Federal fiscal operations and maintenance funding rules: what contract managers need to know; Maintaining vigilance in O & M funding issues and sharing knowledge among the agency's management and employees is a necessity--not an option.
Processes have been put in place to ensure proper obligation and tracking of the O & M one-year funding. This "color of money" has invoked various interpretations and applications that sometimes leave a contract manager asking, "Where do I go from here?" Learning in-depth about O & M funding will help you then make prudent decisions that support the government agency's requirements.
The U.S. Constitution Article I Section 9 Clause states, "No money shall be drawn from the treasury but in consequence of appropriations made by law." All fiscal law flows from this authority. Subsequent statutes came into being because the agencies abused the appropriations they were given--for example, spending in excess of their appropriations. Agencies would go to Congress for a "deficiency" appropriation to meet their obligations--hence the name, Anti-Deficiency Act (ADA).
Besides appropriation law provisions, fiscal law includes other legal applications, such as public laws, U.S. Code, regulations, and opinions. Agencies apply the fiscal law to ensure that appropriated federal funds are used properly. As stipulated in the fiscal law, appropriated funds are to be applied using three major rules: (1) an appropriation may only be expended for the stated purpose; (2) one cannot obligate the government in excess or in advance of the appropriation (the ADA); and (3) a fiscal year appropriation may be obligated only to meet a bona fide or legitimate need arising in the fiscal year for which the appropriation was made.
These major rules were seen as clear and easily understood--at least that is what Congress thought when the promulgated law was implemented. Then, why do good contract managers ponder over the many U.S. General Accounting Office's (GAO) legal decisions regarding federal contractual funding before obligating their agency's funding?
Historically, the United States has gone through economic evolutionary phases such as wars, depression, inflation, global trade deficits, and any other phenomenon that affect Congress's purse. In turn, the appropriations reflect these changes as to how the budget is approved and disbursed among the federal government agencies. Congress embedded flexibility within the law, realizing that the congressional budget cannot be put in stone.
Exceptions were approved that address the different "color of money" applications to maintain the agency's support and continuity of the mission. The congressional objective was that as long as the three major rules are followed and approved "exceptions" were in place, this should avoid discrepancies and ADA violations within the federal government procurement process. We still see GAO reports, however, that clarify the use of federal funding. Accounting Office has developed and maintained the Principles of Federal Appropriations Law that was later termed the "Red Book," due to the red-colored hard covers that bind the pages. The third version was recently released (January 2004), which includes the updates of GAO case law and processes. In reviewing the Red Book Chapter 2, there is information about "two appropriations available for the same purpose," and "reprogramming." At this juncture, the reader begins to realize the flexibility that is provided to agencies; but the reader can also realize the room that is still left open for misinterpretation or need for clarification of the law, which has required GAO's decisions and possible intervention. Chapters 4 and 5 provide the detail needed to fully understand the "availability of appropriations (purpose and time)." In these two chapters, operations & maintenance (O & M) funding is prevalent and more detailed information on this topic begins.
O & M Funding
This type of funding is one of the multiple "colors of money" that has always been the highest expenditure within the federal government. When reviewing GAO cases involving funding, O & M funding application appears to be the most controversial and the most transformed. The acquisition private and public sectors need to be knowledgeable and current on this transformation to standardize the use of O & M expenditures. Although the Red Book is explicit and well documented, further in-depth research is necessary to fully understand the transformation of O & M funding.
To make procuring officials aware of the changes that have occurred in O & M appropriations and fiscal law, the Red Book includes GAO cases that have profoundly affected O & M funding determinations. To understand the terms and conditions of O & M expenditures--and for the purpose of this article--knowledge is required of the following nomenclature: (1) non-severable (ref. Department of Defense Federal Acquisition Regulations (DFARS) Part 204.7101), "a deliverable item that is a single-end product or undertaking, entire in nature, that cannot be feasibly subdivided into discrete elements or phases without losing its identity;" (2) "Bona Fide" rule, 31 U.S.C. 1502(a) (i.e., appropriations "for the good or service of the present year"); and (3) Anti-Deficiency Act (i.e., funding is sufficient for contract obligation amount).
Bona Fide rule applications evolved and were continually redefined throughout the years by Congress in order to improve procurement process flexibility. These revisions were necessary to respond to the dynamics of U.S. economical changes. The Bona Fide rule became a key tool used to baseline the amount of flexibility allowed by law while fulfilling the agency's mission. Also, a severable versus non-severable determination is a major factor in the Bona Fide application. GAO's cases promote caution to the procurement community to remain current and be aware of present fiscal law boundaries. Table 1 on p. 59 includes GAO's cases involving O & M appropriation expenditures and are representative of this "color of money" transformation.
Looking at these GAO cases, it appears that applying the Bona Fide rule and the non-severability definition to O & M procurements can depend on the specific good or service, the duration of any necessary time lag, and that prior old cases can be overturned by the comptroller general as deemed necessary. As the years pass in the acquisition world, more cases will be brought forth to the comptroller general, and agencies will make arguments that fit their mission's needs.
GAO's Red Book provides the optimum rationale on hand today. As the economy and government budget circumstances change, however, it will be the agencies' responsibility to apply the most current fiscal law and GAO decisions, using a logical approach. Agency interpretation and challenges of the fiscal law stems from "what makes sense," as they perform a balancing act between the needs of the mission and maintaining the accountability process as established by Congress.
By definition, O & M appropriations have expanded in purpose and time to meet the needs of our nation. Through the O & M transformation era, Congress may willingly limit oversight, and GAO may relax prior interpretations to the law. Until these changes take place, however, agencies will go forward with prudent decisions and supporting justifications of their positions. Maintaining vigilance in O & M funding issues and sharing knowledge among the agency's management and employees is a necessity--not an option.
As O & M funding is changing, a good contract manager is also transforming into a skilled business manager. This inherent business role is based on "doing what makes sense," while challenging the cultural norm--but during this transformation of duty, let us never forget the intent of the constitutional law.
GAO GAO Issue Case No. Date Case Cite B-130815 Sept. 3, 1957 37 Comp. Atomic Energy Commission (AEC) Gen. 155 claimed to have general procurement authority (to meet the mission) to contract for out-ward years for supplies and to be funded with present O & M appropriations. B-217722 Mar. 18, 1985 64 Comp. National Institutes of Health Gen. 359 Research Grants considered O & M funding effort for research as non-severable to fulfill the mission. B-219829 Jul. 22, 1986 65 Comp. The Veterans Admin. (VA) Gen. 741 purchased an assessment study of Vietnam-era veterans (final report) based on P.L. 98-160, which would not be completed in the obligating year and thereby non-severable. Present O & M funding used for outward years until study was completed. B-235678 Jul. 30, 1990 N/A The Navy Space and Naval Warfare Systems Command (SPAWAR) said the Bona Fide need rule only applies to annually-funded contracts (O & M) and not R & D multi-year contracts level-of-effort (LOE) that has been considered severable (65 Comp. Gen. at 156). B-238940 Feb. 25, 1991 60 Comp. Dept. of Agriculture wanted to Gen. 455 use current O & M appropriations for a training course that could not begin until the following fiscal year. B-259274 May 22, 1996 The U.S. Air Force staggered (also ref. performance periods of a fixed 10 USC 2410a) price service contract options to maintain continuity of meeting the requirements and retained funding availability. In the 3rd Option Year, the POP was shortened to 31 August 1994 and the 4th Option Year began 01 September 1994 using FY1994 funding. The 4th Option Year was for one year, ending 31 August 1995. The FY 1994 fiscal year funds were only sufficient to cover 4 months of the 4th Option. There were 2 issues: (1) Did the AF violate the Anti-Deficiency Act when the 4th Option requirement was not fully funded, and (2) Can the FY 1994 funding be used for FY 1995, when the effort is severable from FY 1994. GAO Case No. Decision B-130815 Comp. Gen. ruled AEC's attempt to use current appropriations for out-year needs violated Bona Fide rule, and therefore it could not contract for out-year supplies. B-217722 Comp. Gen. ruled that effort was year-to-year & the requirements are severable which violates the Bona Fide rule. B-219829 Comp. Gen. ruled that the service requiring a final report is non-severable. The agency was in compliance of the Bona Fide need rule when funding for outward years. B-235678 GAO clarified level-of-effort versus completion contract (FAR Sec. 16.306(d)(1), (3).) and LOE is not defined by severability. The severable/non-severable determination was based on the components being separated versus a need for a specified whole end product within the estimated costs and time. Thus, the Bona Fide need rule applied to both annual & multi-year contracts. B-238940 Comp. Gen. ruled that since the time lag between the procurement and performance (training) was not excessive during two (2) fiscal years involved, the agency complied to the Bona Fide need rule. B-259274 Comp Gen. ruled, by definition, the service contract was (also ref. severable; AF complied with the Bona Fide rule; the need 10 USC 2410a) is recurring and it began for a 12-month period only. 10 USC 2410a is a statutory exception to the bona fide needs rule (FY funds are made available for the following FY.) The AF did not violate the ADA based on GAO's decision A-60589, July 2, 1935--GAO expressly declined to overrule at this time. Contract contains availability of funds clause--no financial exposure to the government. Table 1.
About the Author
JANICE SMETS, CPCM, FELLOW, is a member of the NCMA Antelope Valley Chapter and a contract specialist for the U.S. Air Force Los Angeles Air Force Base. Send comments on this article to email@example.com.