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
June 6, 2006
|MEMORANDUM FOR||STACIA HYLTON
OFFICE OF THE FEDERAL DETENTION
|FROM:||GLENN A. FINE
|SUBJECT:||Office of the Inspector General Audits
of Intergovernmental Agreements
This is in response to your April 26, 2006, memorandum to the United States Marshals Service (USMS) summarizing our April 20 meeting regarding Intergovernmental Agreements (IGAs) for detention services. We believe that your memorandum does not fully describe the Office of the Inspector General’s (OIG) position, and we want to be clear as to that position. We also want to respond to your March 17, 2006, memorandum in which you indicated that you had instructed the USMS to refrain from recovering overpayments identified by the OIG as a result of our IGA audits. As you are aware, the Department’s current detention budget exceeds $1 billion, and consequently the budget implications surrounding this issue are significant.
Establishing Rates for Audited IGAs
Since 1995, the OIG has performed about 30 IGA audits that identified approximately $42 million in either unallowable or unsupported costs and $24 million of funds that could be put to better use if the USMS renegotiated jail-day rates based on the information reported in the audits. Our audits generally found that the USMS paid jail-day rates that far exceeded the jails’ actual and allowable costs.1 However, the Office of the Federal Detention Trustee (OFDT) asserts that because the IGAs we audited typically described the unit price the federal government will pay as a “fixed rate,” and because the jails’ actual costs are only one factor considered in determining this rate, overpayments identified by OIG audits are not recoverable.
While the OIG agrees that the USMS has the authority to enter into IGAs based on factors other than cost, we believe it did not do so for the IGAs we audited. In addition, we believe that the term “fixed rate” cannot be applied in isolation, but, rather, must be considered in light of the agreements as a whole that, as discussed in more detail below, repeatedly refer to establishing rates on the basis of actual and allowable costs. Support for our view is found in the language of the IGA agreements, documentation provided by the USMS during our audits, USMS policies and procedures, and USMS internal audits.
First, the term “fixed rate” has always been used in IGAs, even when there was no doubt that all parties were proceeding on the assumption that allowable costs were the sole basis for the agreed-upon rate and that the USMS could recover amounts that exceeded the local facility’s actual and allowable costs. Thus, we do not believe that the use of the term alone can be taken as a reliable indicator of the parties’ intention to exclude the recovery of overpayments in those cases were the rate turns out not to have reflected the locality’s actual cost.
Second, the meaning of the term “fixed rate” must be read in light of the language of the agreements as a whole. The IGAs state that the local governments are responsible for complying with OMB Circular A-87, which establishes the principles and standards for determining allowable costs for goods and services obtained by the federal government from state, local, and federally recognized Indian tribal governments and provides the criteria used in evaluating whether such costs are allowable and reasonable. Moreover, the agreements specifically inform the local governments that they will be held accountable for any overpayment, audit disallowance, or breach of the agreement that results in a debt owed to the federal government.
Similarly, the cost-sheet instructions that the USMS has provided to the local governments inform them that “ the fixed per diem rate will be computed on the basis of actual, allowable, and allocable direct and indirect costs associated with the operation of the facility and that benefit federal prisoners during the most recent accounting period.” The cost-sheet instructions further state that “Local Governments shall only request the reimbursement of costs to the extent provided for in the latest revision of OMB Circular No. A-87.” The cost sheet also contains a certification statement that the Comptroller or Chief Financial Officer of the local government is required to sign attesting to the fact that the cost sheet does not include any costs prohibited by the Circular. Finally, we have not encountered during our audits documentation indicating that factors other than cost were considered in establishing jail-day rates.
We also note that the USMS IGA Audit Branch itself has conducted audits to determine if IGA jail-day rates were based on allowable costs. For example, in a January 1998 audit of the [SENSITIVE INFORMATION REDACTED], the USMS IGA Audit Branch determined that a $65 temporary jail-day rate was not supported and that the operating costs only supported a $37.95 rate. The Audit Branch recommended that the USMS “negotiate a revised jail-day rate based on the information contained in this report and actual cost and prisoner population data” and “remedy the $3,883,433 in questioned costs.”
Thus, our position is not, as you described in your memorandum regarding the April 20 meeting, that the USMS “should maintain better records of its negotiations.” Rather, we believe that the available records indicate that cost and population data provided by the state or local governments and represented by those governments to be correct was the sole factor considered in reaching the jail-day rates in the 30 IGAs we audited. We also note that in a memorandum to the Deputy Attorney General, dated August 1, 2002, the prior Detention Trustee apparently agreed, indicating that most if not all IGAs then in effect limited reimbursement to actual cost or the same daily cost that state and local authorities incur to hold their own prisoners and did not allow for a payment of profit or fee to state and local governments. Accordingly, he concluded that “the issue of whether the Department may or may not pay a profit or fee should not be a contentious item in these audits, since the audits were conducted on IGAs where both the departmental components and the state or local governmental entity agreed to reimbursement of actual costs.”
As a result, we believe your instruction to the USMS that it should not seek to recover any of the overpayments identified in our audits was overbroad and incorrect. Rather, we believe that the USMS should address each recommendation to remedy questioned costs by either collecting overpaid funds; providing documentation to support the existing IGA rate; adjusting the IGA rate and offsetting future payments in an amount sufficient to recover questioned costs over a reasonable time; or administratively waiving the questioned costs on a case-by case decision based on exigencies, such as a lack of other viable location or security problems or significantly greater costs that would result from changing facilities.
In total, almost $46 million in dollar-related OIG findings remain unaddressed by the USMS. However, by pursuing a policy of not seeking recovery of overpayments, the OFDT is failing to provide needed relief to a limited detention budget and it is also encouraging other jails, which were content to be reimbursed on a cost basis, to seek inflated rates.
Finally, whether one considers the agreements to be fixed-rate vehicles based on factors in addition to cost as you assert, or cost-based agreements as we believe, the OIG disagrees with your assertion that the USMS can seek recovery of overpayments only in those cases of proven “fraudulent conduct.” Not all legal remedies require a showing of fraudulent conduct. Even the False Claims Act requires no more than a showing of reckless disregard for the truth or falsity of information presented to the government. In any event, the USMS is not limited to strict legal remedies for recouping overpayments. Rather, it has other methods of recouping overpayments, such as negotiating reduced rates in subsequent years. For example, the USMS recovered $156,000 in overpayments from the Lexington County, South Carolina Sheriff’s Office over an extended period – September 2000 through August 2004 – by reducing the per diem rate of $32.97 by $1.17, until the $156,963 in overpayments was recouped. However, you did not discuss any of these possibilities in either of your memorandums.
Establishing Future IGA Rates
We are also concerned that, contrary to OFDT assertions, the automated econometric and statistical pricing system that the OFDT is creating, eIGA, will not resolve the problem of the USMS paying excessive rates for detention services and instead could result in escalation in detention costs nationwide. We are therefore providing the OIG’s observations and concerns about the eIGA system, as it has been explained to us by OFDT.
Based on our discussions with you and OFDT staff, we understand that the eIGA pricing model starts with a nationwide core jail-day rate of [SENSITIVE INFORMATION REDACTED] that was calculated using [SENSITIVE INFORMATION REDACTED] rates, and then adjusts that base rate using various factors to arrive at an adjusted core rate, which is referred to as the “should cost” rate. According to the OFDT statistician, the model assumes that the [SENSITIVE INFORMATION REDACTED] IGA rates accurately reflect each facility’s costs. However, the OFDT did not perform any tests to establish the accuracy of this assumption. This shortcoming is of particular concern because our individual IGA audits often note significant variances between established jail-day rates and the rates supported by the detention facilities’ allowable costs and average daily populations.
Further, we believe that even when eIGA is implemented, detailed cost information should continue to be obtained from detention facilities and considered in reaching jail-day rates. Unlike the cost sheet data relied on in the past, eIGA will not capture cost information broken down by category. Instead, price reasonableness will be determined by comparing a detention facility’s proposed rate to the [SENSITIVE INFORMATION REDACTED] generated by eIGA and the established rates of similar facilities. [SENSITIVE INFORMATION REDACTED]. In contrast, detailed cost information would permit the USMS to use the lower of the cost or the model-generated rate as a negotiating base. In sum, we believe that cost information would provide an important check on rate reasonableness and therefore help ensure the integrity of the eIGA model.
The value of this hybrid approach is already evident from the USMS’s recent experience in negotiating a jail-day rate with the [SENSITIVE INFORMATION REDACTED]. The Center originally requested a jail-day rate of $61.42, [SENSITIVE INFORMATION REDACTED]. However, the cost sheet provided by the detention center only supported a rate of $54.13. The USMS used this cost information to negotiate a rate of $54.13. Without that information, the USMS may have accepted the original rate of $61.42 as reasonable based on the model at an extra cost to the taxpayer of $3.5 million in a single year.
In sum, given the expense to the taxpayer of housing detainees, it is vital that the USMS ensure that jail-day rates paid pursuant to past IGAs and those to be paid in the future are reasonable and do not include excessive profit. With regard to past agreements, we believe the OFDT should instruct the USMS to address each of the OIG’s recommendations in the manner discussed above. Going forward, we agree that the USMS may consider factors other than actual cost, including profit, when negotiating jail-day rates. However, we continue to believe that in doing so the USMS must demonstrate the factors that were considered, provide an economic analysis of those factors, consider cost data, and place some reasonable limitation on the amount of profit allowed. Accordingly, we believe eIGA should be modified to include detailed cost information, and clear guidance and training should be provided to USMS personnel on negotiating reasonable rates.
We recognize that there are significant pressures on the USMS to obtain detention space. For example, not seeking recovery of overpayments may appear preferable to the operational and logistical costs of negotiating new rates and repayment plans or the risk of having to use a more distant facility because a facility will not accept a reduced jail-day rate or agree to a repayment plan. However, allowing payment for services that far exceed allowable costs without analyzing and documenting price reasonableness will inevitably encourage detention facilities to seek inflated rates and could cause a severe escalation in detention costs nationwide. Because the Department’s current detention budget exceeds $1 billion and will only continue to increase, the long-term budget implications on such a policy are substantial.
We hope to continue to work with your office in an effort to reach a resolution to our differences regarding these issues.
Actual costs refer to the costs incurred by a detention facility. According to (OMB), for actual IGA costs to be allowable, costs must be: necessary and reasonable; authorized or not prohibited under state or local laws or regulations; conform with laws, regulations, and terms and conditions of the award; accorded consistent treatment; in accordance with generally accepted accounting principles; net of all applicable credits; and adequately documented.
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