<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:22186.wais]
LEGAL SERVICES CORPORATION: A REVIEW OF LEASING CHOICES AND LANDLORD
RELATIONS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 28, 2005
__________
Serial No. 109-145
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
_____
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Commercial and Administrative Law
CHRIS CANNON, Utah Chairman
HOWARD COBLE, North Carolina MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin JERROLD NADLER, New York
J. RANDY FORBES, Virginia
LOUIE GOHMERT, Texas
Raymond V. Smietanka, Chief Counsel
Susan A. Jensen, Counsel
James Daley, Full Committee Counsel
Brenda Hankins, Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
----------
JUNE 28, 2005
OPENING STATEMENT
Page
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Chairman, Subcommittee on Commercial and
Administrative Law............................................. 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Commercial and Administrative Law........................... 2
The Honorable William D. Delahunt, a Representative in Congress
from the State of Massachusetts, and Member, Subcommittee on
the Judiciary.................................................. 5
The Honorable Louie Gohmert, a Representative in Congress from
the State of Texas, and Member, Subcommittee on the Judiciary.. 6
WITNESSES
Mr. Thomas Smegal, Chairman of the Board, Friends of the Legal
Services Corporation
Oral Testimony................................................. 8
Prepared Statement............................................. 12
Mr. Frank B. Strickland, Chairman of the Board of Directors,
Legal Services Corporation
Oral Testimony................................................. 14
Prepared Statement............................................. 15
Mr. R. Kirt West, Inspector General, Legal Services Corporation
Oral Testimony................................................. 18
Prepared Statement............................................. 20
APPENDIX
Material Submitted for the Hearing Record
Letter from Thomas F. Smegal, Jr., Chairman, Friends of Legal
Services Corporation, dated December 9, 2004, to Laurie
Tarantowicz, Office of the Inspector General, Legal Services
Corporation.................................................... 49
Letter from Laurie Tarantowicz, Assistant IG and Legal Counsel,
Legal Services Corporation, Office of Inspector General, dated
December 13, 2004, to Thomas F. Smegal, Jr., Chairman, Friends
of the Legal Services Corporation.............................. 60
Letter from Thomas Smegal, Chairman,, Friends of Legal Services
Corporation, dated February 3, 2005, to Kirt West, Office of
the Inspector General, Legal Services Corporation.............. 61
Letter from Kirt West, Inspector General, Legal Services
Corporation, Office of Inspector General, dated February 23,
2005, to Thomas F. Smegal, Jr., Chairman, Friends of the Legal
Services Corporation........................................... 63
Letter from Thomas F. Smegal, Jr., Chair, Friends of Legal
Services Corporation, dated March 2, 2005, to Kirt West,
Inspector General, Office of the Inspector General, Legal
Services Corporation........................................... 64
Letter from Laurie Tarantowicz, Assistant IG and Legal Counsel,
Legal Services Corporation, Office of Inspector General, dated
March 7, 2005, to Thomas F. Smegal, Jr., Chairman, Friends of
the Legal Services Corporation................................. 68
Response to Post-Hearing Questions from Thomas Smegal, Chairman
of the Board, Friends of the Legal Services Corporation........ 70
Response to Post-Hearing Questions from Frank B. Strickland,
Chairman of the Board of Directors, Legal Services Corporation. 93
Response to Post-Hearing Questions from R. Kirt West, Inspector
General, Legal Services Corporation............................ 104
Letter from Thomas Smegal, Chairman of the Board, Friends of the
Legal Services Corporation, dated October 13, 2005, to the
Honorable Melvin L. Watt, Subcommittee on Commercial and
Administrative Law, Committee on the Judiciary................. 121
LEGAL SERVICES CORPORATION: A REVIEW OF LEASING CHOICES AND LANDLORD
RELATIONS
----------
TUESDAY, JUNE 28, 2005
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 12:41 p.m., in
Room 2141, Rayburn House Office Building, the Honorable Chris
Cannon (Chair of the Subcommittee) presiding.
Mr. Cannon. Good morning, ladies and gentlemen. This
hearing of the Subcommittee on Commercial and Administrative
Law will now come to order.
I will keep my opening remarks brief, as I believe that the
testimony and the opportunity to ask questions of our witnesses
will prove to be more valuable, and I want to leave as much
time as possible for the Members of the Subcommittee to utilize
this opportunity.
We consider today the ``Legal Services Corporation: Leasing
Choices and Landlord Relations.'' This hearing comes as a
result of the findings in the report of the Office of the
Inspector General for LSC, a report which raised several issues
of serious concern and which was unanimously rejected by the
LSC board of directors.
It is important to stress the reason why we are here.
Congress wanted an independent review of the Executive Branch
and independent agencies to determine if there is waste, fraud,
or abuse occurring in Government generally.
Is this microphone working?
In order to aid Congress and the agencies for whom they
work in this endeavor, the Inspector General was created. The
success that the IGs have had across the spectrum is
unquestioned. Upon receiving this report, I'm glad to see the
IG at LSC is trying hard to continue in this tradition.
The posture which the board and LSC management has adopted
in this matter is troublesome. Some of the LSC management
questioned the utility of this hearing, despite the conclusions
of the IG's report. In view of their reluctance, I'm glad that
Mr. Strickland, the board chairman, is here today to answer
questions raised by that report.
At issue today is how federally appropriated dollars are
being utilized; whether there is efficient use of those
dollars; and whether they are being used appropriately. These
issues become all the more important when we're discussing the
budget of an organization that is in existence to assure the
provision of civil representation to those who could otherwise
not afford it, and whose every inefficiency equates to the loss
of representation to a potential client in need. These are
serious questions which I can assure you this Committee and I
will always have time for.
I would like to thank each of our witnesses for taking the
time to inform the Subcommittee of the facts involving this
arrangement between LSC and Friends of LSC.
At this time, I'd like to recognize my good friend and
distinguished Ranking Member, Mr. Watt. I understand there are
some issues he would like to address at this time. With the
permission of Mr. Watt and the Subcommittee, I would also like
to comment on the issues which he presents. I believe them to
be of great concern to our body and our ability to conduct
hearings which are conductive and can accomplish that which
Congress needs to do as this Government's legislative arm.
Thank you, Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. And I want to start by
thanking the Chairman for convening this oversight hearing of
the Legal Services Corporation which, in my estimation, is an
extremely vital part of our legal system.
Last year, the Legal Services Corporation celebrated its
30th anniversary. It was created by Congress in 1974 to ensure
that Americans have access to our justice system regardless of
their economic means. The Legal Services Corporation has for
three decades lived up to the high purpose for which it was
created, providing legal assistance in civil matters to tens of
millions of low-income Americans who would have otherwise gone
without counsel.
Today, we are here to exercise our oversight
responsibilities with respect to the Legal Services
Corporation. The briefing materials issued by the Chairman in
preparation for this hearing identify the purpose of the
hearing to be, ``to examine the fiscal soundness of a lease
entered into by Legal Services Corporation, the potentially
false representations made by Friends of the Legal Services
Corporation, the relationship key agents played in the
interactions occurring between the Legal Services Corporation
and Friends of the Legal Services Corporation, and the overall
relationship between the Legal Services Corporation and Friends
of the Legal Services Corporation.'' That's the purpose for
which this hearing is here.
Now, today we have three witnesses before us, and we have
an empty chair in front of which I've taken the liberty of
putting the name of the fourth witness who we've been trying to
get to be here. The empty chair was to be occupied by John
McKay, who is currently the U.S. Attorney for the Western
District of Washington State. For the second consecutive year,
the U.S. Department of Justice has thumbed its nose at a
legitimate request from Congress, and refused to allow Mr.
McKay to testify about the matters about which he has personal,
historical, and professional knowledge.
Before I continue, Mr. Chairman, I do want to acknowledge
the support and assistance you have provided in attempting to
secure Mr. McKay's presence. I believe you agree that the
Department of Justice is undermining the ability of this
Subcommittee to faithfully execute its oversight function.
The position of the Justice Department lacks credibility.
Last year we were told, ``DOJ officials testify on DOJ matters,
not on matters relating to other entities.'' Similarly, this
year we were told that, ``Department of Justice witnesses
testify about Department of Justice issues.''
Notwithstanding this curious position, on Mr. McKay's DOJ
website, his bio proudly proclaims, ``Between 1997 and 2001,
Mr. McKay served as the president of the Legal Services
Corporation in Washington, D.C. Mr. McKay's tenure at the Legal
Services Corporation was characterized by a bipartisan approach
to working with Congress, driven by a deeply-held commitment to
the principle of equal justice.'' Apparently, that approach has
not been adopted by Mr. McKay's superiors, who have again
treated this Subcommittee with disdain.
Mr. Chairman, I have specifically requested from the
Department an official copy or reference to the policy that
prohibits DOJ employees from responding to invitations from
Congress to testify about issues relevant to their prior
Government service--all to no avail. Can it be that the DOJ
requires all of its employees to check their past lives at the
door, even when the past life was with other entities of, or
connected to, the Federal Government?
I have not asked for Mr. McKay's cooperation because I
think he would make an entertaining witness. The focus of this
hearing is on the leasing arrangement between the Legal
Services Corporation and the Friends of the Legal Services
Corporation, Inc. Mr. McKay is integral to that leasing
arrangement, which is both complicated in detail and lacks some
key documentation.
Mr. McKay's role in the formation of Friends is undisputed.
Let me quote from some of the submitted testimony. Mr. Smegal,
Chair of Friends, states this concept of Friends--and I'm
quoting, ``The concept of a Friends-owned building, leased to
LSC for its administrative headquarters at a flat, fixed rate,
was the motivation for the efforts of those including John
McKay and Congressman John Erlenborn during their terms as
president of LSC.''
Mr. Strickland, the Chair of the LSC Board, states, ``This
transaction was conceived by John McKay, who President Bush
appointed as, and is now U.S. Attorney for the Western District
of Washington.'' Even the Inspector General acknowledges Mr.
McKay's role by reference to the dates of his presidency of
LSC.
As one of, if not the principal architect of the lease
arrangement that we now review, Mr. McKay's presence is vital
to a complete understanding of LSC's intent in entering into
this arrangement with the Friends of LSC.
While it is true that Congressman Erlenborn made many of
the subsequent decisions necessary to implement the concept, he
is, unfortunately, ill, and therefore unavailable to testify.
The present president, Ms. Barnett, has only been over--
been at Legal Services for a little over a year.
Mr. McKay is the only prior LSC official with knowledge of
the contemporaneous events and circumstances surrounding the
lease arrangement that we are now asked to scrutinize so
closely. Mr. McKay, at least last term, was willing to testify.
This year, after 20 days of negotiating with the Department of
Justice commencing on June 8, we were advised only yesterday,
and I quote from a DOJ e-mail, ``Even if we agree that U.S.
Attorney McKay should participate in this hearing--which we
don't--he could not do it anyway, because we were told last
week that he was away on vacation.''
It strikes me that that response is arrogant and insulting.
Either the DOJ is totally inept, or completely contemptuous of
this Congress.
This matter was left unresolved last term, Mr. Chairman.
But given Mr. Erlenborn's condition, it will certainly arise
again if this Subcommittee is serious about getting to the
facts about this lease arrangement.
I will listen to the witnesses who are here today; but
without Mr. McKay present before us, actively engaged in the
dynamics of a hearing about his brainchild, the Friends of the
LSC, and about a period he proudly and clearly--without the
Department of Justice's objection--boasts on his website about,
I certainly can't consider this record complete.
Mr. Chairman, I hope that you will actively join with me to
pursue this to an appropriate conclusion. I believe that the
time is now for us to consider issuing a subpoena to either Mr.
McKay or the appropriate Department of Justice official or
officials who continue to disregard and disrespect this
Committee's jurisdiction. And I yield back the balance of my
time, if I have any.
Mr. Cannon. Thank you. Let me just add to your comments
that being on vacation is not an appropriate reason to not be
here, especially when one wonders whether the vacation was
planned in advanced, or a matter of convenience.
The request that we made of Mr. McKay was as you said, a
legitimate request. And it is not possible for us to faithfully
fulfill--again, quoting you, Mr. Watt--our oversight
obligations, if we don't have the ability to bring witnesses
before us.
You mentioned that the Department of Justice is
contemptuous. There may be people there who are contemptuous,
who need to learn a lesson. And may I just suggest for the
gentleman that I am willing to consider leaving this hearing
open at the end of the hearing--recessing, rather than
adjourning, so that we retain our options as they relate to Mr.
McKay and the Department of Justice.
Mr. Watt. If the gentleman would yield on that point?
Mr. Cannon. Certainly.
Mr. Watt. I've been told though, that the Chairman of our
full Committee will not allow that to happen, so I suspect----
Mr. Cannon. But actually, I'll run it by the Chairman of
the full Committee just--I think we actually have authority
here in our Committee to do what we want to do; but he was
gracious enough to suggest that if we wanted to keep it open,
he would be fine with that.
Mr. Watt. Hallelujah.
Mr. Cannon. The heavens open. I'm only going to introduce
our board Members and submit their background for the record
for purposes of conserving time here. I want to just say that
we're very grateful to have the people who are here, who are
outstanding individuals with terrific histories.
We'll begin with Mr. Thomas Smegal, who is the Chairman of
the Board of Friends of Legal Services Corporation; and then go
to Mr. Frank Strickland, who is the Chairman of the Board of
Directors of the Legal Services Corporation; and then finally,
we'll go to Mr. Kirt West, who is the Inspector General for
Legal Services Corporation.
And if you gentlemen will excuse me for not giving your
whole bios here, I would appreciate that. And let us begin, Mr.
Smegal----
Mr. Delahunt. Mr. Chairman, I would like to make a
statement.
Mr. Cannon. Oh, the gentleman from Massachusetts. Or would
anyone else like to make an opening statement at this point?
[No response.]
Mr. Delahunt. I'd just like to make an observation.
Mr. Cannon. The gentleman is recognized for 5 minutes.
Mr. Delahunt. I'm conflicted about this hearing. First, let
me say that I think it's important that we conduct aggressive
oversight. And I want to compliment the Chair of the
Subcommittee, the Chair of the full Committee, for their work
with Members on this side, in terms of doing that oversight in
a way that is in camera, if you will.
And I see Mr. Daley here. Let me also acknowledge his role
in terms of conducting oversight into the FBI.
And I think we need to be much more aggressive in public.
Yet at the same time, here we are with the LSC again. A year or
two ago, we were talking about a lease where there was a
disagreement over--I don't know--$1,000 a month. I'm looking at
the facts as put--as memorialized in a memorandum.
And again, I'll just presume that these facts, in arguendo,
are accurate. Over the life of the lease, they will overpay 1.2
to 1.9 million. This is according to the Inspector General. And
I should add that there appears to be a disagreement between
the board of directors and the IG, and I'm sure that's what
we'll hear about today.
It's submitted that there could be saved 680,000, plus a
440,000 early termination fee, by staying at original location.
And yet, here we are in Congress, Mr. Chairman, where it was
just this past week that there was a congressional hearing on
the development fund for Iraq--the first occasion for an
oversight hearing--where there are allegations of fraud, waste,
and abuse of some 9 billion. I guess I'm talking about
proportionality here. I think it's time that we take on some
issues that have more significance than the one we are today.
Having said that, I think we need a sense of proportion.
And I would like to discuss with you and Mr. Watt and other
Members, as well as the Chair of the full Committee, some
areas. And I think we should communicate in letter, requesting
oversight hearings into areas that I think have vastly more
significance, with all due respect to Legal Services, because
Legal Services is an easy target. And again, I think we should
have a conversation, and then a letter.
But--my final observation--to think that the Department of
Justice--and I've met Mr. McKay, and I found him to be an
individual of integrity, and I think he attempted to do well by
Legal Services. I'm sure that this disagreement most likely
will be a matter of opinion, but will establish that people
were motivated by an effort to do better by Legal Services
Corporation.
But at the same time, to think that the Department of
Justice won't provide Mr. McKay for testimony, that is
contemptuous. And I would remind the Chair that I served with--
on an ad hoc basis with the Government Reform Committee, and we
ran into the same resistance there. And Chairman Burton had to
threaten the White House with a contempt citation before there
was cooperation. And again, I would suggest that it wasn't a
full measure of cooperation; not what should be expected to a
congressional Committee.
And I would add that Chairman Burton had bipartisan, full
support of every single Member of that Committee to issue a
subpoena. So I would just mention that to you, and suggest that
that's something to consider.
One further final thought. When we talk about the sunset
provision in the hearings that the Crime Subcommittee has had--
and I know the Chairman of the Crime Subcommittee is here, Mr.
Coble; and I see my friend from Texas, Mr. Gohmert--if this
isn't an example of what myself and others have been saying
about the need for a sunset provision to ensure that there is
cooperation and collaboration by the Department of Justice, I
can't think of a better case.
With that, I'll yield back.
Mr. Cannon. If the gentleman would yield just for a moment,
let me just say that no one has been more careful of the
prerogatives of Congress than I have, regardless of the
Administration, Republican or Democrat. And so I agree with the
gentleman.
And putting in perspective this hearing--and I think Mr.
McKay is relevant to that fact--if he were here, that would
help us solve the problem at one time and move on to what I
agree with the gentleman are much more important problems. That
said, I believe that our role here is, when we have a problem
as has presented itself before us today, that we need to look
at it. And it will be interesting to hear our witnesses present
their information and be questioned.
There is no question but what there's a problem. The
problem is not in the nature of the 1.2 million or the 1.9
million dollars for rent. The question is in the nature of the
relationship between the two organizations, a relationship that
was created in the context of a rule by OMB that would have
disallowed Legal Services Corporation from owning its own home
because of its scoring rules.
And so I think this is an appropriate time to look
carefully and intimately into this problem, and then move on.
But I agree with the gentleman, we have many things that we
ought to look to. And we in particular ought to be enormously
concerned about the prerogatives of this body, as opposed to
those of what every Administration is going to presume, as
opposed to what is appropriate. So I pledge to the gentleman
that we'll work together both on our oversight process and as
to this witness who is not with us today, in particular.
Are there other Members who would like to make an opening
statement? Mr. Gohmert? The gentleman is recognized for 5
minutes.
Mr. Gohmert. I thank you, Mr. Chairman. And I would like to
applaud you for calling the hearing. And even though some might
feel like 1.2 to 1.9 million dollars overpayment over a 10-year
period is not all that significant, as the old adage goes, you
know, ``A million here, and a million there, and before long
you're talking about--''
Mr. Delahunt. ``A billion.''
Mr. Gohmert. Well, we're dealing with a million here, so
before long you're talking real money.
But it is important. And where we have an institution
that's supposed to be providing legal advice and helping others
with legal rights, my goodness, they certainly ought to be able
to help themselves appropriately, ethically. And I think it's
certainly worthy of review and oversight, and I applaud the
Chairman, regardless of what Administration is in the White
House. And I think it speaks volumes for the Chairman that we'd
have a hearing of this nature with Republicans in the White
House. It just shows, if there's some problem, we're not going
to mask it. Let's get it out there where we can look at it.
Now, I would like to also hear from Mr. McKay. I couldn't
agree with my friend from Massachusetts more on that, and with
Mr. Watt, as well. I think from what I was hearing there's a
multiple problem, a multi-faceted problem in that he's on
vacation, as well. But I get the impression that we're going to
get a chance to hear from Mr. McKay, if enough of us want to
hear from him, and that's what it sounds like.
So I'm very interested in getting to the bottom of this,
especially where we have officers of the bar who are supposed
to be providing help to other people and yet, if you do what my
old professor in law school said and apply the smell test,
there's an odor here that is not good, and we need to get to
the bottom of it. So I appreciate the chance.
Mr. Watt. Would the gentleman yield just briefly?
Mr. Gohmert. Surely.
Mr. Watt. Just he hasn't been around quite as long as we
have. But I've been working on getting Mr. McKay here for 2
years, and I haven't seen him yet. So my patience is running a
little thin.
Mr. Gohmert. Well, there is----
Mr. Cannon. If the gentleman would yield, I've been here
for the last 2 years, and my patience is--``thin'' is a gentle
way to say it.
Mr. Gohmert. Well, I'm newer here, and I have that hope
that springs eternal in the human breast, I guess. And I
believe we're going to get him here at an appropriate time, so
I would encourage the Chairman. And I expect to see that
happen, or there will be consequences.
But I appreciate the effort, and I applaud the Chairman's
effort, and thank you for allowing me to be a part of it.
Mr. Cannon. The gentleman yields back. Without further
opening statements, let's turn to the panelists. Mr. Smegal,
would you please take 5 minutes and explain. I assure you,
we'll have time after.
There's a light in front of you illuminating all panelists.
It stays green for 4 minutes; turns yellow for a minute; and
then turns red. You don't have to stop in the middle of a
sentence, but if you could begin to wrap up at that point, we'd
appreciate it. Thank you.
TESTIMONY OF THOMAS SMEGAL, CHAIRMAN OF THE BOARD, FRIENDS OF
THE LEGAL SERVICES CORPORATION
Mr. Smegal. Thank you, Chairman Cannon, Ranking Member
Watt, and the outpouring of others at this Committee. I
appreciate the opportunity to address you. My name is Thomas
Smegal, and I am Chairman of this Board of the Friends of the
Legal Services Corporation, which is a District of Columbia
non-profit Corporation recognized by the Internal Revenue
Service as a public charity under section 501(c)(3) of the
Internal Revenue Code.
Congressman Watt, in my past life--you mentioned John
McKay's past life--in my past life, I was first honored to be
nominated by President Reagan in 1984 to serve on the Legal
Services Corporation Board. In 1993, I was again honored by
President Clinton to serve on this board, and I served over the
course--each of those nominations, by the way, were confirmed
unanimously by the United States Senate--and I served for
approximately 18 years.
Now, I've made an attempt to balance a Federal budget while
I've been on the board--while I was on the board. There's an
attendance fee that members of the board get. Chairman
Strickland tells me it's now $318. I didn't take that $318 a
day for the 20 years I was on that board. I worked on my own
nickel. I represent friends pro bono. The only compensation I
have ever gotten--and I haven't gotten it yet--is that I
understand from Mr. Daley that I may be reimbursed for my plane
fare and hotel room last night, in coming to attend this
hearing.
Friends was established in 2001, during my then most recent
term on the Board of the Legal Services Corporation. Until a
month ago, when we replaced a pro bono staff person from the
Corporation, there was no one who was paid to be part of
Friends of the Legal Services Corporation. Friends has always
been staffed by non-paid volunteers. Its sole mission has been
to act in the best interests of the Legal Services Corporation.
Upon dissolution of Friends, any asset that has accumulated,
including the building that is the subject of this hearing,
will revert--must revert--to the Legal Services Corporation.
The way this process started was when John McKay was
president--Congressman Watt pointed out that he was president
of this--the staff president of the Legal Services Corporation,
as Helaine Barnett is now, from 1997 to, I recall, about June
of 2001, when he was then being nominated by President Bush to
be the U.S. Attorney for the Western District of Washington.
But prior to his departure, in 1999 he and others went to the
Office of Management and Budget with the idea that had been
created by some of us who were sitting on the board, had been
subjected to two leases, payment of two leases, when we became
board members in 1992--one at 750 Northeast First Street, and
the other on Virginia Avenue. Our prior board had determined to
move, expecting property in D.C. in 1991 to be rentable on a
sublease, and we paid--we paid double rent for 2 years.
Anyway, the concept here was: Is there some way we can cap
the rent of the Legal Services Corporation in the District of
Columbia? We have to be in the District of Columbia. We have to
have space here. And the concept was: If we owned our own
building, if the Corporation owned its own building, then maybe
we'd have some control over what the rent would be.
In addition, it occurred to us--and at that time, I spent a
lot of time before various Committees of the House and the
Senate, defending the Corporation and defending its budget. And
we got a lot of--there was a lot of concern upon the Hill here
for the Legal Services Corporation. The other concept was: If
we had a permanent home, we weren't just wandering around town
renting, that maybe that would be helpful with you Members of
Congress to demonstrate that we were a vital component of the
United States delivery system of legal services.
So John McKay and others went to OMB and said, ``Here's
what we want to do. We want to buy a building.'' And OMB said,
``Well, you can do that, but if you do that, we're going to
score it. We're going to take whatever that building costs off
the top of your appropriation in whatever year you do it.'' And
John McKay and others said, ``Geez, that doesn't sound like
something that we want to do, then. Is there any alternative?''
And OMB said, ``Yes, there is an alternative. You can set up a
501(c)(3) corporation which will own the building, and you can
rent from that corporation.''
And there happens to be--and I think Mr. Strickland will
share with you several examples of that, that existed before.
The Navy has a setup like that; Friends of the Zoo here has a
similar situation; and there are a couple of others that Mr.
Strickland will get to.
In any event, that was the first conversation. There was no
Friends of the Legal Services Corporation at that point. The
next meeting--and I was part of that meeting, and went to the
White House. And we talked to Counsel to the President, Charles
Ruff, and we explained to him what we had hoped to do, if we
could accomplish this. And the Clinton White House, through
Charles Ruff, said, ``This is a great idea.''
The process kept going. And incidentally, I'm not here to
defend the Justice Department. I'm not here to defend John
McKay. But let me at least give you a little insight into what
was going on. If you want someone who was there all the time
and can answer all the questions, I'm here.
The original Gates offer of $4 million to buy a building
occurred in the year 2001--19--no, 2001, when John McKay was,
in fact, staff president. The problem with that original grant
was that it would expire on December 31, 2001. The problem was
at that point we had an opportunity. We hoped to buy a vacant
lot up here, which fell through, and December 31 came and went.
Now, John McKay had left the Corporation in June of 2001.
He hadn't been there for 6 months. So when the contact is again
made with Bill Gates, Sr., I make the contact. I call Bill
Gates, Sr. I say, ``We couldn't make the deal by the end of
December 31, 2001. Can you extend the term in which we could
have this grant?'' And Bill Gates, Sr., said, ``Well, I'll
check with my son. I'll call you back.'' A few months later, I
got a call from Bill Gates, Sr., saying, ``I'm going to make
your day, Tom. My son says we'll give you the money. You can
have additional time in which to find a building for the Legal
Services Corporation.''
Now, we're now in 2002, and we've got a building in sight.
And the significance of the building--which, by the way, has to
be a Class ``B'' building, because you can't be a Class ``A''
building unless you have 100,000 square feet of space. The
building has 65,000 square feet. As the Inspector General's
appraiser points out, it's 46 percent empty. It's the old adage
of, ``Is the glass half-full or half-empty?'' To us, that's the
good news; because we're looking for space to put the Legal
Services Corporation in, in June of 2003, when they can get out
of the lease at 750 Northeast First Street.
We come to Congress; we come to this Committee; we come to
the Judiciary Committee on April 23, 2002. There's no lease.
There is no deal. We've got a hold on the building. We're
trying to get it. We come up here. And John Erlenborn, Vic
Fortuno, Lynn Bulan, Mauricio Vivero, and the person who's
trying to put this deal together for us, a financial person,
Don Carpenter--the five of them come up here. They meet with
Patty DeMarco and J. Keith Ausbrook, who I understand then to
have been the chief counsels for oversight investigation for
this Committee. That was April 23, 2002, at 2 p.m.
Now, this Committee signed off on the deal, and it was
structured at that point. We understood what we were going to
do. And then, we went to the only bank that would give us any
money. We've got $4 million of Gates' money, maybe, and we have
nothing else.
Mr. Cannon. Mr. Smegal, I apologize for cutting you off,
but we have--I can assure you that under questioning time
you'll have the opportunity to finish----
Mr. Smegal. Well----
Mr. Watt. Can I just yield him my 5 minutes, so we can get
a clear picture of how this occurred?
Mr. Cannon. Yes. Absolutely.
Mr. Smegal. Thank you.
Mr. Cannon. The gentleman is recognized for an additional 5
minutes.
Mr. Smegal. Well, BankAmerica is very skeptical about this
whole deal, and they say, ``Well, geez, we're going to have to
give you $15.5 million. We want a million and a half of the
Gates money set in a separate account as a reserve, in case you
lose your tenant. We want a tenant in that building that will
yield $1.7 million a year, so that we know you can service the
debt, the 15-point-million-dollar debt that you're going to
incur. And as long as you can guarantee us that, then we're
willing to give you the opportunity to have this money and go
and try and make your deal with the bank.''
They had an appraiser. The appraiser is in here. You've got
the appraiser's report that the BankAmerica--someone they
trust; someone they went to; someone they go to a lot. And they
said, ``What's this building worth?'' This individual said,
``This building is worth $60.2 million, once they put some
tenant improvements in there.'' And the concept was up to $2
million in tenant improvements in this 54 percent of this
vacant building that the Corporation is going to occupy in June
of 2003.
The bank says, ``We'll make the deal. You get $38 a square
foot, flat, because that's what we need--'' They didn't say
that. ``That's what we need to carry the debt. That's what
you're going to need to carry the debt in addition to the
million and a half we've asked you to set aside.''
So we go to the Corporation. John McKay is a year away from
what's going on here now. He left in June of 2001. This is now
June of 2002. The bank gets their appraisal. The banks says,
``Okay, we've got a deal.'' And I, as part of the Legal
Services Corporation--I'm serving on the board--and the rest of
us who are involved in this--there's nobody else here. It's
just us. There's no conflict of interest. There's nobody. It's
the Legal Services Corporation, trying to save the Government
some money; trying to create a permanent home.
So we create a lease. And the lease is for $38 a square
foot, flat, forever. No pass-throughs; no increases; nothing.
So what else did we do? There's parking spaces in the building.
They're going for $175 to $200 a month in 2002. We say, ``A
hundred bucks a month, forever.'' What else? No pass-throughs,
no tax increases; $38.
We have a meeting of the board on February 6, 2002. You
have the minutes. Bill McAlpin, one of my fellow board
members--appointed to the Legal Services Corporation twice--
says to me, ``Tom, you know, when we came in the office in
1993, we were saddled with two leases, only one of which we
could occupy. And you know, that was troublesome.'' And that
was in response to the question he had asked me, ``How long is
the lease going to be, Tom?'' And I said, ``Bill, how long do
you want the lease to be?''
The tax-free Government bonds that I persuaded the District
of Columbia to provide to us, in lieu of the $15.5 million in
loan from the Bank of America, is a 25-year bond issue. Twenty-
five years sounds like an appropriate term.
The only reason for having the rent level at $38 a square
foot, the million-seven, is to service the debt. We have other
tenants in the building from which we obtain sufficient funding
to accomplish the rest of the management of the building.
And incidentally, there was some question raised somewhere
along the way as to, ``Gee, the other tenants are paying much
less. And how come the Corporation is having to pay this
incredible amount?'' The other tenant on the fourth floor,
Penzance, renewed their lease. We inherited a lot of leases in
2002, in the part of the 46 percent of the building that was
occupied.
Penzance recently executed a lease at $31 a square foot.
They pay $175 a month for eight parking places; and they have
pass-throughs and bumps every year; and their lease is going to
end in 2009. The Corporation's current lease is going to end in
2013.
Frank Strickland and his board asked for an additional
lease extension--we're now past the owning two buildings, or
renting two buildings--a number of months ago. And we started
to prepare that. And the Inspector General decided that there
was something wrong with a lease extension, so we have put that
aside. But certainly, at some point we're going to pick that
up.
And incidentally, the other thing that seems to get
overlooked in this process, the rest of our tenants are now
paying for the space on what is called a BOMA measurement
standard. The Corporation is paying on the D.C. standard
process. And when you measure with the D.C. standard process,
you now get 45,000 feet. If you measure with BOMA, you'd get
48,000-something. The rest of our tenants are paying more rent,
based upon the way you measure the building. BOMA is the way
you measure buildings in this city presently. The Corporation
has the old standard; much less space they're paying for.
Your Honor, I appreciate--or Congressman, I appreciate this
opportunity. And I expect to hear some questions.
Mr. Cannon. I thought you were talking to Mr. Watt there
for a moment. [Laughter.]
Who is certainly honorable.
Mr. Smegal. I'm sorry, I do have one other point that I
want to make right now. Somebody referred--I think it may have
been you, Congressman Gohmert--to this 1.3 to 1.8 million of
overpayment over a 10-year period. And it was Adlai Stevenson
said, ``A million here and a million there and sometimes--
sooner or later, you have a lot of money.''
The cover letter that the appraiser for Mr. West provided
to him in his January 25 report contains the following
statement, ``While the lease was--'' And he's evaluating this
in 2001-2002. ``While this lease was under negotiation as of
our retrospective value date, it had not been signed. And at
your request, our evaluation does not include the terms of this
lease. Our valuation is based on the terms of the seven
existing leases that Friends inherited, encumbering 46 percent
of the building, with 54 percent vacant; with the balance of
the space being vacant on a current basis.'' Thank you.
[The prepared statement of Mr. Smegal follows:]
Prepared Statement of Thomas Smegal
Chairman Cannon, Ranking Member Watt and Members of the
Subcommittee:
Thank you for inviting me to speak at this hearing. My name is
Thomas Smegal and I am the Chairman of the Board of Friends of the
Legal Services Corporation (``Friends''), a District of Columbia non-
profit corporation recognized by the Internal Revenue Service as a
public charity under Section 501(c)(3) of the Internal Revenue Code.
In 1984 I was nominated to the Board of the Legal Services
Corporation (``Board'') by President Reagan. In 1993 I was again
nominated to the Board by President Clinton. Both nominations received
unanimous confirmation by the United States Senate and resulted in my
serving on the Board for parts of 18 years until 2003.
Friends was established in 2001 during my most recent term on the
Board and at the direction of the Board. Until a month ago when Friends
hired a part-time executive director, Friends has always been staffed
by non-paid volunteers, including myself. Its sole mission has been to
act in the best interests of the Legal Services Corporation (``LSC'').
Upon dissolution of Friends, any assets it has accumulated, including
the Building that is the subject of this hearing, must revert to the
LSC.
At the outset, let me suggest that, as the Inspector General
(``IG'') himself has acknowledged, the discussions we are having today
are premature. The IG has stated that his evaluation of the 3333 K
Street Lease is not complete. In effect, what we are discussing is an
interim report by the IG that says ``LSC is paying more for this car
than the price of other cars available at the car dealer.'' What this
statement omits is any discussion about whether the car being bought is
a used Saturn with 100,000 miles on it or a brand new Buick.
In its simplest terms, the IG is saying ``LSC is paying $38 per
square foot in rent, and that seems too high to me.'' What that comment
ignores--by the IG's own admission--is the rest of the terms of both
the Lease itself and the relationship between Friends and LSC. Thus, I
would rather that the Subcommittee had the benefit of the full
analysis--which the IG has suggested he is undertaking--as that full
analysis will show this transaction to have been extremely favorable to
both LSC and the Federal Government. However, as we are here today, let
me point out the main features of the Lease that the IG has yet to
consider and which, I am confident, will obligate him to render a
favorable final report when it is written.
First, the Lease at a fixed $38 per square foot is a long-term
lease. All other leases in the building are for 5 years or less, as
opposed to the 10-year lease Friends has with LSC. It is customary in
the District of Columbia (``DC'') for long-term leases to have
different terms than short-term leases. This long-term fixed rate
Lease, with the resulting security of tenancy, was one of the primary
goals the Board was seeking in looking for new space to occupy when the
existing LSC lease on Capitol Hill expired in 2003.
Second, this long-term Lease does not include any rent increases. A
typical long-term lease would include both ``bumps'' every 5 years and
CPI increases in each year. As the IG's appraisers acknowledge, even if
there were a slightly higher initial rental rate fixed for 10 years,
versus a slightly lower initial rental rate that rose over the term of
a lease, the actual result would be a net savings to LSC. Further, the
IG has yet to consider the added value throughout the Lease term of
providing 52 below-market parking privileges to LSC.
Third, the Lease is a ``full service'' lease, which transfers the
risk of rising real estate taxes, utilities and other operating
expenses to the landlord. With oil prices spiraling, you can easily see
that the structure of this Lease is highly favorable to LSC.
Finally, and perhaps more importantly, the IG has not evaluated the
unique relationship between Friends and LSC. As I noted in the
beginning of this statement, Friends was created by LSC and its sole
mission is to support LSC. Once the mortgage on the Building is paid,
Friends has several options. Friends can either dissolve and turn the
Building over to LSC, rent the Building to third parties and turn over
the profits to LSC, or relet the Building to LSC at terms even more
favorable to LSC than those provided by the present ten-year Lease.
The concept of a Friends' owned building, leased to LSC for its
administrative headquarters at a flat, fixed rate--to cap the LSC
annual rent appropriation requested from Congress--was the motivation
for the efforts of those including John McKay and Congressman John
Erlenborn during their terms as President of LSC.
As the attached chart shows, in 1992, the per square foot price of
LSC's space was $28 per square foot (DC standard). By 2001, the year
Friends was incorporated, that price had risen to $36 per square foot.
One of the IG's appraisers projected that LSC's cost was going to rise
to nearly $49 per square foot by 2012, and the Board actually saw it
going higher than that. By contrast, LSC's current cost per square
foot, fixed at $38 gross through 2013, is actually less than $37 net
and declining annually when the increasing value of the parking subsidy
is thrown in. Thus, as the attached chart clearly illustrates, bringing
an end to soaring occupancy costs had already been one of the
significant results of the Lease.
As the Board informed the IG in its ``Response'' of April 20, 2005,
the creation of Friends and acquisition of 3333 K Street were vetted
with and approved by his predecessor, OMB and both the Senate and House
Appropriations Committees. The structure of Friends as a 501(c)(3)
corporation was designed by the Board, based on advice of counsel, to
satisfy OMB and CBO budgeting rules, and provide LSC with a mechanism
to fix, and then to reduce, and finally to eliminate the occupancy cost
component of its budget. Through the acquisition of 3333 K Street by
Friends, LSC will be able to devote more of its precious resources--the
taxpayers' dollars--to its vital mission of delivering legal services
to indigents.
We are proud of the creativity that went into developing Friends as
an opportunity to save taxpayers' dollars, made possible by the
generous contribution of the Melinda and Bill Gates Foundation in
supporting the LSC mission through the vehicle of Friends.
Thank you for your time. I'll be happy to respond to any questions.
Mr. Cannon. Thank you, Mr. Smegal.
Mr. Strickland, you're recognized for 5 minutes.
Pardon me. Let me point out, staff has just pointed out
that we did not swear witnesses in as we typically do. That's
fine. Let me just say that if you swear in, then you're subject
to perjury. If you just talk to Congress and say something that
would otherwise be perjury, it is telling--it's not being
truthful with Congress; which has exactly the same penalties.
So I just want to inform you that, in my view, a swearing
in is redundant. And given the lawyers we're dealing with, I
think you understand the implications of that. And I apologize
for that diversion.
Mr. Strickland, we're looking forward to hearing from you
for 5 minutes.
TESTIMONY OF FRANK B. STRICKLAND, CHAIRMAN OF THE BOARD OF
DIRECTORS, LEGAL SERVICES CORPORATION
Mr. Strickland. Thank you. Chairman Cannon and Mr. Watt,
and other Members of the Committee, thank you for inviting me
to be here today. I'm Frank Strickland, and this is my third
year as Chairman of the Board of Directors of the Legal
Services Corporation.
I will add, also, that when our board members were
nominated and confirmed in 2003, it was by unanimous vote of
the Senate.
You already have my prepared remarks, which I understand
will be entered into the record, so let me just make a few
brief comments.
The transaction we're talking about today is at 3333 K
Street. It was conceived by our predecessor board, not the
current board. We have simply inherited what was delivered to
us. So the question would be: Was it a good deal?
We think it was. And we've said so in our replies to the
Inspector General's report. The evidence to us is clear that
what the prior board did was a far better alternative than the
continued reliance on the Washington, D.C., commercial real
estate market. And the market today, as we understand it, is
that non-profit organizations are leaving the District, because
they can't afford to pay the rent. LSC doesn't have that
option. We're required by law to be located in D.C.
Now, another question might be whether everything that was
done in connection with the lease transaction was done
perfectly. I can't say that it was. But we do believe that our
predecessors had a good idea, and that they implemented it
successfully.
Was the transaction transparent? We think it was. You've
just heard Mr. Smegal explain all the bases he touched, and
others in LSC touched, when the transaction was being
contemplated.
As far as we can tell, Congressman Erlenborn, who was then
the president of LSC, and the LSC staff, briefed all
appropriate parties, including this Committee and the Office of
Inspector General.
We've been told that because the Inspector General's report
did not contain any recommendations, that our board actually
did not have to respond. But when we got the report and
reviewed it, we concluded that we had to reply to it. We
disagreed with the methodology in the report, the conclusions
reached in the report, and the characterization of the
transaction.
From the perspective of our board, dealing with a report
that's critical of our organization, even though we didn't do
the lease transaction, that's very distracting to our board and
to our management from doing what we should be doing; and
that's trying to run an efficient and effective nationwide
program to provide legal assistance to the poor.
That's our mission, and we shouldn't forget it. We know
that in the past there have been disagreements between LSC and
the Congress on exactly how our mission should be undertaken.
Since I've been the Chairman, our instructions to the staff
have been clear. We're going to run an efficient, high-quality
legal services program exactly in the manner that Congress
intends that we run it.
Our predecessors, we believe, were correct in trying to get
LSC out of the D.C. office market. They were looking for a way
to cap occupancy costs. They were creative, and they put
together a deal that was far better than the status quo at the
time.
And as Mr. Smegal said, in doing so, they persuaded the
Gates Foundation to donate $4 million, specifically for the
purpose of this building. They cleared it with both the Clinton
and Bush administrations and briefed the House and the Senate
Appropriations Committees, as well as this Committee.
Mr. Chairman, that concludes my short opening statement.
[The prepared statement of Mr. Strickland follows:]
Prepared Statement of Frank B. Strickland
Mr. Chairman, Mr. Watt, and Members of the Subcommittee, thank you
for the opportunity today to testify with regard to the current leasing
arrangement the Legal Services Corporation has for its headquarters at
3333 K Street, Northwest.
When I and seven of my fellow members of the LSC Board of Directors
had the honor of being nominated by President Bush and unanimously
confirmed by the Senate in 2003, our plan was to oversee the delivery
of high quality and efficient legal services to the poor throughout
America, and to faithfully enforce the intent of Congress as expressed
by the various laws governing both LSC and our local legal services
programs. I believe we are doing that.
One of our first tasks was to fill the two positions at LSC that
report directly to the Board. The President, former Congressman John
Erlenborn, a distinguished member of this body for twenty years,
clearly indicated his desire to retire and we had an acting Inspector
General. The Board brought on Helaine Barnett as President in January
2004 and Kirt West as Inspector General last September.
In February, the Inspector General delivered a draft report
prepared by his Office regarding the lease of 3333 K Street. Because
that report made no recommendations and did not question the conduct of
either the current Board or President, the Board had no legal or
substantive obligation to respond, a fact the Inspector General pointed
out to us.
However, because the report stated that LSC was overpaying rent by
as much as $1.9 million over 10 years compared to fair market value,
and paying more than if it had remained in its previous offices, we
decided to examine the report carefully. Moreover, because of vague
allusions to conflict of interest and breaches of fiduciary duty, our
President in consultation with me decided to appoint a new senior staff
person, who had not been present during the transaction, to help the
Board review the matter.
The Board concluded its review in the third week of March. We voted
unanimously that, based on the information provided to us by the OIG,
we could not conclude that the lease transaction was ``inappropriate or
fiscally unsound.'' In short, we rejected the draft OIG report. The
final OIG report, basically unmodified from the draft, and the Board
response were transmitted to Congress on April 22.
Let me quickly highlight the key findings of the Board. First, we
had serious problems with the methodology employed by the two
appraisers hired by the OIG as well as the manner in which the OIG
analyzed those appraisals. The appraisers, on the apparent instructions
of the OIG, used a static, retrospective analysis based solely on the
state of the commercial real estate market in July 2002. It seems
obvious, in reviewing the judgment of the prior Board and Congressman
Erlenborn, the evaluation should be based on expectations of the
commercial market from June 2003 through May 2013 (the life of the
lease) and should take into account events that have transpired since
mid-2002. In this regard, one of the OIG's appraisers noted that the
retrospective analysis they employed is normally used for estate
valuations, tax assessments, and condemnations. That kind of analysis
is irrelevant to evaluating the merits of LSC's current lease.
Second, in comparing LSC's costs to those at its prior offices, the
OIG ignored the fact that the prior Board and management had concluded
that LSC needed additional space, and in fact acquired 5,000 additional
square feet and 27 additional parking spaces as a result of the move.
The OIG did not take into account what it would have cost LSC to get
5,000 additional square feet in its previous office building on First
Street, even if such space was available. The OIG also ignored the fact
that LSC's lease was expiring in 2007 and that LSC had would have had
to renegotiate with its then-existing landlord or find new space in
what is clearly now a very hot D.C. commercial real estate market. In
fact, as of this moment, LSC is paying less, when taking into account
the additional space and parking spots, than it would have been paying
had it not moved, a point one of the OIG's appraisers acknowledged.
Third, with respect to the allegation that LSC is overpaying
compared to fair market value, the Board concluded that the analysis
employed by the OIG failed to take into account several key factors. I
will not repeat all of them here; they are in our response. The key one
is that LSC received tenant improvements of up to $2 million--well over
what a typical market transaction would have provided for. Just like a
car buyer gets a different price depending on whether he puts up cash
or insists the dealer provide him with a no interest loan, when a
tenant receives above market concessions from the landlord, they have
to be paid for and that will reflect itself in the lease cost. The
difference between tenant concessions assumed by one of the OIG's
appraisers in estimating fair market rent and what LSC actually
received is $1.6 million--$1.3 million in tenant improvements and at
least $300,000 in parking concessions--over 80 percent of the alleged
$1.9 million over-payment that the OIG calculated using that
appraiser's assumptions. Even accepting some questionable assumptions
on the part of the OIG and its appraisers, we are left with an alleged
overpayment over ten years of $300,000 when the tenant concessions are
accurately counted. That amounts to 1.7 percent of the total lease
payments to be made under the contract.
A week after the OIG report was submitted to Congress, I was
provided a copy of the contemporary appraisal commissioned by the Bank
of America in 2002 before it agreed to finance the transaction. That
appraisal concluded, taking into account the value of the above market
build-out, that the proposed LSC rent was within the range of fair
market value. The Board was not made aware of the appraisal during its
consideration of the OIG draft report, although the OIG had the
appraisal, and the Board subsequently voted unanimously that we should
have had it and that it confirmed our conclusion. Accordingly, we
believe the OIG failed to make his case and we consider this matter
closed.
Finally, I would like to make a few observations. First, I will not
try to assert that everything done by LSC from 2001 to 2003 was
perfect. However, the OIG's suggestion that LSC overpaid by $1.9
million over ten years or somehow failed to adequately serve as a
reasonable, fiscally prudent steward of public funds is incorrect. I
would note that the then-Inspector General was at the time represented
at virtually every meeting at which the lease transaction was discussed
and was fully aware of all the details of the transaction, even
requesting and receiving a private briefing. It is my understanding
that no objections were raised with the previous Board or management by
the previous Inspector General or the OIG.
Second, it is indisputable that this transaction will ultimately
save LSC money. The only question is how much and beginning when. The
OIG pegged the beginning of savings to be in the last couple of years
of LSC's ten year lease with total savings only to be realized if there
is an extension. Based on the evidence provided to the Board, it
appears more likely that LSC is beginning to see savings now and will
show significant savings during the current lease term. There is no
question that, during a second ten year term and beyond, savings will
be substantial compared to the alternative of continuing to rent
commercial office space.
Third, there has been no evaluation by the OIG of the substantial
benefits to LSC from the transaction. These include efficiencies from
LSC's possession of space built to its needs and specifications;
stabilizing LSC's cost of space and removing its dependence on the D.C.
commercial office market; and the long-term advantage of having a
nonprofit landlord which was specifically created for, and whose
charter provides as its purpose, to benefit LSC and support its mission
of delivering legal services to the poor. No other landlord fits this
description.
This transaction was conceived by John McKay, who President Bush
appointed as and is now U.S. Attorney for the Western District of
Washington. The K Street building was found, the details negotiated,
and the contracts executed under the direction of former Congressman
Erlenborn, with every key decision approved by my predecessors on the
Board. I cannot say everything was done perfectly; I was not here at
the time. I am confident, however, that the prior LSC Board acted
honorably and properly every step of the way and that, if any mistakes
were made, they were miniscule compared to the overall long-term gains
that are and will be realized by LSC. The current Board has reviewed
the reports of the Inspector General suggesting that our predecessors,
previous management and the former Inspector General all erred in
approving this transaction and we unanimously rejected that finding.
Mr. Smegal. Would you mind referring to the graph, please?
Mr. Strickland. I would want to refer--you mean to the
graph?
Mr. Smegal. Yes, I'm sorry, Your Honor----
Mr. Strickland. I'm sorry. Mr. Smegal reminded me, I want
to refer to the graph that's over here on the chart. And I hope
that we've provided--we're now providing copies of the graphs
so that you can read it up close.
Mr. Cannon. Without objection, the graph will be made part
of the hearing record.
[The information referred to follows:]
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Mr. Strickland. I'd be glad to discuss that, or Mr. Smegal
can discuss that graph at the appropriate time, whether that's
now or later, Mr. Chairman. But except for the presentation of
the graph, that would conclude my brief opening. And I'll be
glad to answer questions at the appropriate time.
Mr. Cannon. Thank you, Mr. Strickland.
Mr. West, you're recognized for 5 minutes.
TESTIMONY OF R. KIRT WEST, INSPECTOR GENERAL,
LEGAL SERVICES CORPORATION
Mr. West. Good afternoon, Mr. Chairman, Mr. Watt, and
Members of the Subcommittee. My name is Kirt West. I've been
the Inspector General of the Legal Services Corporation since
September 1, 2004.
For nearly 20 years, I've served in various legal and
executive capacities in the inspector general community. I
appreciate this, my first opportunity to discuss the work of
the LSC OIG with the Subcommittee. A more exhaustive review
will be included in my written statement.
Before discussing the leasing arrangement, I would like to
begin briefly by discussing my role as IG. Like all IGs, my
mission is to prevent and detect waste, fraud, and abuse, and
to promote efficiency and effectiveness. IG quality standards
require me to adhere to the highest ethical principles, and to
conduct my work with integrity.
Ultimately, my job is to write independent and objective
information to the LSC board, the Congress, and the public, as
to whether federally-appropriated tax dollars are being spent
wisely and prudently in carrying out the LSC mission.
This past October, in response to inquiries from the
Subcommittee, I decided to look into LSC's 2003 move from
Capitol Hill to Georgetown. Staff from OIG and LSC management
had also told me in confidence that they believed that LSC was
overpaying for its Georgetown location. At that time, I was
also aware that LSC was negotiating a lease extension, so I
wanted to provide prompt, independent, and objective
information about rent to assist the board in its negotiations.
Because we are not commercial real estate experts, I hired
two experienced commercial real estate appraisal firms to
determine whether LSC was paying fair-market rent when it
signed a lease in July of 2002, as well as in November in 2004,
in case there had been significant changes in the Georgetown
market.
The appraisers followed their professional standards and
used their independent judgment. No one from my office directed
the appraisers' work or suggested any particular outcome. Both
appraisers independently concluded that LSC is paying higher
than market rent for its Georgetown space. This was the case in
July 2002, and is still the case.
Based on these reports, the OIG calculated LSC would
overpay the landlord between 1.23 million and 1.89 million over
the life of the 10-year lease. This overpayment occurs in the
first 7 years of the lease. For example, over the next 12
months, LSC will overpay at least $300,000.
In addition to these appraisals, Mr. Chairman, the OIG has
overwhelming objective evidence that LSC is overpaying rent.
For instance, all other tenants in the building are paying
below market rent. Even the landlord's own rental agent states
that LSC's first-floor space would only rent for 24 to 26
dollars per square foot; far below what LSC is paying.
The OIG also calculated that LSC could have saved at least
$1.1 million by remaining at its Class ``A'' location on
Capitol Hill, next to Union Station, instead of moving to its
Class ``B'' building in Georgetown.
Finally, LSC may be due a rent credit of more than
$100,000. LSC was charged for 2,000 square feet of space that
it did not occupy for 18 months.
I'd like to mention a few of the many other observations
that have come from this review. Although this building is
commonly referred to as LSC's permanent home--or, as Mr. Smegal
suggested, forever--LSC has a 10-year lease, and the OIG is not
aware of any legally binding agreement allowing LSC to stay
permanently or to take ownership from Friends.
LSC management has not provided the OIG with any documents
that support the need for LSC to have a 45,000-square-foot
headquarters out of a 65,000-square-foot building--which I
think is more like two-thirds than 54 percent.
LSC did not have records tracking how much of its $2
million tenant improvement allowance was spent.
Although LSC officials created the Friends of Legal
Services Corporation, LSC no longer controls Friends.
Friends recently made an unrestricted contribution to the
National Legal Aid and Defenders Association, that LSC itself
could not make directly.
Thank you, Mr. Chairman, for this opportunity to testify
before the Subcommittee. I am proud of the work being done by
the staff of the LSC OIG. We look forward to continuing to
conduct independent and objective reviews, so that the LSC
Board of Directors, the Congress, and ultimately the American
taxpayers can be assured that federally-appropriated tax
dollars are being spent wisely and prudently to provide legal
services to those in need.
[The prepared statement of Mr. West follows:]
Prepared Statement of R. Kirt West
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Mr. Cannon. You obviously practiced your time. That was
within the 5 minutes. Thank you. Elegantly done.
The Chair recognizes himself for 5 minutes. That's
something I don't normally do. I usually go last on the
questioning, but the situation really begs for my discussion
early, I think.
I was surprised, Mr. Strickland, on seeing this chart on
the board when I walked in, because we talked about this chart
last night in my office. And I thought I made some compelling
points on that chart. Do you recall those points?
Mr. Strickland. As I recall our discussion, the chart
demonstrates the cost of continuing at 750 First Street, versus
the flat rate at 3333 K Street. Mr. Smegal wanted to make use
of the chart, to make some of his points, and that's the reason
why we brought it today.
Mr. Smegal. Congressman, yes, it's part of my presentation.
But I ran out of even Congressman Watt's time, so I went on.
Mr. Cannon. Thank you. We'll come back to it. But let me
just tell you why I think the chart is a problem here. The pink
dots represent a possible future scenario that you can't know
until you get to the signature on a new lease. And while that--
even if it were true and not a fantasy, not a future
projection, it totally misses the underlying point; which is
looking backwards to the time when Friends of Legal Services
was created.
Friends of Legal Services was created to do something that
Legal Services itself could not do directly; that is, get
around the OMB A-11 regulation that dealt with capitalized
loans. And so we have this. What is really deeply concerning me
here about this discussion is that there is--and the
presentation so far--is that you all are acting as lawyers and
advocates; instead of acting as board members and considering
the policy implications of what's going on.
And as a result of that, the advocacy that you're
presenting just begs for challenge. And in fact, if you will
look at the issues, there are many points that can be
challenged. And what's not happening here is you're not saying,
``We've got a problem. We've got a building. We have got a
conflict of interest. We have two groups.''
And I've read Mr. West's report very carefully. And Mr.
Strickland, I think you were a little bit upset yesterday in my
office about the statement in Mr. West's report that referred
to if there were the Federal Government standards and ethics
applicable to this agency there may be even a crime. That was
outrageous, given the stature of the board members--which I
agree is a pretty remarkable set of people.
The point is not that a crime was committed. The point is
that there is an inherent context of conflict which you're not
dealing with, and which leaves your opening statements subject
to, I think, some serious questioning that puts your integrity
on the line; instead of the problem with the decision.
And the decision--I don't want to go back and say, ``Oh,
you guys did it wrong, looking backwards.'' But you as a
board--representing two boards, President of Legal Services,
and LSC--ought to be looking back and saying, ``Hey, wait a
minute. What did we do?''
So for instance, you have said, Mr. Smegal, in your opening
statement that the issue was vetted--not a legal term, but it
is in fact a term of art. And that's important, because you
said it's vetted with OMB and both the Senate and the House
Appropriations Committees. And then you said here a moment ago
that it was run by--the agreement was run by counsel to this
Committee. Now, when you say ``vetted,'' what do you mean, Mr.
Smegal?
Mr. Smegal. Well, I'm sorry, Congressman, if I used a term
that is too legal. But what I mean by that is that this
Committee, April 23, 2002, 2 p.m. in the afternoon, its staff
asked to be briefed on what it was the Corporation was
intending to do. John Erlenborn, 20 years one of the members of
your body----
Mr. Cannon. Did you present to the staff the details of the
lease?
Mr. Smegal. That was the purpose of the meeting, ``Here's
what we're going to do.'' Don Carpenter had it all laid out.
That was there for that purpose. They were there for that
purpose. The Committee members--Patty DeMarco and J. Keith
Ausbrook--were there for the purpose of asking those questions.
Mr. Cannon. And did they agree with your proposed----
Mr. Smegal. They agreed that the Corporation, through the
vehicle of Friends, could proceed with the purpose of a
building, if we could find one. We had one in sight. As I've
told you, we had this----
Mr. Cannon. Let me read Mr. Ausbrook's recollection of that
meeting.
Mr. Smegal. Okay.
Mr. Cannon. Thank heaven for modern technology--or curse
it; whatever you will. ``On the latter point, we did meet with
them on their building. We expressed some concerns about the
expense and the appearance of luxury digs in Georgetown. No
further action was taken. The previous Chairman of the
Subcommittee was aware of the purchase at the time. Are you now
looking at this, almost 3 years later?''
Well, the answer is, yes, we're looking at it. And I
suspect that if Mr. Ausbrook was sitting here as a witness, he
would disagree with you that there was an agreement.
Mr. Smegal. Oh, I don't know. I wasn't there----
Mr. Cannon. Certainly, not as to details.
Mr. Smegal. There are staff people who were here then. They
were there for the meeting. I was not present. I didn't come to
every meeting. I couldn't afford that, Your Honor. I live in
San Francisco.
Mr. Cannon. My----
Mr. Smegal. But I do understand. My understanding of what
happened at that meeting is this Committee was told April 2002,
before any of this happened. We didn't make any deals. We
didn't have the Gates money. Bill Gates says to me, ``When you
have a building, call me up, and we'll see how we get you the
money.''
There was no building in April. We were there to the
Committee to tell them what we had in mind; as we'd gone to
OMB; as we'd gone to the Office of the Counsel to the
President.
Mr. Cannon. My time has expired. I think we'll probably do
a second round on this issue.
Mr. Smegal. I hope so, Your Honor.
Mr. Cannon. And, well, normally, I would. If there were
only three of us, we could probably share time. But we have so
many Members that I think that we'll go, and I probably in an
hour--Bill, would you like to take some time? The gentleman
from Massachusetts is recognized for 5 minutes.
Mr. Delahunt. You know what I'm concerned about, Mr.
Chairman, is that I see these two gentlemen here. It's clear
that they were well intentioned; felt that they had a good
deal. I concur. I happen to think that you did the right thing.
Now, I don't know the details. But the last thing that we
want to find ourselves in the position of doing is discouraging
the likes of Mr. Strickland and Mr. Smegal from serving on the
board of directors of the Legal Services Corporation, which is
a non-profit charity. I mean, they're not getting a lot, other
than just a sense of public service and reward, from their
effort.
Mr. Cannon. Would the gentleman yield?
Mr. Delahunt. Yes.
Mr. Cannon. I agree with the gentleman. And that's why this
is such a matter of concern. The issue here is not to attack
people of great integrity. The issue is to have the perspective
of the current board on a problem that I think is a significant
problem, and resolve the problem.
Mr. Smegal. Congressman----
Mr. Cannon. Not flail people here. That's not my objective
at all.
Mr. Smegal. Congressman, the only reason there is an
alleged problem is because the OIG has suggested there was one.
I've seen no legal brief on a conflict of interest. I don't
have a conflict of interest.
Friends was created by the Legal Services Corporation. They
were one entity. What OMB told us, we had to have a separate
entity in order to avoid, as the Navy has done, as the
Smithsonian Institute has done, as--what's the other one;
there's a third one--has done, we had to set up a separate
501(c)(3). We did what we were told.
Mr. Cannon. Mr. Smegal, look, I understand what you're
saying and----
Mr. Strickland. It's the National Academy of Science.
Mr. Smegal. National Academy of Science, Congressman.
Mr. Cannon. I understand. The problem is that you now have
an entity that has, as you pointed out, a lease figure that was
set by the lender; not by two parties at an arm's length. And
the owner of the building does not--is not--the same as the
institution for which it was set up. That's an inherent
conflict. And I just would--I'm on the gentleman's time, and I
apologize for going on. I don't mean to lecture.
Mr. Delahunt. That's all right.
Mr. Cannon. But what I see is defensiveness about an issue,
instead of resolution. And that is remarkable. This is not Mr.
West who's bad; it's Mr. West who's doing his job and who
should be not argued against, but considered and have the
underlying problem resolved so we can get the little sliver out
and go on with life.
Mr. Smegal. Well, Your Honor----
Mr. Cannon. I yield back to the gentleman.
Mr. Smegal. Congressman, I disagree with you on your
characterization of Mr. West. But nevertheless, if you go to a
bank and try to buy property, they're going to ask you for a
financial statement. Friends did not have a financial
statement. So the lender said to us, the prospective lender
said, ``We want a certain amount of income to service this debt
you're asking us to take on, $15.5 million.''
Mr. Cannon. If the gentleman would yield again?
Mr. Delahunt. Sure.
Mr. Cannon. Our arguments are not joining here. I
understand your argument. Just take my word for it. I
understand your argument. And I'm suggesting that the animosity
that you've just expressed toward Mr. West is highly misplaced.
And everybody is better served if the animosity disappears and
you deal with the underlying problem.
You were talking about billions of dollars maybe that we
ought to be overseeing at other places. Let me just reiterate,
this is a problem in a context that is not infinite. But the
problem which I am deeply concerned about is the reaction of
both boards to Mr. West and his presentation of an issue which,
on its face--and I've read his report very carefully--is valid.
And your incensed reaction to it doesn't make it less valid.
And if you step back and look at it, nobody is being called
criminal. The issue of a conflict between two entities is there
and clear. But it's, again, not infinite. It has narrow scope.
It has a clear definition. And what I'm not hearing is--I'm
hearing more animosity toward Mr. West than I am about solving
an underlying problem--which, by the way, can't be solved with
a simple dissolution of Friends of Legal Services and with the
building being turned over to LSC, because I think you'd still
probably have the underlying problem with OMB.
So instead of arguing back and forth, it would be a matter
of great appreciation from my perspective if you said, ``Look,
we have a problem. How do we solve it? We can't just dissolve.
Let's talk to OMB and see what the path is.'' And if you did
that, we'd say, ``Thanks.''
Mr. Smegal. Congressman, I disagree. There is no problem.
In fact, the statement of the Inspector General is internally
inconsistent; contrary to what you've just said. He says on the
one hand, the problem is that the Legal Services Corporation no
longer controls Friends; and then on the other hand, he says
the problem is that the Corporation is independent. You can't
have it both ways. He's working both sides of the street in his
statement. He's worked both sides of the street in everything
he's filed.
Mr. Cannon. That's consistent. He says that Legal Services
doesn't control Friends.
Mr. Smegal. That's right.
Mr. Cannon. And he says that Friends is independent.
Mr. Smegal. That's right.
Mr. Cannon. Those are highly consistent.
Mr. Smegal. But he criticizes both of those.
Mr. Cannon. Well, because when you have two independent
organizations that overlap, then there is obviously criticism
from both points of view. But it's actually really the same
point of view.
Mr. Smegal. No, no, he's saying--Congressman, he's saying
that----
Mr. Delahunt. Mr. Chairman, I ask unanimous consent that I
receive an additional 2 minutes. [Laughter.]
That I'll yield to the Chairman.
Mr. Cannon. Without objection.
Mr. Gohmert. Mr. Chairman, I have no objection to 5
minutes. You really didn't get started.
Mr. Delahunt. I withdraw my unanimous consent, and concur
with the gentleman from Texas and ask unanimous consent for an
additional 5 minutes that I'll yield to the Chairman.
Mr. Cannon. Thank you. And without objection, so ordered.
Now, let me just say, Mr. Smegal, this is not a debate. And
I actually don't want to pursue it any more, and I'd like to
leave this part aside. Although let me just admonish the two of
you that I have read this very carefully, and Mr. West's report
does not go beyond the bounds of what an appropriate IG should
be doing. And in the environment of advising the board--and the
board that he advises is just LSC, and it gets to the friends
of LSC, I think appropriately--I don't think in that report
there is anything that is amiss.
And the problem here is that the retrenching around that
issue has created a problem where one probably doesn't need to
be. There is a problem. The problem is, what do you do with OMB
and this building long-term? I think we need to--you need to
deal with that.
But I don't want this just to be a back-and-forth debate
where you assert something, and I'm just telling you something
entirely different. I hope you'll recognize the difference.
Mr. Smegal. Yes, Congressman. In fact, I'm particularly
pleased that you've given me this opportunity to be a
participant in this debate, because the OIG wouldn't do that.
In his letter of February 23, 2005, in response to my request
for his report, he says the following: I won't give it to you,
``However, we will consider your letter a request for a copy of
the final report under the Freedom of Information Act. And once
the final report is issued, we will release it to Friends, as
appropriate, in accordance with FOIA.''
I haven't been part of this debate. I didn't have a chance
to file anything with this Committee, Your Honor, other than my
statement.
Mr. Cannon. But you are not the agency that Mr. West
represents. He couldn't give that to you directly. You're a
lawyer. I don't understand why you've just made that statement.
He couldn't do that.
Mr. Smegal. That's incorrect, Congressman.
Mr. Cannon. Well----
Mr. Smegal. He could give it to me.
Mr. Cannon. Why?
Mr. Smegal. There is no basis for him taking this position
with respect to this----
Mr. Cannon. Well, because his client--he is the IG for LSC.
The appropriate request would be from you to Mr. Strickland.
Mr. Smegal. No, that's not correct. The appropriate request
is from him. He labeled Friends as a contractor, a Government
contractor. And under the provisions of the OIG Act, I get that
report. I get the report from him. He never gave it to me. I'm
here today for the first time in a position to respond to his
various statements that he's filed with this body.
Mr. Cannon. And gave to LSC. And I assume that you got it
from LSC at some early point, which would be perfectly
appropriate.
Mr. Smegal. I did, yes.
Mr. Cannon. Let me just ask----
Mr. Smegal. Not at an early point; at a later point.
Mr. Cannon. Mr. West, Mr. Smegal has just said that he had
a legal right, because you characterized him as a contractor,
to get your report. Does he have that right, in your view? And
did you appropriately withhold it?
Mr. West. I'm unaware of ever calling him a contractor. In
the financial statement that was prepared for the Legal
Services Corporation, Friends of Legal Services is listed as a
component.
When I have dealt with contractors in previous instances,
if we did an audit of the contractor, they of course get the
draft audit report. But this was a report to the board that was
for them to negotiate the lease extension with Friends. I had--
and that's all that was, was information to the board.
Mr. Cannon. Mr. Smegal, do you agree with that analysis?
Mr. Smegal. I wasn't listening. I'm looking at a letter I
wrote to the Inspector General. Incidentally, I'd like, if it's
possible, to keep the record open. I have an exchange of
correspondence that I had with the Inspector General starting
on December----
Mr. Cannon. I can assure you that----
Mr. Smegal. --December 9; none of which is in his report.
But starting on December 9.
Mr. Cannon. Well, without objection, that will be made part
of the record.
Mr. Smegal. Thank you, Your Honor.
[The information referred to is available in the Appendix.]
Mr. Smegal. In that, one of these communications from him,
he did--he or one of his assistants referred to Friends as a
Government contractor.
Mr. Cannon. I think he dealt with that issue in his
response.
Mr. Smegal. Well, I'm not sure. I don't have a legal brief
on it, so I don't know.
Mr. Delahunt. Mr. Chairman, reclaiming my time?
Mr. Cannon. Oh, yes, it is your time. The gentleman--I
yield.
Mr. Delahunt. You know, I can see that this dispute has
become, you know, a question of, I think, both--particularly
Mr. Smegal feels that the role, as he understands it and has
lived it, of the LSC and its clear, to me, good intentions have
been impugned by the report. Now, I understand there are rules
and guidelines, etcetera. But I would hope that, you know, an
exchange that was appropriate and civil and courteous would
always exist between any office of inspector general and those
individuals that are participating or are being--whose actions
and transactions are being reviewed.
I mean, this is--well, let me ask you a question, Mr. West.
Is there anything that you have discovered where any individual
has accrued any particular financial benefit from this
transaction?
Mr. West. With respect to anybody on the LSC board?
Mr. Delahunt. Right.
Mr. West. Anybody on the Friends of LSC? No.
Mr. Delahunt. Okay. I mean, which confirms, I think, what
you and I have both been saying, Mr. Chairman; is that these
are people of integrity.
I think, as I'm hearing the exchanges going on, you alluded
to the OMB and the rule that requires this pass-through public
charity corporation being created; not just in the case of the
LSC but, I understand, the Smithsonian, the Navy, and others.
You know, I would like to understand the rationale for that
particular rule. It appears to me to be somewhat archaic.
You know, maybe there is good reason. But I daresay we
wouldn't be having this hearing today if the LSC as a board
could have acquired the property directly; rather than the need
to create another vehicle. It just doesn't seem to make any
sense to me; particularly when, for protection of the taxpayer,
we have an Office of Inspector General as part of the LSC
board.
So maybe Mr. Chairman, you should request the
representative of the Office of Management and Budget to come
and sit down. We don't need a public hearing. If the public
wants to sit and listen to the conversation, I don't have any
problems with that. But to explain to us the rationale for the
rule. And then, among ourselves we ought to consider whether
the rule has--no longer serves its original purpose--we don't
know what that original purpose is--and do whatever has to be
done to put the rule into the dustbin of oblivion, if you will.
So that we don't find ourselves enmeshed in this kind of--
you know, I'm sure they're great appraisers but, you know, that
Bank of America appraiser, I bet he went to school for
appraisers, and has his benefits, and has a master's degree in
appraising buildings in Georgetown. I mean, that's the micro
level that we're getting ourselves into, a dispute among
professionals.
I mean, it's like in my former life, it was always
fascinating to me that when a criminal defendant pled insanity
in a criminal trial--I yield to my----
Mr. Gohmert. I take exception to saying ``insanity'' and
pointing to me.
Mr. Delahunt. No, I did it like this, Charlie. [Laughter.]
It was up in the air. I didn't mean----
Mr. Cannon. That was the Almighty.
Mr. Delahunt. Okay? And somehow, psychiatrists--you could
disagree as to whether there was legal responsibility on the
behalf of the defendant. And we are, as a Subcommittee,
monitoring, you know, which appraiser is right. I yield back.
Mr. Cannon. The gentleman yields back. Let me point out,
there are actually three appraisals. Two agreed, and the other
appraisal was by the lender, which is in a different context.
But I agree with most of what you said, Mr. Delahunt.
Now the Chair recognizes the gentleman from Texas, Mr.
Gohmert, for 5 minutes.
Mr. Gohmert. Okay, thank you, Mr. Chairman. And I do want
to say, I am grateful that people of high esteem are willing to
serve in these thankless jobs. I'm grateful that we have
someone who would be able to solicit or obtain a $4 million
contribution to an entity like this, because that's not
something easy to do. So I'm grateful for that.
I think probably all of us up here agree that there are
aspects of OMB scoring that we don't like. We don't think that
they use good business judgment. And I will readily acknowledge
right up front that all three of you are a lot more financially
smart than I am, because you've never run for judge and you've
certainly not--smart enough to avoid running for Congress. So
I'll give you right up front, you're smarter than me.
But just to go back on some of the testimony, Mr. Smegal,
that you've given us. You gave us a good overview of the whole
scenario, how this came about. Have you been with LSC board
from the beginning? How long were you with it?
Mr. Smegal. Congressman, you may have missed my opening
remarks. I was nominated----
Mr. Gohmert. Oh, I was here for all of your remarks.
Mr. Smegal. Well, I've been on the Legal Services
Corporation Board at the nomination of two Presidents and the
unanimous confirmation of the United States Senate for 18
years.
Mr. Gohmert. I guess what I was trying to get to was----
Mr. Smegal. I was there--excuse me.
Mr. Gohmert. What I was getting to was, you were testifying
about conversations, some of which you said, ``And I was there
at that one.'' And I take that to mean that you may have been
testifying about conversations where you weren't there. And so
I'm just trying to----
Mr. Smegal. Yes.
Mr. Gohmert. So obviously, you're giving us an overview
which includes some hearsay of what you've heard from other
people; which if we want to get to the bottom of it, it's
always best to hear it straight from the people that were there
personally.
But I am concerned, as the Chairman has indicated, as smart
as you obviously are just--and I mean, I know I look stupid,
but I did not miss some of the snubs like when you were talking
about vetting and you comment, ``Well, sorry I used a term that
was too legal,'' like, ``You wouldn't understand.''
But you say you don't see a conflict. And I mean, it's
very, very basic. If I'm a judge, and I'm dealing with a
landlord and a tenant, and they may be friends, and one's got
an attorney, I'm going to appoint an ad litem attorney to
represent the other side; because there is a clear conflict
between a landlord and a tenant.
There is a clear conflict between someone who is a borrower
on a note, and someone who is not a party to that note. There
is a conflict between someone who's trying to get enough rent
to service a note, as opposed to somebody that's trying to get
the cheapest rent they possibly can, and therefore get the
biggest bang for their buck. There is a conflict. And I'm
shocked that, as brilliant as you are, that you cannot come in
here and say that you actually see that.
So let me ask you this. Is there a legitimate basis for
agreeing to $38 a foot for the LSC?
Mr. Smegal. Is there a legitimate basis?
Mr. Gohmert. That's right.
Mr. Smegal. Absolutely, Congressman. And in fact, the chart
that I--that was supposed to be attached to my remarks, which
is over there displayed, and you have, demonstrates that the
reality of what the Corporation now has by way of its space is
represented at 2003 by the line that continues.
Now, $38 a square foot continues on that line and goes down
because of the advantages of the $100-a-month parking spaces.
So it's actually going down, as we go out to the right. Whereas
the Corporation would have continued in--and the numbers there
out through 2007 are real numbers. Congressman Cannon suggested
maybe they weren't. They are the lease that the Corporation had
through 2007. So you're up there at 42 or 43 dollars a square
foot.
The rest of that would be the anticipated--there was no
additional renewal at 750 First Street, Northeast, Congressman.
So those red numbers are what is anticipated might have
happened after that time.
Mr. Gohmert. And we take it as just that: something that
might have happened. But we're looking at a $38-a-foot lease
for this whole--you indicated in your testimony in your opening
statement--which I did hear--that by law any property of the
Friends would revert or go to the LSC. The OIG says he knows of
no contract or anything that would cause that to revert to the
LSC. Do you know what law that is that would cause it to
automatically revert to the LSC, if Friends is dissolved?
Mr. Smegal. Yes, the bylaws by which the LSC was created.
It's a document that had to be filed with the District of
Columbia when the 501(c) incorporation was obtained. It clearly
spells out exactly what happens to Friends, should it be
abolished. All--whatever assets Friends has is automatically
transferred to the Legal Services Corporation.
Mr. Gohmert. Okay, so bylaws----
Mr. Smegal. Incidentally----
Mr. Gohmert. --and I will conclude. My time is running out.
But you mentioned bylaws. Bylaws, as you know, can be
unilaterally changed by the Corporation that set up those
bylaws; isn't that correct?
Mr. Smegal. I apologize. I misspoke. ``Vetted'' was a bad
term, and I apologize for that, too. But it's the articles of
incorporation; not the bylaws.
Mr. Gohmert. All right. The articles of incorporation.
Mr. Smegal. Of Friends.
Mr. Gohmert. Of Friends.
Mr. Smegal. Yes, sir.
Mr. Gohmert. And are you familiar with how--or the manner
in which articles of incorporation could be changed?
Mr. Smegal. I'm sure there's a provision in there that
would permit changing under some circumstances, yes, sir.
Mr. Gohmert. And that LSC would not necessarily be a part.
Mr. Smegal. Well, I don't know. I can't speculate.
Mr. Gohmert. Well----
Mr. Smegal. Incidentally, I am advised that the red numbers
that you and I were referring to a minute ago actually are the
OIG's numbers, right off his materials that he's provided to
you in one or more of his presentations.
Incidentally, Congressman Delahunt, you said--or maybe it
wasn't you, and I apologize if I'm----
Mr. Gohmert. All right, obviously, my time is up, and so
it's up to the Chairman at this point to determine who's going
to talk after this.
Mr. Cannon. Are you yielding back, Mr. Gohmert?
Mr. Gohmert. My time has expired.
Mr. Cannon. I thank the gentleman.
Let me just thank the members of the panel. I appreciate
your being here through a relatively tense period. And it's
been actually a pleasant exchange, let me just say, from my
point of view. It's like a bunch of lawyers going back and
forth at each other. Mr. Smegal, you wanted to say something?
Mr. Smegal. I do. I have one other comment, and I
apologize. Mr. West, in response to a question, I think it was
of Congressman Delahunt, indicated that he had accused no one
of doing anything, and he mentioned specifically the Friends
and the Board of the Legal Services Corporation. But I would
direct your attention to--his pages are unnumbered, but if you
go to what I've numbered page 14, he's got a bullet. And the
bullet is the following: ``Friends made a $50,000 unrestricted
contribution to an organization to which LSC is restricted from
making the same kind of contribution.''
Now, three things. He doesn't identify the organization
there, but he did in his opening statement. It's the National
Legal Aid and Defender Association.
Mr. Cannon. I think he identifies it earlier in his report.
Mr. Smegal. I don't think it's in here, Your Honor. But in
any event, there's two things wrong with what he says, two
significant errors. One, it was not an unrestricted
contribution. He has my letter of February 9, 2005, which will
be in the packet that I'm providing, which includes the nine-
page grant to the NLADA--very restricted in its use of the
$50,000.
The other point that I would make is that NLADA is not an
organization described as he states. Legal Services
Corporation--and they can speak for themselves--have given
grants to the NLADA for years for various things. There's
nothing wrong with the National Legal Aid and Defender
Association and, in particular, this $50,000 grant.
The innuendo here by this Inspector General is that Bill
Gates would give us $4 million so somehow we could give $50,000
to some organization that's going to violate congressional
restrictions on LSC activities? That's nonsense.
Mr. Watt. Mr. Chairman?
Mr. Cannon. Certainly, Mr. Watt.
Mr. Watt. Could I ask unanimous consent just to ask one
question? And I know I gave my time away.
Mr. Cannon. Before you do that, may I just say, Mr. West, I
think you understood the two statements, or the two accusations
made by Mr. Smegal. Are you comfortable responding to those in
writing? Not now, because we're----
Mr. West. Yes, I'll respond to them in writing.
Mr. Cannon. Thank you. The Chair recognizes Mr. Watt for 5
minutes.
Mr. Watt. And I'm not sure exactly what implications this
has, but Mr. West, do you have any idea what the value of this
building is now?
Mr. West. I have no idea. I have not seen an appraisal of
the building. My report was restricted to what would have been
the fair-market rent if the Legal Services Corporation entered
into an at-arm's-length transaction in July 2002. That's what
we wanted our appraisers to tell us: If they were going out in
the marketplace, what would have been a fair-market rent?
Mr. Watt. But the appraisers did the appraisal on an income
approach?
Mr. West. They did an income, and they also did a sales
approach. Income--I don't have it in front of me. I could get
the specific information for you. But the appraisals, I
believe, are going to be in the record.
Mr. Watt. Okay. Mr. Strickland or Mr. Smegal, either of you
have any idea of what the value of this building is now?
Mr. Smegal. Yes, and I haven't got this in writing,
Congressman, but the tenant on the fourth floor along with us,
who's working its way up and about to pass through $38 a square
foot, I am advised by our realtor, is prepared to offer us $20
million for the building.
Mr. Watt. So the bottom line is this building was acquired
for--what?--$15 million, $16 million?
Mr. Smegal. No, Congressman, actually what happened was
this building was sold for $16 million, and the deal fell
through; which is the reason we got an opportunity to buy it.
We bid 14.2. There were two other bidders at 14.2. The prior
owner understood who we were and what we were going to do with
the building, and said, ``You get it.''
So we bought it for 14.2. We put $2 million, roughly, of
tenant improvements in--a million-eight, eight-fifty--into it.
And the bank then appraised it; understanding that to happen at
17.1. And my understanding from the realtor that's leased space
for us in the building is that the other tenant on four is
prepared to offer us $20 million.
Mr. Watt. And of that $16.2 million that you all have in
it, Bill Gates gave you 4 million of it?
Mr. Smegal. Yes, Congressman, that's correct.
Mr. Watt. So the net amount that Legal Services has in this
building is approximately $12.2 million, and you have an asset
that's worth $20 million in today's market.
Mr. Smegal. Yes, Your Honor. Actually, we've been paying
off the bonds over the last couple of years, so--and our
financial statements show that our liabilities are even less
than that.
Mr. Delahunt. Would the gentleman yield?
Mr. Watt. Yes, I'm happy to yield.
Mr. Delahunt. Mr. Chairman, there's a certain irony here
because--and I'm not being critical of the work done by the
Inspector General--but because of the lack of flexibility
that's inherent in Government bureaucracy, big Government, we
find ourselves not allowing a certain entrepreneurial
initiative which I think is inherent in the free market.
When you see something that's a good deal, if you can get 4
million out of Bill Gates and negotiate favorable terms and
look down the future 20 years when the bonds are paid off, we
have a quasi-public corporation not paying, you know, any rent;
probably generating some revenue from this asset which would
reduce the cost to the taxpayers, or maybe provide services for
more individuals who need them. Because my recollection is
Legal Services is incapable, because of lack of resources, to
provide individuals--in terms of the number--the pie that ought
to be receiving services, only 20 percent are in fact receiving
the services that are necessary for them, thereabouts. I'm sure
my figures are not exact. But again, with all due respect to
Mr. West, you're building equity up.
Mr. Watt. Let me reclaim my time, though. Because I want to
be clear that just because the value of the building may exceed
the investment, the end doesn't always justify the means. And I
think what the Chair's concern is that a means was used that
might have been an end around.
But the bottom line is that the Friends of Legal Services
and, if they ever dissolve, Legal Services, would be the
beneficiary of a much, much more valuable asset. So we need to
figure out a way to resolve this in a way that it will cut off
our nose despite our face or whatever the----
Mr. Delahunt. Well, Mr. Watt, I just--I'm sure that, you
know, the panel, and maybe those that are here, are somewhat
confused. This is the Democratic side of the panel----
[Laughter.]
--those, you know, who ascribe to the ``big Government''
theory----
Mr. Cannon. If the gentleman would yield----
Mr. Delahunt. And they're the Republicans over there, the
``free marketeers.''
Mr. Cannon. If the gentleman would yield----
Mr. Watt. No, I'm not going to yield. I'm not going to
yield to either one of you---- [Laughter.]
Mr. Cannon. The gentleman's time has expired. He yields
back.
Mr. Watt. I'm not going to yield to either one of you. I'm
just going to try to walk right down the middle here----
[Laughter.]
--and remind you all that this is the result of an
entrepreneurial ownership spirit. But it's a good thing, and we
shouldn't be discouraging it for non-profits and valuable
organizations like Legal Services any more than we discourage
it--now, that doesn't mean that the end justifies the means.
So we've got to figure out a way to step back from this.
Now that we've got it all out on the table now, let's just
figure out a way to resolve this in a way that doesn't
disadvantage the clients of Legal Services.
Mr. Strickland. If I may address that, Mr. Watt's point,
Mr. Chairman, certainl, it is the case with the current board
having inherited this transaction, that it is our intent, if
there's a problem that needs to be resolved, we will work
diligently to resolve it. And I think the reason that we
disagreed with the Inspector General is that as I said in my
opening, we had questions about his methodology and his
conclusions. And we don't necessarily think his office is
infallible, so we disagreed with it. But having said that, I'll
emphasize again that if there is a problem, we will do our best
to resolve it.
Mr. Cannon. Thank you. The gentleman yields back.
A couple of points. First of all, let me ask--well, let me
get to that, I guess, in order. First of all, as to the
relevant rule at OMB, this is a rule that's been around for a
very long time under both Administrations. In the fiction of
Government, it's very difficult to deal with. And so the point
I don't think is to change OMB, but to adapt to the
circumstances.
And I suspect that both Friends and Legal Services
Corporation--and what I take it that you've just suggested, Mr.
Strickland, is that you're going to be working on this rule
with Friends and with OMB to see how the underlying problem can
be resolved.
Because currently, all the equity that you referred to, Mr.
Delahunt, is in Friends. In other words, it doesn't accrue yet
to LSC. And so I suspect that we will see some discussion
there.
I ask unanimous consent that the record be kept open and
that questions may be directed to the witnesses. Without
objection, so ordered.
One of those first questions, Mr. Smegal, is going to be in
relationship to the grant that Friends has given, which you
referred to as restricted. And staff tells me they've been
through it; they don't see any restrictions. We'd like to
understand what you view those restrictions as being. We'll get
that to you by way of a written request.
I'd also like to ask unanimous consent that we recess this
hearing at this point, subject to the call of the Chair.
Without objection, so ordered, and we'll finish.
[Whereupon, at 2:15 p.m., the Subcommittee was recessed,
subject to the call of the Chair.]
----------
[The following is excerpted from the transcript of the
legislative hearing on H.R. 6101, the ``Legal Services
Corporation Improvement Act,'' held on Tuesday, September 26,
2006 by the Subcommittee on Commercial and Administrative Law,
Committee on the Judiciary:]
Mr. Cannon. If we could just take one more moment,
Mr. Watt, I'd like to make the following motion: The
unfinished business before the Subcommittee is the
adjournment of the Subcommittee's June 28, 2005
hearing, which was recessed subject to the call of the
Chair. Without objection, the aforementioned hearing is
so adjourned. Without objection, so ordered. We left it
open.
A P P E N D I X
----------
Material Submitted for the Hearing Record
Letter from Thomas F. Smegal, Jr., Chairman, Friends of Legal Services
Corporation, dated December 9, 2004, to Laurie Tarantowicz, Office of
the Inspector General, Legal Services Corporation
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Letter from Laurie Tarantowicz, Assistant IG and Legal Counsel, Legal
Services Corporation, Office of Inspector General, dated December 13,
2004, to Thomas F. Smegal, Jr., Chairman, Friends of the Legal Services
Corporation
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Letter from Thomas Smegal, Chairman, Friends of Legal Services
Corporation, dated February 3, 2005, to Kirt West, Office of the
Inspector General, Legal Services Corporation
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Letter from Kirt West, Inspector General, Legal Services Corporation,
Office of Inspector General, dated February 23, 2005, to Thomas F.
Smegal, Jr., Chairman, Friends of the Legal Services Corporation
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Letter from Thomas F. Smegal, Jr., Chair, Friends of Legal Services
Corporation, dated March 2, 2005, to Kirt West, Inspector General,
Office of the Inspector General, Legal Services Corporation
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Letter from Laurie Tarantowicz, Assistant IG and Legal Counsel, Legal
Services Corporation, Office of Inspector General, dated March 7, 2005,
to Thomas F. Smegal, Jr., Chairman, Friends of the Legal Services
Corporation
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Response to Post-Hearing Questions from Thomas Smegal, Chairman of the
Board, Friends of the Legal Services Corporation
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Response to Post-Hearing Questions from Frank B. Strickland, Chairman
of the Board of Directors, Legal Services Corporation
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Response to Post-Hearing Questions from R. Kirt West, Inspector
General, Legal Services Corporation
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Letter from Thomas Smegal, Chairman of the Board, Friends of the Legal
Services Corporation, dated October 13, 2005, to the Honorable Melvin
L. Watt, Subcommittee on Commercial and Administrative Law, Committee
on the Judiciary
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
<all>