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The Emerging Federal Quasi Government: Issues of Management and Accountability.

In recent years, both Congress and the president have turned to hybrid organizations (Fannie Mae, National Park Foundation, Polish-American Enterprise Fund, for example) to implement public policy and functions that traditionally have been assigned to executive departments and agencies. Hybrid organizations, which possess legal characteristics of both the government and private sectors, tend to generate considerable support and criticism. Today, associated with the federal government alone, there are literally hundreds of hybrid entities that have collectively come to be called the "quasi government" (Seidman 1988). The relationship of this burgeoning quasi government to elected and appointed officials is of growing interest, and some concern, as it touches the heart of democratic governance: To whom are these hybrids accountable? How is the public interest being protected against the interest of private parties?

The scope and consequences of these hybrid organizations have not been studied extensively. Basic definitional issues resist resolution. Even the language used in discussing the quasi government is in dispute. Should quasi government management be discussed in the language of public law, economic theory, or the business school? The traditional tools for holding executive agencies accountable (such as the budget and general management laws) are often inapplicable, leaving these hybrids free to pursue their own institutional interests, which may or may not conform to the public interest as defined by the nation's elected leadership.

The current popularity of the quasi-government option can be traced to at least four major factors at work in the political realm:

1. Current controls on the federal budget process that encourage agencies to develop new sources of revenues;

2. Desire by advocates of agencies and programs to be exempt from central management laws, especially statutory ceilings on personnel and compensation;

3. Contemporary appeal of generic, business-focused values as the basis for a New Public Management; and

4. Belief that management flexibility requires entity-specific laws and regulations, even at the cost of less accountability to representative institutions.

Congress is increasingly engaged in quasi-government issues ranging from the creation of nonprofit organizations to promote individual national parks, to proposals to strengthen regulation of government-sponsored enterprises such as Fannie Mae, to oversight hearings on national security issues at Los Alamos Laboratory, a government-owned, contractor-operated national laboratory. There is nothing modest about the size, scope, and impact of the quasi government.

Definitions and Variations in Kind

Writing about the quasi government is like entering a thicket with little hope of escaping unscathed. The truth is that the quasi government, virtually by its name alone and the intentional blurting of its boundaries, is not definable in any precise way. In general, the term describes entities that have some legal relation or association, however tenuous, to the federal government. One common aspect of this melange of entities is that they are generally not agencies of the United States, as that term is used in Title 5 of the U.S. Code.(1)

The first task is to break the many hybrid entities in the quasi government into manageable categories so that legal and behavioral generalizations may be made. For the author's purposes, the following categories of quasi-government entities are defined and discussed: (1) quasi-official agencies; (2) government-sponsored enterprises; (3) federally funded research and development corporations; (4) agency-related nonprofit organizations; (5) venture capital funds; (6) congressionally chartered nonprofit organizations; and (7) instrumentalities of indeterminate character. There is nothing definitive about these categories; they are simply intended to provide a useful framework for analysis. There is some utility in viewing them on a lineal spectrum, ranging from quasi-official agencies that are closest to the executive branch (such as the Smithsonian Institution) to entities apparently furthest from the executive branch (such as the Veterans of Foreign Wars). There is also a category of hybrids called instrumentalities of indeterminate character, to include entities such as the American Institute on Taiwan and the U.S. Investigations Service, which frustrate any taxonomy.

The distinguishing characteristic of the organizational categories of the quasi government is the commingling of the legal characteristics of the government and private sectors. It may be an implicit guarantee by the federal government of debt instruments, or simply permission to use a logo implying government approval. In any case, to some degree the attributes of the sovereign are assigned to an otherwise private party.(2) The decision to create a quasi-governmental body is not politically neutral. Presumably, the private parties receive advantages that are not available to others. On the other hand, the private beneficiaries then become liable for reporting and supervision of their activities by the sovereign to protect it and the citizenry against abuse.

Even in situations in which abuse seems unlikely, it may still exist in subtle forms. Perception can become reality in the political world. The interests of the private and government sectors may appear to be congruent or complementary at one level, while at another level they may appear to be in direct conflict. At the very least, they are generally different interests. For instance, the federal government's interest in national security against espionage is likely to be greater than any one of its contractors engaged in operations. The federal government's concern for protecting the interest of the taxpayer may conflict with the private shareholder interests in a government-sponsored enterprise (GSE), such as the Federal Home Loan Mortgage Corporation (Freddie Mac). Even in the most tenuous element of the quasi government--congressionally chartered nonprofit organizations--the government's interests may be at odds with the interests of, say, the American Legion or the U.S. Olympic Committee.

There is little federal understanding, much less supervision, of much of the quasi government. Indeed, a good part of the quasi government's appeal, and of its growth, is that it has little accountability. The complexity of much of the subject matter and its low visibility and impact contribute to this failure of attention. But occasionally, what starts out as a small exception to meet a particular need becomes a substantial entity with its own constituency, still under little accountability. This is what has happened with respect to GSEs like Fannie Mae: They started small and were considered an appropriate response to a defined problem. Then, they took on a life of their own, providing benefits to certain groups and risks to others, and today are viewed by many as too big and powerful to be effectively regulated and supervised (Kosterlitz 2000).

Both Congress and the executive branch are duty bound to ask certain questions about the burgeoning quasi government:

* Is the quasi government a desirable or undesirable organizational option for public purposes?

* Does it make a difference if a task is assigned to a quasi-governmental organization rather than a regular agency in the executive branch; if so, in what ways?

* To what extent should accountability to government institutions be required?

* Who benefits from the quasi-governmental status, and who is harmed?

* Can an economic value be placed on quasi-governmental status, and who receives this value?

* When we create an entity for a public purpose and give it a quasi-governmental identity, who determines if and when the public purposes have been met? Is there an exit strategy?

* Does the quasi government, in concept and practice, run counter to democratic values?

These questions deserve the attention of political leaders, public administrators, scholars, and interested citizenry.

The Public Law Tradition and Political Accountability

The framers of the Constitution intended the authority and organization of the executive branch to be unified under the president and accountability to be rendered to Congress. This theoretical proposition was put into practice when Congress convened in 1789. One of the first orders of business was the establishment of executive departments. Three "organic" statutes were enacted, creating three "great" departments: Treasury, State, and War. (Hart 1948; White 1948). Department heads were directly responsible to the president and were his agents (and thus removable by him), but accountable for policy purposes to Congress. All functions of the newly created executive branch, save that of delivering the mail, were entrusted to these departments.

With respect to fundamental authorities and lines of accountability, however, the executive branch has never been a pristine unity. From the decision in the first Congress to give the Treasury's comptroller substantial legal autonomy within the department,(3) down to today's uneasy relationship between "independent counsels" and the executive branch (Fisher 2000; Harriger 1994), not all officers have been directly accountable to the president (Tiefer 1983). These exceptions notwithstanding, the prevailing norm has historically been an executive accountable to the president (Arnold 1998).

The view that authority ought to be delegated by the president or by department heads to subordinate officers, rather than assigned directly by Congress, reinforces the hierarchical concept of the accountable executive.(4) The first substantial break with that concept occurred in the creation of the Civil Service Commission in 1883 and the Interstate Commerce Commission in 1887. In the twentieth century, an increasing number of "independent" agencies and commissions were established, the term "independent" meaning in this instance an agency not in a department (for instance, the Tennessee Valley Authority or the National Aeronautics and Space Administration). The independent agencies remained full government agencies operating under the general management laws,(5) except where exempted.

The Hoover Commission's 1949 report reinforced the view that all government activities should be accountable in some manner to politically responsible officials: "[The] organization and administration of the Government ... must establish a clear line of control from the President to these department and agency heads and from them to their subordinates with correlative responsibility from these officials to the President, cutting through barriers which in many cases made bureaus and agencies partially independent of the Chief Executive" (U.S. Commission 1949, 7).

Through the 1950s, the organization and management of the executive branch generally followed some basic rules. If Congress established an entity to accomplish a public purpose, it was probably an agency of the United States operating under the general management laws enforced by the president and his central management agencies. These values, originating with the Founding Fathers, as reinterpreted by the Progressive Movement during the early decades of the last century, featured the centrality of public law, departmental integration, and political accountability. The president was viewed, inter alia, as the chief manager of the administrative system. The government and private sectors cooperated, but they were kept legally separate to protect citizens against arbitrary government actions (Moe 1997).

These values began to atrophy in the 1960s, evidenced by the establishment in 1962 of the Communications Satellite Corporation (ComSat) a private, for-profit corporation indicating Congress's more flexible attitude toward organizational matters (47 U.S.C. 701). Additional organizations (such as Manpower Demonstration Research Corporation) appeared that were intentionally mixed in their legal characteristics. The term "quasi governmental" began to appear in legislation and reports, and unusual structures were constructed to promote "flexibility," even when flexibility resulted in less accountability. This was one of the arguments for creating the Corporation for Public Broadcasting as a "nonprofit corporation" that would "not be an agency or establishment of the United States Government" (47 U.S.C. 396) (Avery and Pepper 1980). Other factors began to erode the unitary-executive model, such as greater dependence on third parties, usually private contractors, to do the government's work (Kettl 1993). The number of federal civil servants as a percentage of the national workforce began to decline substantially, a decline that has accelerated in recent years.(6) Finally, the emergence of a "quasi government" was recognized and received some scholarly and media attention.

In the late 1980s, the concept of legally distinct government and private sectors was seriously questioned (Bozeman 1987). In its place, a "New Public Management" concept emerged, arguing that the government and private sectors were essentially alike and subject to the same economically based behavioral norms and practices. Internationally, the New Public Management (NPM)(7) movement, coupled with the movement toward privatization of government agencies and programs, rapidly became the dominant school of thought. Many elements of NPM were found in Vice President Al Gore's National Performance Review (NPR),(8) which sought to "reinvent" some executive branch units and create corporate-style, entrepreneurial structures.

The purported, and occasionally realized, strength of entrepreneurial management lies in the flexibility it provides managers to improve performance. In the entrepreneurial context, performance is measured in terms of "output" or "results" rather than in conformance to process regulations or congressional intentions. The rapid ascendancy of these entrepreneurial values has spurred the quasi government's growth.

Quasi-Governmental Organizations

Quasi-Official Agencies

The United States Government Manual 1999-2000 includes a section titled "Quasi Official Agencies," which lists four entities: Legal Services Corporation; the Smithsonian Institution; the State Justice Institute; and the U.S. Institute of Peace. In prior years, other entities have been accorded this designation, such as the National Railroad Passenger Corporation, the National Consumer Cooperative Bank, and the National Academy of Sciences. This is something of a catch-all designation to include entities that the National Archives and Records Administration (NARA), the Manual's compilers find difficult to fit elsewhere. NARA's defining characteristic for quasi-official agencies is that they "are not agencies under the definition of 5 U.S.C. 105 but are required by statute to publish certain information on their programs and activities in the Federal Register," also published by NARA (Manual 1999-2000, 717).

Quasi-official agencies' problems tend to be related to their legal status, as defined by the agencies themselves, at any particular moment and with the particular subject under discussion. The Smithsonian Institution, from its inception a hybrid, prefers to be considered "private," or at least nongovernmental, for certain purposes and "governmental" for other purposes. In procuring space and services, the Institution asserts either its "privateness" or its governmental associations, depending on which status will advance its current objective.

Quasi-official agencies, like other elements of the quasi government, exist in the twilight zone between the government and the private sector. Their status permits considerable autonomy from regular lines of accountability to central managerial agencies as well as to the General Accounting Office. It is not, however, as is often argued, protection from "political influences." Quasi-official agencies, like other forms of quasi-governmental institutions, may be highly political and subject to the same pressures experienced by regular executive agencies.(9)

Government-Sponsored Enterprises

Distinctions between the government and private sectors are especially blurred with respect to a category of organization known as government-sponsored enterprises (GSEs). For the purposes of this article, a GSE "is a privately owned, federally chartered financial institution with nationwide scope and spending powers that benefits from an implicit guarantee to enhance its ability to borrow money" (Moe and Stanton 1989, 321). This definition is consistent with amendments to the Congressional Budget Act of 1974 (2 U.S.C. Sec. 622[8]). Beyond this, precise ascriptions are hard to apply to GSEs because so many variations are possible and because the political process tends to adopt variations rather than well-understood organizational structures (Stanton and Moe 2001).

The federal government has been involved in few commercial enterprises on an equity basis. There were some early instances of the federal government participating in otherwise private corporate enterprises on a shared-ownership basis, most notably the first and second Banks of the United States (Hammond 1957; Holdsworth and Dewey 1910; White 1954, ch. 24). This practice came into question, however, as a consequence of the Supreme Court's 1819 ruling.(10) From that time to the present the federal government, with few exceptions, has avoided shared-ownership involvement with private entities. This doctrine of equity separation helped to make the GSE option more attractive.

Congress created GSEs to help make credit more readily available to sectors of the economy believed to be disadvantaged in the credit markets (Stanton 1991,2001). Three of the five existing GSEs are investor owned: the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Agricultural Mortgage Corporation (Farmer Mac). Two are owned cooperatively by their borrowers: the Federal Home Loan Bank System and the Farm Credit System. In addition, the Financing Corporation and the Resolution Funding Corporation are government bodies that were given GSE status so their funding would not appear to be federal borrowing for purposes of the federal budget. Finally, the Student Loan Marketing Association (Sallie Mae) recently shed its GSE status and functions in the private sector (Dean, Moskowitz, and Cipriani 1999).

Defenders of the GSEs and their underlying economic concepts argue that the entities meet national needs that would be met poorly or not at all by private corporations. They contend the current GSEs are well managed, financially sound, and assist less-advantaged mortgage borrowers. They also maintain that the subsidy that flows from the federally implied guarantee of GSE obligations is largely passed on to the consumer in the form of lower mortgage rates. In its national advertising campaign, Fannie Mae suggests that its GSE status is worth a quarter of a percent in mortgage interest and that 400,000 families who would not otherwise qualify are thus provided mortgages. "At Fannie Mae, we have one job. One mission. One purpose. To do whatever we can to lower the cost of home ownership.(11)

Contemporary GSEs are part of a tradition of mercantilist financial institutions, in that the government assigns them benefits and privileges in their charters that are not available to fully private corporations (Stanton 1994). In return, the government can limit their activities and lines of business and can require them to promote selected public policy objectives. The present GSEs can be traced, conceptually, to several enterprises created during the Great Depression.(12) GSEs issue capital stock and short- and long-term debt instruments, guarantee mortgage-backed securities, purchase loans and hold them in their own portfolios, fund activities (such as subsidized mortgages in selected areas), and collect fees for guarantees and other services (GAO 1998, 3).

There is nothing modest about the GSEs' size and scope; their rapid growth is due, in large measure, to the implicit federal backing of their notes. There is no explicit guarantee in law for GSE liabilities. Correct or not, the market considers the specific liabilities incurred by GSEs contingent or potential liabilities of the federal government because of their federal charters. There is a general presumption that the federal government would not let the GSEs fail and declare bankruptcy. This implied guarantee is similar to reinsurance, and it is the critical element determining the behavior of GSE management and the market attitude toward GSEs.

GSEs are among the largest financial institutions in the United States. Together, Fannie Mae and Freddie Mac fund close to $1.5 trillion in home mortgages, in their own portfolios or through mortgage-backed securities; the Federal Home Loan Bank System holds $250 billion in loans to member financial institutions and investment assets; and the Farm Credit System holds more than $84 billion in assets. Implicit federal backing is one factor that has enabled GSEs to grow rapidly; on average, the combined size of Fannie Mae and Freddie Mac has more than doubled every five years since 1968 (Stanton 2001, 8).

Two issues stand out regarding the GSEs' financial status: safety and soundness and managerial accountability. GSEs act primarily as financial intermediaries to assist borrowers in housing, education, and agriculture. Although privately owned, they benefit financially from government sponsorship. Their securities can be collateral for public deposits (such as Social Security Administration deposits) and can be held in unlimited amounts by most banks and thrifts. With one exception (Farmer Mac), they are not subject to Security and Exchange Commission (SEC) regulation, and their corporate earnings are exempt from state and local income taxes, the latter practice attracting some controversy (CRS 1995). They may borrow virtually unlimited amounts of money in the federal agency credit market on favorable terms and from the Treasury, at the latter's discretion. The credit market perceives that federal sponsorship results in an implied federal guarantee of their corporate debt obligations. These factors ensure that GSEs can borrow at a lower interest rate than their competitors. Reviewing these special arrangements, which are in fact subsidies, it is not surprising that critics, including the U.S. Congressional Budget Office (CBO), say that much of the subsidies are retained by the GSE shareholders and managers and not passed through to the citizenry, and that the subsidies encourage GSEs to engage in riskier activities than might otherwise be the case (CBO 1996).

GSE management is not primarily accountable to the federal government, nor to borrowers, but to the corporation's shareholders. Investors come first, followed closely by management's interests. Edward A. Fox, then chief executive officer at Sallie Mae, told a Senate oversight subcommittee in 1982, "We are a private corporation and as such, with stockholders and bondholders, we have a fiduciary responsibility to those individuals.... We are not charged with subsidizing the guaranteed student loan program or subsidizing the students."(13)

In 1996, the CBO conducted a study of GSEs and concluded that
   The conduct of GSEs ... is not scandalous or even anomalous. Rather it is
   entirely consistent with the management's obligation to protect the
   interests of the shareholders. The lawful, but unbridled, advance of
   shareholders interests at the expense of taxpayers, however, is an
   essential and inescapable consequence of the choice of GSEs as a means of
   delivering a federal subsidy to borrowers. It is part of the price of using
   GSEs as an instrument of public policy. Not least, it is a fact to be
   weighed in any decision to continue the practice or to end it by
   privatizing Fannie Mae and Freddie Mac. (CBO 1996, 37)

Although GSEs are now considered to be in sound financial condition, their creditworthiness has not always been so secure. In 1988, the federal government thought it prudent to authorize $8 billion in financial assistance for the insolvent Farm Credit System. Fannie Mae was in trouble in the early 1980s, when its capitalization dropped until the corporation had a net worth of-$11 billion. These instances, plus the sheer size and growth of a putative unfunded liability on the Treasury, has prompted concern about the risks that GSEs pose to the political and economic systems (Stanton 1991; Wallison and Ely 2000).

GSEs are instrumentalities, not agencies, of the United States--a legally and administratively important distinction. The federal government's control differs significantly depending on whether an institution is an agency or instrumentality. An agency (as defined in Title 5) is managed directly through the federal management hierarchy. It is subject to all general management laws and regulations provided in the U.S. Code, unless exempted from such coverage in its enabling statute, or by virtue of being part of an exempted class of agency. Thus, unless exempted, an agency is subject to federal appointment of its senior officers (often requiring Senate confirmation), to civil service and federal procurement laws, and to the federal budget and other direct management controls.

An instrumentality of government, on the other hand, is a privately owned institution that is not subject to any of the general management laws and regulations unless so indicated in its enabling legislation (charter). An instrumentality's charter may contain limited prerogatives (such as immunity from state taxation) that are normally associated with the government's sovereign authority. In return for this limited assignment of governmental powers, an instrumentality cannot, on its own authority, alter the charter or conduct of activities contrary to the intent of the charter. A GSE is supervised but not directly managed by the federal government.

There have been instances in which the law provides that the president shall appoint members to the boards of otherwise private corporations, such as Fannie Mae and ComSat. The issue has been raised as to whom these governmentally appointed board members are accountable? Should they represent the administration that appointed them; the so-called "public interest," however it is defined, even when it may conflict with the financial interests of the GSE shareholders; or the shareholders exclusively? It is worth noting that even though the president may appoint such directors, they are not considered to be officers of the United States.(14) As for the competing purposes of government directors, to represent the public interest, as it is distinguished from the corporation's private interests, clearly the latter choice has been persuasive. GSEs work to increase the identification of the government directors with the interests of the shareholders, rather than the interests of the public.(15) In general, the practice of appointing government directors to private corporations has been viewed as unsuccessful (Schwartz 1965; Seidman 1998, 212).

Recently, questions have been raised as to whether GSEs have accomplished their original purpose to rectify market imperfections and are no longer necessary or desirable (CRS 1996). It seems evident that the financial success of a GSE depends as much, if not more, on its skills in the political arena as it does on delivering its services. Herein lies their strength and their vulnerability. Today, the forces arguing against GSEs and their hybrid status have gained considerable support not only in the business sector, but in the executive branch and in Congress. The debate is in full flower (Knight 2000).

Accountability for GSEs, and for much of the quasi government, involves allocating benefits and risks between private parties and the federal government and taxpayer. One observer, Harold Seidman, remarked: "Intermingling of public and private purposes in a profit making corporation almost inevitably means subordination of public responsibilities to corporate goals. We run the danger of creating a system in which we privatize profits and socialize losses" (Seidman 1998, 213).

Federally Funded Research and Development Centers

One category of organization in the quasi government is largely a World War II and immediate-postwar phenomenon: the federally funded research and development centers (FFRDC).(16) The FFRDC is a hybrid organization designed to meet a federal need through the use of private organizations. During World War II, there was a national emergency requirement that scientific and engineering talent be rapidly assembled and put to work. National laboratories such as those at Oak Ridge and Los Alamos were created to be government owned, but operated by nonfederal organizations that were not fettered by civil service rules or most general management laws. Under wartime conditions, these government-owned, contractor-operated facilities worked quite well. Immediately after the war, the new Department of Defense (particularly the Air Force) was reluctant to part with this talent base and sought ways to keep them in service to the government. The solution: establish private, nonprofit corporations to contract with the Armed Services. These corporations would depend primarily upon government-contracted projects.

The first FFRDC was RAND, created by the Air Force in California in 1947 (B. Smith 1966). This pioneer was followed over the years by well-known FFRDCs such as Mitre Corporation, Aerospace, and the Institute for Defense Analysis. Of the 39 FFRDCs functioning in 1998 (down from 41 in 1988), most were established in the 1950s and 1960s.(17) Some FFRDCs have ceased to be listed, although not all those unlisted have ceased to exist; in several instances they have become private organizations.

Although the Defense and Energy departments account for most FFRDCs, the National Science Foundation has four research and development laboratories administered by universities, and NASA, the Federal Aviation Administration, the National Institutes of Health, and the Nuclear Regulatory Commission each have one. Many FFRDCs conduct research in classified fields for the defense and intelligence communities. Critics assert they receive many of their contracts without competitive bidding and work with little oversight. In recent years, complaints have been aired about an "interlocking directorate" among the FFRDCs, including recent retirees from Defense agencies, other FFRDCs, and for-profit private corporations.

Many contend the United States is not as effective as other nations in taking the results of government-supported basic research and transforming it into commercially viable products for world markets (CRS 2000; Crow, Emmert, and Jacobson 1999). The bright spot in this otherwise dark picture may lie with the FFRDCs and their ability to promote technology transfers between the government and private sectors. The knowledge base created by the agencies' use of FFRDCs often serves as a foundation for commercially relevant efforts in the private sector. Technology transfer, however, is controversial and subject to many interpretations.

Congress has been overseeing FFRDCs since their inception. Some members view FFRDCs as a means to circumvent both civil service hiring practices and general management laws. Managing through third parties and exceptions to law results in lax accountability practices, especially in the area of national security, as Congress discovered with respect to the Los Alamos Laboratory in recent years (House 1999).

Conflicts of interest arise because FFRDCs tend to have an advantage in competing with private firms for contracts. They are exempt from most taxes, facilities and equipment are often owned or financed by the federal government, and they receive operating expenses without assuming business risks or costs associated with competing for most federal contracts. Such conflicts are particularly acute when FFRDCs are affiliates or subsidiaries of a non-FFRDC corporation. FFRDCs often have privileged access to government-to-government information, plans, data, employees, and facilities, which may be difficult to insulate from private partners involved in for-profit activities. Unbiased advice may be difficult to provide when the future of the FFRDC may be adversely affected.

Congressional questioning has led to hearings, warnings, and some changes in the law to enhance competition (such as the Competition in Contracting Act of 1984; 98 Stat. 1175) between FFRDCs and private firms. Congress also limited the Department of Defense and others in creating FFRDCs (Pearlstein 1991). For instance, the 99th Congress passed legislation providing a statutory limit on Department of Defense funding of FFRDCs and upon their creation (10 U.S.C. 2367). While the number of defense-related FFRDCs has declined and is expected to decline further, support for new, civilian-oriented FFRDCs has increased. The Internal Revenue Service now has the Tax Systems Modernization Institute, its own FFRDC (Senate 1992). The Social Security Administration and the Environmental Protection Agency have sought private, nonprofit research centers as well. In fiscal year 1998, appropriations for all FFRDCs totaled $5.1 billion.

Federal management of FFRDCs is based principally on two regulations: the Office of Federal Procurement Policy's (OFPP) Letter 84-1, and the Federal Acquisitions Regulations, which implement the policy letter. Federal policy mandates that FFRDCs should not be established or employed unless the agency cannot accomplish the activity in-house, through other government agencies under the Economy Act,(18) or through regular procurement procedures.

The OFPP letter provides guidelines for establishing, organizing, and managing FFRDCs. FFRDCs cannot be used to perform quantity production and manufacturing work unless authorized by legislation. The OFPP policy letter and its guidelines do not apply to commercial activities that are governed by the Office of Management and Budget Circular A-76, which deals with functions for which executive agencies may contract.

Agency-Related Nonprofit Organizations and Corporations

The term "agency-related nonprofit organizations and corporations" represents an attempt to classify under one heading a number of different types of organizations that share one characteristic: a legal relationship with a federal agency. These relations may differ greatly from one situation and organization to the next. To assist our review, however, nonprofit organizations and corporations will be considered under four categories: (1) adjunct organizations under the control or direct supervision of an agency; (2) organizations independent of, but dependent upon, agencies; (3) nonprofit organizations voluntarily affiliated with agencies; and (4) nonstatutory corporate bodies under control of agencies. While these distinctions have an arbitrary character imposed after the fact, there is, nonetheless, some utility in viewing the agency-related nonprofit organization and corporation within the quasi government as one of four essential types.

Adjunct Organizations under the Control or Direct Supervision of an Agency. There is an indeterminate number of organizations under the control or direct supervision of an agency; this review must, therefore, be illustrative rather than comprehensive. Nonetheless, a survey of several agency-controlled organizations facilitates an understanding of their nature.

The Department of Agriculture makes extensive use of adjunct organizations. Presently, there are 12 statutorily chartered agricultural-commodity organizations (such as the National Pork Board or the Pecan Marketing Board), whose purpose is to engage in generic promotion, research, and information activities for agricultural commodities, thereby increasing the total market for a commodity, as distinguished from a brand name. The Secretary of Agriculture is assigned varying degrees of authority over these boards. To rationalize oversight of such boards and the processes for creating additional boards, Congress passed the Commodity Promotion, Research, and Information Act of 1996 (P.L. 104-127; 7 U.S.C. 7411). In the future, new commodity organizations (usually referred to as "boards" or "councils") will be established by the secretary under departmental orders rather than by statute, presumably providing greater uniformity in chartering procedures and oversight provisions. The 1996 act is similar to a general incorporation act containing specific provisions to be included in the individual charters. All boards are required to receive secretarial approval for their budgets, plans, and research activities.

The creation, operation, and continuance of the boards is determined by a rather elaborate referenda process of the commodity producers themselves, administered by the Agricultural Marketing Service. The concept is for the commodity interests to propose to the secretary that an organization be chartered to promote a product (such as milk) generically, rather than by brand name. The critical feature of these boards is that they are financed through assessments from members, according to a secretarially approved rate structure. The assessments on both domestic and imported products are generally based on value or weight. Small producers may be exempted from assessments. The boards realize they exist because of federal authorizing legislation, and, without such authorization, they would be confronted with the "free rider" problem of a voluntary program. To compensate for the involuntary nature of the assessments, periodic referenda are authorized. In February 1999, Secretary Glickman announced that hog farmers could have a referendum on ending mandatory assessments (viewed by some as a tax) used to promote pork products. The question will be to determine whether the assessment (45 cents per $100 of pork sales) will be continued. A similar referendum is planned for the beef producers, and a petition to this effect had more than 126,000 signatures (Claiborne 2000, A3).

The boards are not established with permanent tenure, but are subject to renewal referenda no later than every seven years. The Agricultural Marketing Service, a relatively small agency with broad programmatic responsibility, is charged with administering what could amount to an almost continuous referenda process with one or another of the boards.

Notwithstanding this mandated oversight and referendum process, the promotion programs (reported in the press to cost producers and importers $660 million a year) have been criticized by the department's inspector general, policy opponents, and media for inappropriate spending, lax accounting, and lavish entertainments (Walsh 1999). In response, the secretary instituted a task force to recommend how the department might better oversee the boards; its December 1999 report contained 21 recommendations, all of which Secretary Glickman endorsed.

This is a case in which creating quasi-governmental organizations does not solve or even reduce the political risk to government agencies. The public assumes these activities have the imprimatur of the federal government and expects accountability for their actions.

Over the years, agencies have found it useful and advantageous to ask Congress to create, or authorize an agency to create, nonprofit organizations to perform functions that the agency itself finds difficult to integrate into its regular policy and financial processes. This is true, for example, when an agency receives gifts of real property and money. The National Park Foundation is the most prominent example, but there are others, such as the National Fish and Wildlife Foundation.

The Department of the Interior, and especially the National Park Service, received gifts of land and money to promote its programs. A National Park Trust Fund was established by Congress in 1935 to receive and hold such gifts to the Service. In 1967, the Trust was superseded by the National Park Foundation, established pursuant to law (81 Stat. 656; 16 U.S.C. 19e-19n). The Foundation is a congressionally chartered nonprofit corporation, organized to accept and administer gifts given to the National Park Service. The Foundation's board consists of the Secretary of the Interior and the National Park Service director, both ex officio, and "no less than six private citizens appointed by the Secretary." In 1998, there were 20 board members; the term for private citizens on the board is six years. The Secretary of the Interior is chairman and the director of the National Park Service is secretary. The board elects a president of the Foundation, who serves at its pleasure. Membership is not an office of the United States, and the Foundation has perpetual succession.

Funding for the Foundation comes from private gifts. Its main purpose was to permit the National Park Service to receive gifts and invest them in something other than federal government securities. The Foundation is not on budget, and its staff are not federal employees. In 1998, the Foundation provided nearly $11 million in grants to 158 projects (NPF 1999, 2). The Foundation is an adjunct activity of, and controlled by, the department and the National Park Service. The appointment process to the board is the secretary's principal insurance that the Foundation will adhere to department policy.

The Department of Veterans Affairs (VA) has a network of nonprofit corporations attached to its medical centers. Provided in law (P.L. 100-322; 102 Stat. 487), the secretary may authorize the establishment of a nonprofit corporation at any VA medical center (Medical Center Research Organization, or MCRO), to be chartered under the resident state law "to provide a flexible funding mechanism for the conduct of approved research." The law reads: "Except as otherwise required in this subchapter or under regulations prescribed by the Secretary, any such corporation, and its directors and employees, shall be required to comply only with those Federal laws, regulations, and executive orders and directives which apply generally to private nonprofit corporations" (38 U.S.C. 4161 (a)).

As of June 1, 1997, the latest data available, 85 VA medical centers had been authorized to form MCROs. Of these, 72 had IRS approval to be considered 501 (c)(3) nonprofit corporations chartered in a state (for example, the Veterans Medical Research Foundation of San Diego or the Albany Research Institute of New York). The corporations derive their funding to operate various research activities from both federal and nonfederal sources. Collectively, they received $98.4 million in contributions in 1997.

The secretary appoints the boards of all corporations, which must in each instance include the director, chief of staff, and assistant chief of staff of the medical center and other public members as the bylaws direct. Each MCRO has an executive director appointed by the board, with the concurrence of the VA's chief medical director. The corporation may hire such employees as it considers necessary and fix their compensation. The corporations come under the jurisdiction of the Department of the Interior's inspector general. The directors and employees of the corporation "shall be subject to Federal laws and regulations applicable to Federal employees with respect to conflicts of interest in the performance of official functions" (38 U.S.C. 4166(c)(2)).

The MCRO concept is not without its critics. While most funds are undoubtedly used to promote useful research, the MCROs are also seen by some as low-visibility conduits to augment the compensation of physicians and other professionals at the centers.

Finally, it is worth mentioning the Securities Investor Protection Corporation (SIPC). Congress established the SIPC in 1970 (84 Stat. 1636) to assure that cash and securities held in brokerage firms are protected from loss caused by securities firms' failures. The SIPC is a nonprofit corporation under the D.C. Nonprofit Corporation Act, which provides that it "shall not be an agency or establishment of the U.S. Government." Of the seven-member board of directors, one is appointed by the Secretary of the Treasury from among his officers and employees; one is appointed by members of the Federal Reserve Board from among its officers and employees; five directors are appointed by the president subject to the advice and consent of the Senate. The president designates the chairman, who is also the corporation's chief executive officer.

Although the SIPC is a nonprofit corporation under D.C. law, it is effectively an administrative subsidiary of the SEC. The corporation's bylaws are subject to the SEC's adoption, amendment, or rejection. The hybrid nature of the SIPC is revealed by various legal characteristics. The SIPC is not under any of the general management laws, including the Government Corporation Control Act. However, to the extent that the bylaws and rules of the SIPC are approved or disapproved by the SEC, they are subject to the Administrative Procedure Act. The corporation also has borrowing authority and a line of credit from the Treasury. The SIPC illustrates how the government can create hybrid organizations, in this instance an organization with predominately private-sector legal characteristics, to implement government policies and regulations. Ultimately, the SIPC is an agent of and accountable to the government through the SEC.

Organizations Independent of but Dependent upon Agencies. The Henry M. Jackson Foundation is an organization that is independent of but dependent upon a federal agency. In 1982, Congress passed legislation to establish the Foundation for the Advancement of Military Medicine (P.L. 98-36; 97 Stat. 200). Five months later, it was renamed the Henry M. Jackson Foundation, after a Senator with a long record of support for military medicine. The enabling legislation provided that the Foundation "shall not for any purpose be an agency or instrumentality of the United States Government. The Foundation shall be subject to the provisions of this section and, to the extent not inconsistent with this section, the Corporations and Associations Act of the State of Maryland." This language indicates there is intended to be legal distance between the nonprofit organization and the U.S. government.

The mission of the Foundation, by contrast, emphasizes that a close organizational relationship is to exist between the Foundation and the Uniformed Services University of the Health Sciences of the Department of Health and Human Services. "It shall be the purpose of the Foundation (1) to carry out medical research and educational research projects under cooperative agreements with the Uniformed Services University; (2) to serve as a focus for interchange between military and civilian medical personnel, and (3) to encourage participation of the medical, dental, nursing, veterinary, and other biomedical sciences in the work of the Foundation for the mutual benefit of military and civilian medicine." The lines between the government and private sectors are blurred: The Foundation seeks out private corporate gifts; it competes for contracts from private corporations; the nine members of its board include, ex officio, two current Senators and two Representatives.(19)

Why is such a foundation needed in the first place? Its official reply: "Because government employees cannot accept money or in-kind gifts from private sources, the Foundation serves a vital function by facilitating collaborative relationships between private industry, academia, and military medicine. One way we do this is securing private funding to support military medical educational programs.... Through our years of experience and commitment, we have established enduring relationships with hundreds of pharmaceutical and biotechnology companies and nearly 100 military medical centers and facilities around the country." In a manner similar to that followed by the VA with its medical center research organizations, the Uniformed Services University uses the Jackson Foundation as a means to provide research funding and income to medical personnel outside the regular appropriations processes and compensation laws.

Nonprofit Organizations Affiliated with Departments and Agencies. There are also nonprofit organizations, chartered under state law, that "voluntarily affiliate" with an agency program. This option has recently been reflected in law and applied by the Department of the Interior. The National Park Foundation is an "adjunct organization" under the Interior's National Park Service. Under the National Park Omnibus Management Act of 1998 (P.L. 105-391; 16 U.S.C. 19o), the National Park Foundation is authorized to encourage the creation of nonprofit organizations with state charters to "assist and promote [philanthropy] at the individual national park unit level." This program is designed to create "the greatest number of national park units practicable" of local fund-raising partner organizations ("Park Partners"), each tied to a specific national park or national park program. Park Partners are to be created by persons within a community under their own state laws.

It is intended that the Park Partners will "voluntarily affiliate" with the Foundation. The law instructs the Foundation to include in its program:

1. "a standard adaptable organizational design format to establish and sustain responsible management of a local nonprofit support organization for support of a national park unit;

2. standard and legally tenable bylaws and recommended money-handling procedure that can easily be adapted as applied to individual national park units; and

3. a standard training curriculum to orient and expand the operating expertise of personnel employed by local nonprofit support organizations" (16 U.S.C. 19o(d)).

A number of Park Partner organizations, some of which existed prior to the law, support specific parks such as Grand Teton, Glacier, and Sequoia. Because there are more than 375 park properties within the system, the potential number of Park Partner organizations is considerable. While the legislation intends that local nonprofit organizations become affiliated with the Park Partner program, the ultimate authority and accountability of the nonprofit organization remains local. The law provides "[a]n affiliation with the Foundation shall be established only at the discretion of the governing board of a nonprofit organization" (16 U.S.C. 19o(f)(2)).

Nonstatutory Corporate Organizations under Control of Agencies. A particularly nettlesome category of quasi-governmental organizations are corporate bodies created as subsidiaries by agencies and government corporations without specific statutory authority. In the 1930s, the Reconstruction Finance Corporation (RFC) began to establish, without obtaining prior statutory approval, subsidiary corporations under state law (Goldberg and Seidman 1953, 67). This placed the federal government in an awkward position: Were the obligations of these RFC subsidiaries protected by the full faith and credit clause of the U.S. Constitution? What are the rights of bond holders and borrowers if the entity is performing a federal mission but operating under a state charter? This ambiguity provided much of the impetus for the passage of the Government Corporation Control Act in 1945 (59 Stat. 597; 31 U.S.C. 9101-9110). The act provided, in part, that no agency could establish a subsidiary agency without expressed authorization by Congress.

In a related case, in the 1945 case of Cherry Cotton Mills v. U.S., the Supreme Court ruled that government corporations are agencies of the United States and are subject to all general management laws, unless specifically exempted as a class or by provision in their enabling legislation. "That the Congress chose to call it [Reconstruction Finance Corporation] a corporation does not alter its character so as to make it something other than what it actually is, an agency selected by the Government to accomplish purely governmental purposes" (327 U.S. 536).

Although the RFC subsidiaries were subsequently dissolved or rechartered by statute, the pressure to create new, nonstatutory subsidiaries remained. In 1985, the Federal Savings and Loan Insurance Corporation (FSLIC), itself an agency under the Federal Home Loan Bank Board, created a corporation, the Federal Asset Disposition Association (FADA) under the laws of the state of Colorado. This corporation, fully capitalized by the FSLIC, was to manage and dispose of assets of failed savings and loans. To an economist, FADA might look and act like a private corporation, but a closer look raises questions.

FADA was not created by Congress and, therefore, its creation was not authorized by Article II of the Constitution, which vests in Congress exclusive power to establish federal offices and to prescribe the powers and duties of federal officers. In keeping with Article II, the Government Corporation Control Act specifies that "[an] agency may establish or acquire a corporation to act as an agency only by or under a law of the United States specifically authorizing the action" (31 U.S.C. 9102).

Being 100 percent owned by an agency of the United States, FADA's argument that it was really a private corporation was greeted with skepticism. Concerned by mounting criticism of FADA and the paucity of congressional knowledge, much less supervision of its operations, the House Banking Committee instituted a staff study. The report was critical of FADA and provided a case study of problems found to varying degrees in much of the quasi government. It stated:
   The Committee found FADA to be an organization out of control. Policies and
   procedures were ignored. Sole-source contracts were awarded to former
   business associates. Quality performance was nearly nonexistent. Criticism
   was muted at both FADA and FSLIC. Employees and contractors who dared to
   breach this wall of secrecy often felt threatened and intimidated.
   Meanwhile, FADA officials lived first class and received excessive salaries
   and bonuses--all at the expense of the FSLIC.

   Rather than maximizing recoveries for FSLIC, FADA had wasted FSLIC funds
   ... FADA has mushroomed into a bloated bureaucracy.... The FADA bureaucracy
   began to challenge FSLIC's authority--first quietly, then openly....
   Conflicts of interest surfaced that would not have occurred if FADA was
   subject to government policies and procedures.... It is easy to understand
   how FADA has lost so much money. Beginning with former FADA President and
   CEO Roslyn Payne's $250,000 salary (plus $75,000 bonus in 1986), FADA top
   32 senior executives have combined annual salaries in excess of $3
   million.... Other FADA expense categories also seem grossly out of line.
   Examples include the $880,000 paid to executive search firms....

   As the Committee's inquiry progressed, it became apparent that FADA did not
   believe that it was accountable to the Congress. It is evident that FADA
   never saw itself as being accountable to FSLIC, its sole stockholder. FADA
   argues that it is accountable to no one but its own industry-controlled
   board of directors. And that board clearly sees FADA as a private
   entity.... The Committee's investigation has proven conclusively that time
   has run out for FADA. The time has come to abandon this costly experiment
   and return to a more traditional, more efficient and rational approach to
   handling the massive caseload of troubled and failed institutions. (House
   1988, quoted in Cong. Rec. Apr. 20, 1988, H2214)

The General Accounting Office was asked to assess the legality of the FSLIC's creation of FADA. "We found," the agency stated, "that FADA was illegally established as a federally chartered savings and loan association. Furthermore, we found no compelling evidence that FADA is essential to FSLIC's management and disposition of assets" (GAO 1989, 2). FADA's days were numbered. In a purely political sense, it appeared that FADA sought to be private in its management direction and interests, but governmental in its rights and privileges. It expired in 1989.(20)

The FADA experience did not dampen efforts to create similar subsidiary corporate bodies in the quasi government. A provision in the 1996 Telecommunications Act (110 Stat. 56) provided that the Federal Communications Commission (FCC) was to administer the universal services program to support schools, libraries, and rural health care providers. The act was silent, however, as to how the FCC was to do it. The FCC directed the National Exchange Carrier Association (NECA), itself an FCC adjunct nonprofit organization, to establish two unaffiliated, nonprofit corporations, to be designated the Schools and Libraries Corporation and the Rural Health Care Corporation under the laws of Delaware. NECA was required to submit the articles of incorporation and bylaws of the corporations to the FCC for its approval. The size, composition, and tenure of the corporate boards of directors were also to be approved by the Commission.

The FCC said that it had authority to establish the two corporations under section 254 of the Communications Act of 1934, which provides: "The Commission may perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions." When asked by a congressional committee to review the FCC's actions, the General Accounting Office concluded: "[T]he Commission exceeded its authority when it directed the NECA to create the Schools and Libraries Corporation and the Rural Health Care Corporation. The Government Corporation Control Act specifies that `[a]n agency may establish or acquire a corporation to act as an agency only by or under a law of the United States specifically authorizing the action.' (31 U.S.C. 9102). These entities act as agents of the Commission and, therefore, could only be created pursuant to specific statutory authority. Because the Commission has not been provided such authority, creation of the two corporations violated the Government Corporation Control Act."(21)

The comptroller general also rejected the FCC's argument that it had not created the corporations, but that they had been created by a neutral body, NECA. He noted that the prohibition against a federal agency establishing a corporation without specific statutory authority "could not be avoided by directing another agency creating or causing creation of a corporation to carry out government programs without explicit statutory authorization."(22)

The FCC argued that silence in its statutory charter permitted the agency to act on its own discretion. The General Accounting Office rejected this reasoning, reasserting that all federal actions required a statutory basis. Silence signaled prohibition, not permission.

The FCC ignored the General Accounting Office's 1998 ruling and determined, again without statutory authority, to merge the two existing Delaware corporations into another Delaware nonprofit called the Universal Service Administrative Company (USAC) (USAC 1998). The FCC used NECA, as it had before, as the incorporating agent, although USAC was intended to be divested by NECA. The legal status of USAC is, arguably, even more ambiguous than that of its two predecessors. While the board consists of 17 members, all selected to represent private designated industry and beneficiary organizations, "persons so nominated and selected by the FCC Chairperson as members ... shall then be elected to office by the incumbent directors" (USAC 1998, 23). The FCC's involvement in the Delaware corporation's management is so extensive as to suggest that its independent status is a fiction. In fact, the bylaws provide that the USAC budget must be submitted to the FCC for final approval.

There are other instances in which agencies have established subsidiary corporations under state law without statutory authority. The Federal Railway Administration of the Department of Transportation has two such subsidiaries, the Union Station Redevelopment Corporation and the Pennsylvania Station Redevelopment Corporation, the latter created under New York state law. Notwithstanding their purported private status, the Secretary of Transportation and the Federal Railway Administrator serve, by statute (105 Stat. 20008, sec. 1211), on the boards of the corporations.

The question then arises, which laws shall apply to the corporation, federal or state? What laws shall prevail to protect the rights of citizens contracting with them? Are the corporation's officers and employees required to follow the legal requirements of due process of law that apply to federal officers in dealing with citizens? Are employees administering these federal programs and funds hired, compensated, and fired under laws applicable to federal employees, or are they subject only to the bylaws and practices of the private corporations? Are they subject to the Freedom of Information Act?(23) Is the full faith and credit of the U.S. Treasury applicable to their debts, or would the Universal Service Administrative Company be permitted to declare bankruptcy under Delaware law? In the world of the federal quasi government, the questions outpace the answers.

Venture Capital Funds

Hybrid organizations perform a wide variety of functions in both the domestic and international arenas. With respect to the latter, the case of venture capital funds is especially interesting because the term encompasses more narrowly defined "enterprise funds" and "investment funds" (Koppell 1999a, 1999b).

The fall of Communism in Eastern Europe and elsewhere in 1989 aroused interest by the United States, and especially Congress, in helping nations to transition from a centrally controlled economy to a market economy. The Support for Eastern European Democracy Act of 1999 (22 U.S.C. 5401) authorized two enterprise funds, one in Poland and the other in Hungary. Later, the legislation was amended to authorize enterprise funds in other Eastern European countries, including the republics of the former Soviet Union and the southern Africa region. By the end of 1995, there were 11 such funds.

The impetus for the enterprise fund concept came from the belief that a nongovernmental entity was needed to implement this kind of program. Congress intended the 1999 act to create venture capital funds that would be designed along private-sector lines, managed by private-sector executives, and be free of most government constraints. The enterprise funds are chartered as private nonprofit corporations under Delaware state law, but are funded by government appropriations.

As the enterprise funds were being established, the Overseas Private Investment Corporation (OPIC), a wholly owned federal government corporation (31 U.S.C. 3101) was itself becoming involved in promoting private investments through "investment funds" in the former communist states. Governed by a 15-member board of directors, a number that includes, ex-officio, senior presidential appointees as well as direct presidential appointees, OPIC's head is appointed by the president and subject to Senate confirmation. Its mission is to provide political-risk insurance and loan guarantees to U.S. corporations that invest in selected developing countries. Although OPIC is prohibited from making direct equity investments, it has achieved similar results by guaranteeing loans made to private, profit-seeking corporate investment funds (Schmitt 2000, C2). By 1999, OPIC was supporting 26 investment funds (such as Russia Partners, Aqua International Partners) all over the world (Koppell 1999a, 10).

Both the enterprise funds and OPIC's investment funds were to have a pool of money, assigned by a private management team to promising new or existing ventures. With respect to enterprise funds, Congress intended that executive-branch oversight of the funds would be limited, a hands-off policy. News accounts of excesses and failures, however, prompted Congress and the executive branch to strengthen its oversight of the Agency for International Development (AID) (now State Department), although the funds still retain most of their autonomy (Bandow 1996; Maas 1993).

Enterprise funds are chartered as nonprofit corporations under Delaware laws and are governed by a board of directors designated (not appointed) by the president and elected by the existing board members. They are not officers of the United States and, hence, are not subject to Senate confirmation. The directors must be citizens of the United States or of the host country (or countries) and can be designated only after "consult[ing] with the leaders of each House of Congress" (22 U.S.C. 5421 (a)(1)). Although Congress and the directors play a role in the selection process, it has largely become a presidential prerogative and, according to critics, involves presidential patronage. Contractors are selected to manage the funds in the name of the boards. Thus, which firms receive capital is determined by third and occasionally fourth parties. In the latter instances, the enterprise fund establishes a subsidiary to make the final loan or grant decisions.

The key for protecting the government's interests in enterprise funds is found in the provisions agreed to in the loan or grant. Once in operation, it is difficult for AID to alter the course of an enterprise fund, although negative controls are available, such as suspension of funds. In practice, however, such controls are difficult to implement (Koppell 1999a, 12).

The OPIC investment funds, on the other hand, don't directly provide capital; rather, they provide guarantees to private parties who lend money to recipients. Congress requires OPIC to undergo annual budgetary review, and it is sometimes criticized that its insurance programs subsidize prosperous American corporations at taxpayers' expense (Wayne 1998). OPIC has been able to keep relatively close oversight of its investment funds by selecting fund management and by negotiating terms of the loan guaranty agreements, terms that generally provide favorable returns to OPIC. The objective of OPIC's oversight is to ensure compliance with the loan agreement, not necessarily to evaluate the fund's investment in economic terms. Compliance, rather than performance, is the primary focus of OPIC's fund oversight.

Venture capital funds are not exhausted by discussion of international enterprise and investment funds. According to press accounts, a domestic venture capital fund, "In-Q-It," has recently been established under the auspices of the Central Intelligence Agency. The purpose of In-Q-It is to permit the CIA to invest in, and thereby encourage, corporations producing technology that the agency will need to perform its mission in the future. Capitalized by $150 million in government funds, this nonprofit corporation is expected to be self-sufficient. On the board of directors are private corporate executives from firms such as Lockheed Martin. In the words of Gilman Louis, In-Q-It's new CEO: "The best thing about In-Q-It, to me, is that it's risky. The CIA and the rest of the government need to catch the entrepreneurial, risk-taking spirit that's driving the Silicon Valley technology revolution. The CIA's new venture may fall flat, but so what. Washington has been a zero-defect culture for too long. If we want a CIA that performs better, we'll need to take more risks--and give our government freedom to fail" (Ignatius 1999).

Venture capital funds in which the federal government participates, as the only party or in cooperation with other parties, are often controversial because such funds require the government to participate in the private equity market and, in effect, pick winners. Whether it is appropriate for the federal government, as a sovereign entity, to maximize its fiduciary interests and return in the private market is a legitimate subject for debate.

Congressionally Chartered Nonprofit Organizations

A category of entities may be collectively identified as "congressionally chartered nonprofit organizations," popularly referred to as "Title 36 corporations." (Moe 1999b). Congressional chartering of private organizations with a patriotic, charitable, historical, or educational purpose is essentially a twentieth-century practice. There are presently 90 organizations listed under Subtitle II, "Patriotic and National Organizations,"(24) among them the Agricultural Hall of Fame, Big Brothers and Big Sisters of America, and the American Legion.

Title 36 corporations generally function simultaneously under both federal and state charters. Indeed, in most instances, organizations were chartered and functioned under state laws long before receiving federal charters. Congressional authority with respect to organizations that function essentially under state law, however, has been controversial. It comes down to fundamental issues of managerial accountability, fiduciary responsibility, and the characteristics inherent to government organizations, but not to private organizations, such as access to the full faith and credit of the United States Treasury.

In chartering patriotic, charitable, and professional organizations under Subtitle II, such as the National Academy of Public Administration (36 U.S.C. 1501), Congress does not make these organizations "agencies of the United States," confer any governmental powers, or assign any benefits. They receive no direct appropriations, they exercise no federal powers, their debts are not covered by the full faith and credit of the United States, and they do not enjoy original jurisdiction in the federal courts.

The federal chartering process is essentially honorific. This honorific character may mislead the public, however, when such organizations feature statements or display logos that they are "chartered by Congress," implying a relationship to the federal government that does not exist. Some may reasonably but incorrectly infer that Congress approves of the organizations and oversees their activities.

The nonagency character of Title 36 corporations may have been breached recently. The "privatization" of the Defense Department's Civilian Marksmanship Program and its assignment to a newly created Title 36 corporation, the Corporation for the Promotion of Rifle Practice and Firearms Safety (36 U.S.C. 40701), raises questions about the limits of Congress's authority to assign a private label to functions of a governmental character. While the corporation has some admittedly governmental attributes (for instance, upon its dissolution the assets would be sold and the proceeds revert to the U.S. Treasury), its enabling statute declares that "the corporation is a private corporation, not a department, agency, or instrumentality of the United States Government." The law further provides that "an officer or employee of the corporation is not an officer or employee of the Government." Whether Congress has the constitutional authority to establish and denote an entity as private, when in fact it has governmental attributes, has been subject to debate and judicial opinion.(25)

Private nonprofit organizations seeking federal charters under Title 36 perceive value behind such charters. Less apparent, however, are the resultant risks. A chartered private organization may lose some of its private rights and may be subject to management laws and regulations that generally apply only to U.S. agencies. Such a situation occurred in 1997 when Congress amended the Federal Advisory Committee Act (5 U.S.C. Appendix; 86 Stat. 700) to include two Title 36 corporations, the National Academy of Public Administration and the National Academy of Sciences, under specific provisions involving the appointment, permissible activities, and reports of their committees doing work for executive agencies.

This is the first instance in which Congress has made Title 36, Subtitle II, corporations subject to the provisions of a general management law. While the action may be supportable on public policy grounds, it diminishes the private character of the affected organizations. As such, it constitutes a precedent with uncertain implications.

Congress and the president have raised questions about the consequences of granting charters to private organizations. In vetoing a corporate charter in 1965, Lyndon Johnson expressed concern about the wisdom of granting charters on a case-by-case basis "without the benefit of clearly established criteria as to eligibility."(26) In 1969, Congress responded by setting out five minimum standards to be met by a private organization seeking a federal charter from Congress (House 1969). These standards, however, did not resolve all of the questions concerning the chartering process or overseeing nonprofit organizations.

Federal supervision of congressionally chartered nonprofit organizations is limited. All "private corporations established under federal law," as defined and listed in Subtitle II, are required to have annual independent audits and to submit the audit reports to Congress.(27) In practice, the House Subcommittee on Immigration and Claims receives the reports and, if corporations have not submitted them on time, reminds them of their legal responsibility. The House Judiciary Committee refers all received audits to the General Accounting Office for review.(28) The Committee's current role is strictly ministerial; as for the Senate Judiciary Committee, it has traditionally deferred to the House Committee on these matters.

Neither the judiciary committees nor the General Accounting Office look over the shoulder of these organizations or conduct audits on their own authority. Congress is understandably ambivalent with respect to chartered organizations; it attempts to protect the public interest while seeking to limit its own involvement in their internal affairs. The charter of a Title 36 organization has never been revoked nor placed at serious risk by noncompliance with reporting requirements.

Hearings held by subcommittees of the House and Senate judiciary committees in the early 1970s raised questions about the intent and practice of such chartering. More organizations, through sympathetic members of Congress, were requesting charters, often extending the definition of congressionally chartered corporations beyond that associated with patriotic and service organizations.

In April 1992, Barney Frank, chairman of the House Subcommittee on Immigration and Claims, announced the subcommittee would no longer consider requests for charters. The reason, Frank said, was that the charters were "a nuisance," a meaningless act; granting charters implied that Congress was exercising some sort of supervision over the groups and it was not. "When I first raised the issue, `What is a federal charter?' The answer was, a federal charter is a federal charter is a federal charter.... You could make up an organization for the preservation of Albert De Salvo, the Boston Strangler. We'd have no way of checking into it" (McAllister 1992).

Continuing to review applications subjected the subcommittee to pressures that could embarrass both the requester and Congress. By ending the practice altogether, the subcommittee hoped it would be "leveling the playing field" among worthy organizations. This view was formalized in the 104th Congress when the subcommittee issued an internal policy directive stating that it would no longer consider any legislation to grant new federal charters because such charters implied to the public that a chartered organization and its activities somehow enjoyed congressional approval.

The moratorium did not, however, stop all charter requests. It remains possible for any other committee, or for the full Congress in its plenary capacity, to charter nonprofit organizations. This has happened in at least six instances in recent years.(29) Nonetheless, the subcommittee reasserted the moratorium in the 105th Congress. It remains to be seen, however, how effective this moratorium will be against the many political attractions of the chartering process.

Instrumentalities of Indeterminate Character

Not all hybrid organizations fit into neat quasi-governmental categories. Some are sui generis while others have such varied characteristics that they are best viewed and considered separately. Examples of instrumentalities of indeterminate character include the American Institute in Taiwan, the National Endowment for Democracy, the U.S. Investigations Service, and the unsuccessfully "privatized" U.S. Enrichment Corporation (Guttman 2000). The U.S. Investigations Service will serve as our representative sample.

As part of Vice President Gore's "reinvention" exercise, a substantial downsizing of the civil service was ordered. Agencies were expected to be creative in seeing that the work was done with fewer personnel and less funds. Cuts in the mission, capacity, funding, and personnel of the central management agencies (that is, the Office of Management and Budget, the General Services Administration, and the Office of Personnel Management) were particularly significant. The Office of Personnel Management's (OPM) security and investigations unit was a special target because its securities-clearance workload had declined at the end of the Cold War and because there were fewer executive-branch new hires.

OPM Director James King created a first: the establishment, by a government agency, of a private corporation whose employees would be transferred from OPM's Federal Investigations Division to a private firm, eventually owned by its employees in what is known as an employee stock-owned plan (ESOP) (Barr 1996a). The rationale was that it would save the jobs of about 700 investigators, and it would save the government money by contracting with this new corporate body.

King let a contract to ESOP Advisors, Inc., for a feasibility study of the concept; not unexpectedly, the study reported that the privatization process, culminating in an ESOP, was feasible. King announced his intention to move forward rapidly, and two hearings were held by congressional committees (House 1995a, b). Two principal points were argued by the opposition: First, civil rights and privacy issues associated with private parties conducting sensitive investigatory reports; and second, the propriety and legality of government agencies creating private corporations with financially advantageous relations with the sponsoring agency. OPM, however, decided to move on its own initiative without specific statutory authority.(30)

To launch the corporation, OPM chose American Capital Strategies (ACS) to develop a business plan. ACS selected Marine Midland Bank of New York as the financial trustee and, together with the Washington law firm Arnold and Porter, began to recruit a management team. They selected, with King's agreement, Philip Harper, a former security-industry official, to take the first step, that is, to form the corporation to be known as the U.S. Investigation Service (USIS) under the laws of the State of Delaware in April 1996. The corporation at this point had a single share and a single employee--Harper (Sanders and Thompson 1997).

The corporation was reincorporated in August 1996, at which time the 700 former Office of Federal Investigations employees were separated from the government and became private employees. In April 1997, it was reported:
   [The] 700 employee-shareholders own about 91 percent of a company valued at
   $28.2 million. Harper and the other 11 company officers, who together put
   up an initial seven-figure investment, hold the remaining shares. Under the
   terms of its corporate charter, USIS is governed by a nine-member board of
   directors. The board's five "inside" members include Harper and two others
   elected by employees; the three of them in turn nominate the two remaining
   members. However, as with most private companies, the board's role is
   limited. It does not run USIS--that's Harper's job, along with his
   immediate staff --instead concerning itself strictly with "ownership
   issues" like oversight. For example, it ensures that company resources are
   allocated in the best interests of employee shareholders, and it also
   approves key strategic decisions. Of course, such issues are made easy when
   you begin a business with the federal government as a guaranteed customer.
   (Sanders and Thompson 1997, 52)

The OPM awarded USIS a noncompetitive three-year contract under a "public interest" exemption in federal contracting law (Barr 1996b). ESOP promoters believed that the OPM employees would not have moved to the new private corporation without a guaranteed, sole-source contract providing a modicum of security.

USIS does not issue an annual report. It asserts, with scarce data, that it is profitable, that it saves taxpayers money, and that it mixes government and private contracts and operations without risk to the government or to the citizenry. USIS does not pay for most of its office space in the Butler City, Pennsylvania, subterranean office complex where the OPM investigations unit was once quartered. Additionally, USIS has free access to government computer databases that are not otherwise available to the public or competitors. By any account, this new entity was given advantages and incentives not available to other startup corporations (Sanders and Thompson 1997, 53).

Critics of the USIS and the privatization process argue that background investigations are inherently a government function, to be conducted by federal employees operating under government management and security protection laws. They believe that legal accountability should be direct through the unit, the department, and the central management agency to the president, and through the president to Congress. Policy considerations, such as jobs for redundant employees, or lower costs, may have moral and economic appeal, but they do not justify creating and supporting this hybrid organization. Critics say that not all personnel investigations are alike and assert that the government's needs and requirements (and indirectly, the public giving information to the government) are legally distinct from those of the private sector. In their view, the issues are constitutional, not economic.

The Clinton administration and other supporters of the OPM's decision to privatize this activity, on the other hand, see the USIS actions as a creative response to a changing situation regarding a government agency and its activities. It is viewed as a successful exercise, one with lessons to be applied in other situations. The USIS's moves into the private-sector market, including extensive contracts with the casino industry, are seen as the logical progression of a generic activity: personnel investigations. The administration asserts that those concerned with legal distinctions between the sectors have misplaced and unnecessary concerns. Many in the New Public Management school agree since, from their perspective, the future lies in eliminating many of the legal barriers between the sectors and creating a seamless web of public--private partnerships.

This brief description of the USIS concludes our review of the different categories of quasi-governmental organizations. What emerges from this review is that certain basic philosophical issues are being debated, occasionally in direct terms, but more often indirectly through the process of reorganizing the executive branch. This process is taking two forms: the splintering of departments into smaller units, however labeled, with many agency-specific management laws; and the assignment of executive-branch functions to the quasi government. This process has had consequences for the institutional presidency and for Congress.

Hybrid Organizations: Problem or Solution?

The number and variety of hybrid organizations commingling government- and private-sector characteristics is growing. Does this constitute a positive or negative factor in the performance of effective democratic governance? Should growth in the number and variety of hybrid organizations be encouraged, benignly recognized, or actively resisted? The answers will be largely influenced by the inquirer's philosophy of public management.

There are two principal paradigms of government management competing for the allegiance of the public management community. It may be useful to refer to them as the constitutionalist management paradigm and the entrepreneurial management paradigm. Constitutionalists generally view the government and private sectors as distinct in character, with the distinctions founded in law. The distinguishing characteristic: of governmental management, contrasted with private management, is that government actions must have their basis in public law, not in the financial interests of private entrepreneurs or in the fiduciary concerns of corporate managers. The hierarchical structure found in the executive branch is designed more to ensure accountability for managerial action; promoting control over employees is secondary. The value of accountability to political leadership and the importance of due process in decision making trumps the premium placed on performance and results. However, it is less a question of pursuing one value at the expense of the other than it is a matter of precedence in the event of conflict (Moe and Gilmour 1995, 138).

Entrepreneurs, on the other hand, have an underlying premise that the government and private sectors are fundamentally alike and subject to most of the same economically derived behavioral norms (Kettl 2000; Schneider, Teske, and Mintrom 1995; Stretton and Orchard 1994). In the private sector the principal, if not exclusive, objective is results, and this principle should be applied to the government sector as well.(31) Thus, the first principle listed in the 1993 NPR Report is: "Effective entrepreneurial governments cast aside red tape, shifting from systems in which people are accountable for following rules to systems in which they are accountable for achieving results" (6-7).

This shift toward results over legal process as the primary value in government management is a statement about political power as well as administrative management. Vice President Gore indicated as much in 1993 when he stated, "Chief Executive Officers--from the White House to agency heads--must ensure that everyone understands that power will never flow through the old channels again. That's how GE did it; that's how we must do it as well" (NPR 1993, 68). Continuing this theme, Comptroller General David Walker recently signaled a shift in his agency away from enforcement of legal processes and toward "performance," however it is defined, "In essence, performance management focuses on results rather than process. The measure of performance is not compliance with rules and procedures, but the achievement of real results. Results (or outcomes) are not to be confused with mere outputs. Outputs give us a sense of how much work has been done, but results give us an indication of the real impact of the work" (Walker 2000, 6).

Under the entrepreneurial management paradigm, the vision is to create a society of government/private partnerships based on pragmatic application of performance-oriented objectives, or what Harlan Cleveland (2000) approvingly refers to as the "nobody-in-charge society." Skeptics of this vision see something very different emerging: a society in which the centrality of public law is being unwisely displaced by business axioms. The focus of management, once the citizen, becomes the "customer." Departmental integration as the norm is replaced by organizational dispersion, with managers institutionally insulated from political accountability. Under the entrepreneurial paradigm, critics believe the protective wall between the government and private sectors is being breached, not merely as a managerial convenience, but as a philosophy of governance. Constitutionalists believe they see an antidemocratic bias in this new entrepreneurial society, unintended but inevitable.

Given the differences between the premises guiding the two schools of management, it is not surprising that their attitudes toward the quasi government are also at odds. Those advocating entrepreneurial management tend to favor organizational disaggregation and managerial autonomy. Congress is viewed as a nuisance to be avoided,(32) and central management agencies are to be stripped of much of their authority and capacity. Entrepreneurs oppose hierarchical structures ("stovepipes") in government and emphasize the desirability of change, of competition for its own sake and managerial risk taking. This set of values makes the hybrid organization within the quasi government an attractive option.

Those favoring the constitutionalist (or public law) approach argue that the fundamental purpose of governmental management is to implement the laws passed by Congress, wise and less-wise, not necessarily to maximize performance (however it is defined and measured) or to satisfy "customers" (Gilmour and Jensen 1998). Like their entrepreneurial adversaries who deny their unconcern for laws, the constitutionalists deny their lack of concern for improved performance. The view of the latter, however, is that while political accountability and effective performance are generally compatible objectives, when these values come into conflict, the democratic values of legal process and political accountability should take precedence over the unquestioned entrepreneurial value of efficiency and results.

Public law advocates see most hybrid entities as instruments of relatively small constituencies whose interests are promoted over the interests of the whole people. Thus, they often oppose such quasi-governmental hybrids as GSEs because they believe those who benefit from quasi-governmental status (shareholders and management) are separate and apart from those who stand at financial risk (taxpayers) (Moore 2000). For constitutionalists, the quasi government tends to represent a retreat from democratic values and accountable management.

Conclusion: Quasi Management of the Quasi Government

The arguments between competing management philosophies aside, is anyone minding the quasi-government store? Quasi-government hybrids do receive oversight from time to time. It may be directed by executive agencies (for instance, Federal Railway Administration oversight of the Union Station Redevelopment Corporation) or by congressional committees (such as House Banking Committee oversight of Freddie Mac), but such oversight is as likely to be protective or promotional as it is critical. Today, the Office of Management and Budget is almost exclusively a budget-driven organization with little capacity to review and assess the quasi government (Moe 1999a). Comptroller General David Walker's statement, cited in the preceding section, reveals the General Accounting Office has also moved away from its traditional public law focus on ensuring agencies' compliance with general management laws, instead promoting performance-based exercises. The General Accounting Office itself is becoming, or trying to become, the model "performance agency" in the federal government.

Who is minding the quasi-government store? Nobody. For entrepreneurs, this is not cause for alarm. The fewer general management laws ("red tape") informing the government, both direct and quasi, the better. Market principles, emphasizing competition, risk taking, outsourcing, cooperative agreements, and management autonomy, are encouraging the growth in the quasi government.

For constitutionalists, on the other hand, growth in the number and varieties of hybrid organizations and their autonomous management is a symptom of decline in the democratic system of government. While government activities of a commercial character are legitimately subject to marketization in practice (for example, the Federal Deposit Insurance Corporation or St. Lawrence Seaway Development Corporation), the legal wall between the sectors needs to be maintained as a bulwark of citizen protection against misuse of government of authority by parties with private interests.

The American Revolution was ignited, in no small measure, by the practices of an early quasi-governmental hybrid entity, the British East India Company. With broad authority from Parliament, the company collected taxes according to its own rules. The citizenry of Boston in 1773 staged a "tea party" to express their opposition to this type of public management. While we do not anticipate another tea party, there is, nonetheless, sufficient evidence today of nonaccountable activity going on in the quasi government to give pause to any concerned citizen.

The debate over the current and future course of the quasi government is centered on fundamentally opposing principles. Under limited circumstances, and after meeting a heavy burden of proof, hybrid organizations may be a creative response to a specific set of circumstances. By their very nature, however, hybrids carry risks for a democratic polity. The management of these risks is among the most critical government responsibilities. The quasi management of the quasi government is itself a risk to the citizenry that needs to be understood, addressed, and ultimately reduced so that full democratic governance can be restored to our republic.


(1.) There are, arguably, several exceptions to this generalization about "non-agency" status in the quasi government. That is why it is a generalization rather than a law.

(2.) In Great Britain and some other countries, the terms "quago" and "quango" are employed to refer to hybrid entities. A quago is essentially a government organization that is assigned some, or many, of the attributes normally associated with the private sector. A quango, on the other hand, is essentially a private organization that is assigned some, or many, of the attributes normally associated with the governmental sector. Under this schema, the Legal Services Corporation, for instance, would be a quago, while the Red Cross would be a quango (Wettinghall 1998).

(3.) Annals of Congress (1789, 614).

(4.) In the administration of James Monroe (1817-25), the president objected to a proposal to establish the Patent Office as an agency independent of any executive department. He argued that such a proposal would usurp his powers as president: "I have always thought that every institution of whatever nature soever it might be, ought to be comprised within some one of the Departments of the Government, the chief of which only should be responsible to the Chief Executive magistrate of the Nation. The establishment of inferior independent departments, the heads of which are not, and ought not be, members of the administration, appears to me to be liable to many serious objections, which will doubtless occur to you." (2 American State Papers, Mis. P. 192).

(5.) "General management law," as the term is used here, refers to those cross-cutting laws (Administrative Procedure Act, Government Corporation Control Act, Freedom of Information Act, and the like) regulating the activities, procedures, and administration of all agencies of government, except where exempted by category of organization or by provision in their enabling statute. There are approximately 50 major general management laws and an equal number of lesser management laws, especially in the personnel management field (CRS 1999a).

(6.) In 1970, federal civilian employment was 2,997,000, or 3.8 percent of total U.S. employment. By 1998, federal civilian employment had been reduced to 2,783,000, or 2.1 percent of the U.S. employment total (U.S. Statistical Abstracts 1999, 364). For discussion of the meaning and consequences of these statistics, as well as the corresponding growth in contract employees working for the federal government, see Light (1999).

(7.) The term New Public Management gained currency partly through its use by the Organisation for Economic Co-operation and Development to refer to the literature, propositions, and practices promoting conceptual convergence of the governmental and private sector management (Kettl 2000; OECD 1995; Terry 1998).

(8.) The term National Performance Review (NPR) refers both to a report and to an organization. In 1993, under Vice President Al Gore's leadership, the NPR issued a report, From Red Tape to Results. The NPR, a nonstatutory organization, continued to issue reports through 1997 (for example, Businesslike Government: Lessons Learned From America's Best Companies 1997). In 1998, the NPR organization changed its name to the National Partnership for Reinventing Government.

(9.) One argument that is often made when proposing independence, autonomy, or quasi-governmental status for an agency is that such a move will result in less political and interest group pressures being brought to bear on the agency. That such an assertion is often not the case is illustrated by a study of the Social Security Administration, recently made independent of the Department of Health and Human Services: "Few, if any putative benefits from reorganization have been realized by the SSA. Removing the agency from HHS has meant, of course, independence from the agency's policy tendencies, but it has left the SSA more exposed to its various clientele or constituency groups and to congressional executive branch politics of divided government" (G. Smith 1998, 230). See also Mashaw (1996).

(10.) See McCulloch v. Maryland (17 U.S. [4 Wheat.] 315, [1819]). The Supreme Court's ruling implied that partial federal ownership of a corporation, in this instance the Bank of the United States, assigned the corporation certain attributes normally reserved to the sovereign authority (such as nontaxable status in the several states). See also Osborn v. Bank of the United States (17 U.S. [4 Wheat.] 738, [1824]).

(11.) Fannie Mae advertisement, Washington Post, May 11, 1999, A4.

(12.) The Farm Credit Banks, however, pre-date the Depression, having been established in 1916 (39 Stat. 360).

(13.) Statement of Edward A. Fox, President and CEO of Sallie Mae (Student Loan Marketing Association), before a Senate subcommittee (Senate 1982, 135).

(14.) See memorandum of the United States Attorney General, Robert Kennedy, "Memorandum Re Constitutionality of Senate Confirmation of Persons Nominated by the President as Incorporators and Directors of the Communications Satellite Corporation." Cong. Rec. vol. 109, pt. 5, 88th Cong., 1st sess., 1963, 6977-78.

(15.) Fannie Mae, for instance, provides generous remuneration to "nonmanagement directors" (presidential appointees) "to reinforce the mutuality of interest" between nonmanagement directors and the shareholders. In 2000, compensation was $23,000 annually plus additional sums and a stock option plan. Presidentially appointed director Jack Quinn, one-time counsel to President Bill Clinton, for instance, owns 1,140 shares with an option to purchase 7,000 more shares (Fannie Mae, Notice of Annual Meeting of Stockholders, May 18, 2000, 3, 21).

(16.) For a brief history of FFRDCs, consult Hostetler (1990).

(17.) The list of FFRDCs for 1998 can be found in National Science Foundation (1998).

(18.) 31 U.S.C. 1535. As amended, the Economy Act of 1932 permits, under certain circumstances, one federal agency to utilize the capabilities and/or resources of another federal agency.

(19.) The question arises, is it legal and ethical for sitting members of Congress to sit on boards of quasi-governmental entities, particularly those that seek and award contracts with large private corporations?

(20.) For a more complete discussion of the FADA experience, see Senate (1995, 22-6).

(21.) U.S. Comptroller General, Letter (B-27820), dated February 10, 1998.

(22.) Ibid.

(23.) For a discussion on how the New Public Management and the reinventing government exercise in the United States has placed at risk coverage of one of the principal general management laws, the Freedom of Information Act (Roberts 2000).

(24.) Title 36 of the U.S. Code, where congressionally chartered nonprofit corporations are listed with their charters, was recodified by law in 1998 (P.L. 105-225). Although some 96 organizations are currently listed in Title 36, six organizations fall into two new categories in the title, thus leaving 90 organizations under Subtitle II; the latter categories receiving our attention in this article.

(25.) In a 1995 case (Michael Lebrovn v. National Railway Passenger Corporation 513 U.S. 374), the Supreme Court addressed the question of whether Congress can declare, by statutory language, that a corporation created by Congress and assigned attributes of the state, is a "private corporation." The National Railway Passenger Corporation (AMTRAK), established by Congress (45 U.S.C. 451) and enumerated as a "mixed-ownership corporation" under 31 U.S.C. 9101 (2), was sued by Michael Lebron for rejecting on political grounds an advertising sign he had contracted with them to display. Lebron claimed that his First Amendment rights had been abridged by AMTRAK because it is a government corporation and, therefore, an agency of the United States. AMTRAK argued that its legislation provides that it "will not be an agency or establishment of the United States government" and thus is not subject to constitutional provisions governing freedom of speech. The Court decided that while Congress can determine AMTRAK's governmental status for purposes within Congress's control (for instance, whether it is subject to statutes such as the Administrative Procedure Act), Congress cannot make the final determination of AMTRAK's status as a government entity for purposes of determining constitutional rights of citizens affected by its actions. To do so, in the Court's opinion, would mean the government could evade its most solemn constitutional obligations by simply resorting to the corporate form of organization.

(26.) A copy of the veto message is printed as H. Doc. 292, 89th Cong., 1st sess. (Washington, DC: GPO, 1965), p. 1.

(27.) The Corporation for the Promotion of Rifle Practice and Firearms Safety, created in 1996 by Congress and not incorporated first in a state, is exempted ([sections] 40707) from the audit requirements otherwise applicable to all but eight Subtitle II corporate organizations (36 U.S.C. 10101).

(28.) See, for instance, GAO, B-280210 (1988).

(29.) In the 105th Congress (1997-98), notwithstanding the moratorium against creating new congressionally chartered nonprofit organizations, two additional organizations were chartered. Each case represented a specific and unusual set of circumstances. In the first session, the Senate Committee on Armed Forces approved a bill, one provision of which chartered the Air Force Sergeants Association (AFSA). This charter proposal had not been referred to the judiciary committees for their review and approval. When the bill reached conference, the jurisdictional issues were raised and a negotiated settlement reached. AFSA would receive its charter in this instance (P.L. 105-85; 36 U.S.C. 20201), but the jurisdictional authority of the judiciary committees, and thus the moratorium, was reaffirmed.

In the second session, a bill to award a charter to the American GI Forum was approved, this time with the approval of the judiciary committees. In this instance, the circumstances involved an act of discouragement by the committee toward a would-be charter applicant under the rules followed prior to 1989. The organization believed it had been improperly informed and unfairly evaluated during its earlier application and deserved to be reconsidered for chartering. The committee permitted the organization to make its case and concluded that, due to exceptional circumstances, an exemption from the moratorium was warranted in this instance, and a charter was granted (P.L. 105-231; 36 U.S.C. 21001).

(30.) The OPM acted to create the USIS without explicit statutory authority. The corporation's official public Web page states: "On July 8, 1996, USIS was formed on the initiative of the President and Congress as an employee-owned company. USIS is steeped in the tradition of providing high-quality, timely investigative services to its customers" (http:/ /www.usis,com/history/history/html). The USIS, unlike ComSat or the Red Cross, has no federal charter. The premise appeared to be that the OPM had the authority to do what it thought necessary or salutary in this instance, unless it received instruction to the contrary form Congress. "With respect to contracting with an ESOP trustee to establish an ESOP corporation, we determined that no statute prohibited OPM from contracting for these services and that expending funds to enter into such a contract was a necessary expense pursuant to applicable fiscal law authority.... Therefore, OPM's decision to contract with an ESOP trustee does not require legislation" (House 1995b, 54).

(31.) A parallel set of entrepreneurial ideas, involving behavior modification by federal government officers more than creating hybrid organizations, is worth critical analysis in another study. The principal purpose of this behavior-modification strategy is to alter the management philosophy and reward/punishment mindset of federal managers toward the practices of the private sector. Anne Laurent, an advocate of "bureaucrats as businesspeople," notes: "Unbeknownst to most American taxpayers and to many federal employees, the government is growing its own businesses. Entrepreneurial outposts are taking root inside federal agencies in the fertile soil of management reform, new purchasing rules, downsizing, and performance pressure. Government business people are shaking off the shackles of limited congressional appropriations and staving off job threats using money they earn selling services within their own and other agencies" (Laurent 2000, 7).

A typical instance of the "business mindset" being promoted by the National Performance Review involves the naval command at Patuxent Naval Air Station. In the name of "profit," the command has contracted out its high tech planes and personnel to the State of Maine to hunt for healthy blueberry patches. "With defense budgets shrinking and more cuts threatened, military research labs and testing bases in the Washington Area are aggressively seeking such business deals to help pay the bills and keep expensive facilities and equipment operating. Consultants are even training government program managers and engineers to think like copier salesmen and `sell' their products" (Vogel 1998).

There can be a legitimate clash of opinion over whether it is wise, creative, or even legal for Patuxent to go to entrepreneurial. Whether this initiative, like so many others, results, if not immediately then soon, in a perversion of the mission and character of government management should concern all who seek a healthy public sector. What may appear initially as a rather simple operational decision may, in fact, be a decision with considerable policy and legal implications. The NPR has intentionally avoided addressing these issues.

(32.) In the words of Donald Kettl: "First, `reinventing government' seeks the transfer of power from the legislature to the executive branch. In the Vice President's report, Congress is notable principally for its rare appearance. When it does appear, it is usually as an unindicted co-conspirator responsible for undermining effective management" (Kettl 1994, 309).


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Ronald C. Moe is the specialist in government organization and management at the Congressional Research Service of the Library of Congress. His responsibilities include providing research and consultations for members and committees of Congress. Mae is also a fellow at the Center for the Study of American Government at Johns Hopkins University. His writings include books and articles in professional journals. He has received the Louis Brownlow Award four times (1988, 1992, 1995, 1996) for the best article by a practitioner to appear in Public Administration Review that year. Email:
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Author:Moe, Ronald C.
Publication:Public Administration Review
Geographic Code:1USA
Date:May 1, 2001
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