Oversight of Intergovernmental Agreements by the United States
Marshals Service and the Office of the Federal Detention Trustee
Audit Report 07-26
Office of the Inspector General
The OIG provided a draft of this audit report to the USMS and the OFDT for their review and comment and their responses are incorporated as Appendices XI and XII of this final report. The OFDT and USMS concurred with 6 of our 10 recommendations, but continued to disagree that they should attempt to recoup millions of dollars in overpayments to state and local detention facilities. The OFDT also disagreed to modify eIGA to maintain data on indirect costs and revenue generated from a detention facility’s operation, have eIGA present a cost-based jail-day rate to IGA analysts in their negotiations with state and local jails, or limit the amount of profit that a state or local jail may earn for housing federal detainees.
The OIG recognizes that there are significant pressures on the USMS to obtain detention space but, as explained below, we disagree with the OFDT’s and USMS’s position on these issues. Rising detention population and costs present a challenge to DOJ’s ability to obtain affordable bed space for individuals not housed in federal facilities. In the past, the USMS required detention facilities interested in housing federal detainees to submit a cost sheet as part of the IGA application process. The USMS cost sheet requested financial and prisoner population information, and informed the preparer that the jail-day rate would be computed on the basis of actual, allowable, and allocable costs associated with the operation of the facility that benefit federal detainees during the most recent accounting period. Prior OIG audits often noted jail-day rates that exceeded the rate supported by a detention facility’s allowable costs and average daily population. We believe that not collecting or using cost data when negotiating an IGA rate, and therefore potentially allowing payment of a rate that far exceed costs, will exacerbate the continuing escalation in detention costs nationwide. Because DOJ’s current annual detention budget exceeds $1 billion, the long-term budget implications of IGA policies are substantial.
This appendix presents our analysis of the USMS’s and OFDT’s disagreements with our recommendations to try and recoup millions of dollars in overpayments to state and local detention facilities, and expand the information collected by eIGA and used by IGA analysts in their negotiations with state and local jails. A summary of actions necessary to either resolve or close each of the report’s 10 recommendations is provided after our analysis of the OFDT’s and USMS’s general comments.
The OIG has completed 31 individual IGA audits since 1995 and reported overpayments totaling almost $60 million, of which $37 million remains unaddressed by the USMS. However, the OFDT and USMS assert that because IGAs are negotiated, fixed price agreements they cannot collect the overpayments identified by the OIG in these audits. In its response to this draft audit report, the USMS stated that OFDT has instructed it to refrain from efforts to collect what the OIG determined to be overpayments. The USMS response stated:
OFDT believes that, in the absence of fraud, the agreements are not subject to retroactive adjustment. Once the USMS and the state or local government negotiated and reached an agreement on a price for the services, that price was fixed and the parties were bound. OFDT believes that the Government cannot, years later, reexamine the state or local government’s costs and prisoner population for the period in question and seek to recover an amount by which, in hindsight, appears to have exceeded those costs.
The OFDT further stated that it “supports the continued use of fixed-price agreements, with the reasonableness of the rate being determined by price analysis, not cost analysis.”
Recently, OFDT obtained an opinion from the General Counsel of the Justice Management Division stating that the IGAs are “fixed price agreements that do not contain a basis for the Department to seek retroactive price adjustment” as a matter of contract law.
As noted in the report, we do not agree with the contention that the IGAs in question were fixed-price contracts that are not adjustable in the absence of fraud by the state or local facility. Rather, the agreements were cost-based, meaning that costs were the basis of the award amount and that cost analysis rather than price analysis was used to establish the jail-day rate.
As detailed in our report, the USMS has consistently requested that detention facilities complete a cost sheet as part of the IGA application process. The cost sheet instructions state that the jail-day rate is based on actual and allowable costs subject to Office of Management and Budget (OMB) Circular A-87. As shown below, the cost sheet requires the detention facility to certify that the costs included are accurate, complete, current, and do not contain any unallowable or unallocable costs prohibited by OMB Circular A-87. The detention facility also must certify that its records can be audited to verify the jail-day rate.
This is to certify that, to the best of my knowledge and belief the date furnished in Schedules B through G are accurate, complete and current, and do not include any unallocable, or unallowable, or unallowable costs prohibited by OMB Circular No. A-87 (Cost Principles for State and Local Governments) or any cost not related to the jail facility as discussed on Form USM-243 (Cost Sheet for Detention Services). The records of this agency area available for review and audit by the authorized representative of the U.S. Government to verify any jail per diem rate negotiated.
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Moreover, even if the IGAs in question were negotiated, fixed-price agreements, as the OFDT and USMS contend, that does not mean that the specified price could not be subject to adjustment by the operation of the clauses in the agreements that specifically address re-pricing or recoupment of amounts disallowed by audits. For example, the agreements provide that:
Jails are responsible for complying with OMB Circular A-87 and 28 CFR, Part 66, and the allowability of the costs covered in its submitted cost sheets. To avoid possible subsequent disallowance or dispute based on unreasonableness or unallowability under the specific cost principles, recipients must obtain prior approval on the treatment of special or unusual costs;
Jails shall notify the USMS of any significant change in the facility, including significant variations in inmate populations, which cause a significant change in the level of services. The notification shall be supported with sufficient cost data to permit the USMS to equitably adjust the jail-day rate included in the IGA. Depending on the size of the facility, for the purpose of assessing changes in the population a 10 percent increase or decrease in the prison population is considered significant;
The USMS will hold jails accountable for any overpayment, audit disallowance, or any breach of the IGA that results in a debt owed to the federal government. The USMS may apply interest, penalties, and administrative costs to a delinquent debt owed by a debtor pursuant to the Federal Claims Collection Standards; and
Jails are responsible for the management and fiscal control of all funds. Responsibilities include the accounting of receipts and expenditures, cash management, the maintaining of adequate financial records, and the refunding expenditures disallowed by audits.
In our judgment, these facts contradict the USMS and OFDT contention that IGAs are negotiated, fixed-price agreements that are not subject to recovery of overpayments in the absence of fraud.
In addition, the USMS acknowledged in its response to the draft audit report that it has in the past recovered (either by collection or offsets on future rates) a portion of funds identified as overpayments. It also acknowledged that in other circumstances, overpayments have been forgiven in accordance with DOJ procedures. Further, the JMD General Counsel acknowledged that depending on the circumstances of each case, the Department may have a legal remedy for recovering overpayments where a state submitted inaccurate cost information during the IGA formation process. He also noted that nothing in the agreements prohibits the DOJ from seeking a prospective rate adjustment.
As detailed in our report, the OFDT is revising the process of how it calculates IGA rates. As part of this process, the OFDT and USMS agreed to develop guidance for establishing IGAs, ensure adequate resources are provided to oversee IGAs, and devise training plans for IGA analysts. We believe that eIGA is a positive step to improving the process historically used to establish jail-day rates. However, we believe that OFDT should improve eIGA by expanding the information eIGA collects to include indirect costs and revenue generated from a detention facility’s operation (also known as credits). In turn, this information should be used to calculate a cost-based jail-day rate for consideration by IGA analysts.
Our audit identified significant deficiencies with how jail-day rates have been established and monitored in the past. Because eIGA is not operational, and the OFDT has neither issued guidance nor trained IGA analysts on how jail-day rates will be established using eIGA, we are unable to predict how successful eIGA will be. However, one critical issue is how the rates negotiated through eIGA compare to rates that would have been established using a detention facility’s actual and allowable costs. Moreover, we believe that, as we demonstrated in our review of jail-day rates that were established using the eIGA model, providing cost information to the IGA analysts will give the USMS more leverage in its negotiations, help control rising detention costs by reducing negotiated jail-day rates, and provide an important check on the price reasonableness model.
In its response, the OFDT noted that eIGA already collects information pertaining to a jail’s average daily population, and that the Jail Operating Expense Information already incorporates substantial expense information. The OFDT stated that it does not intend to increase the burden placed on jails by requiring them to submit the additional information suggested by the OIG. In support of this position, OFDT points to the language of Federal Acquisition Regulation (FAR) 15.402 stating that “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 contracting parties.”
We disagree with the OFDT’s suggestion that the submission of the additional data is unnecessary in this case. First, Section 15.403 of the FAR states that cost or pricing data shall not be required in the following circumstances:
None of these circumstances describe the IGA process. For example, detainee bed space is not a commercial item and IGAs are not competitively awarded.
Second, FAR 15.404-1 states that contracting officers are “responsible for evaluating the reasonableness of the offered prices.” That provision further provides that “[t]he complexity and circumstances of each acquisition should determine the level of detail of the analysis required.” For the reasons stated in our report, we believe that cost data is necessary to any evaluation of price reasonableness in the IGA context.
We also disagree that the eIGA method is a true price analysis as the OFDT asserts. The FAR defines price analysis as “the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profits.” FAR 15.404-1(b). In contrast, cost analysis is defined as “the review and evaluation of the separate cost elements and profit in an offeror’s... proposal... and the application of judgment to determine how well the proposed costs represent what the cost of the award should be, assuming reasonable economy and efficiency.” FAR 15.404-1(c). Contrary to its argument that it is performing a strict price analysis, the OFDT is requesting and taking into account certain types of cost information (labor and fringe benefits by position, consultant and contractual services, utilities, telephone, equipment, and insurance to name some of the categories) as part of the revised eIGA process, and therefore should request and consider in its negotiations the other categories of data.
In a demonstration of eIGA that OFDT provided to us in October 2006, average daily population, indirect costs, and credits were not captured in eIGA. At that time, the OFDT stated that these elements would not be included because they varied daily. In our judgment, however, indirect costs and credits are no more variable than labor, fringe benefits, equipment, or utilities, all of which eIGA collects. Further, by asking for telephone costs without asking for the telephone credits, the information obtained is inaccurate and does not provide an adequate basis for the costs of the jail, the level of profit it would obtain under eIGA, or a fair and reasonable price.
We also do not concur with the OFDT’s assertion that historical rates from the 1,800 IGAs that have been awarded by DOJ and ICE provide a reasonable basis to justify prices on new awards. This assertion assumes that historical rates were reasonable. However, our prior audits have questioned millions of dollars of payments associated with these agreements because of jail-day rates that included unallowable or unsupported costs and inaccurate or unsupported jail population figures. In addition, because OFDT has yet to establish policies or procedures regarding how similar facilities will be identified and compared, and has acknowledged the difficulty in comparing facilities in the same geographic area (San Francisco and Modesto) as well as between geographic areas (Northeast versus Southwest), we are concerned about how this data will be used to establish price reasonableness.
The OFDT also disagreed with our recommendation to develop guidance that would limit the amount of profit a state or local jail may earn for housing federal prisoners. In its response, the OFDT referred to a March 1999 opinion from OMB and stated that fixing a fee or profit would only be applicable in a cost-reimbursement type of agreement.
Our report does not recommend that the OFDT and USMS establish jail-day rates using a cost reimbursement type of arrangement. However, we continue to believe that whatever contract model is used, the OFDT and the USMS must ensure that the rates paid are reasonable. We do not believe that they can effectively do so without considering the amount of profit state and local facilities are earning and ensuring that such profit is kept within reasonable limits.
The USMS also included a series of comments that are unrelated to the reports specific recommendations. We address these comments in the following paragraphs.
The USMS stated that our observation on the reduced number of onsite audits failed to recognize the number of desk audits that were conducted beginning in FY 2005. As part of our audit, we requested a listing of all audits conducted by the USMS. Our analysis of the number of audits was based on the information supplied by the USMS. Thus, the reason any such audits were not referred to in our report was that the USMS did not disclose this practice. Nevertheless, we also note that the number of onsight audits performed by the USMS decreased by almost 50 percent from FYs 2003 to 2004, before the practice of conducting desk audits was implemented in FY 2005.
The USMS did not agree with our classification of over $37 million in questioned costs based on the definition noted in Appendix IV. Appendix IV is a compilation of prior OIG audit findings. The questioned costs are computed by adding together the expenditures that either did not comply with legal, regulatory, or contractual requirements, are not supported by adequate documentation at the time of audit, or are unnecessary or unreasonable and multiplying that figure by the average number of jail days. We believe the term questioned cost and the definition of questioned cost in the appendix is accurate.
The USMS stated that some of the audits listed in Appendix IV were referred to the Department of Justice Audit Resolution Committee, where no action has been taken to date, and that almost $1.8 million in overpayments was recently forgiven in accordance with DOJ procedures for [SENSITIVE INFORMATION REDACTED]. We accordingly revised Appendix IV to identify audits that were referred to the Department of Justice Audit Resolution Committee and changed the status of [SENSITIVE INFORMATION REDACTED] as an audit that no longer needed to be addressed by the USMS.
The USMS commented that $2.5 million identified as funds to put to better use in the [SENSITIVE INFORMATION REDACTED] audit represented an unsupportable capital cost recovery proposal that was neither endorsed nor considered by the USMS in the development of the jail-day rate. Our audit report stated that the USMS could save more than $2.5 million annually by disallowing the proposed capital cost recovery surcharge of $23.05 per jail day. Since Appendix V discusses the issue in detail, we do not believe that clarification of this matter is warranted.
Finally, the USMS commented that of the nearly $38 million in overpayments identified in Appendix IV, over $9.5 million represented audits covered by the OFDT’s March 17, 2006, memorandum in which the Detention Trustee advised the USMS not to collect overpayments. Since our report discusses at length the basis of our disagreement with OFDT, and includes the Detention Trustee’s memorandum in Appendix VI, we did not revise the Appendix to identify audits covered by the memorandum.
Summary of Necessary Actions
Based on the OFDT and USMS responses, we consider the report unresolved. The following is a summary of actions necessary by each component to either resolve or close the recommendations.
Unresolved (USMS). In consultation with the OFDT, the USMS disagreed with this recommendation. The OFDT and USMS believe that in the absence of fraud, the agreements are not subject to retroactive adjustment. The USMS stated, however, that it will review each audit on a case-by-case basis to make a final decision as to a remedy. This recommendation can be closed when the USMS adequately addresses each open recommendation.
Unresolved (OFDT). As previously discussed, the OFDT did not agree to modify eIGA so that it captures information on ADP, indirect costs, and credits. This recommendation can be resolved when the OFDT either agrees to modify eIGA to capture this information or proposes an alternative corrective action.
Unresolved (OFDT). As previously discussed, the OFDT did not agree to modify eIGA so that it presents a jail-day rate to the IGA analysts based on the actual and allowable costs of the jail. This recommendation can be resolved when the OFDT either agrees to modify eIGA to present a jail-day rate based on actual and allowable costs or proposes an alternative corrective action.
Resolved (OFDT). The OFDT stated that, in concert with eIGA, it will collect and analyze detailed data describing detention facility expenditures; identify additional factors, where possible, that are predictive of detention facility expenditures on a per capita basis; assess the impact of inflation on per capita detention expenditures; and 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 until eIGA has been implemented and 12 months of data have been collected to support the quantitative analysis. This recommendation can be closed when the OFDT provides documentation showing that it adequately re-examined the core rate.
Resolved (OFDT). The OFDT agreed to develop guidance and training for the USMS on how jail-day rates will be established using eIGA. Additionally, OFDT stated that it is funding Federal Acquisition Institution-mandated training for USMS IGA Analysts through an outside vendor. This recommendation can be closed when we review the guidance and training material on how jail-day rates will be established using eIGA.
Unresolved (OFDT). As previously discussed, the OFDT did not agree to develop guidance that limits the amount of profit a state or local jail can earn for housing federal prisoners. This recommendation can be resolved when the OFDT either agrees to develop guidance that limits the amount of profit a state or local jail can earn for housing federal prisoners or proposes an alternative corrective action.
Resolved (USMS). The USMS agreed to develop annual training plans for all staff working in the Programs and Assistance Branch. This recommendation can be closed when we review guidance for implementing annual training plans for staff working in the Programs and Assistance Branch and approved first year training plans.
Resolved (USMS). The USMS agreed with the recommendation and estimated that updated policies can be developed 6 months after the OFDT provides information required under Recommendations 5 and 6. The USMS also anticipated that a comprehensive overhaul of the policies related to IGAs will be necessary based on the implementation of eIGA. This recommendation can be closed when we are provided with the USMS’s revised IGA policies.
Resolved (USMS). The USMS agreed with the recommendation. According to the USMS, 99 percent of identified expired permanent IGAs have been extended, and the remaining expired IGA will be extended by January 31, 2007. In addition, the USMS stated that beginning in calendar year 2007 the Programs and Assistance Branch staff will issue a memorandum to the field, under the Assistant Director’s signature, on a monthly basis identifying usage of expired IGAs and require they discontinue use until a new agreement is established. This recommendation can be closed when we are provided documentation on the extended IGAs, as well as the formal policy on the USMS’s new procedures.
Resolved (USMS). The USMS agreed with the recommendation. According to the USMS, additional staffing for review, approval, and audit of IGAs is critical to the successful operation of the program. Upon implementation of eIGA, a workgroup will be convened to discuss staffing and needed resources for the Programs and Assistance Branch. Completion of this step is estimated at no longer than six months after eIGA is implemented. This recommendation can be closed when we review the documentation detailing the agreed upon resources for adequately overseeing IGAs.
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