Oversight of Intergovernmental Agreements by the United States
Marshals Service and the Office of the Federal Detention Trustee

Audit Report 07-26
March 2007
Office of the Inspector General

Appendix XI
OFDT Response to the Draft Audit Report

Inspector General
Office of the Inspector General

FROM: Stacia A. Hylton
Federal Detention Trustee

SUBJECT: Response to the Draft Report Oversight of Intergovernmental Agreements by the United States Marshals Service and the Office of the Federal Detention Trustee

In accordance with your memorandum dated November 17, 2006, the Office of the Federal Detention Trustee (OFDT) offers the following comments, based upon our review of the recommendations contained in the subject report.

Recommendation #2: Modify eIGA so that it captures average daily population, indirect costs, and credits as part of its Jail Operating Expense Information.

Response: eIGA already collects information pertaining to the average daily populations. We do not agree with collecting information pertaining to indirect cost or revenues. OFDT developed the Jail Operating Expense sheet in accordance with Part 15 of the Federal Acquisition Regulations (FAR) which requires the government, in establishing the reasonableness of the offered prices, to use every means available before requesting cost or pricing data. As stated at FAR 15.402 Pricing policy, contracting officers must not require unnecessarily the submission of cost or pricing data, because it leads to increased proposal preparation costs, generally extends acquisition lead time, and consumes additional resources of the contracting parties. OFDT believes that the JOIE already requires jails to submit substantial expense information; it does not seek to increase that burden by requiring jails to submit such additional information such as indirect costs and credits.

Moreover, the OFDT and eIGA method is based on determining a rate by using price analysis techniques. Price analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements to determine a fair and reasonable price. Projected revenues and indirect costs are variable in nature and do not provide any additional information required to determine a fair and reasonable rate.

Recommendation #3: Modify eIGA so that it presents a jail-day rate to the IGA analysts based on the actual and allowable costs of the jail.

Response: OFDT disagrees. As the Draft Report points out on pages xvii, 29, 30 and 32, using a cost-based negotiated rate may be inaccurate and unreliable. Moreover, based upon the manner in which the OIG uses the term, "actual and allowable costs," it is clear that the OIG is recommending the use of a cost-reimbursement arrangement which OFDT does not agree should be used in the case of IGA agreements. OFDT supports the continued use of fixed-price agreements, with the reasonableness of the rate being determined by price analysis, not cost analysis. Price analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements to determine a fair and reasonable price.

The Department of Justice (DOJ) and the Department of Homeland Security (DHS) have approximately 22 competitively awarded contracts for privately provided detention and/or correctional services, nearly 1,800 IGAs with State and local authorities for the housing of Federal prisoners and inmates, and approximately 22 federally-operated detention facilities. This historical data provides the perfect platform for determining a fair and reasonable price, and would be acceptable evidence for the award of a competitively awarded contract to a privatized detention facility.

OFDT believes a comparison of previously proposed IGA prices, Government-operated facility per capita rates and private contract prices, with a proposed rate from a local government, clearly meets the requirements of the FAR, as pertains to Price Analysis.

Recommendation #4: Develop procedures for re-examining the [SENSITIVE INFORMATION REDACTED] core rate to ensure that it accurately reflects the average jail-day rate based on actual and allowable costs.

Response: OFDT agrees, in part. Prior to the audit, OFDT had already planned to review, evaluate, and validate the core pricing model that is integral to its eIGA initiative. Accordingly, OFDT supports the OIG’s recommendation. In furtherance of OFDT's Strategic Objective 1.2 (Ensure Efficient Use of Detention Space and Regulate Price Increases), the Detention Trustee has approved a project plan for evaluating and validating the methodology for establishing the core rates. In concert with eIGA, the objectives of this project are to: (1) collect and analyze detailed data describing detention facility expenditures; (2) identify additional factors, where possible, that are predictive of detention facility expenditures on a per capita basis; (3) assess the impact of inflation on per capita detention expenditures; and (4) evaluate the reliability of the current pricing model, including re-specification of model parameter estimates, where necessary. Because detailed financial data is necessary to support this project, it is not anticipated that any substantial work will begin on this project until eIGA has been implemented and 12 months of data have been collected to support the quantitative analysis.

Despite OFDT’s agreement that it should review, evaluate and validate the core pricing model, OFDT continues to object to the OIG’s implied recommendation of the use of a cost-reimbursement arrangement, which OFDT does not agree should be used in the case of an IGA.

Recommendation #5: Develop guidance and training for the USMS on how jail-day rates will be established using eIGA. The guidance and training should include how to negotiate with detention facilities, clearly documenting the basis for negotiated jail-day rates, evaluating cost and non-cost factors, when it is appropriate to deviate from the scheduled adjustments to the core rate, how deviations should be documented, defining what constitutes an appropriate facility to compare jail-day rates, evaluating and documenting the analysis of established jail-day rates of similar facilities in justifying a jail-day rate, documenting the rationale for any retroactive increase or extension of temporary agreements, and ensuring that follow-up on temporary jail-day rates is timely.

Response: OFDT agrees. As we have repeatedly informed the OIG, we are currently developing training and guidance for the eIGA system. Additionally, OFDT is funding Federal Acquisition Institution-mandated training for USMS IGA Analysts through an outside vendor.

Additional Corrective Action: While OFDT agrees with the OIG that the USMS should document the basis for the rate and any deviations from the core rate under eIGA, it continues to be concerned about the documentation of IGAs under the current system. Indeed, OFDT agrees with the OIG’s assertion on page 34 of its Draft Report that, although by virtue of 18 U.S.C. § 4013(a)(4)(C), the USMS legally was permitted to consider "conditions" other than cost in setting the fixed rate per diem, the extent to which the USMS did so in setting a fixed rate per diem was not always sufficiently documented. Consequently, as OFDT already has done, OFDT will continue to recommend to the USMS that it review its files for these IGAs to ensure that appropriate documentation exists regarding the costs or other conditions which formed the basis for the fixed rate. Additionally, if upon a further review of any existing IGA, the USMS or OFDT determines that a jail misrepresented its costs and that, but for that misrepresentation, the USMS would not have agreed to the approved rate, OFDT will recommend to the USMS that it take action to adjust the rate. Indeed, it should be noted that, contrary to the OIG’s assertion, OFDT has never stated that fraud is the only instance in which payments may be recovered and, if a jail misrepresented its costs to the USMS to obtain a more advantageous rate, OFDT concurs that corrective action is warranted.

Recommendation #6: Develop guidance that limits the amount of profit a state or local jail can earn for housing federal prisoners.

OFDT disagrees. Since IGA(s) are considered a fixed-price arrangement, we refer OIG to the March 1999 letter to the Department of Justice from G. Edward DeSeve, then Deputy Director for Management of the Office of Management and Budget (OMB). With regards to the negotiating of fixed-price agreements, DeSeve stated:

“Therefore, under such fixed-price arrangements, no consideration is given to what profit or fee a particular contractor or recipient may earn or receive. The concept of profit or fee is simply inapplicable to these instruments, since the total contract price is the only basis upon which a fair and reasonable price can be established.”

Fixing a fee or profit would only be applicable in a cost-reimbursement type of agreement. If we were to use cost-reimbursement agreements, we would be responsible for any loss the local government may incur in providing bed space to the USMS, which from the OFDT standpoint is an unacceptable exposure to the government.

This exposure is shown in the recent OIG of [SENSITIVE INFORMATION REDACTED], in which the OIG determined the actual and allowable costs to be $100.26 for FY 2004 and the USMS provided payment to the jail $84.69, $15.57 lower than actual costs, thus creating an underpayment totaling approximately $10.0 million for the period of FY 2004, FY 2005, and FY 2006. Additionally, a recent Maryland legislative audit determined that the State had been under paid for the housing of federal prisoners by approximately $3.5 million over the last four years.

The FAR at Part 16.301-3 provides the following limitations with respect to cost reimbursement agreements:

The reality is that, while local jails employ accounting systems, these systems are not always adequate to segregate costs associated with the housing of federal prisoners from the costs associated with the housing of state or local prisoners and there is not appropriate Government surveillance to ensure efficient methods and effective cost controls are used. Simply auditing “actual and allowable” costs does not identify the prudence of such costs. A fixed price arrangement is the proper method for these agreements to protect the government.

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