DRAFT NCAI CSC REPORT

Revised on June 4, 1999 (3:52PM) by LBM

TABLE OF CONTENTS

Part I Executive Summary

Purpose and Background of the NCAI National Policy Work Group on Contract Support Costs

Organization of the NCAI National Policy Work Group on Contract Support Costs

Findings

Part II Overview and History

A. The Indian Self-Determination Act

B. Contract support costs under the ISDA

C. BIA and IHS approaches to contract support costs

D. Recent judicial and administrative decisions concerning contract support costs

E. Congressional actions in 1998 (FY 1999) relating to contract support costs

F. Funding contract support cost needs:

past, present and future

Part III Understanding Contract Support Costs:

the Myths and the Realities

Part IV Findings and Recommendations

A. Findings

B. Guiding Principles for the Recommendations

C. Recommendations

Part V Conclusion

Purpose and Background of the NCAI National Policy Work Group on Contract Support Costs.

In 1970 President Nixon formally launched the Nation into the Era of Tribal Self-Determination. Five years later that policy was embraced by Congress through enactment of the Indian Self-Determination and Education Assistance Act. Under that Act, federal agencies within the Department of the Interior and the Department of Health and Human Services were required and directed to turn over the complete administration of their federal Indian programs to the Indian tribes themselves, upon receipt of a formal tribal request.

The result of that enactment has been the transfer of hundreds of millions of dollars in federal Indian programs from the Bureau of Indian Affairs and the Indian Health Service to tribal operation, leading to enormous improvements both in the empowerment of tribal governments and in the delivery and quality of local health and social welfare programs serving Native American people. This massive transfer of federal authorities to local tribal governments has emerged as an outstanding example of the success that comes from the devolution of federal governmental prerogatives to local governmental institutions.

From the earliest implementation of the 1975 Act it was clear that the Bureau of Indian Affairs and the Indian Health Service were unable (and in some instances unprepared) to transfer to tribes the full resources of the federal government available to the agencies to carry out their federal Indian programs. It was recognized that if additional Acontract support cost" funds were not provided to tribes, over and above the program resources being transferred, tribes would actually be penalized in exercising their self-determination rights, by being compelled to reduce program operations to cover these unavoidable costs. (Such costs are typically associated with personnel administration, financial management, procurement activities and the like.)

Despite this early recognition, since the inception of the Indian Self-Determination Act of 1975, each and every Administration has failed to meet its legal obligation 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, by being compelled to reduce essential governmental programs.

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. It also reaffirmed that self-determination is not a mere program, but an enforceable system of important contractual obligations. But despite the 1988 reforms, and a second round of comprehensive congressional reforms in 1994, the Administration and the Congress continued to force upon tribes the burden of reducing direct program services in order to cover the federal government's 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. At the same time, courts and administrative law judges began to award tribes substantial damages against the agencies. As differences deepened between the authorizing and appropriations committees, as well as between the committees and the Administration, tribes were increasingly caught in the middle.

Organization of the NCAI National Policy Work Group on Contract Support Costs.

It is in this environment that in May 1998, the National Congress of American Indians took the initiative to form the National Policy Work Group on Contract Support Costs. The goals of the Work Group 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.

In April 1998 the National Congress of American Indians 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 Work Group on Contract Support Cost. In organizing the Work Group, 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 Ron Allen. On July 24, 1998 the full Work Group convened in Washington, D.C.

The NCAI National Policy Work Group on Contract Support Costs has now convened eleven national meetings and several additional smaller committee meetings, including a special technical work group created to explore alternatives in the determination of tribal contract support cost needs.

The NCAI National Policy Work Group on Contract Support Costs has devoted one year to the study of contract support cost issues. It has taken into consideration all of the prior governmental and nongovernmental studies of the issue, the various approaches taken by the agencies over the years, and the various approaches explored by the authorizing and appropriations committees as well. The Work Group has also drawn upon the expertise of tribal leaders, tribal administrators and financial consultants, accountants and tribal attorneys with specialized expertise in matters pertaining to contract support costs.

Throughout its deliberations the Work Group has worked closely with representatives of the Bureau of Indian Affairs, the Indian Health Service and the Office of Inspector General. In some instances, the Work Group has also been joined by representatives from the Office of Management and Budget (OMB), the General Accounting Office and various congressional offices. Finally, the Work Group has explored at length the difficulties faced by tribal providers of federal ISDA programs as they struggle to deal with contract support shortfalls caused both by the consistent failure of the BIA and IHS to pay the full amounts required by law, and by the persistent failure of other federal agencies to pay the full amounts required by the government-wide indirect rate established by each tribe's cognizant federal agency.

The NCAI National Policy Work Group on Contract Support Costs believes that much needed reform can be brought to the contract support cost system to alleviate the problems faced by tribal communities as they struggle to administer federal programs with insufficient administrative support. Those reforms have been developed in light of several key findings from the past year's work, including the following:

• The payment of full contract support costs is essential to the success of the Self-Determination Policy and to avoid a contracting penalty associated with the transfer of federal programs to tribal operation;
• The policy of paying contract support costs began with the BIA's and IHS's recognition that such costs were necessary to preserve the resources of the programs being transferred to tribal operation. Without full funding of contract support costs, program resources will necessarily be diverted to sustain necessary administrative functions;
• The determination of contract support costs has historically occurred in arms-length government-to-government transactions, primarily with the United States represented by the Department of the Interior's Office of the Inspector General in the context of indirect cost rate negotiations. These negotiations have been free of collusion, undue influence, or conflicts of interest;
• To date the indirect cost system has proven to be the most flexible system available for fairly determining each tribe's prudent requirements for contract support costs;

• Past efforts to replace the indirect cost system have failed because they have not taken into account programmatic differences, large and small tribe factors, geographical locations and a number of other distinguishing elements that vary from tribe to tribe, and from contract to contract;
• No study of contract support issues has ever developed a more reliable system for better determining a tribe's necessary and reasonable requirements for prudent management of a contract than the IDC rate system;
• The BIA and IHS have consistently failed to meet their responsibilities to timely report to Congress on the full nature of contract support costs and contract support cost shortfalls, denying Congress vitally needed information in the budget and appropriations process;
• Going back as far as the 1970s, the agencies have consistently failed to meet their obligations to fully fund contract support costs. In most years the failure can be attributed to the refusal to request sufficient funds as part of the budget and appropriations process, while in a few years Congress has simply ignored requests for substantial contract support increases;
• Agencies continue to withhold programs and resources at the area and central office levels, leaving tribes with fewer resources to operate their programs and administer their overhead;
• The underpayment of contract support costs in support of programs transferred from the BIA and IHS accounts for only a portion of the severe hardships faced by tribal contractors in administering federal programs. The remainder is caused by the failure of other federal agencies to abide by the government-wide OMB-controlled process for establishing indirect cost rates;
• Indirect cost rates and contract support cost ratios have, in the aggregate, remained constant over the past decade, refuting allegations that either rates are on the rise or that the indirect cost system represents an open-ended or uncontrollable liability;

• Tribal contracting and compacting activities accelerated to their peak in the mid-1990s in response to the 1994 ISDA Amendments and extension of the self-governance initiative to IHS. The trend in the transfer of federal Indian programs to tribal operation under the ISDA has leveled off from the peak experienced in the mid-1990s, and with a few notable exceptions should remain constant in the years ahead;
• The stability in aggregate information, combined with the leveling off in new contracting activities, will yield improved long-term predictability over the next decade in contract support cost demands;
• With respect to the Indian Health Service, IHS estimates that going in to FY 2000 there will be a total annual contract support cost requirement of approximately $310 million (including a 5% inflation factor for FY 1999 and FY 2000 ($26,120,842); and a $15,000,000 ISD Fund for new and expanded ISDA operations);
• The contract support cost Ashortfall" experienced by IHS in recent years is a combination of (1) shortfalls in contract support cost funding for programs long ago transferred to tribal operation, and (2) shortfalls in contract support funding for more recently transferred programs that did not receive any contract support at all until FY 1999;
• The IHS and the BIA have for many years used an identical system for funding the contract support costs associated with newly transferred programs: newly transferred programs have received funding on a first-come/first-served basis out of 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 (but for FY 1997), avoiding a large accumulated backlog. The IHS Indian Self-Determination Fund has not been similarly sufficient to keep pace with new ISDA activities;

• Of the total contract support funding required by tribes in connection with IHS programs transferred to tribal operation, on average 79% of the contract support reflects indirect costs, and 21% 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;
• Over one-half of the 330 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 of the IHS programs under tribal operation are in excess of $5 million (of which only seven are in excess of $20 million);

• 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 beginning with FY 2001;
• The only Aspikes" 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;
• Approximately 40% of the IHS and BIA budgets are currently being administered by tribes;
• The Work Group estimates that the total annual Adirect" contract support cost burden not recognized or paid by the BIA is approximately $25 million to $30 million. 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 presently under tribal operation ($115 million in funding distributed across $139 million in need). When the excluded direct contract support costs are factored in, the total BIA FY 1999 funding for contract support drops to approximately 69% of need, with a $52 million shortfall. If one factors in the law enforcement programs added by Congress in FY 1999, the shortfall increases substantially;

• CSC funding covers a variety of fixed costs related to the administration of programs and facilities, and certain personnel and program expenses not otherwise funded under the ISDA. To the extent CSC is insufficiently funded, a contracting or self-governance tribe is generally 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);
• In FY 1997 the average indirect rate for tribes that negotiated indirect costs based on a Adirect cost" base (the method used by most, but not all, tribes) declined as the total size of the program increased. For example, tribes whose direct-cost base is under $500,000 had an average indirect rate of 49.5%, whereas tribes with a direct-cost base in excess of $20 million had an average indirect cost rate of 22.7%. The single largest category of tribes, those with a direct-cost base of between $1 million and $5 million, had an average rate of 31%. In each instance, however, the average represents an average among 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 for each tribe was between 32.1% and 35.6%;
• The Office of Inspector General reports that the aggregate indirect cost rate for the period from 1987 through 1997 is approximately 25%. The OIG computed the overall aggregate rate by dividing the total indirect cost pools by the total direct cost bases;
• According to AA Guide for Nonprofit Organizations," the following agencies have indirect cost rates in excess of 50%: 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;
• During the period 1991 through 1995, 105 universities examined had an average indirect rate of between 52% and 53.1%;

• Excluding the recently concluded phased transfer of IHS Alaska Area programs to tribal operation, contracting activities for both agencies have begun to level off from their peak in the mid-1990s. There are many reasons for this new development. 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 IHS and BIA agency operations as terribly underfunded and have chosen not 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 yet to operate certain programs on their own;
• 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.

In the course of its work to respond to these findings, as well as the more technical findings contained in the body of this report, the NCAI Work Group developed a set of eight principles to guide the development of NCAI's recommendations.

First, improvements in the contract support cost system must preserve and promote the intent of the Indian Self-Determination Act to reduce federal paternalism, foster tribal operation of federal Indian programs, promote the devolution of federal authorities to local tribal governments, and avoid erecting barriers to the full exercise of tribal self-determination rights.

Second, full funding of contract support costs is essential to the success of the Self-Determination Policy.

Third, improvements in the contract support cost system should promote tribal financial stability and predictability, tribal choice, and tribal flexibility.

Fourth, improvements in the contract support system should be coordinated with continual downsizing of the BIA and IHS, and the transfer of operational savings to Indian tribes.

Fifth, new approaches in the contract support cost system must not include reallocations that attempt to shift to tribes the federal government's own responsibility for meeting the requirements of the Indian Self- Determination Act.

Sixth, improvements in the contract support cost system should continue to encourage tribes to adopt management practices that maximize efficiencies in the local delivery of health and social service programs, while remaining sensitive to real-world limitations confronting rural tribal communities.

Seventh, improvements in the contract support cost system should foster simplification wherever possible, without compromising the other principles.

Eighth, the continued stability of the entire self-determination contracting and compacting initiatives, and the Self-Determination Policy of which they form a critical part, depends upon the federal government's proper respect for the legal obligations it enters into with tribal governments, as a matter of statutory, contractual, fiduciary and constitutional law.

Within these broad parameters, the National Policy Work Group on Contract Support Costs recommends the following reforms.

Recommendations pertaining to the determination contract support cost needs.

1. The Office of Management and Budget should issue new circulars, in close consultation with an active participation by tribes and tribal organizations, concerning the negotiation of indirect cost rates and auditing issues unique to tribes and tribal organizations. These circulars should reflect issues unique to Indian tribes, including the provisions set forth in section 106(k) of the ISDA, 25 U.S.C. ' 450j-1(k), and the rebudgeting and redesign provisions set forth in Titles I, III and IV of the ISDA. They should include provisions intended to determine the necessary and reasonable needs of tribes for administrative overhead costs consistent with sound and prudent management practices.

2. The Department of Interior of Office of Inspector General, the Department of Health and Human Services Division of Cost Allocation, and the Department of Labor Office of Cost Determination should be directed to explore with NCAI and other tribal representatives the development of a Abenchmarking" approach which might guide the negotiation of contract support costs, including indirect cost rates. The development of nonbinding benchmarks for the different elements of contract support costs, and for certain components within each element, can potentially might serve to encourage a greater standardization among tribes in similar situations, without mandating identical calculations that could overpay or underpay particular tribes given their local circumstances.

Recommendations pertaining to the funding of contract support

costs.

15. The BIA and IHS should cease and desist from efforts to extinguish past obligations incurred under solemn government-to-government contracts. They must accept that tribal contracts and compacts are first and foremost legal commitments and obligations of the United States, obligations that are protected by the Constitution and whose terms are set forth in the ISDA and basic contract law.

16. Congress and the Office of Management and Budget should each explore and address the root causes of the failures of agencies other than the BIA and IHS to respect the full indirect rate negotiated by each tribe's cognizant federal agency.

The National Congress of American Indians National Policy Work Group on Contract Support Costs reaffirms its commitment to continue working with Indian country, Congress and the Administration, including the Office of Management and Budget, the Department of the Interior and the Department of Health and Human Services, to keep faith with the Nation's Self-Determination Policy.

No single policy in the history of Native American Affairs has more forcefully and effectively permitted tribes to empower their tribal institutions and their people. No single policy has more effectively served to break the cycle of dependency and paternalism. No single policy has better served the philosophy of devolution -- moving federal authorities to that level of local government that is closest to the people. And, no single initiative has contributed more to the improvement in the conditions facing Native American peoples.

As the Nation enters the new millennium, it is essential that the American people recommit fully and keep faith with the Self-Determination Policy. Only through the continuation of that policy can the Nation both respect the fundamental government-to-government relationship that exists between tribes and the United States, and fulfill the federal government's trust responsibility to protect the interests of Native American tribes.

II. OVERVIEW AND HISTORY

A. The Indian Self-Determination Act.

For the last 30 years the hallmarks of this Nation's Indian policy have been the promotion of tribal autonomy and self-governance, and the elimination of federal control and paternalism over daily tribal life. Those goals were first formally announced by President Nixon in 1970, and today they remain at the heart of Federal Indian policy. The cornerstone of that policy is the Indian Self-Determination Act of 1975, an Act repeatedly reaffirmed by Congress through extensive strengthening amendments enacted in 1988 and 1994.

Prior to the 1975 Act, most governmental programs in most tribal communities were designed, controlled and carried out by federal agencies, primarily through the Bureau of Indian Affairs (BIA) and the Indian Health Service (IHS). Although the Buy Indian Act permitted these agencies to contract with a tribe to carry out one or more programs, the choice was the agencies' and not the tribes'. As a consequence, tribes generally did not administer federal Indian programs, and those few that did had no autonomy whatsoever in how a contracted program was carried out.

With the enactment of the ISDA in 1975, this relationship fundamentally changed. Under the ISDA, it became a tribe's choice whether to take over the operation of a BIA or IHS program, and the agencies were mandated to transfer programs to the tribes unless the agencies could prove that one of several very limited reasons existed for declining to do so. Moreover, once a program had been transferred by contract to a tribe, the tribe was authorized to redesign the contracted program to best meet the local needs and priorities of the tribal community. Although BIA and IHS resistance to the Act's mandates has from time to time seriously impeded its implementation, this is not surprising, for there is no other example of a federal agency being required to transfer full operational control over a program to another government upon request, and in so doing to fully divest itself of its own resources, including funds, equipment and even personnel.

The success of the Self-Determination Policy has been frequently noted, notwithstanding agency resistance and agency conflicts of interest. By the mid-1980s, the BIA had transferred over one-fifth of its programs ($234.8 million) to tribal operation, while the IHS had transferred to tribes six hospitals and 300 outpatient clinics. The most recent available figures indicate that today tribes contract for the operation of $596 million in BIA programs (36% of the total BIA budget) and $765 million in IHS programs (40% of the total IHS budget).

As detailed by the Senate Indian Affairs Committee in 1988, and more recently by the National Indian Health Board in 1998, the result consistently has been (1) improved service delivery, (2) increased service levels, and (3) strengthened tribal institutions. Today the greatest innovations occurring across Indian Country in health care, education, economic development, local employment, trust resource management, welfare reform, family support, alcohol and substance abuse treatment, and clinical care and preventive care are occurring in federal Indian programs transferred to and operated by tribes under the ISDA.

The Nation's Tribal Self-Determination Policy has been a resounding success for tribal communities. Virtually every tribe in the United States is involved in the operation of at least some BIA or IHS programs, and many operate or control all available programs. The Policy itself, embraced by every Administration from President Nixon to President Clinton, is also supported today by the increasing devolution of federal authorities to state and local governments, and the persistent congressional call for reductions in the federal bureaucracy.

Nonetheless, there have been severe obstacles to the full realization of this enlightened Policy. As we next describe, chief among these has been the problem associated with the failure of the BIA and IHS to fully pay contract support costs, including indirect costs.

B. Contract Support Costs Under the ISDA.

From the beginning, the ISDA has required the BIA and IHS to transfer to a contracting tribe the Federal Government's full resources supporting a particular program, such as a BIA law enforcement program or an IHS clinic or hospital. But for many years the agencies refused to transfer any resources other than those located at the community level, thus depriving tribes of essential supportive activities situated at the agencies' Area and central offices. Moreover, in many instances some of the federal resources supporting a given program were located in entirely different departments or agencies, such as the various functions carried out by the Office of Personnel Management, the Merit Systems Protection Board, the General Services Administration, the General Accounting Office, agency Inspector General functions, and the Treasury Department.

Understandably, neither agency could secure and transfer to tribes the federal resources provided from these other portions of the federal bureaucracy. To compound the problem, Congress and the agencies imposed upon tribes a raft of requirements such as program reporting requirements, annual financial audits, insurance and the like that had no comparable cost for the federal government.

As explained in more detail in Part C, the agencies early on determined that contracting tribes should be paid these operational costs (largely representing necessary administrative overhead) through the indirect cost system. Under that system, a separate agency (typically the DOI Office of Inspector General, but occasionally the DHHS Division of Cost Allocation) would independently determine a tribe's reasonable and necessary costs to carry out such functions, and the BIA and IHS would then pay their calculated share of those costs.

Congress has consistently recognized the importance of paying indirect costs, along with other contract support costs, and in 1988 and 1994 Congress twice reinforced section 106 of the Act to assure that contract support costs would be paid.

The importance of the issue here cannot be understated, for if tribes are not reimbursed fully for their contract support costs and they therefore experience a shortfall, they are effectively penalized for exercising their self-determination rights, since the only choice left is to actually cut into the transferred BIA and IHS programs themselves in order to cover the shortfall.

The BIA and IHS have consistently failed to meet their obligations to fully fund contract support costs (including indirect costs), a failure that has emerged as the leading impediment to realizing the full promise of the Self-Determination Policy. Ten years ago the Senate Indian Affairs Committee put it well:

Perhaps the single most serious problem with implementation of the Indian self-determination policy has been the failure of the Bureau of Indian Affairs and the Indian Health Service to provide funding for the indirect costs associated with self-determination contracts. The consistent failure of federal agencies to fully fund tribal indirect costs has resulted in financial management problems for tribes as they struggle to pay for federally mandated annual single-agency audits, liability insurance, financial management systems, personnel systems, property management and procurement systems and other administrative requirements.

Unfortunately throughout the same period the IHS and BIA programs themselves have been woefully underfunded, even losing ground against inflation. As a result, the continual failure to fully fund contract support costs has compounded the gravity of program underfunding by requiring tribes to reduce those programs even further. This is the Acontracting penalty" which Congress has consistently sought to avoid in the ISDA.

In 1987 the Senate Indian Affairs Committee repeatedly targeted the agencies' failure to even request contract support funds:

For several years the Bureau of Indian Affairs and the Indian Health Service have failed to request from the Congress the full amount of funds needed to fully fund indirect costs associated with self-determination contracts.

S. Rep. 100-274 at 9. The Committee noted that Aself-determination contractor's rights have been systematically violated particularly in the area of funding indirect costs." Id. at 37. The Committee directed IHS and the BIA to Acease the practice of requiring tribal contractors to take indirect costs from the direct program costs, which results in decreased amounts of funds for services." Id. at 12. The Committee highlighted Athe overwhelming administrative problems caused by indirect cost shortfalls, and concluded that:

Full funding of tribal indirect costs associated with self-determination contracts is essential if the federal policy of Indian Self-Determination is to succeed.

Id. at 12-13. As the Appropriations Committees have likewise noted from time to time, that statement is as true today as it was in 1988.

C. BIA and IHS Approaches to Contract Support Costs.

This section reviews the evolution in the BIA and IHS approaches to contract support costs. As this section reflects, the two agencies have approached contract support cost issues somewhat differently, and today those differences persist. The critical common denominator, however, is the two agencies' general failure to fully request and budget for contract support costs, leading to the repeated congressional criticisms highlighted in Part II-B.

The term Acontract support cost" was first coined by the BIA in the 1970s to designate the supplemental funds needed to assure that tribes would not be required to reduce contracted programs in order to operate those programs. In this way the BIA sought to comply with original section 106(h)'s requirement that the funds made available to carry out a federal program not be less than Athe amount the Secretary would have otherwise provided for his direct operation of the programs or portions thereof for the period covered by the contract." The key conceptBcarried forward to this dayBwas to prevent a tribe from having to divert program funding to cover contract support cost needs, a consequence that would lead to fewer program funds being available to the tribe than the Bureau would have had to operate the programs itself.

The Bureau (along with the Indian Health Service) recognized that when a tribe contracts a local BIA or IHS program based strictly on the agency's local budget, there will be costsBincluding even Secretarial program costsBthat are not included in the contract because they are not situated locally. Costs incurred at another level in the BIA or incurred by other departmental offices in support of the local program would still need to be incurred by the tribe. In addition, ISDA contracts would require activities for contract compliance or prudent management which the federal agency would not incur at all. The agencies sought to address this issue by requesting additional Acontract support" funding and by establishing a procedure to negotiate a reasonable adjustment in self-determination contracts to determine such costs.

Early BIA policies regarding contract support costs. In 1976 the BIA began using the indirect cost system to pay contract support costs on self-determination contracts, using a budget item entitled AContract Support Funds." In its April 1977 AProcedural Guidelines on 25 C.F.R. 271," the BIA explained that Acontract support" funds were being provided to cover the additional administrative costs incurred as a result of tribal contracting of Bureau programs, emphasizing that these funds were essential and necessary Ato prevent program deterioration, and not for program enhancement or expansion."

In the guidelines the BIA made clear that tribal contract support funding needs normally would be based on a tribe's negotiated indirect cost rate. Only in certain special circumstances involving small contracts would such funds be provided based on a lump sum negotiation. The BIA also stated that all allowable indirect costs could and would be paid from the contract support budget category Abecause of their administrative nature".

Overview of the indirect cost system and early funding problems. Over the years, both agencies have employed the Aindirect cost" system for determining most contract support cost needs for most tribal contractors. AIndirect costs" are costs (such as procurement, auditing and other administrative costs) that are pooled together as a separate part of a tribal contractor's overall budget. These common pooled costs Aindirectly" benefit each of the programs operated by the tribal organization, thus leading to the term Aindirect costs." Under the applicable OMB circulars and guidelines, a tribal contractor negotiates an indirect cost rate with the Department from which the tribe receives its relatively largest amount of federal funding. For most tribes and tribal organizations, that agency is the Department of the Interior, and DOI has assigned the responsibility for negotiating indirect cost rates to its Office of Inspector General (OIG). For the minority of tribes whose lead Acognizant" federal agency is the Indian Health Service, the Department of Health and Human Services has assigned a similar responsibility to the DHHS Division of Cost Allocation (DCA).

The function of the OIG and DCA is to reach agreement with a tribe on the appropriate level of pooled administrative costs that are incurred for a common purpose that jointly benefits all of the programs being operated by the tribal organization. So long as a particular item of cost is not readily assignable directly to each of the benefitted programs without an accounting effort that is disproportionate to the result achieved, the cost will be included along with other pooled indirect costs.

Indirect costs generally cover such categories as financial, personnel, property and records management, planning activities, activities of the tribal contractor's governing body, data processing and other office services, rent and utilities, housekeeping, maintenance and other facilities-related costs, insurance, legal and audit services, and other general support services. Once OIG (or DCA) gives final approval to the size of the indirect cost pool, the pool is divided by the total amount of programs under tribal operation to yield an indirect cost rate.

In the earliest years of ISDA implementation, tribes commonly experienced shortfalls in their indirect cost requirements, resulting in offsetting reductions in contracted programs. In 1980 the Senate Appropriations Committee directed the BIA and the OIG to develop a system to prevent indirect cost shortfalls in the future, and called for a BIA report. The result of this effort was a report confirming the BIA's failure to budget sufficient contract support funds to meet actual tribal needs. The report also highlighted the persistent problem caused by the failure of some federal agencies to respect the government-wide indirect cost rate that had been negotiated by the OIG, leaving tribes with shortfalls associated with those programs as well.

By the early 1980s, two things were firmly well established. First, that payment of contract support costs was necessary to comply fully with the full program funding mandate of the ISDA; and second, that the BIA and IHS were consistently failing to meet their responsibilities to pay contract support costs. In June 1982 the Senate Select Committee on Indian Affairs held field oversight hearings to explore these issues, and while no legislative proposals emerged, the hearings further documented both the failure of the BIA and IHS to fully pay contract support costs, and the failure of other federal agencies to follow the OIG and DCA indirect cost rate agreements.

1983: Agrandfathering" and flat rates. In 1983 the Senate Appropriations Committee moved the contract support system into a new direction by calling for the transfer, or Agrandfathering," of contract support costs into each tribes's direct program base. This new approach was intended to give tribes greater flexibility in the management of their total BIA funding, and by memorandum dated May 21, 1984 the Acting Deputy Assistant Secretary of Indian Affairs announced the implementation of the policy. As indicated below, however, this experiment eventually failed because it was launched, once again, with insufficient funding.

Also in 1983 the American Indian Law Center, Inc. (AILC) completed a controversial review of the BIA's own overhead rate. The AILC study was requested as part of a BIA initiative to replace the indirect cost rate system with one that would simply try to mirror the BIA's overhead rate, and to then transfer a comparable amount to tribal contractors on a continuing annual basis regardless of local factors. The BIA's AILC study, severely criticized in later years by the Senate Indian Affairs Committee, charged that tribal contractors had somehow manipulated indirect costs into an Aopen-ended uncontrollable entitlement fund" notwithstanding the involvement of a quasi law enforcement agency such as the Office of Inspector General. AILC eventually calculated that the Bureau's own overhead rate was a surprising 15.5%, and that tribal contractors should therefore be paid a flat add-on in that amount for contract support costs.

In response to the cursory AILC report, the Office of Inspector General undertook its own independent review of 81 tribes going back over a five-year period. OIG's analysis flatly impeached the AILC approach and reaffirmed the integrity of the indirect cost negotiation system. It also noted that historic increases in indirect cost needs reflected the fact that (1) salary costs over the five-year period had increased by 81.5% as a result of improving tribal administrative capacities; (2) tribal council costs had increased by 86.2% as a result of a trend toward professionalizing service on tribal councils; (3) audit costs had increased 230.5% (including 102.2% in one year only) as a result of the federal requirement to use certified public accountants for annual auditing purposes; and (4) the movement toward computerization (known then as Aelectronic data processing") had increased overhead costs by 225.7%.

Based largely on the OIG analysis of the A15 percent flat rate" idea, the BIA rejected the proposal, explaining:

To use a single uniform rate for all contracts simply cannot take into a consideration a number of variables such as programmatic differences, large and small tribe factors, geographic locations and a number of distinguishing elements which vary from contract to contract.

In a bizarre twist, however, the Bureau decided to request contract support funds from Congress using the 15.5% calculation, guaranteeing that the funds so received would be insufficient to meet all tribal requirements.

Although the AILC flat rate proposal died, the Agrandfathering" of contract support costs into the direct program base went forward. Nonetheless, the system contained the seeds of its own undoing, since the amount of contract support initially Agrandfathered" was woefully insufficient to meet the requirements of the statute. As a result, as the years went forward tribes became increasingly compelled to subsidize the grandfathered amount with direct program funds. With the grandfathered funds becoming almost impossible to track, and tribes facing uncontrollable increased costs as a result of inflation and new federal compliance requirements, the grandfathering experiment was eventually abandoned. In its FY 1988 budget request, the BIA proposed to Arecapture" the contract support funds previously Agrandfathered" to tribal contractors and proposed using the recaptured funds to implement a new Aadministrative fee" to pay contract support to all tribal contractors. In the face of tribal and congressional opposition, however, the new Aadministrative fee" proposal was abandoned.

Persistence of the Aother federal agencies" problem. Compounding the BIA's and IHS's shortcomings, it bears emphasizing once again that throughout the early 1980s there was a growing awareness that a substantial part of the hardship faced by tribes in the indirect-cost system was also being caused by the failure of agencies other than the BIA and IHS to pay indirect costs according to the government-wide negotiated OIG rate.

By late 1983 the OIG complained vigorously to the Office of Management and Budget that the Aother agency" problem associated with indirect costs could not be resolved by any single department. The letter called upon OMB to exercise its authority by authorizing (and possibly mandating) a lump-sum approach to funding tribal contract support cost needs, by overriding all federal agency limitations on payment of indirect costs that are not based upon statutory limitations, and to propose curative legislation. Despite this plea, and despite the fact that the earlier OIG research (prompted by the AILC study) noted that tribally contracted programs would continue being penalized so long as indirect costs were underpaid, OMB, the agencies and Congress never responded.

Events immediately preceding the 1988 Amendments. By 1986, the indirect cost problem had become sufficiently severe to prompt major legislative proposals to overhaul the Indian Self-Determination Act. In hearings on H.R. 4174, witness after witness testified to the difficulties created by the failure of the IHS and BIA to honor the OIG-negotiated indirect cost rates, and the equally serious failure of other agencies to similarly pay indirect costs at the negotiated rate (again, a problem compounded by OIG's practice of penalizing tribes for failing to collect such sums from the other agencies). Although the House Committee on Interior and Insular Affairs reported a bill that would have mandated that all other agencies respect the OIG-negotiated indirect rates, the bill did not pass. (The same bill would have prohibited the BIA from again imposing a flat rate on all tribes, or once again Agrandfathering" indirect costs into the base.)

With the BIA having abandoned the Aflat rate" and Aadministrative fee" approaches, in mid-1987 the Assistant Secretary for Indian Affairs turned to a new work group to analyze the contract support cost situation. The work group reported that both the BIA and other federal agencies were failing to pay full indirect costs as determined in the OIG negotiations. The report also debunked the myth that tribal indirect cost rates were excessively high, and explained some of the factors that go into the calculation of indirect cost rates. While the work group explored a number of options for overcoming the difficulties associated with the indirect rates, it ultimately recommended that the BIA adhere to the OIG-negotiated indirect cost process. The work group urged that the BIA request from Congress 100% of the need generated by that process, that the Secretary of the Interior seek authorization from OMB to establish the BIA as a lead agency for all federal agencies providing financial support to tribes, and that the Secretary request that OMB take action to eliminate the accounting penalty suffered by tribes when other agencies fail to pay at the full negotiated rate.

During the same period, the President's Council on Integrity and Efficiency (PCIE) directed that a study be undertaken by the Inspectors General of the Department of the Interior, the Department of Health and Human Services and the Department of Education. The PCIE report sampled 38 Indian tribes to assess the nationwide impact of the contract support cost problem. Once again, this study confirmed that tribes had been severely underfunded in their indirect-cost requirements and that the underfunding was caused both by a failure of the BIA to secure sufficient funds to pay tribes, and the failure of other federal agencies to respect government-wide negotiated indirect cost rates. The PCIE study recommended (1) removing all restrictions that prevent any federal agency from fully reimbursing negotiated indirect costs; (2) authorizing the BIA to negotiate lump-sum agreements to fund all indirect costs associated with all federal grants and contracts; and (3) fully funding the BIA to cover the costs of these negotiated lump-sum agreements. Significantly, the PCIE study also expressed concern that Athe budget request submitted by the Bureau of Indian Affairs to Congress did not include sufficient funds to cover the anticipated indirect costs."

Throughout the 1980s, the Indian Health Service likewise recognized the need to pay contract support costs over and above the actual program amounts (although initially IHS did not establish a budget line item for this purpose). Most importantly, both agencies correctly viewed full payment of contract support costs as the necessary corollary to the legal requirement that tribes must have available for actual service delivery the same program amounts as the agencies had, with no service reductions compelled by the need to cover unfunded essential administrative costs. During this period IHS experimented less than did the BIA with alternative approaches to the continuing shortfall in contract support costs. In fact, prior to 1986 the only significant change made by IHS was to begin separately identifying contract support as a sub-subactivity in its budget request (beginning with the FY 1985 budget).

In the 1986 budget request IHS, for the first time, requested a separate fund for the negotiation of contract support costs associated with new self-determination contracts. Since that time, IHS (and later the BIA) has generally identified in its budget request a separate amount to pay contract support costs associated with new contracts.

Congressional actions in 1988 to strengthen the contract support system. In 1988 Congress enacted substantial amendments designed to force the agencies to fully fund contract support costs associated with self-determination contracts, to relieve tribes of the accounting penalty resulting from the failure of other agencies to follow the government-wide negotiated indirect rates, and to grant tribes real remedies in the event such costs were not paid. At the same time, the 1988 amendments stopped short of requiring that other federal agencies fully pay their share of tribal indirect cost pools. (Instead, it required the BIA to pay the full costs associated with ISDA contracts.)

The 1988 amendments mandated that contract support costs, including indirect costs, be Aadded" to the program funding amounts being transferred to tribal operation under the ISDA. The amendments made clear that contract support costs should include funding for those activities which a tribe must perform to assure contract compliance and prudent management, but which for whatever reason are either not normally performed by the agency or are not provided within the program being transferred to tribal operation. The amendments mandated detailed annual reports on contract support shortfalls (and other issues), to be furnished to Congress by April of each year in time for the supplemental appropriation process. The amendments also established new judicial remedies, including remedies available under the Contract Disputes Act, so that tribes would have a viable means of enforcing their contract rights and the ISDA's funding requirements.

IHS responses to the 1988 Amendments. In the wake of the 1988 amendments, the BIA and IHS each moved forward to reform their systems. In 1992 IHS issued Indian Self-Determination Memorandum (ISDM) 92-2. IHS ranked all new tribal contracting requests on a priority list or Aqueue." Tribal contract support cost needs on the queue would then be paid by a special budget line known as the AIndian Self-Determination Fund." For ongoing tribally contracted operations, contract support costs would continue being paid out of the amount budgeted by IHS for this purpose. Although the circular aspired to fully fund all such contract support costs, the circular made no provision for actually assuring that full contract support cost requirements would, in fact, be paid. And, in fact, they never were.

In its contract support policy, IHS departed from the BIA's practice in two respects. First, IHS recognized that some tribal contract support cost requirements might, by their nature, not be appropriate for inclusion in a tribe's indirect cost pool. This might occur if the particular contract support item was not an item of cost that equally benefitted all of a tribe's programs and instead only specifically benefitted the IHS program (such as workers compensation insurance). The IHS circular recognized such costs as Adirect contract support costs" (as distinguished from Aindirect contract support costs"), and it correctly included such costs as part of the tribal contract support entitlement.

Second, the IHS circular adopted a policy of not reducing the contract support amounts being paid to a tribe from one year to the next, unless the amount so paid would exceed 100% of the tribe's need in the new year. The intent (and the effect) of this policy has been to provide a small measure of predictability in the amount a tribe will receive from one year to the next.

Putting aside the severe problems generated by the growing unfunded Aqueue" list, the IHS policies described here were substantial improvements over the BIA's approach to contract support, and more closely met the spirit of the ISDA. The IHS policies set forth in ISDM 92-2 were carried through in IHS Circular 96-04 (informally withdrawn January 1999). Since early 1999, IHS has abandoned the Aqueue" first-come-first-served system for new contracts, and has recently proposed a new circular for implementation in FY 2000. The new proposal seeks to distribute future contract support increases among all unfunded tribes, while still preserving stability in the contract support base from one year to the next. As internal guidelines only, these circulars may guide IHS personnel but they are not binding on tribes.

BIA responses to the 1988 Amendments. For its part, the BIA has not issued a comprehensive contract support cost policy since the 1977 Procedural Guidelines. What the BIA has done, like IHS, is continue to sanction using the indirect-cost system for determining contract support cost needs, and has annually issued one-year policies governing each year's distribution of contract support costs.

Beginning in FY 1994 the BIA began issuing annual notices in the Federal Register that its contract support cost funding would be distributed based upon the indirect-cost rates negotiated with the OIG. Unlike IHS, the BIA announced that to the extent the amounts allocated within its budget for contract support costs were insufficient to meet all tribal indirect-cost needs, tribal contract support payments would be recalculated without regard to the amount paid in the prior year, with each tribe paid on an equal pro rata basis.

This pro rata approach was encouraged by language contained in the House/Senate Conference Report for the FY 1994 appropriation, and has been followed every year since. Although appearing equitable on its face, the result in fact has been substantial instability for tribal governments as they struggle to operate programs never knowing exactly how much they will have in contract support until the fiscal year is almost over.

Also, in 1994 the BIA began ranking new contracting requests on a priority list (much like the IHS A'queue"), and paid such requests out of the BIA's annual ISD Fund on a first come-first served basis. That Fund has generally been funded at $5 million and has been sufficient in all but one year (1997) to fund all contract support needs associated with newly transferred BIA programs. (In comparison, by FY 1999 the IHS queue had unfunded requirements associated with newly transferred programs totaling some $59.9 million.)

In another serious departure from the statute (as well as IHS practice), the BIA has consistently failed and refused to fund Adirect-type" contract support costs that are not accounted for within tribal indirect cost pools, such as workers' compensation insurance that tribes must pay on program salaries. (Such federal costs are not transferred by the BIA or IHS as part of the program amount, but nonetheless must plainly be incurred by tribal contractors for prudent administration.) The BIA's practice is contrary both to the statute and its implementing regulations, and continues to expose the BIA to potential liability.

Finally, neither agency has complied consistently with the ISDA's section 106(c) directive to submit to Congress detailed shortfall reports by May 15 of each year. The reasons have been many: in some years the agencies simply have not done their work, in others the agencies' reports have been blocked at higher levels outside the IHS and BIA, and in the remaining years the agencies reports have generally been too late to fulfill the purpose of giving Congress an opportunity to assess fully the contract support cost funding situation, and to properly address it, as part of the supplemental and ordinary appropriations processes.

Appropriations Committee actions in 1994-1995 directed at the BIA. At the congressional level, in FY 1994 the Appropriations Committees began including a cap in the appropriations statute limiting the amount the BIA could allocate for payment of contract support costs. (A similar cap was not added to the appropriations statute for the IHS until FY 1998.) As discussed further below, subsequent litigation has focused on whether these appropriation limits on how the agencies may spend their funds also block the liability of the United States to pay contract support costs under duly executed ISDA contracts.

Also at the congressional level, in 1995 the appropriations committees instituted a new policy for the BIA that is somewhat surprising, given the historic difficulties confronting tribes as a result of the underfunding of contract support costs. Although study after study had shown (and continue to show) that tribal programs are penalized by the reductions necessary to cover the agencies' contract support cost shortfalls, beginning in FY 1995 the Appropriations Committees gave their blessing to the reallocation of program funds contained within the ATribal Priority Allocation" (TPA) budget line to cover precisely those shortfalls. This approach has represented a major break from the past policy of the appropriations committees, as well as a major break from the ongoing policies of the authorizing committees as reflected in the ISDA.

Along similar lines, the appropriations committees have at least once urged the BIA to move all contract support cost funding into the TPA group of programs, harkening back to the long-rejected Agrandfathering" approach of the 1980s. Fortunately, the BIA's proposal to carry out the appropriations committees' instruction was abandoned in 1996 in the face of overwhelming tribal opposition.

Recent appropriation shortfalls. Over the past five years, the shortfall between contract support cost requirements and contract support cost appropriations has grown. See Part III, below. In most years, the Administration has simply failed to request any substantial increases in contract support funding for either agency, and it has never requested the full amount required by law to be paid. In some years, large agency requests have been rejected by OMB (as occurred for the IHS in FY 2000 budget request). In one or two years, significant Administration requests have been flatly rejected by Congress (such as the $40 million contract support funding increase requested in FY 97 for IHS). And in some years, Congress has appropriated substantial increases in the face of no requested Administration increase at all (as occurred in FY 1999 for IHS).

Tribes continue to be caught in the middle, with the perennial Hobson's choice of either reducing program operations to sustain fixed administrative overhead costs, or turning the operation of programs back to the BIA and IHS. With the latter choice unthinkable for most tribes, the ultimate victims of the contract support cost shortfall are the tribal members who depend so vitally upon these programs for their health, education and welfare.

D. Recent Judicial and Administrative Decisions Concerning Contract Support Costs.

Although it is a President who first announced the Indian Self-Determination Policy, and Congress which put it into law, it is the Judiciary that has ultimately been called upon to enforce it. This is particularly so in recent years, as the pressure on the contract support cost system has become palpable and tribes press forward their claims in all available legal forums. The result has been a stunning uniformity in cases upholding the right of tribes to receive full contract support costs associated with the operation of federal Indian programs transferred under the Act. These victories have reflected not only the judicial interpretation of the law, but also the judicial enforcement of the federal government's trust responsibility to Indian tribes.

Ramah Navajo School Bd. v. Babbitt, 87 F.3d 1338 (D.C. Cir. 1996). This first and major court ruling on contract support costs struck down the BIA's assertion of unreviewable discretion to manage contract support cost funds in whatever way the BIA deemed best. At issue was a BIA policy that penalized tribes if they did not submit indirect cost information to the Bureau by a certain date. The court found that the Secretary had no authority to impose such penalties, and that Congress intended in the ISDA to require the Secretary to fully fund contract support costs from all available appropriations. The court indicated that, although a flat pro rata distribution among all tribes would meet the Secretary's obligations under the ISDA (in years when the Secretary's available appropriations are insufficient to pay the government's obligations to all tribes), other methodologies might also comply with the law. The court did not have occasion to consider IHS's variation on the pro rata policy, in which IHS generally commits not to reduce tribal contract support payments from one year to the next.

Ramah Navajo Chapter v. Lujan, 112 F.3d 1455 (10^th Cir. 1997). This case arose out of the persistent failure of most federal agencies other than the IHS and BIA to pay indirect costs at the full negotiated indirect rate determined by the OIG. The tribe argued that when the BIA and OIG assign a theoretical share of the indirect cost pool to some other federal agency which the BIA knows will not pay its share of the pool, the BIA in effect dilutes its own responsibility to pay the full contract support costs associated with carrying out its own programs. This common occurrence is readily apparent and has substantial impact when the administrative burden on a tribe to operate its programs is not materially increased by the administration of a few non-BIA and non-IHS programs.

The Tenth Circuit Court of Appeals ruled that the BIA practice of including in the program base Aother federal agencies" that do not contribute toward the indirect cost pool, diluted the BIA's own actual responsibility to fully fund contract support costs associated with the BIA's own contracts. The portion of the case relating to FYs 1989-1993 has since been settled for approximately $76 million.

Not yet resolved in the case is the equitable relief necessary to change the BIA and OIG's practice regarding the calculation and payment of indirect costs. This issue has received considerable discussion within the NCAI National Policy Work Group on Contract Support Costs, and a proposed recommended solution is contained in Part IV of this report. Based upon those deliberations, however, it now appears that historically the BIA and OIG practice for negotiating indirect cost rates has reduced BIA and IHS calculated contract support entitlements by approximately 15% from the amounts to be paid under the ISDA. Regrettably, to date the DHHS, Division of Cost Allocation (which performs the same function as OIG for several tribal contractors) has consistently refused to participate in any of these NCAI-sponsored discussions.

Shoshone-Bannock Tribes v. Shalala, 988 F. Supp. 1306 (D. Or. 1997) (Shoshone-Bannock I) and Shoshone-Bannock Tribes v. Shalala, 999 F. Supp. 1395 (D. Or. 1998) (on reconsideration) (Shoshone-Bannock II). In the course of two rulings the Federal District Court for the District of Oregon concluded that since IHS's lump sum appropriation was legally available in 1996 to meet the Shoshone-Bannock Tribes' contract support costs requirements, IHS was legally required to pay those requirements. The court rejected the argument that IHS retained discretion over its lump sum appropriation sufficient to avoid the contract support cost funding mandate of the ISDA:

[P]ermitting IHS to first allocate a certain amount of funding from its lump sum appropriation for CSC and then deny CSC funding if the requests exceed the allocation would create an enormous loophole, granting the Secretary nearly unfettered discretion to determine when appropriated funds are available.

The decision effectively nullified IHS's practice of placing tribes on a priority list (or Aqueue") and requiring tribes to wait years and years before receiving any contract support costs at all associated with new programs. Although IHS paid the resulting judgment and reserved its right to appeal, during the pendency of the appeal Congress enacted section 314 as a rider to the FY 1999 Appropriations Act for IHS and BIA. In response, the parties in the case have agreed to a limited remand to the district court for a determination whether section 314 retroactively extinguishes the Shoshone-Bannock Tribes' claims. A decision on that issue is pending.

Appeal of Alamo Navajo School Board, Inc. and Miccosukee Corp., IBCA 3463 (Dec. 4, 1997); Babbitt v. Miccosukee Corp., Federal Circuit No. 98-1457 (appeal pending). In this case, the Interior Board of Contract Appeals ruled that the BIA could not reduce the amount of the administrative funding owed to a tribally operated BIA school below the amount required under the formula provided in the Tribally Controlled Schools Act of 1988 (TCSA), simply to keep the total amount paid to schools within the amount budgeted for that purpose by the Bureau. The IBCA concluded that:

[when] making allocations and disbursements for indirect costs under contracts and grants pursuant to the ISDA and the TCSA, and funded under unrestricted lump sum appropriations . . . the department remains bound by the statutory language of the authorizing legislation, despite shortfalls in the total amounts appropriated, because in providing indirect costs under these Acts the department is performing an essentially ministerial function. It has no authority to modify administratively the clear statutory mandates giving priority to indirect costs.

This aspect of the IBCA ruling is very similar to the ruling issued in the Shoshone-Bannock litigation (insofar as it concerns agency responsibilities in managing a lump sum appropriation), and has not been appealed.

The IBCA also ruled that the Miccosukee's FY 1994 indirect cost entitlement remained a legal obligation that must be paid by the government, notwithstanding an appropriations cap that year on contract support costs limiting the total amount available to the BIA for this purpose. The IBCA noted in a lengthy decision that the Miccosukee had negotiated both its indirect rate and its BIA contract, and had also commenced performing the contract, long before Congress imposed the appropriations cap. The BIA has appealed this aspect of the IBCA ruling to the Federal Circuit.

California Rural Indian Health Board v. Shalala, No. C-96-3526 (N.D. Cal.). In this case, the Federal District Court followed the lead of the Oregon District Court in Shoshone-Bannock and ruled that IHS's Apriority list" (or Aqueue") policy (under which Tribes receive no contract support costs at all for several years in connection with more recently transferred programs) was illegal. Like the Shoshone-Bannock litigation, the case involved years when contract support costs were paid out of the IHS lump sum appropriation, and not out of an appropriations earmark. In May 1999 the court also rejected IHS's argument that section 314 of the FY 1999 Appropriations Act (discussion below) is sufficiently clear to preclude the Tribe's right to continue its litigation against IHS through the discovery process.

Appeal of Cherokee Nation of Oklahoma v. United States Department of Health and Human Services, IBCA No. 3877-98. Appeal of Seldovia Village Tribe, IBCA Nos. 3782-97, 3862-97 and 3863-97. These appeals involve claims against the Indian Health Service for unpaid contract support costs. In both cases the tribes argue that the ISDA and their contracts entitle them to full contract support costs, and in both cases the government has raised as a defense the section 314 rider (among other defenses). The Cherokee Nation case was argued April 15, 1999 and, along with the Seldovia case, is now awaiting decision.

Cherokee Nation and Shoshone-Paiute Indian Tribes v. Shalala, (E.D. Ok. CIV 99-092S). In this recently filed case the Cherokee Nation and Shoshone-Paiute Tribes seek damages for the government's failure to pay contract support costs. In the case of Shoshone-Paiute, for two years the Tribes received no contract support costs at all associated with its operation of a 15-bed hospital in remote Owyhee, Nevada, causing severe curtailments in all hospital and community health programs. The case has been filed as a class action, and on May 10, 1999 the Federal District Court issued a scheduling order to address Phase I liability issues.

E. Congressional Actions in 1998 (FY 1999) Relating to Contract Support Costs

In 1998 the appropriations committees became increasingly concerned with the rising demands associated with contract support cost requirements due under the ISDA.

As this Report documents, over the years the agencies' available appropriations have failed to keep pace with the rising contract support cost requirements associated with the trend among tribes to take over the operation of increasing portions of the BIA and IHS. Although the committees recognized in 1998 that the widening gap between available agency appropriations and contract support cost requirements was not caused by any increase in indirect cost rates, pressure from the contract support system was nonetheless making it increasingly difficult for the appropriations committees (and subcommittees) to manage the IHS and BIA budget among competing demands. As a consequence, the appropriations committees took several actions either in the form of committee instructions or new statutory language.

FY 1999 moratorium. First, Congress imposed a one-year moratorium on any further transfers of IHS and BIA programs to tribal operations. The moratorium, promoted as a temporary measure to take stock of the situation, was nonetheless severely criticized by tribes and strongly opposed by the Administration. The moratorium was adopted without any involvement from the authorizing committees and without any hearings whatsoever.

Although all concerned parties recognize the severe problems caused by the lack of available appropriations to pay the federally negotiated contract support cost requirements, the moratorium is viewed as a dangerous interruption in the Nation's Self-Determination Policy. Moreover, the moratorium as finally enacted appears to have been unnecessary; had Congress continued its practice of appropriating $5 million for the BIA for needs associated with new contracting initiatives, it does not appear the new initiatives would have exceeded these sums. (For IHS, it is less clear whether a $7.5 million ISD Fund would have been sufficient to cover contract support costs associated with new interests signed in FY 1999.) By its own terms, the moratorium only has effect for one year.

The 1999 GAO Study. Second, the Senate Appropriations Committee directed the General Accounting Office Ato conduct a comprehensive examination of existing contracts and compacts for BIA and IHS programs, entered pursuant to the ISDEA, as they may be impacted by the available appropriations for associated contract support and other indirect costs." The primary focus of the GAO report is expected to be the impact of contract support cost shortfalls on the tribal operation of programs transferred under the ISDA. The report is expected to be issued in June 1999.

FY 1999 CSC increase for IHS. Third, in the face of an approximately $90 million shortfall in available IHS appropriations to meet FY 1999 requirements, and also in the face of a failure on of the part the Administration to request any increase at all to meet this shortfall, Congress appropriated an additional $35 million. As indicated elsewhere, the resulting $204 million so earmarked is presently estimated by IHS to still fall approximately $115 million short of the total need for contract support costs for FY 2000. (On a related note, in its FY 2000 budget request, the Administration has asked for an additional $35 million increase.)

FY 1999 CSC increase for the BIA. Fourth, in the face of an understated BIA calculated contract support cost need of $137 million, Congress appropriated $115 million, an amount sufficient to only pay approximately 84% of all BIA-computed tribal requirements for contract support costs in FY 1999. (This amount represents a very modest $4 million increase over the amount appropriated in the prior year.)

FY 1999 response to the ARamah Chapter" litigation. Fifth, and in apparent response to a possible misreading of a recent Tenth Circuit decision in Ramah Navajo Chapter v. Lujan, Congress included identical restrictions in the IHS and BIA portions of the Appropriations Act stating that contract support costs Amay 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 Afor any contract support costs or indirect costs associated with any [contract, compact or funding agreement] entered into between and Indian Tribe or tribal organization and any entity other than [the IHS or the BIA]." Although the BIA commonly refers to the Ramah case as having called upon the BIA to pay all indirect costs that are not paid by other federal agencies, the case appears only to have required the BIA to stop the practice of diluting its own responsibility for the payment of indirect costs. Accordingly, this parallel provision, contained in both the IHS and BIA portions of 1999 Appropriations Act, should not have any impact on ongoing agency or tribal practices.

The FY 1999 Asection 314" rider. Sixth, Congress included a measure (section 314) stating that Aamounts appropriated to or earmarked in committee reports for the Bureau of Indian Affairs and the Indian Health Service" by the Appropriations Act for FYs 1994-1998 for contract support costs Aare the total amounts available" for those years for such purposes. In the Appeal of Cherokee Nation and Appeal of Seldovia cases pending in the Interior Board of Contract Appeals, and in the Shoshone-Bannock litigation pending in the Oregon federal court, IHS has taken the position that this language extinguishes any claims that arose during the last five fiscal years for unpaid contract support costs. IHS also takes the position that section 314 prohibits IHS from using any unexpended balances remaining in IHS's lump sum appropriations from those years to meet its contract support cost obligations, and further prohibits IHS from using the new FY 1999 contract support cost appropriation to pay any portion of any contract support costs incurred in four of the five prior years (such as startup costs).

Although the IBCA and the Federal District Court have not yet ruled on the issue, the District Court for the Northern District of California recently rejected IHS's attempt to cut off any further litigation based upon section 314, finding that section 314 does not Amoot plaintiffs' CSC claim." Affected tribes have been alarmed by IHS's interpretation of section 314, because it would mean that Congress has sought to extinguish claims that had already accrued many years earlier. Among the issues under review by the relevant judicial bodies is whether such action, if it was intended, would be constitutional under the Fifth Amendment.

Also as part of section 314, Congress provided that the new measure does not prohibit tribes from using Atribal priority allocations for unmet indirect costs of ongoing contracts, . . ." This measure, which is similar to comparable measures included by the appropriations committees in very recent years, once again represents a disturbing response to the contract support shortfall issue, for it effectively endorses the very penalty which Tribes have suffered under since the earliest days of self-determination contracting: requiring Tribes to divert desperately needed program resources to make up for the shortfall in contract support costs. This is precisely the practice which in years past the appropriations committees (and the authorizing committees) have sought to avoid by requiring full budgeting and full payment of contract support costs.

Perhaps the most interesting aspect of the debate over contract support cost issues in 1998 is that almost all of the debate occurred within the House and Senate Appropriations Committees. Until the very end of the process (when the leadership of the authorizing committees and the leadership of both chambers became involved), the appropriations committees' attempt to make far reaching changes in the contract support cost part of the Indian Self-Determination Act occurred without any meaningful involvement by, much less deference to, the House Resources Committee and the Senate Indian Affairs Committee. By contrast, in 1999 the House Resources Committee will in July 1999 hold the second of two oversight hearings on the issue, and the Senate Indian Affairs Committee is likewise expected to convene the first of its own oversight hearings in the summer of 1999. The NCAI National Policy Work Group on contract support costs plans to be actively involved in those hearings.

F. Funding contract support cost needs: past, present and future.

As recent litigation reflects, considerable potential liabilities have arisen as a result of past agency failures to comply with the ISDA's contract support funding mandates. For the past, the Work Group has concluded there is little Congress can or ought to do to address the government's liability. 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 against the grave contractual and constitutional problems posed by Congressional efforts to repudiate past government contract obligations.

As for the present, the Work Group 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 Adirect service" Tribes by being compelled to Arob 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, the chapter which follows shows that Congress is already witnessing a significant slowing down in the rate at which IHS and BIA programs are being transferred to tribal 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 local IHS and BIA agency operations as woefully 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. For one thing, Congress's FY 1999 moratorium is no doubt producing somewhat of an artificial backlog that will now have to be addressed, with two years' growth being compressed into FY 2000. 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 continue to fold those programs into their existing operations. Finally, from time to time there are likely to be contract support Aspikes" that occur when Tribes such as the Navajo Nation or the Cherokee Nation move forward to take over the operation of unusually large agency programs not presently under tribal operation.

III. Understanding Contract Support Costs: The Myths and the Realities

In this chapter, the NCAI Contract Support Cost Policy Workgroup summarizes the available information on the determination of need for contract support costs. In presenting this data, two caveats are in order. First, most of the data presented is through the Indian Health Service and Bureau of Indian Affairs. These two agencies furnished the contract support data. The Department of the Interior’s Office of the Inspector General provided the indirect cost data. As noted earlier, the Department of Health and Human Service’s Office of Cost Allocation did not share its indirect cost data on tribal organizations, and the Department of Labor’s limited information on a small number of tribal organizations was not requested. The second caveat is that given the limited resources available to NCAI, the Workgroup did not independently collect data, nor did it independently review the analysis performed by the agencies.

Overview Contract support costs eligible to be paid under the ISDA are comprised of three distinct categories: (1) start-up and pre-award costs, (2) annually recurring direct contract support costs, and (3) annually recalculated indirect costs.

To determine the requirement for the first two components of contract support costs, a tribe must reach an agreement each year directly with the funding agency on a sum certain for direct contract support costs and, for the first year of a program’s operation, non-recurring start-up costs. For the third component, each year a tribe must also either negotiate an indirect cost rate with the accounting or audit arm of its "cognizant" federal or lead funding agency, or negotiate a lump sum amount for "indirect-type" costs with the BIA or IHS. If (as is generally the case) the tribe negotiates an indirect rate, the BIA and IHS apply this rate to the appropriate direct cost base of funds paid by the agency, to arrive at the appropriate indirect contract support amount. By law, no amount paid as contract support cost can be duplicate of the amounts already included in the program funding transferred to the tribe under the ISDA. If duplicated costs are identified, the IHS or BIA will negotiate with the tribe to remove such amounts from the tribe’s total contract support requirement.

Once a tribe’s total contract support requirement has been determined, the agencies will pay the contract support amount from funds appropriated to the agency for that purpose. If the agencies determine that appropriated funds are not adequate to fully fund all tribes contract support requirements, a partial payment is made across all tribal contractors based on agency policies. The remaining unfunded amount must be reported to Congress by May 1^st of each year (although in many years, the IHS and BIA have either failed to provide timely reports, or to provide any reports at all). As indicated in the previous chapter, since at least FY 1994, BIA has allocated contract support cost on a straight pro-rata allocation of total funding against the total recurring need. Tribal amounts thus vary from year to year, and cannot be finally determined and paid until close to the end of the fiscal year. By contrast, the IHS policy (currently under review) does not reduce the amount paid to a tribe unless the amount exceeds 100% of the tribe’s computed need.

Start-Up and Pre-Award Costs are provided for under 25 U.S.C. § 450j-1(a)(5) and represent the one-time costs required to support a tribe when it initially takes over the operation of a BIA or IHS program. These costs are negotiated directly with the agency, normally in conjunction with a proposal for a new or expanded IHS or BIA program.

Start-up costs include reasonable costs necessary to plan and prepare for the operation of a new or expanded program. Tribes typically provide the agency with a detailed start-up proposal for these costs. Start-up costs can include pre-award costs to the extent the tribe has notified the Secretary in advance that these costs are going to be incurred, and typically include the costs of negotiating a contract, or securing space to operate the program or software. Typical costs are computer hardware and software needed to integrate the federal program into the overall tribal operation, and consulting and legal services necessary to prepare for and negotiate a new or expanded program.

In general, start-up costs only represent between 2% and 3% of all contract support costs awarded by the agencies. Because these costs only occur once in the initial year of the award of a new or expanded program, they do not have a major impact on the overall need for contract support. In addition, the data indicates that over time, the proportion of start-up costs has trended downward as the proportion of new and expanded programs in any given year has decreased as a percentage of all programs under contract.

Both agencies report that they have been able to fund the entire need for start-up costs in the year in which the remaining portion of the contract support cost proposal has been funded. For the BIA, this has normally meant that start-up costs were fully paid in the year the contract support proposal was submitted. However, it became apparent in the course of NCAI’s work that many tribes were unaware that the BIA recognized such costs, possibly because the only clear statement to this effect is the BIA’s annual Federal Register notice.

Although IHS indeed pays all start-up costs, IHS has historically paid such amounts, not in the first year of the contract, but much later when a tribe’s remaining contract support cost requirement is funded from the ISD "queue." (This policy was abandoned in FY 1999.) For both agencies, it appears that in years where all start-up costs cannot be funded, unfunded amounts are carried over into the subsequent years. As noted in the previous chapter, however, in FY 1999 the IHS has interpreted the provisions of Section 314 of the Appropriation Act to prohibit the agency from paying start-up costs incurred in a prior year, effectively extinguishing IHS’s liability for these costs. Since these costs are one time in nature, under the IHS’ interpretation, the result has been that in FY 1999 a significant amount of prior year start-up costs which were negotiated as reasonable and necessary will apparently, never be paid regardless of future appropriation levels.

Direct Contract Support Costs Any contract support costs eligible for payment under the provisions of the ISDA may be paid as a direct cost or as an indirect cost, depending on the structure of each tribe’s accounting system and cost allocation plan. The IHS recognizes the tribal entitlement to all three forms of contract support costs (start-up costs, recurring direct contract support costs, and indirect costs). In contrast, the current BIA system has only paid start-up costs and indirect costs. The BIA's failure to recognize recurring direct contract support costs is presently under active review and to be changed, according to the testimony of the Assistant Secretary for Indian Affairs before the House Resources committee in April 1999.

Direct contract support costs are determined through direct negotiation between the IHS and the tribe. Costs frequently paid by IHS as "direct" contract support include; workers compensation costs, unemployment insurance, certain retirement costs (especially Commissioned Corps retirement costs), and insurance. IHS will also recognize, as a direct contract support costs, certain facilities costs, to the extent they are not included in either the program funding (the "106(a)(1)" amount) or in the indirect cost pool together with, any other un-duplicated costs that meet the criteria of Section 106(a)(2) and that are not included in the tribe’s indirect cost pool.

Direct contract support costs are paid by IHS on a "recurring" basis, meaning that tribes are not required to re-justify these costs each year. However, to the extent necessary, a tribe has the option to renegotiate its direct contract support in future years. According to IHS data, direct contract support costs make up approximately 21% of the total negotiated contract support cost need in the IHS. Direct contract support cost need has generally been computed by the IHS to be about 15% of the direct personnel costs transferred in the new or expanded program. IHS data shows that the proportion of direct contract support costs to indirect costs generally does not vary significantly with the size of the tribal operation, although, however it may well vary significantly according to the type of program to be supported under the contract.

Indirect (or "Indirect Type") Costs. The most important element of contract support costs is indirect (or "indirect type") costs. These costs now represent over 98% of contract support costs paid be the BIA, and about 75% of the total contract support costs paid by IHS. These costs typically support commonly used facilities or functions of an administrative nature. They include funding for financial management and audit systems, personnel management systems, payroll systems, procurement systems, facility leases, interest and depreciation on facilities and facility support activities, and other administrative activities that must be carried out by a tribal contractor to ensure compliance with applicable federal laws and prudent management of all programs.

For the most part, these functions are carried out by the federal government, either from portions of the agencies not transferred to tribal operation, from portions of the Departments outside IHS and BIA that are not transferred to tribal operation, or from other departments altogether. These include functions as those performed by the General Services Administration, the Merit Systems Protection Board, the Office of Personnel Management, and Treasury of the Department. To a lesser extent, indirect costs also cover the organization-wide requirements imposed upon tribes by such federal laws as the Single Agency Audit Act.

Indirect costs may be determined in two ways. In most cases the tribe has a negotiated federal indirect cost rate and that rate is applied to the IHS or BIA direct cost lease. In cases where the tribe does not have a federally negotiated rate, the tribe negotiates a lump sum amount directly with the BIA or IHS. Usually tribes without rates are either very small tribes or are new tribal organizations entering into ISDA agreements for the first time. Both the BIA and IHS rely on negotiated indirect cost rates to determine the vast majority of contract support provided to tribes.

Tribes Without Indirect Cost Rates. Tribes that do not have indirect cost rates may negotiate a "lump sum agreement" with the IHS or BIA for "indirect type costs." This lump sum agreement requires the tribe to propose a budget for its reasonable and necessary costs for the same types of costs that would generally be approved under an indirect cost agreement. Thus, the categories often considered are overall governance program, financial management, personnel management, data processing, planning, facilities costs, legal costs, insurance, depreciation, and so forth.

Tribes with Indirect Cost Rates For tribes with negotiated federal indirect cost rates, the IHS and BIA compute tribe’s indirect contract support requirement by applying the most current federally negotiated rate to the appropriate direct cost base being funded by the agency, subject to any special provisions in the rate. The amount determined to be the tribes indirect contract support requirement must be consistent with the individual tribe's rate agreement, and will therefore reflect any exclusions required by the indirect rate agreement. It will also reflect reductions negotiated by the agency to offset any duplication of costs between the tribe’s indirect cost pool and its program funding.

Determining Indirect Cost Rates The most confusing and controversial element in the process for determining of contract support costs is the method which tribes (and other federal contractors) use to determine and negotiate an indirect cost rate (IDC).

Cost principles for tribes establishing indirect rates are published in OMB Circular A-87 Cost Principles for State, Local and Indian Tribal Governments. According to this Circular, indirect costs are those costs that are:

"incurred for a common or joint purpose benefiting more than one cost objective, and

not readily assignable to the cost objectives specifically benefited without effort disproportionate to the results achieved."

OMB Circular A-87 calls for each tribe and tribal organization to establish a cost allocation plan that allocates all indirect costs on a fair and uniform basis. In negotiating indirect cost rates, tribes are bound to the same set of rules that control as state and local governments. Each tribe must negotiate with the cognizant federal agency to determine which costs are "direct" and which costs are indirect. Costs must be treated consistently by the tribe and are subject to the Circular’s allowability rules. The Department of Interior, Office of Inspector General (OIG) has been assigned responsibility to negotiate indirect cost rates with tribes.

As noted earlier, tribes generally include various administrative and overhead costs in their indirect cost pools, rather than directly attribute pieces of such costs to specific programs. After calculating the indirect cost pool, the tribe will categorize the direct costs received from all funding agencies as either a part of the program base or excluded cost. The net direct cost base is divided into the indirect pool yield an indirect cost rate.

Once a tribe has submitted an indirect cost proposal, it is reviewed, and negotiated by the OIG to verify that all the costs are reasonable and necessary, and that costs have been treated consistently under the proposal. Annually thereafter the tribe will submit a new indirect cost proposal together with an annual financial audit for the last completed year prepared in conformiity with the Single Agency Audit Act of 1984. The OIG will reconcile the budgeted IDC pool with actual costs incurred, as shown in the tribes’ audited financial statements, to insure all costs were appropriately considered. Any necessary adjustments will then be made based on the reconcilation from the audited statements, and a final negotiated rate will be issued.

Variation in Indirect Cost Rates Among Tribes Determining contract support cost needs through the negotiation of indirect cost rates permits administrative overhead costs to be determined in the manner that is most appropriate to each tribe's unique situation, much in the same way that states and local governments negotiate their indirect rates independent of one another. Factors influencing indirect rates can include variations in the manner that tribes treat certain costs, the availability of federal facilities to house tribal administrative functions and programs, the economies of scale for certain administrative functions, and a variety of other factors, including the cost allocation plan and type of financial management system in use by the particular tribe.

Moreover, there are a multiple of methods for computing indirect cost rates. Among other variations, there are several different types of indirect cost agreements; several different types of direct cost bases; and two different methods that can be used to negotiate indirect cost agreements with DOI-OIG or with DHHS-DCA. As a result, two apparently identical rates for two tribes may in fact represent substantially different contract support amounts for each tribe. Because of these factors, it is very difficult and, indeed, misleading to compare tribal indirect cost rates from tribe to tribe.

When viewed in the aggregate, however, some rough comparisons can be made. Indirect or indirect like costs do generally vary with the total size of the tribe’s operating budget. For example, in general, smaller tribes tend to have higher indirect cost rates. In general, this is caused by the lack of economies of scale in small administrative units, and the difficulty of allocating very small portions of administrative time to small program functions. This causes small tribes to allocate more administrative functions to the indirect cost pool and to have relatively higher costs of carrying out the administrative responsibilities of the contract. In his analysis of indirect cost rates of Northwest Indian tribes, Jim Sizemore has reported this fact, noting that in general, indirect rates tend to be higher in smaller tribes (Determining the True Cost Of Contracting Federal Programs for Indian Tribes, Second Edition – 1997).

The OIG also has provided figures consistent with the Sizemore Report indicating that for tribes negotiating with the OIG and whose direct cost base is under $500,000, the average indirect rate is 49.5%, whereas tribes whose direct cost base exceeds $20 million have an average indirect rate of 22.7%. The single largest category of tribes, those with a direct cost base of between $1 million and $5 million for all programs included in the direct cost base, have an average indirect rate of 31%.

Several alternatives to the use of indirect rates have been offered over the past two decades. The complexities inherent in the indirect cost rate settling process, the variations in that system, and a desire to lower the amount required to be paid as contract support costs have all led to alternate approaches being suggested to compute tribal indirect contract support cost need. As described in the previous chapters, these approaches have included flat rates, grandfathering, and other formula approaches. While many of these approaches have attractive elements, none have been adopted after numerous reviews. Primarily this is because, as shown in numerous reviews, none of these approaches provides for a more fair and equitable method of calculating indirect types of contract support costs that the current method of using negotiated indirect cost rates.

The NCAI Contract Support Workgroup explored at length the use of alternative approaches for determining indirect types of contract support costs. In general, the Workgroup concluded that no alternative method could work and be acceptable to tribes, no matter how carefully designed and implemented, if the methodology is not fully funded by Congress. Given the history of agency attempts to impose such systems in an environment of insufficient funding, the Workgroup concluded that the use of fixed formulas or predetermined rates would simply tend to lock in tribes at insufficient levels of contract support funding as required by law.

Because of this history, and the proven advantages of the indirect rate system, the Workgroup was extremely reluctant to move away from that system for determining indirect contract support requirements. Even still, however, the Workgroup acknowledged that the indirect cost rate negotiation process could possibly be improved. To explore such improvements, the workgroup envisioned the development and field testing of a "benchmarking" process which could improve training and encourage greater consistency in the negotiation and application of indirect cost rates. Since such an approach could unnecessarily complicate an already complicated process, its development requires care and intense study to determine fair and equitable benchmarks for all tribes.

Trends in Indirect Rates Congress has repeatedly expressed concern regarding the increase in the contract support shortfall for ISDA contracts and compacts. There has been a perception in some quarters that this increase is attributable in a large part to tribal indirect cost rates that are rising uncontrollably due to widespread abuse of the system. In responding to such concerns over the years, the agencies, in conjunction with the OIG, the DHHS-Divisions of Cost Allocations, and the General Accounting Office (GAO) have again and again undertaken analyses of the tribal indirect cost rate trends that dispel such misconceptions.

All of these analyses are consistent in their findings that the primary cause of the increases in contract support cost requirements is simply the increase in levels of tribal contracting and compacting of BIA and IHS programs. The cause is not an escalation in tribal indirect cost rates.

In 1997, IHS collected data that indicating that between 1993 and 1996 for every dollar in IHS programs transferred to tribal operation between 1993 and 1996, on average, an additional 22 cents to 23 cents has been required to support indirect costs. This ratio remained steady over the period, suggesting a stabilization in the aggregate total requirement for contract support cost needs.

Source: TPA Workgroup "A Study of Contract Support Costs and Recommendations for Reform."

Data provided from the OIG confirms this stable trend in tribal indirect cost rates over the past ten years. During this period there has been surprisingly little overall variation in the average indirect cost rate negotiated for all tribes by the OIG. From 1988 to present, the average indirect rate negotiated by OIG collectively for all tribes was approximately 25%.

This stabilization in rates over a period of many, many years, conclusively answers the concern that indirect rates are an open-ended entitlement not subject to any meaningful control. Indeed, tribal indirect rates compare favorably to the indirect cost rates negotiated by the federal government with many other public governmental and private non-profit institutions. According to the BIA, in 1995 the GAO reported that indirect cost rates for 118 universities averaged about 50% for the 10 year period from 1986 to 1995.

Weighted Average Indirect Cost Rates for 118 Major Research Universities for

Fiscal Years 1986 to 1995

Contract Support Shortfalls Contract support shortfalls are created when the agencies fail to pay the full computed contract support requirement for each tribe. Although shortfalls have been endemic in the ISDA process, the shortfalls have worsened in recent years, due to increases in tribal contracting of federal programs (and not increases in tribal indirect cost recoveries). This contracting increase was stimulated by the 1988 and 1994 ISDA amendments, and is consistent with the intent of Congress in these amendments to foster greater self-determination activities. Despite this Congressional policy, both the IHS and the BIA have been unable for a variety of reasons to achieve the level of appropriations necessary to support the contract support costs associated with increased self-determination contracting.

Tribes have repeatedly emphasized to Congress the need to provide adequate contract support funding to support the essential and prudent administrative functions of the tribes. They have testified that insufficient contract support appropriations threaten the full implementation of the Nation’s federal Indian Self-Determination Policy, and the devolution of federal control to local units of government.

The Bureau of Indian Affairs and Indian Health Service have incurred contract support shortfalls for many years. The figure below shows that over the past ten years BIA shortfalls averaged about 15% of the total requirement for contract support costs. History confirms that both Congress and the agencies share responsibility for these shortfalls. Not only has the BIA not requested funds in the annual agency budget request sufficient to fully fund known contract support cost needs, but Congress has often refused to fund agency requests, even in the face of substantial known shortfalls.

(in thousands)

Source: TPA Workgroup "A Study of Contract Support Costs and Recommendations for Reform."
Note: * Estimated for FYs 1999 and 2000

The Indian Health Service has only recently begun to experience significant contract support shortfalls. The figure below shows that prior to FY1995 the agency had very limited shortfalls in its contract support requirements. Beginning in FY 1996, however, rapid growth in self-determination contracting activities, coupled with static appropriations for the IHS’s Indian Self-Determination Fund and no increases for inflation, led immediately to substantial contract support shortfalls. These shortfalls caused long waits on the agency’s "queue" often resulting in tribes going several years with no contract support at all on programs they continued to operate on behalf of IHS.

Trends in Contract Support Need. The future need for contract support shortfall is dynamic. It will continue to vary as current programs under contract experience inflationary increases, as new administrative requirements are placed on tribal programs by state and federal laws and regulations, and as tribes continue to exercise their rights under the ISDA by contracting for additional federal programs in the agencies. The tribal contract support requirement is growing at the same rate as the contracting of federal programs by tribes with the appropriations for contract support relative flat for the period from FY1994 through FY97. This growth in contracting which has accounted for the vast majority of increases is the most difficult factor to estimate as it is controlled by the decisions of the tribes. Both agencies predict that the demand for contract support costs will level off in the future. In FY 1999, however, the "Section 328" moratorium on contracting has prohibited either agency from awarding any new ISDA contracts making it difficult to predict what impact the lifting of the moratorium will have on future tribal plans.

Although the agencies have had a mixed record of estimating the need for contract support costs on a year to year basis, agencies’ estimates have over the long-term been reasonably accurate. Agency projections for growth in contract support costs are based on the continued steady growth in the assumptions of programs by tribes in future years.

The Bureau of Indian Affairs In FY 1999, the BIA had a projected $24 million dollar shortfall on existing ISDA contracts, excluding direct contract support costs. In addition to funding this shortfall and normal inflationary increases, the Bureau has initiated several expansions of existing programs and some new programs which will be available for ISDA contracting. While tribes steadily continued to contract for existing BIA programs until the FY 1999 moratorium, the trend had not increased significantly in recent years. In FY 1996 through FY 1998, the Bureau received $5,000,000 in appropriations to the ISD fund to fund new and expanded contracts. This increase has been sufficient to fully fund new tribal contacting in these years, and with adjustments for inflationary increases is anticipated to be adequate in the future for such purposes.

The BIA contract support projections will necessarily be impacted by the Ramah decision, and by the agency’s agreement to finally recognize direct contract support costs as a fundable category of contract support costs. The total impact of these decisions is difficult to estimate. The projected contract support costs for the BIA are provided below for the next five years. The amounts estimated for the costs of the Ramah settlement are taken from estimates provided by the OIG. Direct contract support cost estimates for the BIA are much more difficult as some direct contract support amounts paid in the BIA may be offset by reduction in the indirect contract support amounts (i.e. facility costs

(in thousands)

The Indian Health Service The Indian Health Service has experienced the fastest growth in contract support shortfalls in recent years. In FY 1999 the IHS experienced the largest ISDA compact in the history of the agency with the transfer of the Alaska Native Medical Center and the non-residual functions of the Alaska Area Office.

With this milestone now passed, the rate of growth in the transfer of IHS programs to tribal operation has begun to slow markedly. IHS estimates that future contract support costs associated with tribes initiating new or expanded contracts will, on average, increase less than $7.5 million per year. This represents a stunning change from recent years, when annual increased contract support cost demands ranged between $20 million to $30 million.

Ongoing contract support cost requirements in the agency will continue to require inflationary and programmatic increases, consistent with the increases in direct program funding. An estimate of the total contract support cost increases for the next five years is provided in Figure 4.7.

(in thousands)

Note: The above estimates are based on IHS estimates of the level of new contractng and inflation of 3.5% per year. New programs which may be enacted within the agency are not included in the above estimate nor are adjustments required for population growth.

 

Although the amount of contract support shortfall required to support continued P.L. 93-638 contracting appears to increase substantially over the next five years this increase is consistent generally with the continued steady growth of self determination contracting in both agencies. This growth is now trending downward and expected to continue to grow at a declining rate for the forseeable future

Summary Contract support costs are paid by both the Bureau of Indian Affairs and the IHS in support of ISDA contracts and compacts. These costs include one time start up and pre-award costs necessary to develop and initiate new ISDA contracts and compacts, as well as certain recurring amounts that are defined by ISDA as necessary to ensure compliance with the terms of the contract and prudent management.

The Indian Health Service pays recurring contract support costs as both direct and indirect costs. The Bureau of Indians Affairs which is the past has not paid any direct contract support costs has determined that this may be required by the law and in developing revised policy guidance on this issue. Both agencies rely on a negotiated indirect cost rate to define the indirect portion of the Contract Support cost requirement. In some few cases where tribes do not have a negotiated indirect rate the tribe negotiated the indirect like requirement with the agency.

Over the past twenty years many studies have been done to determine if the use of federally negotiated indirect cost rates is a fair and equitable method of determining the requirement for indirect contract support costs. Most studies have concluded that although imperfect the indirect rate negotiation process is the fairest method to determine these costs.

Congress has expressed concern with the growing demand for Contract Support Costs and has suggested that increasing indirect cost rates might cause this. The data clearly shows that increasing contracting support cost need is a direct result of increasing tribal contracting for federal programs under the ISDA. Data also show that the tribal indirect cost rates have been stable over the past decade. Tribal indirect cost rates are also low compared to university rates, hospital rates or other government contractor rates.

Serious shortfalls remain in contract support at both the IHS and at the BIA. Once these shortfalls are funded contract support needs will continue to grow as continued tribal contracting and inflation increases the amount under tribal Self-Determination contracts and compacts. This continued growth in contracting appears to have stabilized and can be expected to slow somewhat in the future.

Full funding for contract support cost encourages tribes to carry out the federal policy of Self-Determination. Congress acknowledged the need for these funds in the statutory provisions of the Act. Congress should continue to acknowledge this need and support the federal policy of Self-Determination by fully funding the requirement for contract in both agency appropriations.

IV. FINDINGS AND RECOMMENDATIONS

The NCAI National Policy Work Group on Contract Support Costs has devoted one year to the study of contract support cost issues. It has taken into consideration all of the prior governmental and nongovernmental studies of the issue, the various approaches taken by the agencies over the years, and the various approaches explored by the authorizing and appropriations committees. The Work Group has also drawn upon the expertise of tribal leaders, tribal administrators and financial consultants, accountants and tribal attorneys with specialized expertise in matters pertaining to contract support costs.

Throughout its deliberations the Work Group has worked closely with representatives of the Bureau of Indian Affairs, the Indian Health Service and the Office of Inspector General. In some instances, the Work Group has also been joined by representatives from the Office of Management and Budget (OMB), the General Accounting Office and various congressional offices. Finally, the Work Group has explored at length the difficulties faced by tribal providers of federal ISDA programs as they struggle to deal with contract support shortfalls caused both by the consistent failure of the BIA and IHS to pay the full amounts required by law, and by the persistent failure of other federal agencies to pay the full amounts required by the government-wide indirect rate established by each tribe's cognizant federal agency.

Based upon its work, most of which is summarized in the earlier chapters of this Report, the NCAI National Policy Work Group on Contract Support Costs believes that much needed reform can be brought to the contract support cost system to alleviate the problems faced by tribal communities as they struggle to administer federal programs with insufficient administrative support.

The recommendations that follow in Part C of this Chapter have been developed against the backdrop of certain conclusions drawn from the past year's work. They include the following:

• The payment of full contract support costs is essential to the success of the Self-Determination Policy and to avoid a contracting penalty associated with the transfer of federal programs to tribal operation;

• The policy of paying contract support costs began with the BIA's and IHS's recognition that such costs were necessary to preserve the resources of the programs being transferred to tribal operation. Without full funding of contract support costs, program resources will necessarily be diverted to sustain necessary administrative functions;
• The determination of contract support costs has historically occurred in arms-length government-to-government transactions, primarily with the United States represented by the Department of the Interior Office of the Inspector General in the context of indirect cost rate negotiations. These negotiations have been free of collusion, undue influence, or conflicts of interest;
• To date the indirect cost system has proven to be the most flexible system available for fairly determining each tribe's prudent requirements for contract support costs;
• Past efforts to replace the indirect cost system with various flat rates or administrative fees have failed because they have not taken into account programmatic differences, large and small tribe factors, geographical locations and a number of other distinguishing elements that vary from tribe to tribe, and from contract to contract;
• No study of contract support issues has ever developed a more reliable system for better determining a tribe's necessary and reasonable requirements for prudent management of a contract than the IDC rate system;
• The BIA and IHS have consistently failed to meet their responsibilities to timely report to Congress on the full nature of contract support costs and contract support cost shortfalls, denying Congress vitally needed information in the budget and appropriations process;
• Going back as far as the 1970s, the agencies have consistently failed to meet their obligations to fully fund contract support costs. In most years the failure can be attributed to the refusal to request sufficient funds as part of the budget and appropriations process, while in a few years Congress has simply ignored requests for substantial contract support increases;
• Agencies continue to withhold programs and resources at the area and central office levels, leaving tribes with fewer resources to operate their programs and administer their overhead;

• The underpayment of contract support costs in support of programs transferred from the BIA and IHS accounts for only a portion of the severe hardships faced by tribal contractors in administering federal programs. The remainder is caused by the failure of other federal agencies to abide by the government-wide OMB-controlled process for establishing indirect cost rates;
• Indirect cost rates and contract support cost ratios have, in the aggregate, remained constant over the past decade, refuting allegations that either rates are on the rise or that the indirect cost system represents an open-ended or uncontrollable liability;
• Tribal contracting and compacting activities accelerated to their peak in the mid-1990s in response to the 1994 ISDA Amendments and extension of the self-governance initiative to IHS. The trend in the transfer of federal Indian programs to tribal operation under the ISDA has leveled off from the peak experienced in the mid-1990s, and with a few notable exceptions should remain constant in the years ahead;
• The stability in aggregate information, combined with the leveling off in new contracting activities, will yield improved long-term predictability over the next decade in contract support cost demands;
• With respect to the Indian Health Service, IHS estimates that going in to FY 2000 there will be a total annual contract support cost requirement of approximately $310 million (including a 5% inflation factor for FY 1999 and FY 2000 ($26,120,842); and a $15,000,000 ISD Fund for new and expanded ISDA operations);
• The contract support cost Ashortfall" experienced by IHS in recent years is a combination of (1) shortfalls in contract support cost funding for programs long ago transferred to tribal operation, and (2) shortfalls in contract support funding for more recently transferred programs that did not receive any contract support at all until FY 1999;

• The IHS and the BIA have for many years used an identical system for funding the contract support costs associated with newly transferred programs: newly transferred programs have received funding on a first-come/first-served basis out of 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 (but for FY 1997), avoiding a large accumulated backlog. The IHS Indian Self-Determination Fund has not been similarly sufficient to keep pace with new ISDA activities;

• Of the total contract support funding required by tribes in connection with IHS programs transferred to tribal operation, on average 79% of the contract support reflects indirect costs, and 21% 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;
• Over one-half of the 330 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 of the IHS programs under tribal operation are in excess of $5 million (of which only seven are in excess of $20 million);
• 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 beginning with FY 2001;
• The only Aspikes" 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;
• Approximately 40% of the IHS and BIA budgets are currently being administered by tribes;

• The Work Group estimates that the total annual Adirect" contract support cost burden not recognized or paid by the BIA is approximately $25 million to $30 million. 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 presently under tribal operation ($115 million in funding distributed across $139 million in need). When the excluded direct contract support costs are factored in, the total BIA FY 1999 funding for contract support drops to approximately 69% of need, with a $52 million shortfall. If one factors in the law enforcement programs added by Congress in FY 1999, the shortfall increases substantially;
• CSC funding covers a variety of fixed costs related to the administration of programs and facilities, and certain personnel and program expenses not otherwise funded under the ISDA. To the extent CSC is insufficiently funded, a contracting or self-governance tribe is generally 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);
• In FY 1997 the average indirect rate for tribes that negotiated indirect costs based on a Adirect cost" base (the method used by most, but not all, tribes) declined as the total size of the program increased. For example, tribes whose direct-cost base is under $500,000 had an average indirect rate of 49.5%, whereas tribes with a direct-cost base in excess of $20 million had an average indirect cost rate of 22.7%. The single largest category of tribes, those with a direct-cost base of between $1 million and $5 million, had an average rate of 31%. In each instance, however, the average represents an average among 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 for each tribe was between 32.1% and 35.6%;
• The Office of Inspector General reports that the aggregate indirect cost rate for the period from 1987 through 1997 is approximately 25%. The OIG computed the overall aggregate rate by dividing the total indirect cost pools by the total direct cost bases;

• According to AA Guide for Nonprofit Organizations," the following agencies have indirect cost rates in excess of 50%: 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;
• During the period 1991 through 1995, 105 universities examined had an average indirect rate of between 52% and 53.1%;
• Excluding the recently concluded phased transfer of IHS Alaska Area programs to tribal operation, contracting activities for both agencies have begun to level off from their peak in the mid-1990s. There are many reasons for this new development. 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 IHS and BIA agency operations as terribly underfunded and have chosen not 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 yet to operate certain programs on their own;
• 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.

With these conclusions in mind, the NCAI Work Group has embraced the following guiding principles for the development of the recommendations which follow.

First, improvements in the contract support cost system must preserve and promote the intent of the Indian Self-Determination Act to reduce federal paternalism, foster tribal operation of federal Indian programs, promote the devolution of federal authorities to local tribal governments, and avoid erecting barriers to the full exercise of tribal self-determination rights.

Second, full funding of contract support costs is essential to the success of the Self-Determination Policy.

Third, improvements in the contract support cost system should promote tribal financial stability and predictability, tribal choice, and tribal flexibility.

Fourth, improvements in the contract support system should be coordinated with continual downsizing of the BIA and IHS, and the transfer of operational savings to Indian tribes.

Fifth, new approaches in the contract support cost system must not include reallocations that attempt to shift to tribes the federal government's own responsibility for meeting the requirements of the Indian Self- Determination Act.

Sixth, improvements in the contract support cost system should continue to encourage tribes to adopt management practices that maximize efficiencies in the local delivery of health and social service programs, while remaining sensitive to real-world limitations confronting rural tribal communities.

Seventh, improvements in the contract support cost system should foster simplification wherever possible, without compromising the other principles.

Eighth, the continued stability of the self-determination contracting and compacting initiatives, and the Self-Determination Policy of which they form a critical part, depends upon the federal government's proper respect for the legal obligations it enters into with tribal governments, as a matter of statutory, contractual, fiduciary and constitutional law.

Within these broad parameters, the National Policy Work Group on Contract Support Cost recommends the following reforms.

Recommendations pertaining to the determination of contract support cost needs.

1. The Office of Management and Budget should issue new circulars, in close consultation with an active participation by tribes and tribal organizations, concerning the negotiation of indirect cost rates and auditing issues unique to tribes and tribal organizations.

The NCAI Work Group recommends that the Office of Management and Budget undertake an initiative (and that it be directed by Congress) to develop new OMB circulars that are uniquely suited to tribes and tribal organizations carrying out federal agency programs under the Indian Self-Determination Act and other federal laws.

Such circulars should reflect issues unique to Indian tribes, including the provisions set forth in section 106(k) of the ISDA, 25 U.S.C. ' 450j-1(k), and the rebudgeting and redesign provisions set forth in Titles I, III and IV of the ISDA. They should include provisions intended to determine the necessary and reasonable needs of tribes for administrative overhead costs consistent with sound and prudent management practices.

The circular can also be used as an opportunity to coordinate the activities of all federal agencies that provide funding to Indian tribes, as a further means of eliminating the problem created by the failure of agencies other than the BIA and IHS to recognize their financial responsibility to pay their appropriate share of each tribe's negotiated in direct cost rate.

This recommendation reflects an interest within NCAI to explore a possible refinement of the current processes for determining contract support cost needs. The development of nonbinding benchmarks for the different elements of contract support costs, and for certain components within each element, might serve to encourage a greater standardization among tribes in similar situations, without mandating identical calculations that could overpay or underpay particular tribes given their local circumstances.

The development of Abenchmarking" percentages, as rebuttable guidelines in contract support negotiations, would also provide some means of standardizing the diverse approaches to the law currently being taken by different agencies (and by

different negotiators within each agency), as well as by different tribes and tribal organizations.

With respect to each of the various categories of contract support costs, the development of a Abenchmarking" approach could potentially provide predictable start-up costs that are a function both of the size of the program being newly transferred to tribal operation, and the relationship between that program and other programs already under tribal administration. The Abenchmarking" of direct contract support costs could provide for a straight percentage of either program costs or program components (such as a percentage of direct program salary costs). Finally, a successful Abenchmarking" approach, as applied in the context of the indirect rate negotiation process, might suggest either overall indirect rates or components of an overall rate as a function of a tribal contractor's overall direct program base and other appropriate factors. Finally, a Abenchmarking" approach might also succeed in bringing some standardization to the different ways in which contract support costs associated with facilities have been handled over time by different tribes, by different cognizant agencies, and even within the same agency.

The NCAI Work Group recommends that Congress provide at least one year for the exploration of one or more Abenchmarking" proposals, and for Joint Tribal-Federal field testing of any such proposals. Thereafter, any proposal that is successfully field-tested should be issued jointly by the relevant Departments in the Federal Register for appropriate comment.

By encouraging the agency's to move toward the Abase budget" concept, Congress can facilitate the ability of tribes to maximize efficiencies in operation by providing real incentives toward that goal. The key incentive would be that, in the event a tribe receives contract support cost funds as part of a Abase budget," there will be no adverse adjustment against that tribe if the tribe achieves greater efficiencies and, as a result, expends contract support cost funds instead for program enhancements.

Successful implementation of the base budget approach will require close coordination with the cognizant agencies such as OIG and DCA , to assure against any adverse adjustments to indirect cost rates in future years as a result of such activities. No such base budgeting can be successful, however, unless the full amount of contract support requirement is included in the base at the beginning.

Since the earliest days of the Indian Self-Determination Act smaller tribes sharing a common interest in a defined geographic area have voluntarily collaborated through inter-tribal organizations in order to maximize their economies of scale and minimize their administrative overhead. At the same time, tribes organizing together in this fashion have also had to balance these principles against the importance of localizing the service delivery system as much as possible for the benefit of the Native American individuals being served.

Experience shows that this delicate balance is part of a dynamic process that changes and evolves over time. As a result, today most inter-tribal arrangements involve an integrated, highly creative and unique set of arrangements among a given group of tribes. At the same time, Congress should not mandate such relationships and should repeal legislation such as the FY 1999 Asection 351 rider" that dictate tribal choices and weakens meaningful tribal organization accountability.

The NCAI Work Group recommends that tribes be continually encouraged to explore these creative relationships, and that Congress direct the agencies to work with tribes in identifying any significant impediments to these arrangements.

In 1999, 24 years after enactment of the ISDA, the Assistant Secretary for Indian Affairs for the first time stated in testimony to Congress that the BIA would very likely commence recognizing the tribal entitlement to receive contract support costs that are not a part of the indirect cost pool and are therefore Adirect" in nature. For too many years the BIA has acted contrary to the mandate of the ISDA in failing to recognize and pay direct contract support costs. The ISDA is clear in this respect, and the ISDA regulations direct tribes to identify those costs as a part of their proposals, the BIA has refused to comply with the law.

The Tenth Circuit Court of Appeals has correctly determined that the common methodology employed by the Department of Interior Office of Inspector General, the Department of Health and Human Services Division of Cost Allocation, and the Department of Labor Office of Cost Determination unlawfully dilute the responsibility of the BIA and IHS to pay full indirect costs associated with ISDA contracts. The NCAI Work Group recommends that this illegal practice be corrected in the following manner.

First, the cognizant agency should remove from the direct cost base tribally administered funds received from other federal agencies.

Next, the agencies should develop a set of guidelines, in close coordination with NCAI, the Ramah plaintiffs, and other tribal contractors, to determine which portions of the other federal agencies' programs that have been removed from the direct cost base (in Step One) should be added back into the base. If, as was the case for the Ramah Navajo Chapter, the burden associated with administering the programs of other federal agencies does not materially or significantly add to the administrative overhead required to carry out the BIA and IHS programs, no portion of the other federal agencies' programs should be added back to the direct cost base. If, on the other hand, the relative size of the other federal agencies' programs is such that the administrative burden upon a tribe will necessarily increase, to that extent the other federal agencies' programs should be added back to the direct cost base. Guidelines will avoid excess or complicated negotiations, and will produce reasonable approximations of need that are predictable.

Finally, the OIG (or other cognizant agency) should calculate an indirect rate to be paid by the BIA and IHS on the adjusted direct cost base, and then apply a credit for any indirect costs actually paid the tribe from the other federal agencies.

The audit arms of the cognizant agencies that negotiate tribal indirect rates do so for all other government contract and grant recipients. They have accumulated nearly 30 years of experience doing so. Their Aindirect" functions are carefully separated from their audit functions, and are also separated from those who determine how agency funds will be spent (i.e., the BIA and IHS). As a result, the agency indirect rate negotiators are free of any financial self-interest (on behalf of the federal government), and free of any partiality toward or against tribes.

For is for these reasons that study after study has confirmed the integrity of the indirect negotiation system. The NCAI National Policy Work Group on Contract Support Costs therefore recommends that the federal responsibility for the indirect rate negotiation system (and any variant on that system such as future Abenchmarking") remain unchanged, and not moved either into the field or to negotiators situated outside the departments.

Recommendations pertaining to the funding of contract support costs.

Congress must not retreat from its commitment in 1975, repeated and strengthened in 1988 and once again 1994, to provide full funding for contract support costs.

Long before Congress improved the ISDA to make clear the contract support cost obligation, the BIA and IHS recognized that such costs must be determined and paid in order to keep faith with Congress's commitment to make available to tribes the full program costs available to the Secretary. Without contract support costs, the agencies recognized that tribes would suffer a contracting penalty. In 25 years this basic fact has not changed.

It is therefore essential that the BIA and IHS report to Congress the full level of contract support costs required in connection with ISDA contracts, in strict compliance with section 106(c) of the Act, and that Congress in turn fully fund that need. Further, the agencies should timely furnish to all tribal governments complete copies of its their annual congressional reports.

In years when IHS has received insufficient appropriations to pay all contract support cost obligations, IHS has refrained from reducing any tribe's contract support cost payment from the prior year (unless the same payment in the new year would exceed the full amount of a tribe's contract support cost entitlement). This practice has promoted stability in tribal financial operations because, regardless of appropriations, tribes can be confident they will receive no less than the amount of contract support costs paid in the prior year. For the same reason, this approach has promoted predictability from one year to the next, permitting tribes to engage in meaningful short- and long-term planning.

The BIA should reform its annual distribution of contract support costs to reflect the IHS approach. As criticized in the Alamo/Miccosukee case, tribes should not be forced to operate programs with a total amount of contract support costs that is unknown until 10 or 11 months into the programs' fiscal year.

The two ISD Funds have proven to be an important and valuable management tool facilitating the ability of the agencies to separately address the unique contract support cost needs associated with programs being transferred from federal to tribal operation for the first time.

In FY 1999 Congress eliminated the BIA's and IHS's ISD Funds as part of the one-year moratorium on any additional transfers of programs to tribal operations. In FY 2000 those two Funds should be restored and funded at no less than $7.5 million for the BIA and $15 million for the IHS (the recommended funding levels are intended to anticipate potential Apent-up" one-year requirements caused by the FY 1999 moratorium). In FY 2001 the Funds should be funded at $5.0 million for the BIA, and $12.5 million for IHS. Thereafter the Funds should receive $5.0 million and $10 million, respectively.

Since tribes are only entitled to contract support costs to the extent they are necessary and reasonably required for prudent management of the transferred federal program, any tribe experiencing a shortfall in contract support cost suffers whether the shortfall is 10% or 50%. Regardless of the level of shortfall, the ultimate victims are the program beneficiaries who will suffer if direct services are reduced to cover this federal responsibility.

For this reason, the NCAI Work Group recommends that in distributing limited agency appropriations, the IHS and BIA should distribute congressional increases among all tribes receiving less than their full contract support cost entitlements. For example, for every $5 paid to a tribe that is 50% underfunded, $4 should be paid to a tribe that is 40% underfunded, $3 to a tribe that is 30% underfunded, and $1 to a tribe that is 10% underfunded.

For 25 years the Self-Determination Policy has proven itself time and again to be the single greatest factor leading to the improvement in service delivery systems at the local tribal level. Tribes simply do a better, more creative, and more efficient job in designing, managing and delivering programs than is possible by the BIA or IHS. Tribal communities must not be denied the opportunity to continue with these powerful improvements simply due to difficulties in managing the technical aspects of the contract support cost system. The NCAI Work Group thus strongly urges Congress to reject any proposals for a moratorium of any kind whatsoever against the transfer of IHS or BIA programs to tribal operation.

Direct contract support costs represent supplemental funds that are needed to support the delivery of a particular IHS or BIA program at the same level of funding enjoyed by the agencies when operating the same program. As such, these Aprogram-type" contract support costs should logically be funded together with the programs themselves, and enjoy mandatory increases and similar congressional adjustments.

The NCAI Work Group recommends that direct contract support cost amounts be transferred out of the contract support cost activity and into the appropriate program activity. Given the two-year budget formulation process employed by the Administration, the NCAI Work Group recommends that the transfer of direct contract support costs occur two fiscal years following the year in which the amounts are first identified and paid. Once transferred, these funds should continue to be separately tracked as contract support funds, and annually reported to Congress under section 106(c) of the Act. The transfer should not impair the tribal right to renegotiate the direct contract support costs as circumstances warrant under section 106(a)(3)(B) of the Act.

Presently, tribes and tribal organizations operate approximately 40% of all IHS programs, and a comparable amount of the BIA's program budget. Taking IHS as an example, this means that to the extent Congress increases funding for a particular program by $10, of that sum $4 will be passed on to tribal organizations operating those programs under the ISDA. This, in turn, will require on average an additional $1.20 in contract support costs to support those programs. NCAI recommends that Congress be informed of that additional requirement at the same time Congress considers the underlying program increase.

Presently, the agencies make no effort to forecast the impact of requested budget increases on tribal contract support cost entitlements as part of the President's budget request. In the absence of such forecasting, there is often a lag of one to two years (and more) before the agencies bring to Congress the problem created by this essentially Aunfunded mandate." The recommended reform would add substantially to the ability of both the agencies and Congress to forecast accurately budget needs both for program administration and to support the self-determination initiative.

15. The BIA and IHS should cease and desist from efforts to extinguish past obligations incurred under solemn government-to-government contracts.

The BIA and IHS must accept that tribal contracts and compacts are first and foremost legal commitments and obligations of the United States, obligations whose terms are set forth in the ISDA and basic contract law.

Although it is the agencies which have primary responsibility for meeting the government's financial obligations under such contracts, this fact does not excuse the agencies' consistent practice of seeking to interject a multitude of terms and conditions into annual contract negotiations, intended to provide the government with loopholes and escape clauses in the event of insufficient agency appropriations. Nor does it excuse the agencies' consistent position that all tribal contractual rights are subject to the BIA's and IHS's discretionary authority to unilaterally alter those rights.

ISDA contracts and compacts are solemn and binding legal obligations of the United States, and IHS and BIA policies and practices should fully respect that fundamental principle.

16. Congress and the Office of Management and Budget should each explore and address the root causes of the failures of agencies other than the BIA and IHS to respect the full indirect rate negotiated by each tribe's cognizant federal agency.

From the very earliest days of ISDA implementation, the failure of other federal agencies to pay their appropriate share of indirect costs has undermined the ability of tribes to administer federal programs without suffering program reductions. Some federal agencies refuse to pay the full indirect rate as a matter of policy, some refuse to pay as a matter of regulatory limitation, and some refuse to pay as a matter of statutory limitation.

In the first two situations, the Office of Management and Budget should take corrective action to assure (and Congress should direct) that regulatory and policy reforms be made so that the principles of OMB Circular A-87 are uniformly followed by all federal agencies entering into funding agreements with Indian tribes.

To the extent limitations on federal agencies are statutory, the Work Group respectfully calls upon Congress to remove these statutory barriers.

V. CONCLUSION

The National Congress of American Indians National Policy Work Group on Contract Support Costs reaffirms its commitment to continue working with Indian country, Congress and the Administration, including the Office of Management and Budget, the Department of the Interior and the Department of Health and Human Services, to keep faith with the Nation's Self-Determination Policy.

No single policy in the history of Native American Affairs has more forcefully and effectively permitted tribes to empower their tribal institutions and their people. No single policy has more effectively served to break the cycle of dependency and paternalism. And, no single initiative has contributed more to the improvement in the conditions facing Native American peoples.

As the Nation enters the new millennium, and consistent with the march toward greater devolution of governmental authority to local units of government, it is essential that the American people recommit fully and keep faith with the Self-Determination Policy. Only through the continuation of that policy can the Nation both respect the fundamental government-to-government relationship that exists between tribes and the United States, and fulfill the federal government's trust responsibility to protect the interests of Native American tribes.

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