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You think the NSC is screwed up? Take a look at Washington's worst run program.

YOU THINK THE NSC IS SCREWED UP?

You can always tell a government programisn't working well when the General Accounting Office decides it can save itself some work by starting each new report on a program with the exact same paragraph. The federal government's royalty management program, operated by the Department of Interior, is a prime example. "Historically, [Interior] has not placed a high priority on the collection of oil and gas royalties," begin the GAO's 1981, 1982, and 1983 reports. "Consequently, serious deficiencies in the collection system that were identified over 20 years ago persist today."

During the past 33 years, three task forces, oneblue ribbon panel, and five outside contractors have tried to improve the Interior's management of this huge program; the GAO, Interior's own inspector general, and five different congressional committees have weighed in with 18 reports totaling 1,319 pages.

Without success. The problem is now worsethan ever. According to a report issued last September by the House Appropriations Subcommittee on the Interior, the government may be failing to collect as much as $1 billion a year in royalties. The government, of course, disputes the exact amount, but admits that hundreds of millions of dollars did go uncollected in 1985, and that over the years, billions more have been lost. The subcommittee estimated that the undercollection rate is twice that of five years ago, and more than triple the estimated undercollection rate of 1975.

These royalties are paid on oil and gas pumpedfrom federal and Indian lands that have been leased to private companies. In exchange for their leases, companies pay 12 to 16 percent on whatever they produce, which can be a significant source of revenue; since 1979, the government has collected more than $28 billion. Indians receive all the royalties paid by companies leasing their land; states get half the royalties earned from public land inside their borders.

Now, you may have more important things toworry about than whether New Mexico is getting its fair share of royalties. It's a good bet most people in New Mexico don't even care. What everyone from Santa Fe to the Senate should care about is that the royalty management program represents government so out of control it makes the National Security Council seem orderly.

The seven percent solution

Until 1982, royalty management was done byInterior's U.S. Geological Survey (USGS), a division well respected for its scientific undertakings. But even in 1959 the GAO pointed out that the study of rocks and the collection of money have little in common. Interior informed Congress that it "seriously considered" this point in 1963 and again a year later. Interior's thoughtfulness, however, wa swiftly followed by decades of inaction.

The geologists meant well. In an early effortto straighten out the collection mess, the director of USGS in 1954 ordered a bureau-wide audit under the direction of a new chief inspector. The only problem was that the order provided no staff. For seven years the "chief" inspector was the only inspector. When the GAO noted the chief inspector had not yet conducted an audit, it suggested USGS give the poor guy some help. A small staff was assigned in 1961, but no audits were done until 1964.

For mose of the next 15 years, USGSmaintained this grueling pace. Of a sample of 5,000 leases in 1979, the GAO found that only eight had been audited. The following year, a look at 18,000 leases showed that USGS auditors had examined only 92.

To do all this work, the royalty managementprogram by 1980 employed 321 people. Unfortunately, 315 didn't know very much about collections: only six were CPAs. When a blue ribbon panel pointed this out to Interior in 1982, the agency decided the Minerals Management Service could do a better job. The MMS has 130 auditors, 108 accountants, and a staff of 618 whose sole purpose is to collect royalties.

But for all its apparent expertise, the MMS hasdone its predecessor proud. To make up for all the previous lax years, the MMS in 1983 began auditing the major companies involved in oil and gas leasing over the previous five years. Auditors were assigned, money was appropriated, and sure enough, $320 million in underpayments was found. That sounds like a lot, but Congress now estimates that undercollections for those years total about $5 billion--15 times the shortfall MMS found.

Officials at Interior are so proud of collectingless than 7 percent of what it is owed that they are reluctant to take on more auditors. In 1984, when MMS had 90 auditors, MMS director William Bettenberg told Rep. John Murtha, "We're in good shape on auditors." A wary Congress gave him more anyway. Last April Bettenberg told Rep. Sidney Yates, chair of the House Appropriations Subcommittee on the Interior, that the 130 auditors now on staff were all he needed. Only after an internal report concluded that by spending $2.5 million more on 50 auditors the department could increase collections by $20 million, did Bettenberg admit that more auditors would be helpful. But in September, when Yates asked Bettenberg whether he'd like 100, Bettenberg replied: "We think not."

'A certain amount of chaos'

Of course, it doesn't matter how many auditorsInterior has if they can't figure out what they're supposed to do. It would seem, for instance, simple to decide how much a company owes in royalties each year. Just determine the market price on the oil and gas, apply the applicable royalty rate, and send out the bills.

Interior has never quite figured this out. Between1949 and 1959, the department simply failed to bill a number of oil producers for royalties, including one that owed more than $250,000 because USGS officials couldn't agree on what its production was worth. No bill, no royalties. After the GAO expressed concern over this lack of collections, USGS officials assured investigators, "Although all the items have not been billed, considerable action has been taken to bring the work up to date."

In fact, little action had been taken years later. In1972 the GAO reported that the USGS determined the value of oil and gas by relying on the price the company set--even when that company was selling oil from one subsidiary to the next. Not surprisingly, an examination of only a small fraction of producing wells exposed hundreds of thousands of dollars in royalties lost due to artificially low prices. Again, the USGS promised that the "assistant secretary has ordered the present operating manual reviewed as rapidly as possible...to ensure that no [questions] remain about the computation of royalty payments." Nine years later the acting director of the USGS was again soberly assuring Congress that Interior was working on "a new accounting system that would solve the valuation problem." The system, he said, would be operating by 1984. There is still no such system.

Moreover, there are still only loose guidelinesfor setting a price on oil and gas. This leaves both conscientious companies and department auditors confused. Consider this exchange last fall between Bettenberg and Rep. Yates:

Yates: How in the world can a company knowwhether it is complying with what you expect them to do? If they have no guidelines, how can your auditors know whether the company is complying? Isn't it total chaos?

Bettenberg: It's not total chaos.

Yates: It is just chaos.

Bettenberg: There is a certain amount of chaosout there.

How much? Enough that not only is Interiorfailing to collect royalties but oil companies are successfully suing the department to get back the small percent of royalties the government does take in. In the absence of specific valuation guidelines, the industry has successfully appealed a number of audit findings on the grounds that the rules are open to interpretation.

Last fall Interior finally came up with a sure-fireway to solve the valuation question: it decided to let Conoco write the guidelines. By the MMS's own estimation, Conoco's proposal would have saved oil and gas companies $600 million. Though the MMS's Royalty Management Advisory Committee vetoed the proposed guidelines by one vote last October, new regulations now pending are no better. If implemented, they would require states and Indians to rebate millions to oil and gas companies for royalties collected since 1982.

Even when Interior does manage to snag someroyalties, it has a hard time keeping track of them. Over the years, the vast majority of lease accounts have been inaccurate. Of the 22,735 such accounts kept by the USGS in 1979, 16,166 were so poorly maintained that there was no way to know whether the government was owed money or whether the companies had paid too much.

When asked that year about the problem, theUSGS assured investigators that all accounts would be reconciled by 1981. But by May 1981 the portion of accounts with errors had grown from 60 to 73 percent. Another assurance from USGS was followed 11 months later by another GAO report. Same first paragraph. Same conclusion. An analysis of 275 lease accounts disclosed errors totaling $1.1 million, indicating, according to the GAO, "the seriousness of the problem the Department has faced in maintaining accurate lease account records."

Interior's solution? Purge some accounts thathad discrepancies. This might seem a prudent approach if directed at the small but time-consuming accounts. But the department naturally opted to wipe the slate clean for only those accounts where the books were off by more than $100,000. The government might be owed $100,000, or it might have been overpaid by that amount--starting in 1985, all accounts that large were wiped clean. In their defense, Interior officials told Congress that they had run a cost-benefit analysis that backed up the write-offs. When asked for a copy of the analysis, Interior officials said that all the copies of the report had somehow been misplaced.

When the agency does collect royalties properly,it doesn't have a conniption about quickly sending Indians and states their share. In 1979 Interior made $359 million late payments; in the second quarter of 1980, $98 million; and in 1981, $390 million. In 1982 an irritated Congress passed the Federal Oil and Gas Royalty Management Act, which required, in part, that Interior disperse royalties within 30 days of receipt. Needless to say, Interior has not complied with the law. In 1985 thousands of Navajos whose lands are leased for oil and gas production sued the department over late payments. Last July, U.S District Court Judge Edwin Mechem ruled in the Navajos' favor, saying the department had consistently failed to satisfy the requirements of the law.

Blind ambition

Considering the history of the program, itshould come as no surprise that the one innovation Interior billed as its panacea for royalty collections followed exquisitely in the sound management tradition of its other reforms. In 1979 Interior began work on a new computer system to track royalty collections and distributions and gave MMS responsibility for overseeing the conversion of data from the existing system to the new computer. Given the importance and complexity of the problem, one might imagine that the MMS would assign as many top-flight people to work on it as possible. Instead, according to an internal General Services Administration (GSA) report last August, which we obtained through the Denver Post, the MMS assigned 14 people to manage the project, only three of whom had any experience in converting date from one system to the next. Only one of those three had any experience in the kind of conversion the MMS was attempting. Moreover, the man MMS put in charge of the project--the man responsible for steering Interior away from the rocks for jocks stewardship of the USGS--was, that's right, a geologist.

The new computer is a dud. To date, Interiorhas spent $82 million on it, and it still doesn't work properly. In August, six years after Interior leased the first contract for the computer, the GSA predicted that unless changes were made, "the project may ultimately fail."

In September 1980, the initial developmentcontract was awarded on a sole source basis to Sterling Systems, Inc., which in turn subcontracted to Arthur Andersen and Company. It quickly became apparent that Andersen was doing all the work. Rather than pay two companies for work only one was doing, Interior canceled Sterling's contract in February 1981.

But the department then chose not to followAndersen's advice that, for $11 million, a new system could be set up using three mainframe computers already in the USGS inventory. Instead, the department started over. By September 1981, three new contractors had been hired to do three separate tasks: development, oversight, and data processing. Rather than use the available computers, American Management Systems (AMS), the company awarded the development contract, designed a new system around one minicomputer, or VAX. Interior purchased one that October. By May 1982, with only 10 percent of the date entered, the VAX was overloaded. A second was purchased. Then a third. Within a year there were six and all were over capacity.

Apparently the minis weren't designed forhigh-volume input, and no software existed to process so much information. Interior could buy 50 minis and the computers still couldn't keep up. So what was MMS's oversight team doing? According to an internal department report, it had no idea. "AMS inundated the MMS staff with paper," the report notes. "Many of these documents containing key design decisions were never really read or analyzed by the MMS staff. . . . It soon became apparent that only [AMS] fully understood the intricacies of the new system."

What everyone did understand was that optingfor the VAX system had turned out to be a $50 million mistake. It was also a waste of four years. Interior decided to go back to the mainframe computer idea Arthur Andersen had suggested in 1980. To implement that, in April 1985 the department awarded a $32 million contract to the Martin Marietta Corporation. Marietta was supposed to complete the system by December 1985. It didn't. It then missed all its 1986 deadlines. Rather than miss another, Marietta now says only that the system will be operational sometime this year.

Interior has fined Marietta $979,498 for thedelays. Marietta refuses to pay, saying the government's records are in such bad shape they cannot be fed into the system. Blaming government delays for its inability to meet its deadlines, Marietta is now demanding $1 million from the agency. One internal MMS report concedes the agency has "error-ridden files that still have not been completely unraveled or reconciled." At the same time, a GSA report concluded that Marietta's management team was no keener than MMS's: "Martin had no personnel with significant conversion management skills assigned to this project [until] about four months after the project got underway." The GSA concluded that the $32 million contract "can be characterized as a case of the blind leading the blind."

Problem? What problem?

The standing joke among those involved inroyalty management is that after 33 years of trying to correct the program's problems, it still takes ten bureaucrats to collect royalties. One to underestimate the amount owed and nine to make sure the payments get screwed up.

Despite years of repeated criticism, the royaltyprogram remains grist for the Borscht belt mill because Interior routinely brushes aside recommended improvements. Even when Congress made the recommendations law, the department ignored them. The reason is simple. There's no financial incentive for Interior to improve collections. Almost all the royalties collected that don't go back to the states or the Indians are deposited in the general treasury. No secretary is going to devote his or her increasingly scarce resources to a program that brings his or her department no return.

A generation of incompetence should be longenough to realize that the only way to improve the royalty management program is to make MMS salaries proportionate to its success. Without this kind of incentive, taxpayers will keep making up the difference, Indians and states that are owed royalties will continue being short-changed, and efforts to improve the program will be met with a kind of imperviousness that leads one to conclude that Interior may even enjoy making a bureaucratic mess.

During a meeting with James Watt and fourof his assistants, David Linowes, chair of the panel assigned to assess the royalty management program, says he pointed out that because the department never matched reports on the production of oil and gas with reports on sales, it was impossible to be sure the proper amount of royalties was being assessed. "The secretary looked at his calendar and said, 'As of today, we'll start doing that,'" recalls Linowes. When, months later, Linowes asked those in the meeting along with Watt why nothing had been done, he says each official replied, "We didn't hear the secretary say he was going to do anything."
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Title Annotation:National Security Council; government royalties collection
Author:Eisendrath, John
Publication:Washington Monthly
Date:Apr 1, 1987
Words:2801
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