September 18, 2002

MEMORANDUM FOR	LARRY D. THOMPSON DEPUTY ATTORNEY GENERAL
FROM:	/s/ Glenn A. Fine GLENN A. FINE INSPECTOR GENERAL
SUBJECT:	OIG Comments on August 1, 2002, Memorandum From Craig M. Unger, Federal Detention Trustee, Regarding Intergovernmental Agreements

This memorandum is written in response to a memorandum to you, dated August 1, 2002, from Craig Unger, the Federal Detention Trustee, concerning Intergovernmental Agreements (IGAs) with state and local governments for detention services. In this memorandum, we address three issues: (1)the resolution of three Office of the Inspector General (OIG) audits concerning claimed overpayments to state and local governments, (2) the collection of continuing overpayments to state and local governments that have occurred subsequent to the periods covered by OIG audits because of the failure of Department components to adjust rates downward to meet audited rates, and (3) the Department's authority to enter into IGAs that may result in a profit above cost being paid to state and local governments providing detention services. We have previously discussed these issues in memoranda to you dated March 12, 2002, and June 12, 2002. Copies of these memoranda are attached as each as Attachments A and B, respectively.

1. Recovery of Overpayments Identified in OIG Audits

The first issue relates to overpayments found by OIG audits of three entities. In an audit issued in December 2000, we found that that the United States Marshals Service (USMS) and the Immigration and Naturalization Service (INS) overpaid Guam $3.6 million in Fiscal Year (FY) 1999 and FY 2000. In an audit issued in June 2001, we found that the INS and the USMS overpaid DeKalb County, Georgia, $5.7 million in FY 2000. In an audit issued in June 2001, we found that the INS and the USMS overpaid York County, Pennsylvania, $6.2 million in FY 2000. Those three audits are included as Attachment C.

In his August 1 memorandum to you, the Detention Trustee notes that the OIG, the USMS, and the INS “historically” have read the enabling statutes and OMB Circular A-87 to preclude a payment of profit or other fee in excess of actual cost, and that ‘[t]he audits were conducted on IGAs where both the Department component and the state or local governmental entity agreed to reimbursement of actual and reasonable costs.” The Detention Trustee therefore recommends that the overpayments identified in the OIG audits should be recovered.¹ We concur with the Detention Trustee’s recommendation to recover the overpayments identified in our audits.

2. Recovery of Post-Audit Overpayments

In addition to the overpayments identified in the OIG audits, the failure of the INS and the USMS to adjust rates downward to conform to the audited rates has resulted in additional overpayments to Guam, York, and DeKalb County.

The OIG recommends that action be initiated immediately to address these overpayments. At the very least, the USMS and the INS should be directed to adjust future payments to meet the audited rates and to avoid additional overpayments.

3. The Department’s Authority to Enter into IGAs that Exceed Cost

The OIG’s consistent position has been that the Department cannot enter onto an IGA that provides for payment beyond cost. A contract that is based on factors other than cost (such as competitive prices) is a procurement vehicle authorized by the Federal Acquisition Regulation (FAR). An IGA is a procurement vehicle authorized by the Director of the Office of Management and Budget (OMB), and we believe that authorization limits payments under an IGA to the reimbursement of cost.

The Detention Trustee correctly notes that there has been a dispute within the Department as to whether the USMS and INS may make payments under IGAs in excess of cost. The Detention Trustee also notes that the OIG requested guidance from the OMB on this issue in April 2002. See Attachment D.

On August 22, 2002, Deputy Comptroller Joseph L. Kull responded to the OIG’s letter. See Attachment E. Unfortunately, his response does not provide guidance on the issue presented. Rather, it suggests that the issue be addressed by the Detention Trustee, but does not state how the acquisition process should be structured or whether a profit may be paid under an IGA.

In his memorandum, the Detention Trustee suggested a possible change in “future IGAs where circumstances exist in which the local authority will not agree to reimbursement of costs.” The Detention Trustee recommends that the Department adopt a procedure to allow payments above costs for state and local government detention services in certain cases. Specifically, when a local government will not agree to reimbursement under an IGA based actual cost, the Detention Trustee proposes to use a fixed-price IGA to establish a rate of reimbursement for detention services, although such an agreement may result in payments beyond cost. This would allow the Department to enter into an IGA that is, in effect, a fixed-price contract as contemplated in FAR while avoiding numerous FAR requirements that have been objected to by state and local governments, including those intended to ensure compliance with federal policies.

First, as a practical and budgetary matter, we believe this approach could have severe implications for the amount of money the Department spends for detention services. Once it becomes known that all a provider need do is refuse to agree to a reimbursement based on cost, we believe that most, if not all, state and local governments will reject that basis in favor of one that enables them to obtain a profit. If one state and local government is allowed profit, others will inevitably find out about it and will demand profit as well. This could have staggering implications on the Department’s detention services. For example, if the Department allowed a 5 percent profit on each of its current IGA agreements, it would cost the government 80 million additional dollars each year for the detainees that are housed under these agreements.²

Second, we still question the legal authority to enter into the IGAs as the Detention Trustee has described. As the authority for allowing a fixed-price IGA with profit, the Detention Trustee points to § 119 of the Department of Justice Appropriations Act for 2001 (P.L. 106-553). For the reasons set forth below, the OIG does not believe that this provision was intended to provide the Department with such authority.

Section 119 of the Department’s appropriation for FY 2001, includes the following language:

Notwithstanding any other provision of law, including section 4(d) of the Service Contract Act of 1965 (41 U.S.C. 353(d)), the Attorney General hereafter may enter into contracts and other agreements of any reasonable duration, for detention or incarceration space or facilities, including related services, on any reasonable basis.

(Pub. L. No. 106-553 Appendix B, 114 Stat. 2762A-69.)

The legislative history of the appropriation act demonstrates that this provision was intended to allow multi-year contracts with private entities. In addition, the term “on any reasonable basis” that appears at the end of § 119 was not intended to address the basis of negotiation. Rather, it addressed the type of contract and is shorthand for the term “to acquire such space or facilities on a lease-to ownership, lease-with option to purchase, or other reasonable basis.”

Section 119 was not intended to be a legislative grant of authority to depart from cost-based agreements with state and local governments. ³ The Conference Committee, at the request of the Department, agreed to authorize multi-year contracts or agreements with private entities on a lease-to ownership, lease-with-option to purchase, or other reasonable basis. There is no suggestion in any of the Department’s communications that the Department sought this provision for the purpose of entering into multi-year contracts or agreements with state and local governments on a basis other than cost. Thus, any suggestion that § 119 vests the Department with authority to depart from the long-established practice of basing contracts with state and local governments on the costs of providing the services is unfounded. Indeed, we believe that it is inappropriate for the Department, which justified the adoption of this language based on one set of facts, to argue that the language adopted stands for a proposition that was never presented to Congress for its consideration.

Conclusion

Based on the foregoing analysis, we recommend that the overpayments identified in the OIG audits of state and local agreements for the provision of detention services be colleted. Second, we recommend that action be taken to collect or resolve the additional costs incurred because of the failure of Department components to adjust payments to state and local governments to reflect the audited rates. Third, we recommend that future awards to state and local governments under IGAs be limited to the actual cost of providing detention services. Because of the large sums of money involved and the importance of these to the Department, we believe it is imperative that the Department decides these issues expeditiously.

Attachments

cc:	Craig M. Unger, Director Office of the Detention Trustee Stuart Levey Associate Deputy Attorney General David Margolis Associate Deputy Attorney General Paul Murphy Associate Deputy Attorney General Robert F. Diegelman Acting Assistant Attorney General     for Administration

1. The Detention Trustee states that if a component disputes the audit recommendations, it should follow the Department’s audit resolution procedures or seek authority to compromise or waive the debt under the Debt Collection Act. The overpayments found in our audits have not been disputed by the USMS or the INS.

2. This figure is likely to be conservative. York County is currently being paid in excess of 50 percent profit.

3. Attachment F to this memorandum sets forth relevant legislative history of this provision.