<DOC>
[110th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:45945.wais]
H.R. 5712, CLOSE THE CONTRACTOR FRAUD LOOPHOLE ACT, AND H.R. 5787,
FEDERAL REAL PROPERTY DISPOSAL ENHANCEMENT ACT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
ORGANIZATION, AND PROCUREMENT
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
H.R. 5712
TO REQUIRE DISCLOSURE BY FEDERAL CONTRACTORS OF CERTAIN VIOLATIONS
RELATING TO THE AWARD OR PERFORMANCE OF FEDERAL CONTRACTS
AND ON
H.R. 5787
TO AMEND TITLE 40, UNITED STATES CODE, TO ENHANCE AUTHORITIES WITH
REGARD TO REAL PROPERTY THAT HAS YET TO BE REPORTED EXCESS, AND FOR
OTHER PURPOSES
__________
APRIL 15, 2008
__________
Serial No. 110-103
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.oversight.house.gov
----------
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania DAN BURTON, Indiana
CAROLYN B. MALONEY, New York CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri CHRIS CANNON, Utah
DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of PATRICK T. McHENRY, North Carolina
Columbia VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota BRIAN P. BILBRAY, California
JIM COOPER, Tennessee BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
------ ------
Phil Schiliro, Chief of Staff
Phil Barnett, Staff Director
Earley Green, Chief Clerk
Lawrence Halloran, Minority Staff Director
Subcommittee on Government Management, Organization, and Procurement
EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania BRIAN P. BILBRAY, California
CHRISTOPHER S. MURPHY, Connecticut TODD RUSSELL PLATTS, Pennsylvania,
PETER WELCH, Vermont JOHN J. DUNCAN, Jr., Tennessee
CAROLYN B. MALONEY, New York
Michael McCarthy, Staff Director
C O N T E N T S
----------
Page
Hearing held on April 15, 2008................................... 1
Text of H.R. 5712................................................ 6
Text of H.R. 5787................................................ 9
Statement of:
Denett, Paul, Administrator for Federal Procurement Policy,
Office of Management and Budget; Barry Sabin, Deputy
Assistant Attorney General, Criminal Division, U.S.
Department of Justice; David Drabkin, Acting Chief
Acquisition Officer and Senior Procurement Executive,
General Services Administration; and Colleen Preston,
executive vice president, Professional Services Council.... 16
Denett, Paul............................................. 16
Drabkin, David........................................... 34
Preston, Colleen......................................... 43
Sabin, Barry............................................. 22
Werfel, Danny, Acting Comptroller, Federal Financial
Management, Office of Management and Budget; and Stan
Kaczmarczyk, Acting Deputy Associate Administrator, Office
of Government-wide Policy, General Services Administration. 77
Kaczmarczyk, Stan........................................ 83
Werfel, Danny............................................ 77
Letters, statements, etc., submitted for the record by:
Davis, Hon. Tom, a Representative in Congress from the State
of Virginia, prepared statement of......................... 60
Denett, Paul, Administrator for Federal Procurement Policy,
Office of Management and Budget, prepared statement of..... 18
Drabkin, David, Acting Chief Acquisition Officer and Senior
Procurement Executive, General Services Administration,
prepared statement of...................................... 37
Kaczmarczyk, Stan, Acting Deputy Associate Administrator,
Office of Government-wide Policy, General Services
Administration, prepared statement of...................... 85
Moore, Hon. Dennis, a Representative in Congress from the
State of Kansas, prepared statement of..................... 75
Preston, Colleen, executive vice president, Professional
Services Council, prepared statement of.................... 45
Sabin, Barry, Deputy Assistant Attorney General, Criminal
Division, U.S. Department of Justice, prepared statement of 25
Towns, Hon. Edolphus, a Representative in Congress from the
State of New York, prepared statement of................... 3
Werfel, Danny, Acting Comptroller, Federal Financial
Management, Office of Management and Budget, prepared
statement of............................................... 80
H.R. 5712, CLOSE THE CONTRACTOR FRAUD LOOPHOLE ACT, AND H.R. 5787,
FEDERAL REAL PROPERTY DISPOSAL ENHANCEMENT ACT
----------
TUESDAY, APRIL 15, 2008
House of Representatives,
Subcommittee on Government Management,
Organization, and Procurement,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:05 p.m. in
room 2247, Rayburn House Office Building, Hon. Edolphus Towns
(chairman of the subcommittee) presiding.
Present: Representatives Towns, Welch, Davis of Virginia,
and Bilbray.
Also present: Representative Moore.
Staff present: Michael McCarthy, staff director; William
Jusino and Mark Stevenson, professional staff members; Velvet
Johnson, counsel; Kwane Drabo, clerk; Jim Moore and Charles
Phillips, minority counsels; and Benjamin Chance, minority
professional staff member.
Mr. Towns. The committee will come to order.
Welcome to today's legislative hearing on two bills related
to contractor ethics and the disposal of Federal surplus
property. The first bill we will review is H.R. 5712, the Close
the Contractor Fraud Loophole Act, introduced by Representative
Peter Welch.
About a month ago Congressman Welch brought to the
committee's attention a loophole in a new rule requiring
contractors to report fraud and over-billing on Government
contracts. For some reason, contracts performed overseas were
exempted from that requirement. Well, that didn't make any
sense to Congressman Welch because so much contract fraud and
waste has been seen on contracts in Iraq and Afghanistan.
So we have been looking into the policy behind that rule
and how that exemption got into the rule in the first place.
Congressman Welch introduced a bill to close the overseas
loophole and another loophole exempting commercial items
contracts.
That bill is the topic of our first panel today. The rule
in question requires contractors to report internal fraud or
overpayment on Government-funded projects rather than wait for
its discovery by the Government. The Department of Justice
believed such a rule was necessary because few Government
contractors voluntarily disclose suspected instances of fraud.
However, the rule exempted contracts to be performed
overseas and contracts for commercial items. This makes no
sense at all. By exempting overseas contracts, this
administration is telling Government contractors that if you
are going to commit fraud, go abroad and do it. I am pleased
that since Congressman Welch brought attention to this detail
and introduced this bill and called for this hearing, it
appears that the administration will now revise its proposed
rule to include overseas and commercial items contracts in the
fraud reporting requirements.
That is a good step, but I think the Welch bill is still
necessary to make sure these types of loopholes stay closed,
and closed forever.
H.R. 5712 will ensure that taxpayers' dollars are used for
the purpose to which they have been appropriated, and not to
line the pockets of corrupt individuals or companies. We take
that responsibility very seriously. At this time when our
national security is of paramount concern, criminals who cheat
the Government must be identified, stopped, and punished.
I look forward to hearing from our witnesses.
Our second panel will discuss a bill by Representative
Dennis Moore of Kansas to streamlining the sale of surplus
Federal land. I will say more about that bill when it is time
for the second panel.
[The prepared statement of Hon. Edolphus Towns and the
texts of H.R. 5712 and H.R. 5787 follow:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Towns. At this time I would like to yield time to
Congressman Welch, the sponsor of this legislation.
Mr. Welch. Thank you very much, Mr. Chairman. I want to
thank Chairman Towns and I want to thank Chairman Waxman for
restoring front and center the responsibility the Congress has
to do oversight. That is especially important on the
procurement process that has become a much bigger part of how
Government spends taxpayers' dollars.
Just a few facts, Mr. Chairman.
In the year 2000, procurement spending was $203 billion. In
the first 6 years of the Bush administration that grew to $412
billion, the highest it has ever been in the history of the
United States.
Also, non-competitive procurement contracting has also
exploded. The use of no-bid contracts and the use of limited
competition contracts rose in the year 2000 from $67.5 billion
to $206.9 billion in 2006, with the largest increase in a
single year being between 2005 and 2006.
Even as that happens, the incidents of documented waste,
fraud, and abuse is also exploding. In a report that was done
under the supervision of Chairman Waxman, ``More Dollars, Less
Sense: Worsening Contracting Trends Under the Bush
Administration,'' has documented that in 118 contracts valued
at $745 billion that were found by Government auditors to
involve very significant waste, fraud, abuse, or mismanagement.
This year the report identifies 187 contracts valued at $1.1
trillion that have been plagued by waste, fraud, and abuse.
That raises the question as to how we will, as a Congress and
as an administration, protect taxpayer dollars from waste,
fraud, and abuse.
The subject of this hearing is about a rule that was
proposed that originally was going to do the obvious, and that
was require contractors who are receiving literally billions of
dollars of taxpayer money to report when they become aware of
any incidents of fraud. That rule, from its original proposal,
did the sensible thing to include that obligation whether the
taxpayer money was spent in the United States or abroad, was
ultimately promulgated with an exclusion for any expenditures
of taxpayer dollars that were spent overseas. Of course, the
dominant place where that money is spent is Iraq and, to some
extent, in Afghanistan.
The chairman laid out why that is not acceptable, but just
a few examples of the really egregious fraud, waste, and
mismanagement that has occurred are incidents in Iraq. Mr.
Chairman, a few of us were able to go to the Baghdad Police
Academy, where the contract wasted millions of taxpayer dollars
building a facility that wasn't able to be occupied for its
intended purpose. There was literally septic sewage that was
leaking from second-story facilities into the first floor.
Folks from the committee went to the Baghdad Police
College, which I just mentioned. Another one was the dam at
Mosul, where millions of dollars of equipment were just gone
missing.
There is item after item that have been documented, Mr.
Chairman, in the report by this committee of taxpayer waste,
fraud, and abuse which everybody opposes, so this rule that has
allowed an exemption to continue can't be sustained.
I thank you Mr. Chairman and yield the balance of my time.
Mr. Towns. Thank you very much. I also thank you for the
great work that you have done on this legislation.
Let me introduce the members of the panel. Let me begin by
introducing the Honorable Paul Denett, Administrator for
Federal Procurement Policy, Office of Management and Budget.
Thank you for coming.
Mr. Barry Sabin, Deputy Assistant Attorney General for
Criminal Division, U.S. Department of Justice. Thank you so
much for coming.
Mr. David Drabkin, Acting Chief Acquisition Officer and
Senior Procurement Executive, General Services Administration.
Thank you so much for coming.
Ms. Colleen Preston, executive vice president of
Professional Services Council. Thank you so much for being
here.
We will proceed with you, Mr. Denett. Let me just say that
each of you have 5 minutes. Of course, we hope that you could
sum up in 5 minutes. When the light goes to caution, we want to
let you know you need to be sort of like winding up, and then
when it gets to red, that means stop. Of course, after that we
have a question and answer period.
Before we do that, it is a longstanding policy here that we
swear in all of our witnesses.
[Witnesses sworn.]
Mr. Towns. Let the record reflect that they all answered in
the affirmative.
We will begin with you, Mr. Denett.
STATEMENTS OF PAUL DENETT, ADMINISTRATOR FOR FEDERAL
PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET; BARRY
SABIN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION,
U.S. DEPARTMENT OF JUSTICE; DAVID DRABKIN, ACTING CHIEF
ACQUISITION OFFICER AND SENIOR PROCUREMENT EXECUTIVE, GENERAL
SERVICES ADMINISTRATION; AND COLLEEN PRESTON, EXECUTIVE VICE
PRESIDENT, PROFESSIONAL SERVICES COUNCIL
STATEMENT OF PAUL DENETT
Mr. Denett. Thank you, Chairman Towns, Ranking Member
Bilbray, and members of the subcommittee. I appreciate the
opportunity to appear before you today to discuss recent
regulatory actions addressing contractor ethics and disclosure
requirements. You have asked for comments on H.R. 5712, the
Close the Contractor Fraud Loophole Act. I have prepared
written remarks that I would like the subcommittee to enter
into the record, and I would like to briefly summarize those
comments for you.
Mr. Towns. Without objection.
Mr. Denett. Let me begin by assuring the subcommittee that
the administration is committed to an acquisition process with
high standards of integrity and effective management controls
to reduce fraud, waste, and abuse in Government contracting.
Two recent rulemakings to change the Federal Acquisition
Regulation reflect unprecedented steps to strengthen contractor
ethics to protect our taxpayers from fraudulent conduct in the
award and performance of Federal contracts and subcontracts.
First, the Civilian Defense Acquisition Regulatory Council's
finalized FAR changes last November that for the first time
establish Government-wide requirements for Federal contractors
to have a written code of business ethics.
Second, the Council has issued a proposed rule, also last
November, that would require Government contractors to disclose
to an agency whenever the contractor has reasonable grounds to
believe that a violation of criminal law has occurred in
connection with award or performance of a contract or
subcontract. The proposed rule would require contractors to
establish internal control systems and employee training
programs to ensure compliance.
You have asked why the rules provide exemptions for
overseas contracts and commercial item contracts. I understand
that the exemption for overseas contracts is patterned after
pre-existing Defense Department regulations dating back to 1988
that exempted overseas contracts from contract clauses
requiring hotline posters. These are posters that are placed in
the contractor workplace with information on how contractor
employees can report suspected fraud and other misconduct.
The exemption for commercial item contracts reflects
provisions in the Federal Acquisitions Streamlining Act that
require the acquisition of commercial items to resemble
customary commercial marketplace practices to the maximum
extent practicable.
I am inclined to favor the elimination of these exemptions
for the purposes of these rulemakings. My office asked the
acquisition law team, which is the team that is responsible for
drafting ethics rules, to carefully consider whether exemptions
for overseas contracts and commercial items acquisition are
necessary.
In response to this request, the Councils sent OMB a draft
proposed rule as a followup to the November proposed rule. This
rule, which OMB received last week, is currently under
interagency review and will be subject to public notice and
comment.
You have asked me to discuss H.R. 5712. This bill would, in
effect, impose statutory requirements on Federal contractors
that are similar to the November proposed rule, except that
H.R. 5712 would also apply these requirements to overseas and
commercial item contracts. The followup rulemaking and the
process I just described will ensure that the concerns
underlying this legislation are appropriately addressed. For
this reason, I believe the legislation is unnecessary.
In short, the administration is creating stronger
Government-wide ethics requirements for government contractors.
I am confident, when the deliberations are concluded and
regulatory changes are finalized and fully implemented, we will
have taken significant steps to have protected the Government
and taxpayer from fraud in Government contracting.
This concludes my prepared remarks, and I will be happy to
answer any questions that you may have.
[The prepared statement of Mr. Denett follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Towns. Thank you very much, Mr. Denett.
Now we go to you, Mr. Sabin.
STATEMENT OF BARRY SABIN
Mr. Sabin. Thank you, Chairman Towns, Congressman Welch. I
appreciate the opportunity to be here today to discuss the
Close the Contractor Fraud Loophole Act, H.R. 5712, the efforts
of the Department of Justice to combat fraud in Government
contracting, and specifically the requirement that Government
contractors report fraud in material over-billing.
The Justice Department has a demonstrated and continued
commitment to a strong and vigorous enforcement effort in the
important area of procurement fraud. The Department of Justice
has made the investigation and prosecution of procurement fraud
a priority, to include procurement fraud related to the wars
and the building efforts in Iraq and Afghanistan.
In October 2006 the Justice Department announced a new
national procurement fraud initiative and the creation of the
National Procurement Fraud Task Force led by the Justice
Department's Deputy Attorney General's Office and Criminal
Division to promote the early detection, prevention, and
prosecution of procurement and grant fraud associated with
increasing contracting activity for national security and other
Government programs.
The task force has been enthusiastically embraced by the
entire law enforcement community, including the FBI, the
Inspector General community, and Defense-related agencies.
Overall, we now have more effective resource allocation in
procurement fraud investigations, which has resulted in the
acceleration of investigations and prosecutions.
This combined effort of task force members has resulted in
significant accomplishments, including a number of working
committees, specialized training, a public Web site, maybe 300
procurement fraud cases, regional working groups, and more.
Procurement fraud cases, especially those involving the
wars in Iraq and Afghanistan, are usually very complex and
resource intensive. The cases often involve extra-territorial
conduct, as well as domestic conduct, requiring coordination
between appropriate law enforcement agencies.
In order to improve coordination and information sharing,
we have established a joint operations center based in
Washington.
To date, the Justice Department has charged 46 individuals
or companies for contract fraud relating to the efforts in
Afghanistan, Kuwait, and Iraq. Last week a KBR fuel technician
was sentenced to 26 months incarceration in the Eastern
District of Virginia following his guilty plea to conspiracy to
defraud and accept bribes in connection with a scheme to divert
fuel intended for our airfield to the black market in
Afghanistan.
Also, last week in the District of Maryland a former senior
contract fuel manager pled guilty to conspiracy to defraud the
United States, commit wire fraud, and steal trade secrets.
With respect to the proposals to require mandatory
disclosure by contractors, on May 23, 2007, in a letter to the
Office of Federal Procurement Policy, the Justice Department
proposed, on behalf of the task force, some modifications to
the Federal Acquisition Regulation, which would require, among
other things, that contractors notify the Government whenever
they become aware of material overpayment or fraud relating to
the award or performance of contract or subcontract rather than
wait for the contract overpayment or fraud to be discovered by
the Government.
Shortly thereafter, the Councils began the review process,
and on November 14, 2007, published proposed rules,
substantially incorporating the task force's requested changes
of the FAR. The task force's proposal is mild on existing
requirements found in other areas of corporate compliance.
In my written statement I will give some of the reasons why
the changes were requested, including the data evidencing a
decline in voluntary disclosures to a Department of Defense
Inspector General.
The proposed rule, as published by the Councils on November
14, 2007, added two exemptions, one to Government contracts
performed entirely overseas and the other for commercial
contracts that were not included in the original task force's
proposal submitted on May 23, 2006.
After the Councils published the proposed rule and sought
public comment, the task force considered ways to improve the
proposed rule. In response to what the task force believed were
some legitimate concerns, we submitted comments on the proposed
rule on January 14th of this year, addressing the standard for
the schedule of over-payments and criminal violations,
cooperation and attorney/client privilege, navigation to
disclose potential violations of the False Claims Act, the
grounds for suspension and debarment, the time limit for
disclosures, and internal investigations by contractors. Law
enforcement agencies submitted numerous comments to the
councils in support of the task force's proposal.
In our January 14th comments we also address the Council's
decision not to include overseas contracts. We asserted that
the United States still is a party to these contracts and
potentially a victim when over-payments are made or when fraud
occurs in connection with those contracts.
We noted that, under these circumstances, the Government
still maintains jurisdiction to prosecute the perpetrators of
fraud and that these types of contracts, which in many cases
support our efforts to fight the global war on terror, need
greater contractor vigilance, because they are performed
overseas where U.S. Government resources and remedies are more
limited.
As the Justice Department has previously stated, the
Department welcomes the enactment of new tools to combat fraud
committed by contractors within the criminal jurisdiction of
the United States. With respect to H.R. 5712, we believe that
the rulemaking process should be able to address real concerns
adequately by appropriately incorporating the types of changes
discussed in our January letter.
The Justice Department and the task force have taken a
proactive leadership role in proposing that new ethics rules
and fraud and overpayment rules be incorporated into the FAR.
Moreover, the Justice Department will continue its efforts to
detect, deter, investigate, and prosecute procurement fraud by
companies and individuals.
Through these and other efforts, we will ensure that
taxpayer moneys are protected, our Nation's security defended,
and the investigation and prosecution of procurement fraud
remains a Justice Department priority.
I welcome any questions you may have.
[The prepared statement of Mr. Sabin follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Towns. Thank you very much, Mr. Sabin.
You may proceed, Mr. Drabkin. Thank you so much.
STATEMENT OF DAVID DRABKIN
Mr. Drabkin. Chairman Towns, Ranking Member Bilbray,
members of the subcommittee, thank you for the invitation to
come and talk to you today about the FAR rulemaking process and
specifically the ``Federal Acquisition and Regulation Case
2007-006, Contractor Compliance Program and Integrity
Reporting.''
Changes to the FAR undergo a long-established process
following the direction of the Congress, the President, or
suggestions from agencies or the public. The proposed changes
are assigned a case number and are referred to one of the
standing teams of the FAR Council. These teams are composed of
career civil servants and uniformed members of the armed
forces. On occasion, an ad hoc team may be formed to address
either an unusually complicated matter or a matter that
requires special attention. Ad hoc teams are also composed of
career civil servants and uniformed members of the armed forces
and are drawn from either existing team members or experts
sought from other agencies.
Once a case is assigned to a team, the team develops the
language they believe implements the suggested or directed
changes based upon their specific expertise and knowledge of
the procurement process. If they are making the changes based
on statutory Executive direction, discretion in formulating
regulatory guidance is limited by the directive they have
received. If they are making changes based upon suggestions for
the agencies or the public, their discretion is much broader in
terms of evaluating the overall consistency of proposed changes
with existing policies and practices. There is a FAR guide, and
that guide is available on the Web, and I have placed the Web
site in my testimony, which I ask, Mr. Chairman, be included in
the record.
Mr. Towns. Without objection, so ordered.
Mr. Drabkin. Once the team completes its assigned work, the
case is then sent to either the Defense Acquisition Regulatory
Council [DARC], or the Civilian Agency Acquisition Council
[CAAC], who reviews the team's work. Once both councils have
concluded their reviews and made any changes they deem
appropriate, the case is submitted to the OMB's Office of
Federal Procurement Policy for review and approval, then to
OMB's Office of Information and Regulatory Affairs [OIRA], for
its review, including an interagency coordination at OIRA's
discretion and approval.
Then the final rule is sent to the FAR signatories. Those
would be the Director of Procurement at Defense, the Director
of Procurement at NASA, and myself at GSA, for their review and
approval, and then the case is published in the Federal
Register.
Currently, over 50 cases are being processed, both
statutory and non-statutory in origin, and the details and the
status of all those cases may be found on the Web site set
forth in my testimony.
With regard to FAR case 2006-007, it originated from a
letter from the Department of Homeland Security as a Katrina
hotline poster case. DHS had been asked by Senators Lieberman
and Collins to acquire and ensure wide distribution of fraud
hotline posters in hurricane relief and reconstruction
contracts. The Senators requested that the regulatory action
mirror the Department of Defense's contract clause contained in
the Defense Acquisition Regulatory Supplement [DFARS], that
requires the prominent display of contract information to
report fraud, waste, and abuse.
DOD, GSA, and NASA took the initiative to make the ethics
coverage in the FARs stronger than DHS or the Senators had
requested. The original request by DHS was to take the existing
DOD hotline poster regulation and make it Government-wide. The
DOD hotline poster clause, which is found at 252.203-7002, was
required in solicitations of contracts expected to exceed $5
million, except when performance will take place in a foreign
country. It also was not required in commercial item contracts.
The DOD ethics and internal control regulation in the DFARS
recommended that a contractor system of management controls
should provide for a timely reporting. This was not mandatory
on contractors, as there was no clause binding the contractor.
In FAR case 2006-007, originating from DHS, we issued a
clause for hotline posters, keeping the overseas and commercial
items exemptions in that case. The FAR case went further by
making the ethics aspect mandatory and adding on to the hotline
poster clause.
The final rule had two clauses, one for the contractor code
of business ethics and conduct and another for the display of
the hotline poster, itself. The introductory paragraph, which
provides an exception if the contract is for the acquisition of
commercial items in the part 12 or if it will be performed
entirely outside the United States applies to both clauses. The
policy states that all the Government contractors must conduct
themselves with the highest degree of integrity and honesty and
should have a written code of business ethics and conduct.
All contractors should also have an employee business
ethics and compliance training program and an internal control
system that is suitable to the size of the company to
facilitate timely discovery and disclosure of improper conduct
in connection with Government contracts, and ensure corrective
measures are promptly instituted and carried out.
As this FAR case was progressing, the Department of Justice
submitted a public comment asking that FAR case 2006-007
provide more detail on the U.S. citizen guidelines. DOJ did not
comment on the exception for contracts for commercial items or
contracts performed entirely outside the United States.
At the same time, DOJ submitted a letter to OFBP setting
out DOJ's request to open a new FAR case. DOJ requested changes
to the FAR to require contractors to establish and maintain
internal controls to detect and prevent fraud in their contract
and notify contracting officers without delay whenever they
become aware of the contract overpayment or fraud, rather than
wait for the discovery by the Government.
The emphasis of the DOJ letter and the focus of the DOD and
GSA and NASA was on mandatory disclosure rather than on the
exemptions. The DOJ request provided that commercial
contractors may be excluded from the compliance program
requirements. DOJ asked for and received a commitment from OFBP
to publish a new proposed rule on an expedited basis. The FAR
Council complied with this request by expediting the drafting,
finishing, and approving of a proposed rule.
The new 2007-006, and this can by very confusing, because
the other rule is 2006-007, but the new rule, 2007-006 proposed
rule did not totally exempt overseas contracts. The proposed
rule applied the new debarment and suspension clauses to the
overseas contracts. A contractor may be debarred or suspended
for knowing failure to timely disclose an overpayment on a
Government contract or violations of Federal criminal law in
connection with the award and performance of the Government
contract or subcontract, which includes violations of any
contract, whether domestic or overseas.
The law team has modified the proposed rule and will
publish it for public comment and review. Comments received
will be considered in drafting the final rule.
Mr. Chairman, Ranking Member Bilbray, the FAR rulemaking
process is one of the unheralded great success stories in the
Federal Government's procurement practices. It has kept parties
and politics out of the business function of Government for
decades. I hope that you will join me in congratulating the
hundreds of career civil servants and uniformed military
members who have, over the years, honed this process and made
it work for the American taxpayers and the Federal Government.
These individuals are truly the unsung heroes of Government.
Our colleagues in government all over the world study our
system with envy and try to emulate it within their own
customers and cultures, as allowed.
I would be happy to answer any questions you may have.
[The prepared statement of Mr. Drabkin follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Towns. Thank you very much, Mr. Drabkin.
Ms. Preston.
STATEMENT OF COLLEEN PRESTON
Ms. Preston. Thank you very much, Mr. Chairman and
Congressman Welch. Thank you for the invitation to testify
today on behalf of the Professional Services Council.
PSC is the national trade association of the Government
services industry. This year PSC and the Contract Services
Association of America merged to form a single unified voice
representing the full range and diversity of the Government
services sector. We now represent over 340 member companies
with hundreds of thousands of employees in over 50 States.
We support the efforts of this committee, the Department of
Justice's National Procurement Fraud Initiative, the various
agencies, and the Office of Federal Procurement Policy in their
efforts to ensure that the Government is protected against
fraudulent behavior by contractors whether in the United States
or abroad, whether commercial suppliers or Government-only
contractors.
We all share the goal of reducing unethical behavior. The
question is how best do you do that.
Often what sounds like a simple and sensible proposal, when
applied in the context of the realities of the contracting
process, can end up having significant unintended consequences
and costs far beyond its benefits. We believe that is the case
with H.R. 5712, and we oppose it in its present form.
Before going further, I would just like to point out that
the Government is currently protected against fraudulent
behavior by any number of criminal statutes, the False Claims
Act, by contract penalties that may be imposed, and by the
suspension and debarment process. These protections apply,
whether or not a company is providing a commercial item or
whether the contract is being performed domestically or
overseas.
Our objections to the proposed legislation are based on the
following key factors: First, there is no reason to believe
that a mandatory reporting requirement will actually result in
reduced fraud or additional opportunities for redress by the
Government. Indeed, history suggests strongly that voluntary
programs properly structured and supported are more effective
tools.
Second, we believe that the voluntary disclosure programs
that are in existence now are actually a lot more effective
than DOJ claims. The data shows that, while the specific DOD
voluntary disclosure program has been experiencing a downturn,
there are other equally important DOJ programs that are
experiencing an increase in voluntary disclosures. They are
projecting the exact opposite trend.
Additionally, there are substantial improvements that could
be made in the DOD voluntary disclosure program that we believe
would strengthen it without requiring mandatory reporting for
every error that may be then subject to the criminal
investigation.
We also believe that contractors are making many, many
voluntary disclosures outside of the formal program, and we
think it would be better served if the Department of Justice
and others would explore why that is occurring outside of the
current formal program and if that is a problem if they are
occurring.
Third, the exemption from reporting for work performed
outside the United States was not added, as you have heard
today, at the last second, and in no way changes a company's
obligations to adhere to U.S. anti-fraud laws and regulations.
What we are talking about in H.R. 5712 is a procedural
requirement. These are procedural requirements that are often
imposed on Government contractors in the United States that our
companies understand. That is not the same when you are dealing
with foreign companies who do not operate under the same terms
and conditions that U.S. companies do.
Fourth, even the Department of Justice in its comments on
the proposed Federal acquisition regulation that this
legislation seeks to modify acknowledged that the proposed
threshold for mandatory reporting, a reasonable grounds to
believe, was too vague and would open the door to potential
landslide of unnecessary reports, which have little or no
relationship to actually fraud.
As they have also acknowledged, it is both unnecessary and
inappropriate to apply this to commercial contracts. The idea
of getting commercial items is that the Government would buy
under the same terms and conditions in the commercial
marketplace that every other vendor does. If you go out to buy
a computer, for example, you don't dictate to the company what
the terms and conditions are of the sale that they are giving
to you. In the same regard, if the Government wants access to
the best technology in the world in the commercial sector and
commercial services, there are many instances where companies
will not abide with agreeing to unique, Government-only terms
and conditions.
Six, the proposed legislation would place prime contractors
in an untenable position. The vagaries of the mandatory
reporting threshold places them at great risk, since it
requires them to have a degree of insight, and inside knowledge
about the business processes of their subcontractors. Might I
add that the legislation provides no threshold for reporting at
the subcontract level. We believe the better approach would be
to mandate that the Department of Justice enter into
discussions with contractors to ascertain why the DOD voluntary
disclosure program isn't operating as effectively as they
believe it should and to require an assessment of the totality
of voluntary disclosures that contractors are making before
making any further changes.
We support the continued emphasis on education and training
rather than penalties to foster that internal self-governance
in companies that will encourage employees to come forward to
seek advice, and then if they find that there have been errors
or problems or infractions to then come forward and report
them.
We strongly encourage companies to do this and we are happy
to work with the committee and the Department of Justice to
assist in developing processes that will further the goal of
enhancing ethical contractor behavior.
Thank you. I appreciate the opportunity to testify. I look
forward to your questions.
[The prepared statement of Ms. Preston follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Towns. Thank you very much. I thank all of you for your
testimony.
Let me begin with you, Ms. Preston. So you are saying that
H.R. 5712 is not necessary?
Ms. Preston. We are saying that we believe that better
approach is--yes, the short answer would be that it is
unnecessary. We believe that through the regulatory process we
have had the opportunity to explain a lot of the concerns that
have come about as a result of the Department of Justice's
proposal, and that, if you look at the behavior of companies
and employees in those companies, you are much more likely to
get not only reporting if there is unethical behavior, but also
cures to make sure that act or problem doesn't occur again if
you have a voluntary program.
Mr. Towns. Mr. Sabin, what do you say to that?
Mr. Sabin. With respect to the legislation?
Mr. Towns. Yes.
Mr. Sabin. The Department of Justice and the task force
proceeded through the regulatory route. We thought that would
be an appropriate means and an appropriate mechanism for
addressing the concerns. We wanted to instill strong ethics,
business corporate compliance, and the like, and we felt that
working through the interagency process, that the regulatory
mechanism, as articulated by Mr. Denett, is an appropriate
vehicle by which to do that.
In terms of the legislation proposed by Congressman Welch
in recent days, we don't have a formal Department of Justice
views letter or position with respect to that piece of
legislation. So, our initial preference is to proceed through
the regulatory mechanism before going through the legislative
process.
Looking at the actual bill, we would be happy to sit down
with staff, with you, but we can, at least on initial
observation, see some deficiencies, both technical,
definitional, and the like, to work through if the legislation
proceeds. But, I don't come before you today with a Department
of Justice views based upon the recency of the proposed
legislation.
Mr. Towns. All right. Mr. Denett, don't you think that
something needs to be done? I mean, I think it was Mr. Sabin
who talked about 46 cases. And let me just say to you that I
know there are a lot of others. So, don't you think we need to
do something?
Mr. Sabin. Well, Congressman, we are doing something. The
things that we have out now are unprecedented. We are advancing
the ethical behavior with contractors more than has ever been
done, so we are pleased by that. We are requiring them to have
ethics training, internal reporting mechanisms. We are
requiring them to inform us when they have done criminal
activity. So to me this is major initiatives that have gone
forth in the last several months.
The fact that we are now giving serious thought to getting
rid of the exemption for overseas and commercial, that is a
significant change from what we proposed a short while ago.
So in order for us to fully vet that and get comments from
everyone--the American Bar, various companies, associations--we
think that they are owed the opportunity, since that is in the
works, to have a chance to vet their views so that we know
everybody's view on this before a final decision is made. I
think to legislate without that input is not a wise choice.
Mr. Towns. Well, you know, let me just go back to you
again, Ms. Preston, because you are saying that voluntary is
fine, voluntary disclosure. You say that is fine, voluntary?
Ms. Preston. Yes, Mr. Chairman.
Mr. Towns. Right, and, Mr. Sabin, you are saying mandatory
is what we need?
Mr. Sabin. We believe that in this context, in the
procurement fraud context, it has not been working. The data
does not reflect that voluntary disclosures to, for example,
the Department of Defense Inspector General has declined,
especially in recent years. Indeed, we are not aware, over the
past 2 years, of any disclosures, voluntary disclosures, from
the top 15 contractors relating to fraud and material over-
billing.
So in that realm, with the increased spending that is
occurring in national security and the like, we believe that
and our recommendations were to have a mandatory disclosure
obligation.
Some of the voluntary disclosure programs that are
referenced either in Ms. Preston's written statement or in her
remarks this morning, we believe are sort of misplaced with
respect to the application in this reign. For example, the
antitrust program that is referenced in her statement in the
Department of Justice that provides amnesty is one in which it
is for the company reporting about other companies, as opposed
to the particular company that is disclosing, which would be in
the procurement fraud context about either conduct that occurs
within that corporate structure. So, to apply other voluntary
disclosure programs, which can work in other contexts, to this
one we believe is misplaced.
Ms. Preston. Mr. Chairman, as Mr. Sabin said, there are
other programs that have worked very well and are working, and
the reporting under those voluntary programs is increasing.
If I understand what he is saying is basically that because
they haven't had a voluntary report from the top 15
contractors, there is an assumption that there is fraud that
has been unreported. Most of those companies belong to and are
probably signatories to the Defense Ethics Initiative and other
things. They have instituted strong, strong ethics programs
with reporting.
Many of the reasons that people do not report, as we are
told, under the DOD voluntary disclosure program is that once
they do, it becomes a criminal process that takes up to two to
3 years to resolve. Most of the times, the companies will
report to a contracting officer if there is not fraudulent
conduct. And, it turns out that if it can be handled through an
administrative process, they will do it that way, and that is
much preferable to them to be able to resolve the situation, to
punish the employee, to figure out why it happened in the first
place, and to work out a system with the Government so that
they can improve the program that they do have and make sure it
doesn't happen again.
So, I think to say that just because they haven't had a
report from 15 companies doesn't mean that the program is not
working. All we are asking is, sit down with us, figure out why
the program isn't working. Let's see if we can make it work by
getting rid of some of the impediments that are causing people
not to report under it.
Mr. Towns. My time has expired, so I yield now to
Congressman Bilbray.
Mr. Bilbray. Justice Department, I assume, has made some
suggestions on some numbers changes in the rulemaking, right?
Mr. Sabin. Yes, we have.
Mr. Bilbray. Including the suspension language. Do you
intend to add any other language or have any other
recommendations specifically to the rulemaking?
Mr. Sabin. We had on January 14th provided a number of
detailed recommendations and suggested language with respect to
2007-006. To the extent that, as Mr. Denett indicated,
additional materials would be circulated, either in interagency
process or published for additional comment, we would actively
engage in that to ensure that the task force's views and the
Justice Department's views are provided.
Mr. Bilbray. Are you comfortable with how FAR has vetted
this with stakeholders such as Ms. Preston?
Mr. Sabin. Yes. I believe the notice and comment period
provided for extensive opportunity for specifics to be
addressed, that there were a number received by both Inspector
Generals, law enforcement community, as well as law firms and
others in private industry, and we have had dialog with a
number of those to ensure that we are trying to be surgical,
reasonable, and thoughtful in how to establish what, I think,
we all share common ground on, which is a rigorous business and
ethics compliance code.
Mr. Bilbray. With the progress we have made on the
rulemaking, do you think this legislation is essentially needed
or advisable?
Mr. Sabin. Our position has been that in the first instance
the rulemaking should proceed forward rather than the
legislative this year.
Mr. Bilbray. Your point is the rulemaking should move
forward and then, we will see what we should do with
legislation?
Mr. Sabin. That is where we are. We do not have further
Justice Department views on the particular legislation.
Mr. Bilbray. OK. Thank you, Mr. Chairman. I yield back. Can
I yield to the chairman, please?
Mr. Davis of Virginia. Closing loopholes always sounds
good, but when the loophole just turns out to be an exemption
inadvertently transported into a proposed rulemaking, this bill
applies a blunt instrument process to a process that requires
delicate surgery.
This bill provides that a known failure to report
violations is a criminal law when it is related to a Federal
contract. It would be a cause of debarment or suspension for
all concerned, including those holding contracts performed
overseas or contracts for commercial items.
That is exactly the coverage currently contained in much
more lengthy proposed regulation. What's all the fuss about?
The proposed rule does include an exemption for overseas and
commercial contracts, but the exemption applies only to the
establishment of internal ethics and programs and control
systems.
The enforcement of debarment and suspension for failure to
report would apply to all contractors, even without this bill.
While it may or may not be good policy to apply all or some of
the internal programs to overseas or commercial contractors,
the frenzy accompanying the bill hardly seems justified.
This does not make a significant change to the substance of
the proposed rule, but it does leap from the statutorily
designated process for writing acquisition regulations and in
statute a novel reporting scheme yet to be completely vetted.
The concept of mandatory reporting by contractors of
possible criminal violations based on reasonable grounds is
unprecedented and controversial. The rule is the subject of
more than 70 comments, and only two of those commentators are
present today. We expected many of the firms subject to the
rule to express serious concerns. They argue a company could
well face the loss of the ability to do business with the
Government based on highly technical interpretations of what
constitutes a criminal law violation.
I admit that debarment and suspension are to protect the
Government, not to punish companies. That has always been the
underlying policy. None of the witnesses today, including the
Department of Justice, support this bill, and they urge
justifiable statutorily mandated regulatory process to take its
course.
We understand the new proposed rules to be issued any day
now, which will, among other things, correct the exemptions and
internal ethics awareness and control programs and call for
another round of comments.
In stark contrast to open and very deliberate and open
process, today is the first and the only hearing on this bill.
Tomorrow at 9:30 a.m. members of the full committee will be
asked to consider and approve this proposal, which appears
designed to close more political holes than legal ones.
Thank you. Thank you, Mr. Chairman.
[The prepared statement of Hon. Tom Davis follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Towns. Thank you.
On that note I yield to the author of the bill, Mr. Welch.
Mr. Welch. Thank you, Mr. Chairman. There are really two
very simple questions. One, how is it that the original rule
was proposed that would require reporting for domestic
contracts but not for foreign contracts? And then the second is
the need for the statutory protection to give the benefit of
protection to the taxpayer.
Mr. Denett, I am going to ask you a little bit about this.
The original rule that was proposed had a requirement for fraud
reporting if it was a domestic contract, correct?
Mr. Denett. Yes.
Mr. Welch. And it did not include a requirement for
reporting if that taxpayer dollar was spent abroad, correct?
Mr. Denett. Well, the work group of career people that
worked on it, when they looked at the fact that Defense
Department had exempted overseas for earlier requirements, such
as these posters, they decided not to include overseas in it.
Mr. Welch. OK. Let me ask you this: in your mind, does a
taxpayer dollar spent abroad deserve any less protection from
waste, fraud, or mismanagement than a taxpayer dollar that is
spent here in the United States?
Mr. Denett. Well, as I stated in my opening remarks, I am
inclined to remove the exemption, but I am not comfortable----
Mr. Welch. I'm asking a simple question: does the taxpayer
dollar abroad deserve the same degree of protection as a
taxpayer dollar spent here at home?
Mr. Denett. All our tax dollars, regardless of location----
Mr. Welch. All right. We all agree on that, I take it. All
right? So isn't it your job, among other things, at OMB to take
appropriate action, including rulemaking, to protect all
taxpayer dollars, regardless of where those taxpayer dollars
are being spent?
Mr. Denett. That is, in fact, what we are doing.
Mr. Welch. And now, you have proposed this rule, and you
are now suggesting that you want to amend it so that it does
incorporate suggestions that were made to you by the Department
of Justice to include foreign contracts, correct?
Mr. Denett. That is correct.
Mr. Welch. All right. I want to know, if you can explain
it, how it is in this rulemaking process where you sent out for
comment the rule that had this exception for foreign
contracts--you sent it to Homeland Security, the SBA, the
Department of Labor, Veterans Affairs, Defense, Housing and
Urban Development, Transportation, Agriculture, Health and
Human Services, State, Interior, Treasury, and so on, 18
different agencies. None of them comment, with the exception of
Justice, about the oversight of leaving outside the protection
of taxpayer dollars that were spent abroad?
Mr. Denett. That is what I am told.
Mr. Welch. All right. We have, thanks to documents that
have been provided, a couple of e-mails that were sent out
probably to 50 to 80 people who had an opportunity to comment,
and with the exception of one comment from the Social Security
Administration, nobody in this extensive process that you go
through flagged this failure to include subject to the rule
foreign contracts?
Mr. Denett. That is correct. The focus was on creating
ethics standards for the first time ever, requiring mandatory--
--
Mr. Welch. Wait a minute. The focus is on protecting
taxpayer dollars. How did we get from here to there? You did
have a comment from the Social Security Administration, of all
places, that stated very explicitly under this proposed rule
contracts performed by a U.S. company on foreign soil would be
exempt. Did you respond to that comment by the Social Security
Administration?
Mr. Denett. I did not. I don't know if GSA, who had members
on there----
Mr. Welch. So the answer is no. Why did you take the advice
offered by the Department of Justice?
Mr. Denett. As I said earlier, our focus was on making
major improvements, which in fact we did. This group of career
civil servants that labored over this for many weeks put forth
to us something that did not include overseas contracting.
Mr. Welch. Mr. Drabkin, what about the GSA? We went through
this extensive process, e-mails and comments from people all
across Government, and no one, with the exception of somebody
from Social Security Administration, flagged this separation
between domestic and foreign?
Mr. Drabkin. Yes, sir. What happened at the CAAC meeting
when the rule was discussed, a Social Security representative--
and I was informed of this today, not when I spoke with your
staff members on Friday--but the Social Security member to the
CAAC did raise the issue. There was a brief discussion, and
that same member withdrew the issue and the rule went forward.
At the time----
Mr. Welch. This is the first----
Mr. Drabkin. If I may, Mr. Welch----
Mr. Welch. No. You have answered it.
Mr. Drabkin. No, sir, I haven't.
Mr. Welch. You actually haven't is right, but do you
support change in the rule so that it includes foreign
contracts as well as domestic contracts?
Mr. Drabkin. Sir, I support the process, and the process we
are going through now, and I support taking public comments.
Since I am one of three people that get to vote on the rule and
sign it, it would be inappropriate for me in advance of that
process being complete to tell you where I sit, although Mr.
Denett has made it clear to us what the administration's policy
is, and we generally follow the administration's policy at this
point.
Mr. Welch. Fair enough. Thank you.
Ms. Preston, you represent the Professional Services
Council. It is over 300 contractors.
Ms. Preston. Yes, sir.
Mr. Welch. And your boss, I think, was on record as saying
that they do not want this rule; is that correct?
Ms. Preston. Yes, sir, that is correct.
Mr. Welch. I listened to your testimony, and, frankly, I
think we are talking about, in some respects, two different
things. This rule and this legislation does not require any of
your member companies to become private Inspector Generals.
This requires them to report when they have knowledge about
waste, fraud, or abuse. I mean, what are you so afraid of if,
let's say, Bechtel and the $150 million that went to $160
million and $169 million contract in building the Basrah
Children's Hospital, if they become aware of fraud why wouldn't
we have an expectation, on behalf of the taxpayers, that they
would report that?
Ms. Preston. The reason that there is concern is because of
the standard and creating a standard for when it is. That----
Mr. Welch. I hate to interrupt, but I don't have much time.
That goes to the terms and conditions and perhaps the language
of the statute or the rule, but why would any of your
contracting entities that you work for--Blackwater, Triple
Canopy, KBR--companies that have received billions of dollars
in taxpayer dollars, why would they have any reservation about
sharing with the Government knowledge that they have when they
have it that taxpayers are being ripped off?
Ms. Preston. There isn't any question that they would share
that information if they knew it. The question is: how is it
drafted in terms of particularly the legislation, and what are
the risks that they incur? So they----
Mr. Welch. So you don't want any statutory either
rulemaking obligation. You want them to have voluntary capacity
to do this, so when in doubt they make the final decision?
Ms. Preston. Because if they voluntarily can report, then
they will report when they understand something. It is the
practicalities of what happens. So if you are the contractor--
and many of these contracts, as you said, are over in Iraq--you
are the contractor who has five levels of subcontractors. The
subcontractor that is doing the plumbing on that building, they
probably----
Mr. Welch. Or not doing the plumbing on that building.
Ms. Preston. The prime contractor is not in privity of
contract with that subcontractor and may not have----
Mr. Welch. I don't have much time, so----
Ms. Preston. Say one of those employees----
Mr. Welch. I yield the balance of my time. I'm sorry.
Ms. Preston. Say one of those employees overhears one of
the Iraqi nationals saying to a friend, I just got someone to
work for me at $10 an hour and I was able to charge the
Government or charge my prime contractor $15 an hour. An
employee of the prime contractor hears that. Does he then
immediately report that as being a case of fraud? He doesn't
know if the person was bluffing. He doesn't know whether or not
there has been a violation of law. He doesn't know if that is
unethical behavior. He doesn't really know what happened.
The concern is that if he doesn't immediately report it and
it later turns out to be some type of fraudulent or unethical
behavior, that company could be debarred, the whole company,
for something that someone overheard in a conversation out on
the----
Mr. Welch. Mr. Sabin, would you debar that company?
Mr. Sabin. It would look to the specific facts and
circumstances relating to the matter. We have limited
resources, and we would use our enforcement and investigative
resources appropriately. I think we could have common ground at
what could be appropriate standards and manners in which
disclosures could be made subject to internal investigation by
the company to root out the particular facts so that
expeditiously the referral was made in a thoughtful and proper
manner.
Mr. Welch. Thank you.
Thank you, Mr. Chairman.
Mr. Towns. I now yield to the gentleman from Virginia, Mr.
Davis.
Mr. Davis of Virginia. We seem to have different
philosophies here. My philosophy in Government contracting is:
you want to get the best deal for the taxpayer, and to do that,
you want as many bidders in the process or as many companies
and ideas coming in as possible.
What I hear coming from some other Members is, we want to
reduce this. We want to debar people. We want to put up
restrictions so you have fewer people, and that means less
competition, which at the end of the day means we end up paying
more and getting less.
Ms. Preston, you have a long record in this, going back to
when I was a Government contracts attorney back in the 1980's.
You remember the procurement integrity certifications and
everything that came out. You note that many commercial
companies would be unwilling to accept the risk level that is
levied upon them by the mandatory self-reporting requirements
in this bill. Do you think the self-reporting regime will cause
such companies to walk away from the Federal market, or parts
of it?
Ms. Preston. I do believe that there are many companies now
who sell commercial products to the Government who are very
concerned that----
Mr. Davis of Virginia. The downside is raised so much.
Ms. Preston. That the costs of doing business with the
Government are increasing, and every single provision that gets
added on, there will come a time when there is the straw that
breaks the camel's back.
Mr. Davis of Virginia. Is there a high cost of compliance
with the proposed self-reporting regime, and is this high cost
or is this a very marginal cost for a company as you look at
it?
Ms. Preston. No. I believe that when you put on the threat
of debarment, suspension in the way this legislation is
drafted, that it will cause companies to increase dramatically
some of the costs of doing business, but it is the risk that is
the biggest factor. It is the unknown that really causes people
concern.
Mr. Davis of Virginia. We did a hearing a couple of years
ago that noted some of the largest companies in America still
refuse to do business with the Federal Government. They will
work through intermediaries, re-sellers, and the like, but they
are very nervous for a number of reasons. Some of it is the
liability, some was protection of IP, some of it is separate
accounting systems. We tried through time to try to attract
these companies--many of them are very large--into the Federal
marketplace so we can get better deals for taxpayers instead of
having to go through re-sellers.
But this is just another, it seems to me, lower of the
unintended consequence of trying to protect consumers. In point
of fact, it may drive away competitors.
Ms. Preston. Exactly. We believe that it will. We believe
that the voluntary process works well. It is an incentive to
companies. Companies have tremendous incentives to report. One
is if they do they avoid the potential of a suit. They get
leniency under the U.S. sentencing guidelines. That has been a
dramatic factor in incentivizing companies to voluntarily
report.
We think that process is working well and allows them to
operate within the context of the ethics programs that they
have established within their companies.
Mr. Davis of Virginia. Mr. Drabkin, let me ask, do you have
any reason or any evidence that the alleged loophole for the
contracts performed overseas or for commercial items was
nefariously slipped in the proposed rule at the 11th hour to
try to give contractors a free ride to defraud taxpayers?
Mr. Drabkin. No, sir. Quite frankly, I am offended that the
suggestion was made without a scintilla of evidence that
suggested that was the case. In fact, for many months prior to
this hearing there have been suggestions floating around that
somehow someone influenced one of these career civil servants
to put that in. That is absolutely not true.
The truth of the matter is they made a drafting error. They
copied and cut and pasted language from 2006-007. They put it
into 2007-006. They didn't give any great thought to whether or
not the exemption made sense or not. They were in a hurry and
they processed a rule. Quite frankly, sir, the suggestion that
has been made by some folks around town that these folks did
wrong is just horrible. It is an offense.
Mr. Davis of Virginia. In point of fact, in procurement in
general, whether it is contract managers, procurement
officials, we are having a hard time recruiting good people
into this business, aren't we?
Mr. Drabkin. Sir, we are not meeting what anybody calls a
recruitment goal. We are barely staying even. We add additional
requirements each day to what a contracting officer does, and
then we impugn their honor and their integrity without a
scintilla of evidence, not a single bit of evidence. Why would
they do this? Ask yourself why would they sign up to do this.
You don't pay them any extra. They're not the ones that get to
go and travel. They are not the ones that get to go to big,
giant institutions for education. They work 60 to 80 hours a
week to get the job done. They don't ask for overtime, and we
impugn their honor and integrity because we--well, I had better
stop.
Mr. Davis of Virginia. I represent 5,400 Federal employees
and a number of contractors, as well, and most of them are very
hard working and try to do their job, and once in a while you
make a mistake, as we do, I might add, up here. We make a lot
of them. Hence, we have a $9 trillion deficit.
Thank you very much.
Mr. Towns. Thank you very much.
At this time I will go a second round.
Ms. Preston, what do you feel could be done to fix this
legislation? What do you feel, or is it a fact that you just
feel that we should not be involved in the process at all?
Ms. Preston. Well, I don't believe the legislation is
necessary at this time. I think the regulatory process is
working well. We have concerns about the regulations the way
they have been drafted, and particularly the new exclusions. We
will get the opportunity to comment on those, as well.
But, certainly we think that, at least in the regulatory
process, you have an opportunity to have every voice heard and
to explore further the particular impact of changes that we
don't necessarily get in the legislative process.
Mr. Towns. Right. You know, it is interesting, though, that
most people just oppose legislation, period. Sarbanes-Oxley, I
will never forget in terms of people coming up and opposing it
and opposing it and opposing it, and at the same time they were
saying there were some problems. So if we have some problems,
how do we fix the problems?
Now, I think with Mr. Sabin, who indicated that those 46
cases--anyway, I think, going back to the money, I think there
was $102 billion we spent over the last 5 years to help rebuild
Iraq and Afghanistan, and, of course, they cover at least $14
million in contract bribes. Well, even with this structure we
are finding bribes. So, I think that there are some serious
problems, and I think that we cannot sit back and just sort of
ignore the problem. I think something needs to be done.
Now, if H.R. 5712 is not the answer, then I think we should
talk about what needs to be done, but to say that legislation
is not necessary, I can't quite accept that. I think that it is
too serious to just sort of pass off the fact that making a
decision to volunteer the information they give to you. I don't
think that we can really move forward with that in mind, with
the fact that the kind of money that is being spent and
knowing--and everybody sitting at that table knows there are
some problems. Nobody said there are no problems.
Ms. Preston. And, Mr. Chairman, we certainly do not
advocate any of the activity that is going on that is unethical
in any form whatsoever. The fact that it is being found and
prosecuted is, I think, a good news story that people are
finding out about what is happening and prosecuting those
people who have acted unethically. That should definitely
happen.
What we are talking about here is not whether or not people
will be prosecuted for fraudulent behavior; it is a question of
a reporting mechanism to--what people believe is the tool to
make sure that we do, in fact, find out about whether or not
there is fraud. That is the issue. It is not whether or not
people are being prosecuted or not; it is how you get there.
We are saying that you are more likely to get companies to
self-report if you don't hit them with punishment and other
things in addition to the penalties that already are associated
with whatever activity occurred. That is the only question is
how you get there.
Mr. Towns. Well, I think that we need to help them get
there, and I think that H.R. 5712 sort of helps them to get
there.
You know, I think that we need to do something, and if this
is not the answer I want to hear something from you other than,
``continue to trust them.'' That is what I really say, because,
you know, we are spending a lot of money. That is $102 billion.
That is B as in Boy. That is a lot of money.
Ms. Preston. I certainly agree, Mr. Chairman, and I am not
asking to trust them. I am pointing out that there are
incentives already in place that are much more powerful than a
mandatory reporting requirement, which has many pitfalls
associated with it; that there are so many more incentives that
would cause a company to report a violation if they found one.
If you are knowingly violating the law, you are not likely
to self-report. The chances are if somebody is embezzling in
one of your companies, they are not going to tell anybody else.
They are not going to self-report. They are not going to report
themselves. If someone else finds out about it, they are much
more likely to report it in a system where they know the
company won't be punished in a way that hits them instead of
the offending person.
If it is your colleague next door and you find out that
they are embezzling, you want that colleague punished. You want
them thrown out of the company. You want them prosecuted, but
you don't want yourself and the rest of your fellow colleagues
hurt, like you would be if you were debarred or suspended.
Mr. Towns. Let me say that it does not appear to me that
the Federal contractors are being asked to do anything that is
not already expected for their counterparts in other
industries. To me, it doesn't appear to be any different. I
guess I need to yield to the author of it, but it seemed to me
that when I look at Sarbanes-Oxley and others, you know that we
are asking the same thing really. I don't understand the
resistance here.
Yes, sir, Mr. Sabin?
Mr. Sabin. I think Ms. Preston's points--we share some
common ground there with respect to the desire that sentencing
guidelines provide a foundation by which risk is taken out of
the equation for corporations in terms of their reporting. I
think we share common ground that we want to increase
incentives so that corporate individuals, both employees and
management, understand the consequences and understand the
process. Process is important, as well as substance. So we get
to, as she indicated, the mechanism by which that can occur so
that we can achieve, both in terms of corporate culture as well
as other appropriate goals and objectives, including law
enforcement, that goal.
I think the flaw in her analysis is that the present system
is working in terms of that kind of information flowing either
to the contracting officer or to the Inspectors General,
because the indication that was received when we looked at this
matter through our interagency process is that those referrals
were not coming, even though there has been an extraordinary
increase in terms of Government spending, and that the idea is
that there needs to be thoughtful prosecutional discretion that
it not linger in terms of the investigation or the prosecution,
that we make real-time decisions, but that the referrals and
that information could assist the Government in greater means
of addressing a problem we believe exists, and that we believe
that additional enforcement efforts, as appropriate--there may
be declinations. There may be matters that are inappropriate
for Federal prosecution.
Again, we are not seeking to go very wide in that. It has
to be fraud in connection with the contract or subcontract. It
has to be material over-billing, not just routine contract
administration. So, our objective is to make sure that those
enforcement efforts are thoughtful and productive so that there
is a culture, both in the corporate community as well as in
their interaction between private and public sector.
Mr. Towns. I yield to Congressman Bilbray.
Mr. Bilbray. Thank you.
As followup on that, doesn't the DOD contractors have the
ability to go to the Defense Contractor Management Agencies,
the Inspector General for the DOD? Now, does the Inspector
General report to these other agencies so that they can be
informed that reports have shown up there?
Mr. Sabin. If I understand the question, there is a
referral process from DOD IG to prosecutorial enforcement, as
well as an interagency process so that we are vetting so that
there isn't overlap between what DOD is doing and another
Inspector General. So there is, as they say in Washington,
deconfliction occurring with respect to the investigative
matter.
Mr. Bilbray. The fact that DOD has this different system,
is it possible that those reports are going over there and not
double backing, not being reported?
Mr. Sabin. The information that we received in the task
force is that those referrals are not occurring, whether in DOD
or elsewhere.
Mr. Bilbray. OK. Now, you deferred to the FAR. Why do you
defer to the FAR?
Mr. Sabin. On certain matters they certainly have the
expertise and the Justice Department doesn't profess to be
experts in all nuances of Government contracting. All they are
primarily is the enforcement. But our task force members, many
of whom are steeped in the specifics, recommended that this was
an appropriate vehicle by which to address a problem that
needed addressing.
Mr. Bilbray. Now, the FAR sort of indicated that this was
sort of a clerical error that had created a loophole here?
Mr. Drabkin. The exception language was a drafting error,
and we now have a draft proposed rule without that language in
it for the comment process. I didn't get a chance to explain it
fully, but we can't add new requirements to a rule after we
have gone out for public comment without going out for public
comment again, and so we have to go back through the proposed
process. And actually, we have more in this proposed rule than
is in Mr. Welch's legislation, including some additional
recommendations from the Department of Justice, which have been
incorporated in the proposed rule and is currently being
cleared within the Government. But, we have provided copies to
members of your staff so you can see what is in there.
Mr. Bilbray. So Mr. Welch's legislation is actually
addressing a concern you have; it is just that you are saying
we created the problem with a clerical error, we are now going
through the process, as mandated by Federal law, to not only
address this but to address other related items or more
extensive coverage within the system where the problem
originally occurred, rather than doing it through the
legislative process?
Mr. Drabkin. I want to be clear, because I don't want there
to be any mistake. We did not knowingly, thinkingly, put in the
exception.
Mr. Bilbray. OK.
Mr. Drabkin. We have taken that exception out in the
proposed rule. Even though it was mentioned by the Social
Security Administration person at the CAAC meeting, it got no
real thought. It wasn't examined. It was never raised, and it
never went any further.
We understand as a result of the comment process, which
Congress told us to use when it set up the procurement
rulemaking process in title 41--we have gone through that
process. It has worked. It has identified this issue and a
number of others, which are really important to making this
work and work well.
I think it is fair to say there is not a member of the FAR
Council that is not concerned with procurement fraud, with
people stealing from the Government or the taxpayers,
particularly in a time of war, but generally as a whole--I am
probably the only person in this room who has actually been a
fraud counsel and ran a fraud program as part of the Defense
Contract Management Agency--none of us like fraud. We all want
to address it. How we address it is a process we go through. We
are going through that process. We certainly don't disagree
with Mr. Welch that we should have a process, but we are going
through the process----
Mr. Bilbray. Title 41, what year did we implement title 41?
Mr. Drabkin. The rulemaking process in title 41 was part of
the OFPP Act, and I believe it was passed in 1970.
Mr. Bilbray. OK. Now, your position is that it is not with
title 41, it is not with the legislation, the enabling
legislation. The problem was basically in the rulemaking
itself, and you are going back and revisiting that within the
rulemaking process?
Mr. Drabkin. Yes, sir, and we have made that clear to the
staff. As I said, we have provided you with copies of----
Mr. Bilbray. But the intention of the gentleman's
legislation--this is the vehicle you are using, saying the
problem was not in the original legislation, it was in a
process of rulemaking, and so that is why you feel you should
keep it in the rulemaking process to correct it?
Mr. Drabkin. Yes, sir, and it also gives us greater
flexibility. If we discover we have made a mistake in
implementing it, we can fix it faster than the legislative
process normally is able to respond. That is not a criticism,
it is just a reflection of the way Government works.
Mr. Bilbray. Thank you very much.
Mr. Chairman, I just think that--remember, we are
legislators. We are taking the vehicles that we have available
to us. Obviously, with the rulemaking the way it is, they are
looking at directing the same issue from their jurisdiction
because they say it came out of their camp.
I yield back, Mr. Chairman.
Mr. Towns. Thank you very much.
Mr. Welch. Thank you very much, Mr. Chairman.
You know, I am hearing two things that are contradictory.
We are hearing that we don't really need legislation because
the rule is being fixed, but I don't think it is a coincidence
that there was no action toward fixing the rule until the
chairman held a hearing and we introduced legislation. Also,
nobody on the panel is committing to when that final rule is
going to be published and implemented, so it raises significant
questions, certainly on my part, as to whether, if we drop the
pressure, the ball is going to be dropped.
The other issue that is really of concern to me, Mr.
Drabkin, you know, I have absolutely no doubt about the quality
and integrity of the folks that work for our entire Federal
Government.
Mr. Drabkin. Thank you, sir.
Mr. Welch. They work hard. They don't get paid. But, what
we have here since 2000 is an explosion in these contracts,
including foreign contracts, including no-bid contracts, and
the contracting procurement process has gone from $200 billion
to $400 billion. And, I bet your department and OMB haven't
received a comparable increase in personnel that they need to
review contracts.
Mr. Drabkin. Sir, the number of contracting specialists in
the Government in 1990 was 33,000 doing $150 billion worth of
work. Today it is 28,000 doing $450 billion worth of work. The
problem is we don't have enough people.
Mr. Welch. That is my point. What you have said, with all
due respect, is that the fix wasn't in. This wasn't a
conspiracy, it was a mistake.
Mr. Drabkin. Yes, sir.
Mr. Welch. Well, that is not reassuring for taxpayers, and
we need a remedy. On the other hand, while your numbers to do
your job have been declining, the membership in the
professional contractors or services, Ms. Preston's group, has
been increasing, and there has been some suggestion here by my
friend from Virginia that it is getting to be a hassle to do
work with the Government. But, there is a lot of contractors
that are doing just fine. We had Blackwater in here who
testified they have done $1 billion worth of contracts and have
made at least 10 percent of profit. That is not a bad take.
Mr. Drabkin. Sir, our concern isn't with Blackwater. In
terms of access to the market, it is not with being able to
access Blackwater; it is being able to access the IT companies
who don't do business with the Government, who have solutions
we would like to buy but who don't want to sell to us because
of our terms and conditions and the fact that we have turned
contracting into a criminal matter, not a contractual business
matter. Although that is no excuse for cheating the Government
and no one should ever be allowed to do it.
Mr. Welch. It is something that is very simple here where
we protect the taxpayer dollars when they are spent abroad as
well as at home. There has been an acknowledgement on the part
of three of the four panelists that there, at least, has to be
a rule, some debate about whether you need legislation. I
absolutely want to give the benefit of the additional
protection to the taxpayer, particularly when the agencies that
are reviewing these contracts are getting squeezed on the
personnel required to protect the taxpayers.
I have some confidence that Justice can use appropriate
discretion so that it will be used wisely and well on behalf of
the goal of protecting the taxpayers. I reject the position of
the contractees, the ones who have been paid $400 billion and
above, that they don't want ``the burden'' of having to accept
as part of the benefit of $400 billion in taxpayer dollars the
obligation to share in a timely way with the Government their
knowledge that taxpayers are being ripped off.
I yield the balance of my time.
Mr. Towns. Thank you very much.
Let me thank all of you for your testimony. Of course, we
look forward to working with you, because I think we agree on
one thing: something needs to be done. It is not perfect. I
think we all agree on that. Of course, I think we can try to
move from there. So thank you so much, all of you, for your
testimony.
Yes, Mr. Denett?
Mr. Denett. Chairman Towns, we will expedite this proposed
rule. I heard Congressman Welch say he's concerned that we
might drop the ball. We won't drop the ball. It is a high
priority to us. We will move it. We will get it out soon. I
hope you give us the opportunity to get input from all
interested parties. We do not need this legislation. Give us a
turn at bat. You will be pleased with the outcome.
Mr. Towns. Well, we thank you very much for your comment.
Of course, as you know, it takes things a while to move around
here, so we will be watching you as we continue to move,
because it doesn't happen overnight around here. It really
doesn't. I wish it did a lot of times.
Thank you so much, Mr. Denett, Mr. Sabin, Mr. Drabkin, and
Ms. Preston. I thank all of you.
I would like to welcome our second panel to H.R. 5787, the
Moore-Duncan Property Bill. I think it will fix the problem
that we should not have. A lot of Federal agencies are sitting
on property that they aren't using, old buildings, antennas,
and plenty of land. GAO says that agencies have almost $14
billion in land that they do not need, and there is also about
$4 billion in land that no one in the Government can use. These
agencies should dispose of the property. There are better uses
for the money.
The problem is that to get the property ready to be sold
there are a lot of up-front costs. You have to do environmental
cleanup, demolition, historical preservation, things like that.
This would cost the agencies a lot, so they just hold on to the
property, especially since they don't keep the proceeds from
selling it. The money just goes back into the Treasury.
Representative Moore from Kansas' bill will allow agencies
to keep all of the proceeds from selling the property and would
give GSA funds to take care of the things that have to be done
first. The agencies would reimburse GSA for those expenses
after the property is sold.
I think the bill will go a long way to helping agencies get
rid of this unneeded property.
As with the first panel, it is our committee policy that
all witnesses are sworn in.
Before we do that, let me yield for an opening statement by
Ranking Member Bilbray.
Mr. Bilbray. Thank you, Mr. Chairman.
Mr. Chairman, I think that this is an issue that both sides
can work on. I think that one of the sides that really is not
talked enough about in Washington is the mistakes that have
been made in the past and try to build onto it. There are a few
of you that might have been around during the so-called savings
and loan debacle. I just know for one, as somebody that saw the
way the Federal Government handled that issue, that the real
crisis in that situation was not that the savings and loans had
problems, but that the Federal Government inherited huge
amounts of real estate assets, and then basically sold it for
10 or 20 cents on the dollar.
The taxpayer was literally ripped off, not by somebody
violating the law, but by agencies not having an incentive to
get every dollar of value out of real estate assets. There is
where the real loss of the savings and loan was. And one way to
be able to point that out is you look around through the tax
codes of how many people made a fortune off of buying up the
RTC property and then selling it and managing the property in
an appropriate way and how much successes were built on the
backbone of us losing huge amount of resources in real estate.
So I am encouraged to go through the hearing, take a look
at the bill as recently introduced, and hopefully we can work
on this.
I think that assets unused are assets wasted, and so let's
see how well we can work this.
The challenge is for any bureaucracy to be responsive and
address this issue in a way that will maximize the benefit for
the taxpayer.
With that, I appreciate the hearing, Mr. Chairman.
Mr. Towns. Thank you very much.
I would like to ask unanimous consent that Congressman
Dennis Moore be allowed to sit in on this hearing. Of course,
it is his legislation.
At this time I would like to yield to Congressman Moore.
Mr. Moore. Mr. Chairman and Mr. Bilbray, thank you very
much for the opportunity to be here to join the subcommittee
today for this hearing to discuss new legislation, H.R. 5787,
that I have introduced with Mr. Duncan of Tennessee that would
help address the disincentives that are currently keeping some
Federal agencies from disposing of assets and property they no
longer need.
Last June, the OMB released a report, which found there is
currently a backlog of more than 21,000 excess and surplus
Federal properties worth a total of $18 billion. Holding on to
these properties has serious implications for the a motion
taxpayer, as it costs Federal agencies billions of dollars each
year to maintain secure properties that are under-utilized or
simply not needed.
Investigations by the GAO have also pointed out that the
administrative requirements and cost preparing the property for
transfer or sale continue to hamper some agencies' efforts to
address their backlog of unneeded properties.
Because it can be difficult for agencies to secure the
resources they need to prepare a property for disposal, these
costs serve as a disincentive, because it makes more sense in
the short term for them to simply hold on to a property,
particularly if they do not expect to receive the proceeds of a
transfer or sale.
Fortunately, over the past several years the administration
and Federal agencies have made progress toward strategically
managing Federal real property by establishing asset management
plans, standardizing data reporting, and adopting performance
measures, but I believe there are common sense steps that we
can take now to ensure that all Federal agencies have the
proper incentives to dispose of property they no longer need.
H.R. 5787, the Federal Real Property Disposal Enhancement
Act, is designed to do that. First, the legislation would move
to help agencies deal with the administrative requirements and
costs of preparing under-utilized properties for transfer or
sale by allowing the GSA, in cooperation with agencies, to use
its resources and expertise to cover these up-front costs and
help agencies ensure that title records, property descriptions,
and environmental clearances are in order. GSA would then be
reimbursed for all the costs it incurs from the proceeds that
agencies receive from the transfer or sale of these properties.
The legislation would also provide agencies with another
incentive to reduce their inventory of unneeded properties by
allowing them to keep all the proceeds received from the sale
of surplus properties, which they could then use for future
disposal and asset management activities.
Over half of all land-holding agencies, including the three
largest land-holding agencies in our Government--Department of
Defense, GSA, and the Veterans Administration--already have
this authority to retain proceeds, and it has been shown to be
a tremendous incentive for some agencies to dispose of property
they no longer need.
As we are all aware, the Federal Government faces huge
fiscal challenges, which is why we must increase our efforts
both to manage our existing assets more effectively and to
significantly reduce the inventory of under-utilized Federal
properties. We should no longer waste precious taxpayer funds
on maintaining and holding properties that are not needed by
our Government.
Again, Mr. Chairman, thank you for the invitation to join
the subcommittee today. I look forward to hearing from the
witnesses. Thank you, sir.
[The prepared statement of Hon. Dennis Moore follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Towns. Thank you very much.
It is a longstanding policy that we swear in our witnesses,
so please stand and raise your right hands.
[Witnesses sworn.]
Mr. Towns. Let the record reflect that they answered
affirmatively.
Danny Werfel is the Acting Comptroller of the Office of
Federal Financial Management at OMB, so we ask that you go
first.
STATEMENTS OF DANNY WERFEL, ACTING COMPTROLLER, FEDERAL
FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET; AND STAN
KACZMARCZYK, ACTING DEPUTY ASSOCIATE ADMINISTRATOR, OFFICE OF
GOVERNMENT-WIDE POLICY, GENERAL SERVICES ADMINISTRATION
STATEMENT OF DANNY WERFEL
Mr. Werfel. I would like to begin by thanking Chairman
Towns, Ranking Member Bilbray, Representative Moore, and other
members of this subcommittee for having the hearing today and
inviting me to speak.
The Federal Government is achieving measurable results as
we work to meet the President's goals of right-sizing the
Federal real property inventory. In 2004, before the President
launched the real property initiative, the Federal Government
lacked a comprehensive inventory of its real property holdings
and could not effectively identify which assets to target for
investment or disposal. Today we have a comprehensive inventory
of more than 1.1 million individual assets with a replacement
value exceeding $1.5 trillion.
Agencies are using performance measures, such as whether
the property is mission critical, the utilization rate of that
property, the cost and condition of that property, to identify
assets in need of investment and those unneeded assets suitable
for disposal.
Agencies have disposed of more than $7 billion in unneeded
Federal real property since 2004, and we are moving toward the
President's goal of disposing $15 billion in unneeded assets by
the year 2015.
While we are proud of these accomplishments, there is more
work to be done. Our inventory shows many surplus assets
remaining on our books. As long as these assets remain on our
books, agencies are investing resources to maintain them. Of
note, our most recent report to Congress shows over 21,000
surplus and excess assets on the Federal inventory.
Also importantly, our inventory shows that we have mission
critical assets with a backlog of repairs and maintenance.
These backlogs degrade our facilities over time and cause us to
spend more on maintenance and repairs in the long run. One of
the anecdotal examples we would like to give is that a roof
repair may cost $7,000 today to address, but if we don't do
that and wait, it could cost us $7 million in the near future
to go ahead and replace that roof.
As reported by GSA in their written testimony for this
hearing, six of our largest property-holding agencies have
backlogs that exceed $16 billion.
Federal agencies need additional tools and resources to
address these ongoing challenges. Agency efforts to manage and
dispose of real property are governed predominately by the Real
Property Act of 1949. Two critical updates to this legislation
are needed: first, allowing agencies to retain a portion of the
net proceeds of sale of unneeded assets and requiring those
proceeds be reinvested to help fund disposal activities and
fund our maintenance backlog; and, second, expediting the
disposition process for our targeted assets.
I would like to talk briefly about these two reform
proposals.
First of all, retention of proceeds. Many agencies do not
have the authority to retain proceeds, and such proceeds can be
converted into significant savings for taxpayers. Let me
explain how: First, proceeds can be used to cover up-front
costs associated with the disposing of unneeded assets. As
these assets are removed from the inventory, the costs to
maintain them are avoided. Second, proceeds can be used to
address repair and maintenance backlogs, avoiding the
inevitable higher costs incurred by agencies when these
backlogs are not addressed timely.
On to the issue of expedited disposals. The disposition
process that we operate under today is lengthy and complex. Our
goal is to streamline that process so that parties interested
in an asset for a possible no-cost conveyance have greater
visibility and more timely access to the assets, and properties
that are not a good fit for a no-cost conveyance can be quickly
demolished or sold at market so that agencies can more
immediately terminate the ongoing maintenance costs associated
with these assets.
Both of these reforms were proposed as part of a pilot
program in the 2009 President's budget. We believe that
enactment of this pilot would both facilitate the disposal of
surplus property in the short term and help inform Congress and
the executive branch on our longer-term, permanent reform
approaches.
While the administration prefers to enact these two
reforms, retention of proceeds and expedited disposals,
together, we are open to working with Congress to consider
alternative paths. Ultimately, we believe that reform in both
of these areas is essential and necessary for agencies to
improve the management of their real property portfolio.
After my written testimony for this hearing was submitted,
OMB completed its review of the draft property bill provided to
us by staff from this committee. I understand that bill has now
been introduced yesterday and is H.R. 5787. We appreciate you
and your staff's willingness to consult with us on the draft
bill, and we respectfully offer the following observations for
your consideration.
The draft bill would allow agencies to retain 100 percent
of the sale's proceeds, a very positive step that we applaud;
however, the draft bill contains additional language that such
proceeds ``shall only be expended as authorized in annual
appropriations acts.''
If we understand the impact of this particular language
correctly, proceeds will only be expended for agency real
property needs if congressional appropriators prioritize such
funding within their existing spending caps, which are
sometimes referred to as 302-B allocations. In this regard,
Federal agencies will face the same challenges they face today;
that is, dollars needed for real property will be directly
competing with dollars needed for other discretionary
priorities.
The intent of the administration's real property proposal
was not only to allow agencies to retain proceeds from property
disposal, but to also provide agencies with the incentive for
increased flexibility to reinvest those proceeds in the
properties that have the highest priorities.
I thank you again for the opportunity to testify today, and
I look forward to answering your questions.
[The prepared statement of Mr. Werfel follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Towns. Thank you very much, Mr. Werfel.
Mr. Kaczmarczyk.
STATEMENT OF STAN KACZMARCZYK
Mr. Kaczmarczyk. Chairman Towns, Ranking Member Bilbray,
and members of the subcommittee. I am Stan Kaczmarczyk,
Principal Deputy Associate Administrator for the General
Services Administration's Office of Government-wide Policy. I
am pleased to appear before you today to discuss GSA's policy
support for and operational success in real property asset
management.
President Bush signed Executive Order 1327, Federal Real
Property Asset Management, on February 4, 2004. From the
outset, GSA has fully supported and participated in the
implementation of the Executive order. GSA has taken a
prominent role on the Federal Real Property Council established
by the Executive order. As one of the Federal Government's many
land-holding agencies, GSA was proud to be recognized by the
administration for achieving and maintaining green status on
the PMS scorecard, the first agency to attain that status.
In support of the Council, the Office of Government-wide
Policy developed and maintains the Federal Real Property
Profile, a centralized real property data base that compiles
data on more than 1.1 million real property assets with a total
replacement value of more than $1.5 trillion. The FRPP collects
24 major data elements, including 4 key performance measures.
Since 2004, using existing authorities, Federal agencies
have reported through the FRPP, as Danny mentioned, the
disposal of more than $7 billion of surplus real property.
One of the significant asset management challenges
confronting the Federal Government is the lack of incentives to
dispose of unneeded real property. For example, some agencies
are unable to retain and reinvest the proceeds from the sale of
surplus assets. With a limited amount of financial resources,
too often the real property inventory becomes a secondary
priority. This creates a backlog of repair needs and deferred
maintenance. As Danny mentioned, in 2007 the Government
Accountability Office found that six land-holding agencies
reported a backlog for repair and maintenance that totaled over
$16 billion. If agencies could retain and reinvest the proceeds
from the sale of surplus real property assets, the funds could
be used to help addresses this significant backlog.
In 2005 GSA received the authority to retain all proceeds
from sales of its surplus properties. Since enactment of this
authority, GSA has disposed of 42 surplus real property assets,
with the total sales amount of $155 million. We believe that
providing all Federal land-holding agencies with the authority
to retain net proceeds of sale will provide an incentive for
sound asset management decisionmaking.
The administration's fiscal year 2009 budget includes
proposed legislation that would allow agencies, those not
previously authorized to retain proceeds, the ability to retain
20 percent of proceeds from the sale of unneeded assets.
Another disincentive to sound real property asset
management is that some agencies retain unneeded real
properties because they cannot afford the up-front costs of
disposal. A general provision in the administration's fiscal
year 2009 budget recommends authorizing GSA to pay for and
provide up-front redeployment services to other agencies to
help them decide whether to retain and reuse the property or to
place the asset in the disposal process.
Federal agencies, under the leadership of the Federal Real
Property Council, have taken the initial steps to promote the
efficient and economical use of Federal real property resources
and to increase agency accountability, but without funds
necessary to reinvest in or dispose of these assets, they will
continue to deteriorate as part of the Federal inventory.
We ask that you consider our legislative proposals to
improve the real property asset management.
Mr. Chairman, this concludes my statement. I will be
pleased to respond to any questions.
[The prepared statement of Mr. Kaczmarczyk follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Towns. Thank you very much. I want to thank you Mr.
Werfel and Mr. Kaczmarczyk for your testimony.
At this time I would like to yield to the ranking member,
Mr. Bilbray.
Mr. Bilbray. Thank you, Mr. Chairman.
Just quickly, the fact is we also don't talk about the fact
that if we put this back into the private sector, the local
government benefits from the tax base--not that the Speaker
would have appreciated us taking the Presidio in San Francisco
and putting it back on the market, which you can imagine the
resources we could have gotten for that.
You made a recommendation, though, and I would ask the
author of the bill to consider the fact that allowing the
assets to go back into either the support for maintenance or
the purchase of new--and keep it within that maintenance and
that property management side, and I think that the authors
should keep a real open mind to keep that from getting lost. I
don't think the intention was for this to get buried. That was
the whole reason to try to make the maximum on this.
That is one recommendation we could make up there, and I
think that we can followup on that working with the author and
trying to focus the staff. It may not be 100 percent, it may be
85, like we do with drug asset seizures for the local
government, but at least focus the resources over on to that
maintenance aspect of where we are getting this.
I think there is a way to work this out. I think the bill
being drafted yesterday just gives us a foundation to work
with, and I appreciate the positive recommendations from both
of you.
Mr. Towns. I would like to yield to the authors of the
legislation, Mr. Duncan and Mr. Moore.
Mr. Moore. Thank you, Mr. Chairman. As I mentioned before
in my statement, in June 2007 OMB reported there is currently a
backlog of more than 21,000 Federal assets and properties worth
$18 billion. Does OMB have an estimate of how much Federal
agencies are spending each year to hold and maintain excess and
surplus properties they no longer need?
Mr. Werfel. We do. It is $130 million per year.
Mr. Moore. That is $130 million?
Mr. Werfel. Yes, sir.
Mr. Moore. All right. You also have an estimate for how
many more Federal properties are unneeded or under-utilized but
are not yet characterized as excess?
Mr. Werfel. That we don't have. I think what you are
talking about, Mr. Kaczmarczyk has it.
Mr. Moore. As you mention in your testimony, OMB has been
supportive of proposals to create a pilot program that would
allow agencies to take excess properties directly to sale,
essentially allowing them to avoid the required screenings for
transfer to another Federal agency, homeless use, and public
benefit conveyance. It seems this proposal is based on the
premise that the screening requirements are the primary factor
keeping agencies from disposing of property they no longer
need. Does OMB have any evidence that this is, indeed, the
case?
Mr. Werfel. What we have discussed in the Federal community
through the Federal Real Property Council are the major
obstacles that we confront in disposing real property, and two
themes emerged. One is the agencies look at the process, which
takes about 240 days to go through, to go through all the
various public benefit conveyance steps that are necessary, and
that is, in many cases, a deterrent to having the agencies push
their properties through for sale.
In addition, as has been mentioned several times, there are
up-front costs associated with getting a property ready for
sale. It can be as simple as moving a large dirt pile from the
property before they get it ready for sale, but removing that
dirt pile could cost a couple of thousand dollars that the
agency doesn't have.
So really seeing both these obstacles, the length of time,
the 240 days for public benefit conveyances on average, and the
proceed issue both present obstacles for agencies.
Mr. Moore. Thank you.
Are you aware of the legislation by Senators Carper and
Coburn that would create a pilot program that would allow
agencies that disposed of properties through the pilot to keep
only 20 percent of the proceeds of their sales? Are you aware
of that?
Mr. Werfel. We are aware of it. It is very similar to a
pilot proposal that has been in the President's budget for the
last few years.
Mr. Moore. My question then is if most agencies can already
keep 100 percent of the proceeds, what incentive would they
have to take part in the pilot program?
Mr. Werfel. Representative Moore, one clarification about
your question. First, it is my understanding that a minority of
our agencies currently have the authority to retain proceeds.
For example, Veterans Affairs and the State Department have
such authorities, but many of our agencies, such as
Transportation, Department of Homeland Security, and many other
agencies, including the Defense Department for their non-BRAC
properties, do not have such authority.
So the 20 percent retention would be a much better
improvement than what they face today, and that 20 percent
proceeds could help. I used the dirt pile example--help the
agencies remove that just for the environment work that is
necessary. We believe that 20 percent would have a big impact.
Clearly, 100 percent would go a much further way. It would
not only allow you to do the up-front cost to get the property
ready for disposal, which, relatively speaking, would be
smaller in amount than addressing our real property maintenance
backlog. So, when you start getting up into the 100 percent
range, now you are talking about the opportunity to really make
investments into our infrastructure that not only will improve
the condition of our facilities, but, as I mentioned, will be a
positive return on investigation for taxpayers because the
sooner you repair those facilities the less expensive the life
cycle cost of those facilities are.
Mr. Moore. May I ask some very brief questions of the
gentleman from GSA, Mr. Chairman?
Mr. Towns. Sure.
Mr. Moore. Could you describe the trend in the disposal of
GSA properties that we have seen since the agency was given the
authorization to retain the proceeds of its sales in 2004? Has
the agency seen a significant increase in the number of
properties disposed of since this authorization was given?
Mr. Kaczmarczyk. The authorization applies to GSA
properties.
Mr. Moore. Right.
Mr. Kaczmarczyk. I don't know if I would say there has been
a significant increase, but it has certainly been a boon to us
in being able to retain the proceeds and to reinvest them.
There has been an increase in recent years, but it has
basically been as a result of a tiering process that was put in
by GSA, but we restructured our portfolio to three tiers. The
ones that we really have a continuing need for that are our top
priority investments, ones that could reach that category with
some additional investment, and then a third tier that we
really should get rid of, we have no use for. That has been the
real driver for the increase in disposals.
Mr. Moore. Does GSA have any evidence that the screening
requirements for homeless use and public benefit conveyance are
keeping agencies from disposing a property they no longer need?
Mr. Kaczmarczyk. I wouldn't say evidence. I agree with
Danny that it is a real concern that comes up in the Federal
Real Property Council, which is all the Federal land-holding
agencies getting together to try to increase or improve asset
management. I am of the mind that if you should get rid of it,
you should get rid of it, especially if it is costing you money
to maintain it, even if it takes time to go through the proper
channels.
Mr. Moore. Last question, Mr. Chairman.
Do you feel that another important factor is that it is
often difficult for agencies to secure the resources they need
to fund disposal efforts, and that not all agencies are allowed
to keep the proceeds from sales they do complete? Is that a
concern?
Mr. Kaczmarczyk. Yes, that is definitely a concern, and the
legislation would be a big help in that area.
Mr. Moore. Thank you, witnesses. Thank you, Mr. Chairman.
Mr. Towns. Let me thank you for sponsoring the legislation,
and, of course, let me thank both of you for your testimony.
Thank you very much.
On that note, the committee is adjourned.
[Whereupon, at 4 p.m., the subcommittee was adjourned.]
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