end of FY 1998.
4. A relatively small number of Tribes (including several operating large IHS programs) negotiate their indirect cost requirements with the DHHS Division of Cost Allocation (DCA). Despite repeated requests, DCA has refused to participate in the work of the NCAI National Policy Workgroup.
5. Although it has been suggested by some observers that fully funding contract support will substantially increase the willingness of Tribes to contract more programs, the IHS experience with the "queue" demonstrates that relatively few Tribes make the "contracting" decision based primarily on the availability of contract support funding, although this factor certainly plays a role.