MEMORANDUM FOR	LARRY D. THOMPSON DEPUTY ATTORNEY GENERAL
FROM:	/s/ Craig Unger Craig H. Unger Federal Detention Trustee
SUBJECT:	Intergovernmental Agreements

The purpose of this memorandum is to provide the Office of the Deputy Attorney General (ODAG) with the Federal Detention Trustee’s (Trustee) recommendation concerning agreements entered into with state and local governments for providing detention services. Specifically, the Trustee was asked to make a recommendation on two issues: (1) the resolution of the Office of the Inspector General (OIG) audits concerning claimed overpayments to state and local governments; and (2) guidance on the issue of whether a fee above cost may be paid concerning such agreements.

The Department of Justice (Department) houses a daily average of approximately 34,000 detainees in state and local facilities. In contrast, approximately 16,000 detainees are housed in federally owned and operated facilities. The relationships established by Intergovernmental Agreements (IGAs) with state and local governments are paramount to carrying out the function of detention. Such arrangements also save on costly capital development of federal facilities.

Since 1982, based on an exception granted by the Office of Management and Budget (OMB)¹, the Department has acquired a significant portion of detention services from state and local governments through the use of IGAs. By virtue of several separate statutes, Congress has since authorized the Attorney General to enter into contracts and agreements with state and local governmental entities for the provision of acquiring detention services². Such IGAs are negotiated in accordance with OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments. Both the United States Marshals Service USMS) and the Immigration and Naturalization Service (INS) have policies that reference the applicability of Circular A-87 when acquiring detention services through an IGA.³

OMB Circular A-87, as revised, provides the following guidance:

“This circular establishes principles and standards to provide a uniform approach for determining costs and to promote effective program delivery, efficiency, and better relationships between governmental units and the Federal Government. The principles are for determining allowable costs only. They are not intended to identify the circumstances or to dictate the extent of Federal and governmental unit participation in the financing of a particular Federal award. Provision for profit or other increment above cost is outside the scope of this Circular.”⁴

Historically, the OIG, as well as the USMS and INS have read the enabling statutes and Circular A-87 to preclude IGAs from including a payment of profit or fee in excess of actual costs. Most, if not all, IGAs in place today limit reimbursement to actual costs or the same daily costs that state and local authorities incur to hold their own prisoners, and do not allow for a payment of profit or fee.

Recently the INS, USMS, and the Justice Management Division (JMD) have expressed an opinion that they are not limited to reimbursement of actual costs and may enter into fixed-priced IGAs, based on a fair and reasonable price for services rendered.⁵ Under such type(s) of arrangements, the price is fixed and is not subject to adjustment on the basis of state or local providers actual costs for providing services. In other words, a predetermined fixed-price is paid for a base time period whether or not the actual costs are below or above the price agreed upon in the IGA. The OIG has disagreed with the INS, USMS, and JMD opinion regarding this issue.⁶

In March 2002, the OIG raised the issue to the Deputy Attorney General with a request to seek OMB guidance on this manner.⁷ The issue on whether a profit or fee is permissible under Circular A-87 has been raised to OMB on another occasion. In March 1999, G. Edward DeSeve, then Deputy Director for Management of OMB, wrote the Department regarding the issue of whether the Federal Government may pay a profit or fee to state and local governments or other sponsored agreements. Deputy Director DeSeve stated:

“OMB Circular A-87, “Cost Principles for State, Local, and Indian Tribal Governments” generally prescribes what costs are allowable under cost-reimbursement contracts and sponsored agreements. Circular A-87 is mandatory for use when determining allowable costs under such agreements, and is also used as a guide for negotiating costs for fixed price instruments (e.g., contracts) when cost data is used for the basis for price negotiations. By definition, profit or fee is an amount in excess of cost. Therefore, OMB Circular A-87 does not address this issue. In addition, other general Federal regulations that form the basis for establishing or negotiating contracts, grants, or other sponsored agreements similarly do not appear to address this issue (although some agency-specific program regulations may prohibit these payments). Federal “policy” with respect to this issue generally, seems to vary from agency to agency, depending upon programmatic responsibilities and mission.”

The DeSeve letter suggests, with regards to the issue of paying profit or fee, to allow the Department to make such determination and establish “policy” based on programmatic responsibilities and mission. With regards to the negotiating of fixed-price agreements, DeSeve stated:

“With respect to fixed-price contracts that are not priced based on cost (e.g., those that are priced based on competition or when commercially available items and services are being obtained), cost data is not normally used to conduct negotiations, and the provisions of OMB Circular A-87, and/or other Federal cost principles are inapplicable. 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.”

“OMB supports the use of contracting arrangements that minimize total costs to the Government. To test the cost effectiveness of contracting alternatives, OMB recommends that the Department of Justice (Department) pilot the use of fixed-price contract arrangements and compare the overall costs of such arrangements with intergovernmental service agreements currently in use.”

Our office has been unable to locate any documentation from JMD, INS, or USMS developing a policy of this nature, nor completing a pilot project recommended by OMB. The approach to entering into IGAs has remained based on the reimbursement of actual costs.

The OIG conducts periodic audits of the Department’s IGAs which is required in cost reimbursement arrangements to determine allowable invoiced costs. Recent audits have disclosed instances of overpayments to state or local authorities. 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 component and the state or local governmental entity agreed to reimbursement of actual costs.

It is the OFDT’s recommendation in the case of these audits that the overpayments should be recovered by the component involved.

If the component disputes the OIG audit findings, then the policies and procedures outlined in Department of Justice Order 2900.6A, “Audit Follow-Up and Resolution” should be followed. This DOJ Order establishes the Department’s specific procedures for resolution of audit findings. Likewise, if the component recommends compromise or termination of debt collection, the Debt Collection Act should be followed.

In April 2002, the OIG, with the concurrence of the ODAG, requested further clarification from OMB on whether an IGA entered into for detention services as governed by Circular A-87 may contain an element of profit in excess of actual costs.⁸ However, OMB has not responded as of this date. This office does not believe any OMB clarification will resolve the current audit findings, since the signed IGAs were based solely on the reimbursement of actual costs. OMB clarification, however, will be a key factor in establishing a Department-wide policy for future IGAs. Since clarification on this matter has been sought from OMB, it is recommended the status quo concerning IGAs be maintained until such guidance is received by the Department.

The nature of cost reimbursement agreements is quite dynamic. Changes in population, direct and in-direct costs fluctuate on a daily basis, and can lead to a variance in the agreed upon jail date rate depending upon the date and time of an audit. Further, such arrangements do not provide an environment (nor incentive) for local jailers to maintain a cost efficient operation, their costs are simply passed on to the Department for reimbursement. Therefore, it is our belief that in certain future cases a fixed-price agreement would represent the best value to the Department and the taxpayer. Section 119 of the Department of Justice Appropriations Act for 2001 (Public Law 106-553) allows the Attorney General to enter into contracts and agreements for any reasonable duration and under any reasonable basis and as such, provides the necessary authority to enter into fixed-price arrangements.⁹ Additionally, Section 119 language should be used to consolidate the previous authorities granted the Attorney General which the Department uses to enter into IGAs for detention and incarceration services. This authority has since been delegated to the Trustee.¹⁰ Hence, future IGA’s will be negotiated and awarded on the basis of benefits to the entire Department of Justice, as opposed to the previous “stovepipe” approach of each individual component.

We propose, in future IGAs where circumstances exist in which the local authority will not agree to reimbursement of actual costs, a fixed-price vehicle should be considered when a benefit is clearly demonstrated to the Department and the taxpayer.

In conclusion, a draft policy has been developed (attached) which would require components to submit a written justification to our office for prior approval, which would provide the basis for entering into such fixed-price IGAs. The justification at minimum would contain:

1. The OMB Circular A-87 costs and data sheets;
2. Historical cost for obtaining the detention service in the geographical area in which the price is being negotiated (to include prices paid to private vendors, cost of existing federally owned and operated space);
3. Cost of alterative performance (i.e. if the agreement was not consummated how would the service be obtained and the associated costs);
4. The term of the agreed negotiated price (i.e. 1 year, 2 years, etc.) with reasonable allowances for price adjustments to be negotiated for subsequent time frames; and
5. Documentation of the price or cost analysis used to determine the reasonableness of price.

Any instances in which DOJ benefit(s) could not be supported and documented, such agreements would be limited to reimbursement of actual costs or at the same daily rate the authority incurs to house its own detainees. We believe this approach would resolve the current controversy, and provide the appropriate controls for cost containment.

I look forward to working with you and the OIG to improve the state of affairs in detention. If you have any questions, please do not hesitate to contact me.

Attachment

Office of the Federal Detention Trustee
Policy Guidance OFDT-02-XXX

Subject: Use of Special Authority for Intergovernmental Agreements for Detention
             Related Services

The Department of Justice (Department) houses a daily average of approximately 34,000 detainees in state and local facilities. In contrast, approximately 16,000 detainees are housed in federally owned and operated facilities. The relationships established by Intergovernmental Agreements (IGAs) with state and local governments are paramount to carrying out the function of detention. Such arrangements also save on costly capital development of federal facilities.

The purpose of this document is to provide guidance for the use of Section 119 of the Department of Justice Appropriations Act of 2001 (Public Law 106-553) for Acquiring detention services at a fixed price from state or local governments. Section 119 allows the Attorney General to enter into contracts and agreements for any reasonable duration and under any reasonable basis. This authority since has been delegated to the Federal Detention Trustee (Trustee).

This authority may not be used without the written approval of the Trustee. Requests for approval shall be submitted prior to agreement on the price or any other term and condition for the service. The following information shall be included with the approval request:

• Basis for requesting the Authority (reason why agreement can not be reached for reimbursement to actual costs or the same daily costs that state and local authorities incur to hold their own prisoners);
• The term of the agreed negotiated price (i.e. 1 year, 2 years, etc.) with allowances (i.e. annual CPI adjustments, Service Contract Act, etc.) for price adjustments to be negotiated for subsequent time frames;
• Documentation of the price or cost analysis used to determine the reasonableness of price to include OMB A-87 costs and data sheets;
• Historical cost for obtaining the detention service in the geographic area in which the price is being negotiated (to include prices paid to private vendors, cost of existing federally owned and operated space);
• Cost of alterative performance (i.e. if the agreement was not consummated how would the services be obtained and the associated costs); and
• Concurrence of component Procurement Chief;
• Any additional pertinent information.

Please include this document to your collection of policy guidance documents. If you have any questions please call Scott Stermer at (202) 353-4601.