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45–945 PDF 2008

H.R. 5712, CLOSE THE CONTRACTOR FRAUD

LOOPHOLE ACT, AND H.R. 5787, FEDERAL

REAL PROPERTY DISPOSAL ENHANCEMENT

ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

ORGANIZATION, AND PROCUREMENT

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

ON

H.R. 5712

TO REQUIRE DISCLOSURE BY FEDERAL CONTRACTORS OF CERTAIN

VIOLATIONS RELATING TO THE AWARD OR PERFORMANCE OF FEDERAL CONTRACTS

AND ON

H.R. 5787

TO AMEND TITLE 40, UNITED STATES CODE, TO ENHANCE AUTHORITIES WITH REGARD TO REAL PROPERTY THAT HAS YET TO BE REPORTED EXCESS, AND FOR OTHER PURPOSES

APRIL 15, 2008

Serial No. 110–103

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

——— ———

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, ORGANIZATION, AND PROCUREMENT

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

CAROLYN B. MALONEY, New York

BRIAN P. BILBRAY, California

TODD RUSSELL PLATTS, Pennsylvania,

JOHN J. DUNCAN, JR., Tennessee

MICHAEL MCCARTHY, Staff Director

(III)

C O N T E N T S

Page

Hearing held on April 15, 2008 .............................................................................. 1

Text of H.R. 5712 ..................................................................................................... 6

Text of H.R. 5787 ..................................................................................................... 9

Statement of:

Denett, Paul, Administrator for Federal Procurement Policy, Office of

Management and Budget; Barry Sabin, Deputy Assistant Attorney

General, Criminal Division, U.S. Department of Justice; David

Drabkin, Acting Chief Acquisition Officer and Senior Procurement Executive, General Services Administration; and Colleen Preston, executive vice president, Professional Services Council ...................................... 16

Denett, Paul ............................................................................................... 16

Drabkin, David .......................................................................................... 34

Preston, Colleen ......................................................................................... 43

Sabin, Barry ............................................................................................... 22

Werfel, Danny, Acting Comptroller, Federal Financial Management, Office of Management and Budget; and Stan Kaczmarczyk, Acting Deputy

Associate Administrator, Office of Government-wide Policy, General

Services Administration ............................................................................... 77

Kaczmarczyk, Stan .................................................................................... 83

Werfel, Danny ............................................................................................ 77

Letters, statements, etc., submitted for the record by:

Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statement of ........................................................................ 60

Denett, Paul, Administrator for Federal Procurement Policy, Office of

Management and Budget, prepared statement of ...................................... 18

Drabkin, David, Acting Chief Acquisition Officer and Senior Procurement

Executive, General Services Administration, prepared statement of ....... 37

Kaczmarczyk, Stan, Acting Deputy Associate Administrator, Office of

Government-wide Policy, General Services Administration, prepared

statement of ................................................................................................... 85

Moore, Hon. Dennis, a Representative in Congress from the State of

Kansas, prepared statement of .................................................................... 75

Preston, Colleen, executive vice president, Professional Services Council,

prepared statement of ................................................................................... 45

Sabin, Barry, Deputy Assistant Attorney General, Criminal Division, U.S.

Department of Justice, prepared statement of ........................................... 25

Towns, Hon. Edolphus, a Representative in Congress from the State

of New York, prepared statement of ........................................................... 3

Werfel, Danny, Acting Comptroller, Federal Financial Management, Office of Management and Budget, prepared statement of ........................... 80

(1)

H.R. 5712, CLOSE THE CONTRACTOR FRAUD

LOOPHOLE ACT, AND H.R. 5787, FEDERAL

REAL PROPERTY DISPOSAL ENHANCEMENT

ACT

TUESDAY, APRIL 15, 2008

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

ORGANIZATION, AND PROCUREMENT,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:05 p.m. in room

2247, Rayburn House Office Building, Hon. Edolphus Towns (chairman of the subcommittee) presiding.

Present: Representatives Towns, Welch, Davis of Virginia, and

Bilbray.

Also present: Representative Moore.

Staff present: Michael McCarthy, staff director; William Jusino

and Mark Stevenson, professional staff members; Velvet Johnson,

counsel; Kwane Drabo, clerk; Jim Moore and Charles Phillips, minority counsels; and Benjamin Chance, minority professional staff

member.

Mr. TOWNS. The committee will come to order.

Welcome to today’s legislative hearing on two bills related to contractor ethics and the disposal of Federal surplus property. The

first bill we will review is H.R. 5712, the Close the Contractor

Fraud Loophole Act, introduced by Representative Peter Welch.

About a month ago Congressman Welch brought to the committee’s attention a loophole in a new rule requiring contractors to report fraud and over-billing on Government contracts. For some reason, contracts performed overseas were exempted from that requirement. Well, that didn’t make any sense to Congressman

Welch because so much contract fraud and waste has been seen on

contracts in Iraq and Afghanistan.

So we have been looking into the policy behind that rule and how

that exemption got into the rule in the first place. Congressman

Welch introduced a bill to close the overseas loophole and another

loophole exempting commercial items contracts.

That bill is the topic of our first panel today. The rule in question

requires contractors to report internal fraud or overpayment on

Government-funded projects rather than wait for its discovery by

the Government. The Department of Justice believed such a rule

was necessary because few Government contractors voluntarily disclose suspected instances of fraud.

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However, the rule exempted contracts to be performed overseas

and contracts for commercial items. This makes no sense at all. By

exempting overseas contracts, this administration is telling Government contractors that if you are going to commit fraud, go

abroad and do it. I am pleased that since Congressman Welch

brought attention to this detail and introduced this bill and called

for this hearing, it appears that the administration will now revise

its proposed rule to include overseas and commercial items contracts in the fraud reporting requirements.

That is a good step, but I think the Welch bill is still necessary

to make sure these types of loopholes stay closed, and closed forever.

H.R. 5712 will ensure that taxpayers’ dollars are used for the

purpose to which they have been appropriated, and not to line the

pockets of corrupt individuals or companies. We take that responsibility very seriously. At this time when our national security is

of paramount concern, criminals who cheat the Government must

be identified, stopped, and punished.

I look forward to hearing from our witnesses.

Our second panel will discuss a bill by Representative Dennis

Moore of Kansas to streamlining the sale of surplus Federal land.

I will say more about that bill when it is time for the second panel.

[The prepared statement of Hon. Edolphus Towns and the texts

of H.R. 5712 and H.R. 5787 follow:]

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Mr. TOWNS. At this time I would like to yield time to Congressman Welch, the sponsor of this legislation.

Mr. WELCH. Thank you very much, Mr. Chairman. I want to

thank Chairman Towns and I want to thank Chairman Waxman

for restoring front and center the responsibility the Congress has

to do oversight. That is especially important on the procurement

process that has become a much bigger part of how Government

spends taxpayers’ dollars.

Just a few facts, Mr. Chairman.

In the year 2000, procurement spending was $203 billion. In the first 6 years of the Bush administration that grew to $412 billion,

the highest it has ever been in the history of the United States.

Also, non-competitive procurement contracting has also exploded.

The use of no-bid contracts and the use of limited competition contracts rose in the year 2000 from $67.5 billion to $206.9 billion in

2006, with the largest increase in a single year being between 2005

and 2006.

Even as that happens, the incidents of documented waste, fraud,

and abuse is also exploding. In a report that was done under the

supervision of Chairman Waxman, ‘‘More Dollars, Less Sense:

Worsening Contracting Trends Under the Bush Administration,’’

has documented that in 118 contracts valued at $745 billion that

were found by Government auditors to involve very significant

waste, fraud, abuse, or mismanagement. This year the report identifies 187 contracts valued at $1.1 trillion that have been plagued

by waste, fraud, and abuse. That raises the question as to how we

will, as a Congress and as an administration, protect taxpayer dollars from waste, fraud, and abuse.

The subject of this hearing is about a rule that was proposed

that originally was going to do the obvious, and that was require

contractors who are receiving literally billions of dollars of taxpayer

money to report when they become aware of any incidents of fraud.

That rule, from its original proposal, did the sensible thing to include that obligation whether the taxpayer money was spent in the

United States or abroad, was ultimately promulgated with an exclusion for any expenditures of taxpayer dollars that were spent

overseas. Of course, the dominant place where that money is spent

is Iraq and, to some extent, in Afghanistan.

The chairman laid out why that is not acceptable, but just a few

examples of the really egregious fraud, waste, and mismanagement

that has occurred are incidents in Iraq. Mr. Chairman, a few of us

were able to go to the Baghdad Police Academy, where the contract

wasted millions of taxpayer dollars building a facility that wasn’t

able to be occupied for its intended purpose. There was literally

septic sewage that was leaking from second-story facilities into the

first floor.

Folks from the committee went to the Baghdad Police College,

which I just mentioned. Another one was the dam at Mosul, where

millions of dollars of equipment were just gone missing.

There is item after item that have been documented, Mr. Chairman, in the report by this committee of taxpayer waste, fraud, and

abuse which everybody opposes, so this rule that has allowed an

exemption to continue can’t be sustained.

I thank you Mr. Chairman and yield the balance of my time.

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Mr. TOWNS. Thank you very much. I also thank you for the great

work that you have done on this legislation.

Let me introduce the members of the panel. Let me begin by introducing the Honorable Paul Denett, Administrator for Federal

Procurement Policy, Office of Management and Budget. Thank you

for coming.

Mr. Barry Sabin, Deputy Assistant Attorney General for Criminal Division, U.S. Department of Justice. Thank you so much for

coming.

Mr. David Drabkin, Acting Chief Acquisition Officer and Senior

Procurement Executive, General Services Administration. Thank

you so much for coming.

Ms. Colleen Preston, executive vice president of Professional

Services Council. Thank you so much for being here.

We will proceed with you, Mr. Denett. Let me just say that each

of you have 5 minutes. Of course, we hope that you could sum up

in 5 minutes. When the light goes to caution, we want to let you

know you need to be sort of like winding up, and then when it gets

to red, that means stop. Of course, after that we have a question

and answer period.

Before we do that, it is a longstanding policy here that we swear

in all of our witnesses.

[Witnesses sworn.]

Mr. TOWNS. Let the record reflect that they all answered in the

affirmative.

We will begin with you, Mr. Denett.

STATEMENTS OF PAUL DENETT, ADMINISTRATOR FOR FEDERAL PROCUREMENT POLICY, OFFICE OF MANAGEMENT

AND BUDGET; BARRY SABIN, DEPUTY ASSISTANT ATTORNEY

GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE; DAVID DRABKIN, ACTING CHIEF ACQUISITION OFFICER AND SENIOR PROCUREMENT EXECUTIVE, GENERAL

SERVICES ADMINISTRATION; AND COLLEEN PRESTON, EXECUTIVE VICE PRESIDENT, PROFESSIONAL SERVICES

COUNCIL

STATEMENT OF PAUL DENETT

Mr. DENETT. Thank you, Chairman Towns, Ranking Member

Bilbray, and members of the subcommittee. I appreciate the opportunity to appear before you today to discuss recent regulatory actions addressing contractor ethics and disclosure requirements. You

have asked for comments on H.R. 5712, the Close the Contractor

Fraud Loophole Act. I have prepared written remarks that I would

like the subcommittee to enter into the record, and I would like to

briefly summarize those comments for you.

Mr. TOWNS. Without objection.

Mr. DENETT. Let me begin by assuring the subcommittee that

the administration is committed to an acquisition process with high

standards of integrity and effective management controls to reduce

fraud, waste, and abuse in Government contracting.

Two recent rulemakings to change the Federal Acquisition Regulation reflect unprecedented steps to strengthen contractor ethics to

protect our taxpayers from fraudulent conduct in the award and

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performance of Federal contracts and subcontracts. First, the Civilian Defense Acquisition Regulatory Council’s finalized FAR

changes last November that for the first time establish Government-wide requirements for Federal contractors to have a written

code of business ethics.

Second, the Council has issued a proposed rule, also last November, that would require Government contractors to disclose to an

agency whenever the contractor has reasonable grounds to believe

that a violation of criminal law has occurred in connection with

award or performance of a contract or subcontract. The proposed

rule would require contractors to establish internal control systems

and employee training programs to ensure compliance.

You have asked why the rules provide exemptions for overseas

contracts and commercial item contracts. I understand that the exemption for overseas contracts is patterned after pre-existing Defense Department regulations dating back to 1988 that exempted

overseas contracts from contract clauses requiring hotline posters.

These are posters that are placed in the contractor workplace with

information on how contractor employees can report suspected

fraud and other misconduct.

The exemption for commercial item contracts reflects provisions

in the Federal Acquisitions Streamlining Act that require the acquisition of commercial items to resemble customary commercial

marketplace practices to the maximum extent practicable.

I am inclined to favor the elimination of these exemptions for the

purposes of these rulemakings. My office asked the acquisition law

team, which is the team that is responsible for drafting ethics

rules, to carefully consider whether exemptions for overseas contracts and commercial items acquisition are necessary.

In response to this request, the Councils sent OMB a draft proposed rule as a followup to the November proposed rule. This rule,

which OMB received last week, is currently under interagency review and will be subject to public notice and comment.

You have asked me to discuss H.R. 5712. This bill would, in effect, impose statutory requirements on Federal contractors that are

similar to the November proposed rule, except that H.R. 5712

would also apply these requirements to overseas and commercial

item contracts. The followup rulemaking and the process I just described will ensure that the concerns underlying this legislation are

appropriately addressed. For this reason, I believe the legislation

is unnecessary.

In short, the administration is creating stronger Governmentwide ethics requirements for government contractors. I am confident, when the deliberations are concluded and regulatory

changes are finalized and fully implemented, we will have taken

significant steps to have protected the Government and taxpayer

from fraud in Government contracting.

This concludes my prepared remarks, and I will be happy to answer any questions that you may have.

[The prepared statement of Mr. Denett follows:]

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Mr. TOWNS. Thank you very much, Mr. Denett.

Now we go to you, Mr. Sabin.

STATEMENT OF BARRY SABIN

Mr. SABIN. Thank you, Chairman Towns, Congressman Welch. I

appreciate the opportunity to be here today to discuss the Close the

Contractor Fraud Loophole Act, H.R. 5712, the efforts of the Department of Justice to combat fraud in Government contracting,

and specifically the requirement that Government contractors report fraud in material over-billing.

The Justice Department has a demonstrated and continued commitment to a strong and vigorous enforcement effort in the important area of procurement fraud. The Department of Justice has

made the investigation and prosecution of procurement fraud a priority, to include procurement fraud related to the wars and the

building efforts in Iraq and Afghanistan.

In October 2006 the Justice Department announced a new national procurement fraud initiative and the creation of the National

Procurement Fraud Task Force led by the Justice Department’s

Deputy Attorney General’s Office and Criminal Division to promote

the early detection, prevention, and prosecution of procurement

and grant fraud associated with increasing contracting activity for

national security and other Government programs.

The task force has been enthusiastically embraced by the entire

law enforcement community, including the FBI, the Inspector General community, and Defense-related agencies. Overall, we now

have more effective resource allocation in procurement fraud investigations, which has resulted in the acceleration of investigations

and prosecutions.

This combined effort of task force members has resulted in significant accomplishments, including a number of working committees, specialized training, a public Web site, maybe 300 procurement fraud cases, regional working groups, and more.

Procurement fraud cases, especially those involving the wars in

Iraq and Afghanistan, are usually very complex and resource intensive. The cases often involve extra-territorial conduct, as well as

domestic conduct, requiring coordination between appropriate law

enforcement agencies.

In order to improve coordination and information sharing, we

have established a joint operations center based in Washington.

To date, the Justice Department has charged 46 individuals or

companies for contract fraud relating to the efforts in Afghanistan,

Kuwait, and Iraq. Last week a KBR fuel technician was sentenced

to 26 months incarceration in the Eastern District of Virginia following his guilty plea to conspiracy to defraud and accept bribes in

connection with a scheme to divert fuel intended for our airfield to

the black market in Afghanistan.

Also, last week in the District of Maryland a former senior contract fuel manager pled guilty to conspiracy to defraud the United

States, commit wire fraud, and steal trade secrets.

With respect to the proposals to require mandatory disclosure by

contractors, on May 23, 2007, in a letter to the Office of Federal

Procurement Policy, the Justice Department proposed, on behalf of

the task force, some modifications to the Federal Acquisition ReguVerDate 11-MAY-2000 10:46 Jan 09, 2009 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 C:\DOCS\45945.TXT KATIE PsN: KATIE
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lation, which would require, among other things, that contractors

notify the Government whenever they become aware of material

overpayment or fraud relating to the award or performance of contract or subcontract rather than wait for the contract overpayment

or fraud to be discovered by the Government.

Shortly thereafter, the Councils began the review process, and on

November 14, 2007, published proposed rules, substantially incorporating the task force’s requested changes of the FAR. The task

force’s proposal is mild on existing requirements found in other

areas of corporate compliance.

In my written statement I will give some of the reasons why the

changes were requested, including the data evidencing a decline in

voluntary disclosures to a Department of Defense Inspector General.

The proposed rule, as published by the Councils on November 14,

2007, added two exemptions, one to Government contracts performed entirely overseas and the other for commercial contracts

that were not included in the original task force’s proposal submitted on May 23, 2006.

After the Councils published the proposed rule and sought public

comment, the task force considered ways to improve the proposed

rule. In response to what the task force believed were some legitimate concerns, we submitted comments on the proposed rule on

January 14th of this year, addressing the standard for the schedule

of over-payments and criminal violations, cooperation and attorney/

client privilege, navigation to disclose potential violations of the

False Claims Act, the grounds for suspension and debarment, the

time limit for disclosures, and internal investigations by contractors. Law enforcement agencies submitted numerous comments to

the councils in support of the task force’s proposal.

In our January 14th comments we also address the Council’s decision not to include overseas contracts. We asserted that the

United States still is a party to these contracts and potentially a

victim when over-payments are made or when fraud occurs in connection with those contracts.

We noted that, under these circumstances, the Government still

maintains jurisdiction to prosecute the perpetrators of fraud and

that these types of contracts, which in many cases support our efforts to fight the global war on terror, need greater contractor vigilance, because they are performed overseas where U.S. Government resources and remedies are more limited.

As the Justice Department has previously stated, the Department welcomes the enactment of new tools to combat fraud committed by contractors within the criminal jurisdiction of the United

States. With respect to H.R. 5712, we believe that the rulemaking

process should be able to address real concerns adequately by appropriately incorporating the types of changes discussed in our

January letter.

The Justice Department and the task force have taken a

proactive leadership role in proposing that new ethics rules and

fraud and overpayment rules be incorporated into the FAR. Moreover, the Justice Department will continue its efforts to detect,

deter, investigate, and prosecute procurement fraud by companies

and individuals.

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Through these and other efforts, we will ensure that taxpayer

moneys are protected, our Nation’s security defended, and the investigation and prosecution of procurement fraud remains a Justice

Department priority.

I welcome any questions you may have.

[The prepared statement of Mr. Sabin follows:]

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Mr. TOWNS. Thank you very much, Mr. Sabin.

You may proceed, Mr. Drabkin. Thank you so much.

STATEMENT OF DAVID DRABKIN

Mr. DRABKIN. Chairman Towns, Ranking Member Bilbray, members of the subcommittee, thank you for the invitation to come and

talk to you today about the FAR rulemaking process and specifically the ‘‘Federal Acquisition and Regulation Case 2007–006, Contractor Compliance Program and Integrity Reporting.’’

Changes to the FAR undergo a long-established process following

the direction of the Congress, the President, or suggestions from

agencies or the public. The proposed changes are assigned a case

number and are referred to one of the standing teams of the FAR

Council. These teams are composed of career civil servants and uniformed members of the armed forces. On occasion, an ad hoc team

may be formed to address either an unusually complicated matter

or a matter that requires special attention. Ad hoc teams are also

composed of career civil servants and uniformed members of the

armed forces and are drawn from either existing team members or

experts sought from other agencies.

Once a case is assigned to a team, the team develops the language they believe implements the suggested or directed changes

based upon their specific expertise and knowledge of the procurement process. If they are making the changes based on statutory

Executive direction, discretion in formulating regulatory guidance

is limited by the directive they have received. If they are making

changes based upon suggestions for the agencies or the public,

their discretion is much broader in terms of evaluating the overall

consistency of proposed changes with existing policies and practices. There is a FAR guide, and that guide is available on the Web,

and I have placed the Web site in my testimony, which I ask, Mr.

Chairman, be included in the record.

Mr. TOWNS. Without objection, so ordered.

Mr. DRABKIN. Once the team completes its assigned work, the

case is then sent to either the Defense Acquisition Regulatory

Council [DARC], or the Civilian Agency Acquisition Council

[CAAC], who reviews the team’s work. Once both councils have

concluded their reviews and made any changes they deem appropriate, the case is submitted to the OMB’s Office of Federal Procurement Policy for review and approval, then to OMB’s Office of

Information and Regulatory Affairs [OIRA], for its review, including an interagency coordination at OIRA’s discretion and approval.

Then the final rule is sent to the FAR signatories. Those would

be the Director of Procurement at Defense, the Director of Procurement at NASA, and myself at GSA, for their review and approval,

and then the case is published in the Federal Register.

Currently, over 50 cases are being processed, both statutory and

non-statutory in origin, and the details and the status of all those

cases may be found on the Web site set forth in my testimony.

With regard to FAR case 2006–007, it originated from a letter

from the Department of Homeland Security as a Katrina hotline

poster case. DHS had been asked by Senators Lieberman and Collins to acquire and ensure wide distribution of fraud hotline posters

in hurricane relief and reconstruction contracts. The Senators reVerDate 11-MAY-2000 10:46 Jan 09, 2009 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCS\45945.TXT KATIE PsN: KATIE
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quested that the regulatory action mirror the Department of Defense’s contract clause contained in the Defense Acquisition Regulatory Supplement [DFARS], that requires the prominent display of

contract information to report fraud, waste, and abuse.

DOD, GSA, and NASA took the initiative to make the ethics coverage in the FARs stronger than DHS or the Senators had requested. The original request by DHS was to take the existing

DOD hotline poster regulation and make it Government-wide. The

DOD hotline poster clause, which is found at 252.203–7002, was required in solicitations of contracts expected to exceed $5 million,

except when performance will take place in a foreign country. It

also was not required in commercial item contracts.

The DOD ethics and internal control regulation in the DFARS

recommended that a contractor system of management controls

should provide for a timely reporting. This was not mandatory on

contractors, as there was no clause binding the contractor.

In FAR case 2006–007, originating from DHS, we issued a clause

for hotline posters, keeping the overseas and commercial items exemptions in that case. The FAR case went further by making the

ethics aspect mandatory and adding on to the hotline poster clause.

The final rule had two clauses, one for the contractor code of

business ethics and conduct and another for the display of the hotline poster, itself. The introductory paragraph, which provides an

exception if the contract is for the acquisition of commercial items

in the part 12 or if it will be performed entirely outside the United

States applies to both clauses. The policy states that all the Government contractors must conduct themselves with the highest degree of integrity and honesty and should have a written code of

business ethics and conduct.

All contractors should also have an employee business ethics and

compliance training program and an internal control system that

is suitable to the size of the company to facilitate timely discovery

and disclosure of improper conduct in connection with Government

contracts, and ensure corrective measures are promptly instituted

and carried out.

As this FAR case was progressing, the Department of Justice

submitted a public comment asking that FAR case 2006–007 provide more detail on the U.S. citizen guidelines. DOJ did not comment on the exception for contracts for commercial items or contracts performed entirely outside the United States.

At the same time, DOJ submitted a letter to OFBP setting out

DOJ’s request to open a new FAR case. DOJ requested changes to

the FAR to require contractors to establish and maintain internal

controls to detect and prevent fraud in their contract and notify

contracting officers without delay whenever they become aware of

the contract overpayment or fraud, rather than wait for the discovery by the Government.

The emphasis of the DOJ letter and the focus of the DOD and

GSA and NASA was on mandatory disclosure rather than on the

exemptions. The DOJ request provided that commercial contractors

may be excluded from the compliance program requirements. DOJ

asked for and received a commitment from OFBP to publish a new

proposed rule on an expedited basis. The FAR Council complied

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with this request by expediting the drafting, finishing, and approving of a proposed rule.

The new 2007–006, and this can by very confusing, because the

other rule is 2006–007, but the new rule, 2007–006 proposed rule

did not totally exempt overseas contracts. The proposed rule applied the new debarment and suspension clauses to the overseas

contracts. A contractor may be debarred or suspended for knowing

failure to timely disclose an overpayment on a Government contract or violations of Federal criminal law in connection with the

award and performance of the Government contract or subcontract,

which includes violations of any contract, whether domestic or

overseas.

The law team has modified the proposed rule and will publish it

for public comment and review. Comments received will be considered in drafting the final rule.

Mr. Chairman, Ranking Member Bilbray, the FAR rulemaking

process is one of the unheralded great success stories in the Federal Government’s procurement practices. It has kept parties and

politics out of the business function of Government for decades. I

hope that you will join me in congratulating the hundreds of career

civil servants and uniformed military members who have, over the

years, honed this process and made it work for the American taxpayers and the Federal Government. These individuals are truly

the unsung heroes of Government.

Our colleagues in government all over the world study our system with envy and try to emulate it within their own customers

and cultures, as allowed.

I would be happy to answer any questions you may have.

[The prepared statement of Mr. Drabkin follows:]

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Mr. TOWNS. Thank you very much, Mr. Drabkin.

Ms. Preston.

STATEMENT OF COLLEEN PRESTON

Ms. PRESTON. Thank you very much, Mr. Chairman and Congressman Welch. Thank you for the invitation to testify today on

behalf of the Professional Services Council.

PSC is the national trade association of the Government services

industry. This year PSC and the Contract Services Association of

America merged to form a single unified voice representing the full

range and diversity of the Government services sector. We now represent over 340 member companies with hundreds of thousands of

employees in over 50 States.

We support the efforts of this committee, the Department of Justice’s National Procurement Fraud Initiative, the various agencies,

and the Office of Federal Procurement Policy in their efforts to ensure that the Government is protected against fraudulent behavior

by contractors whether in the United States or abroad, whether

commercial suppliers or Government-only contractors.

We all share the goal of reducing unethical behavior. The question is how best do you do that.

Often what sounds like a simple and sensible proposal, when applied in the context of the realities of the contracting process, can

end up having significant unintended consequences and costs far

beyond its benefits. We believe that is the case with H.R. 5712, and

we oppose it in its present form.

Before going further, I would just like to point out that the Government is currently protected against fraudulent behavior by any

number of criminal statutes, the False Claims Act, by contract penalties that may be imposed, and by the suspension and debarment

process. These protections apply, whether or not a company is providing a commercial item or whether the contract is being performed domestically or overseas.

Our objections to the proposed legislation are based on the following key factors: First, there is no reason to believe that a mandatory reporting requirement will actually result in reduced fraud

or additional opportunities for redress by the Government. Indeed,

history suggests strongly that voluntary programs properly structured and supported are more effective tools.

Second, we believe that the voluntary disclosure programs that

are in existence now are actually a lot more effective than DOJ

claims. The data shows that, while the specific DOD voluntary disclosure program has been experiencing a downturn, there are other

equally important DOJ programs that are experiencing an increase

in voluntary disclosures. They are projecting the exact opposite

trend.

Additionally, there are substantial improvements that could be

made in the DOD voluntary disclosure program that we believe

would strengthen it without requiring mandatory reporting for

every error that may be then subject to the criminal investigation.

We also believe that contractors are making many, many voluntary disclosures outside of the formal program, and we think it

would be better served if the Department of Justice and others

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would explore why that is occurring outside of the current formal

program and if that is a problem if they are occurring.

Third, the exemption from reporting for work performed outside

the United States was not added, as you have heard today, at the

last second, and in no way changes a company’s obligations to adhere to U.S. anti-fraud laws and regulations. What we are talking

about in H.R. 5712 is a procedural requirement. These are procedural requirements that are often imposed on Government contractors in the United States that our companies understand. That is

not the same when you are dealing with foreign companies who do

not operate under the same terms and conditions that U.S. companies do.

Fourth, even the Department of Justice in its comments on the

proposed Federal acquisition regulation that this legislation seeks

to modify acknowledged that the proposed threshold for mandatory

reporting, a reasonable grounds to believe, was too vague and

would open the door to potential landslide of unnecessary reports,

which have little or no relationship to actually fraud.

As they have also acknowledged, it is both unnecessary and inappropriate to apply this to commercial contracts. The idea of getting

commercial items is that the Government would buy under the

same terms and conditions in the commercial marketplace that

every other vendor does. If you go out to buy a computer, for example, you don’t dictate to the company what the terms and conditions are of the sale that they are giving to you. In the same regard, if the Government wants access to the best technology in the

world in the commercial sector and commercial services, there are

many instances where companies will not abide with agreeing to

unique, Government-only terms and conditions.

Six, the proposed legislation would place prime contractors in an

untenable position. The vagaries of the mandatory reporting

threshold places them at great risk, since it requires them to have

a degree of insight, and inside knowledge about the business processes of their subcontractors. Might I add that the legislation provides no threshold for reporting at the subcontract level. We believe

the better approach would be to mandate that the Department of

Justice enter into discussions with contractors to ascertain why the

DOD voluntary disclosure program isn’t operating as effectively as

they believe it should and to require an assessment of the totality

of voluntary disclosures that contractors are making before making

any further changes.

We support the continued emphasis on education and training

rather than penalties to foster that internal self-governance in companies that will encourage employees to come forward to seek advice, and then if they find that there have been errors or problems

or infractions to then come forward and report them.

We strongly encourage companies to do this and we are happy

to work with the committee and the Department of Justice to assist

in developing processes that will further the goal of enhancing ethical contractor behavior.

Thank you. I appreciate the opportunity to testify. I look forward

to your questions.

[The prepared statement of Ms. Preston follows:]

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Mr. TOWNS. Thank you very much. I thank all of you for your

testimony.

Let me begin with you, Ms. Preston. So you are saying that H.R.

5712 is not necessary?

Ms. PRESTON. We are saying that we believe that better approach is—yes, the short answer would be that it is unnecessary.

We believe that through the regulatory process we have had the

opportunity to explain a lot of the concerns that have come about

as a result of the Department of Justice’s proposal, and that, if you

look at the behavior of companies and employees in those companies, you are much more likely to get not only reporting if there

is unethical behavior, but also cures to make sure that act or problem doesn’t occur again if you have a voluntary program.

Mr. TOWNS. Mr. Sabin, what do you say to that?

Mr. SABIN. With respect to the legislation?

Mr. TOWNS. Yes.

Mr. SABIN. The Department of Justice and the task force proceeded through the regulatory route. We thought that would be an

appropriate means and an appropriate mechanism for addressing

the concerns. We wanted to instill strong ethics, business corporate

compliance, and the like, and we felt that working through the

interagency process, that the regulatory mechanism, as articulated

by Mr. Denett, is an appropriate vehicle by which to do that.

In terms of the legislation proposed by Congressman Welch in recent days, we don’t have a formal Department of Justice views letter or position with respect to that piece of legislation. So, our initial preference is to proceed through the regulatory mechanism before going through the legislative process.

Looking at the actual bill, we would be happy to sit down with

staff, with you, but we can, at least on initial observation, see some

deficiencies, both technical, definitional, and the like, to work

through if the legislation proceeds. But, I don’t come before you

today with a Department of Justice views based upon the recency

of the proposed legislation.

Mr. TOWNS. All right. Mr. Denett, don’t you think that something

needs to be done? I mean, I think it was Mr. Sabin who talked

about 46 cases. And let me just say to you that I know there are

a lot of others. So, don’t you think we need to do something?

Mr. SABIN. Well, Congressman, we are doing something. The

things that we have out now are unprecedented. We are advancing

the ethical behavior with contractors more than has ever been

done, so we are pleased by that. We are requiring them to have

ethics training, internal reporting mechanisms. We are requiring

them to inform us when they have done criminal activity. So to me

this is major initiatives that have gone forth in the last several

months.

The fact that we are now giving serious thought to getting rid

of the exemption for overseas and commercial, that is a significant

change from what we proposed a short while ago.

So in order for us to fully vet that and get comments from everyone—the American Bar, various companies, associations—we think

that they are owed the opportunity, since that is in the works, to

have a chance to vet their views so that we know everybody’s view

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on this before a final decision is made. I think to legislate without

that input is not a wise choice.

Mr. TOWNS. Well, you know, let me just go back to you again,

Ms. Preston, because you are saying that voluntary is fine, voluntary disclosure. You say that is fine, voluntary?

Ms. PRESTON. Yes, Mr. Chairman.

Mr. TOWNS. Right, and, Mr. Sabin, you are saying mandatory is

what we need?

Mr. SABIN. We believe that in this context, in the procurement

fraud context, it has not been working. The data does not reflect

that voluntary disclosures to, for example, the Department of Defense Inspector General has declined, especially in recent years. Indeed, we are not aware, over the past 2 years, of any disclosures,

voluntary disclosures, from the top 15 contractors relating to fraud

and material over-billing.

So in that realm, with the increased spending that is occurring

in national security and the like, we believe that and our recommendations were to have a mandatory disclosure obligation.

Some of the voluntary disclosure programs that are referenced either in Ms. Preston’s written statement or in her remarks this

morning, we believe are sort of misplaced with respect to the application in this reign. For example, the antitrust program that is referenced in her statement in the Department of Justice that provides amnesty is one in which it is for the company reporting about

other companies, as opposed to the particular company that is disclosing, which would be in the procurement fraud context about either conduct that occurs within that corporate structure. So, to

apply other voluntary disclosure programs, which can work in

other contexts, to this one we believe is misplaced.

Ms. PRESTON. Mr. Chairman, as Mr. Sabin said, there are other

programs that have worked very well and are working, and the reporting under those voluntary programs is increasing.

If I understand what he is saying is basically that because they

haven’t had a voluntary report from the top 15 contractors, there

is an assumption that there is fraud that has been unreported.

Most of those companies belong to and are probably signatories to

the Defense Ethics Initiative and other things. They have instituted strong, strong ethics programs with reporting.

Many of the reasons that people do not report, as we are told,

under the DOD voluntary disclosure program is that once they do,

it becomes a criminal process that takes up to two to 3 years to

resolve. Most of the times, the companies will report to a contracting officer if there is not fraudulent conduct. And, it turns out that

if it can be handled through an administrative process, they will

do it that way, and that is much preferable to them to be able to

resolve the situation, to punish the employee, to figure out why it

happened in the first place, and to work out a system with the

Government so that they can improve the program that they do

have and make sure it doesn’t happen again.

So, I think to say that just because they haven’t had a report

from 15 companies doesn’t mean that the program is not working.

All we are asking is, sit down with us, figure out why the program

isn’t working. Let’s see if we can make it work by getting rid of

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some of the impediments that are causing people not to report

under it.

Mr. TOWNS. My time has expired, so I yield now to Congressman

Bilbray.

Mr. BILBRAY. Justice Department, I assume, has made some suggestions on some numbers changes in the rulemaking, right?

Mr. SABIN. Yes, we have.

Mr. BILBRAY. Including the suspension language. Do you intend

to add any other language or have any other recommendations specifically to the rulemaking?

Mr. SABIN. We had on January 14th provided a number of detailed recommendations and suggested language with respect to

2007–006. To the extent that, as Mr. Denett indicated, additional

materials would be circulated, either in interagency process or published for additional comment, we would actively engage in that to

ensure that the task force’s views and the Justice Department’s

views are provided.

Mr. BILBRAY. Are you comfortable with how FAR has vetted this

with stakeholders such as Ms. Preston?

Mr. SABIN. Yes. I believe the notice and comment period provided

for extensive opportunity for specifics to be addressed, that there

were a number received by both Inspector Generals, law enforcement community, as well as law firms and others in private industry, and we have had dialog with a number of those to ensure that

we are trying to be surgical, reasonable, and thoughtful in how to

establish what, I think, we all share common ground on, which is

a rigorous business and ethics compliance code.

Mr. BILBRAY. With the progress we have made on the rulemaking, do you think this legislation is essentially needed or advisable?

Mr. SABIN. Our position has been that in the first instance the

rulemaking should proceed forward rather than the legislative this

year.

Mr. BILBRAY. Your point is the rulemaking should move forward

and then, we will see what we should do with legislation?

Mr. SABIN. That is where we are. We do not have further Justice

Department views on the particular legislation.

Mr. BILBRAY. OK. Thank you, Mr. Chairman. I yield back. Can

I yield to the chairman, please?

Mr. DAVIS OF VIRGINIA. Closing loopholes always sounds good,

but when the loophole just turns out to be an exemption inadvertently transported into a proposed rulemaking, this bill applies a

blunt instrument process to a process that requires delicate surgery.

This bill provides that a known failure to report violations is a

criminal law when it is related to a Federal contract. It would be

a cause of debarment or suspension for all concerned, including

those holding contracts performed overseas or contracts for commercial items.

That is exactly the coverage currently contained in much more

lengthy proposed regulation. What’s all the fuss about? The proposed rule does include an exemption for overseas and commercial

contracts, but the exemption applies only to the establishment of

internal ethics and programs and control systems.

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The enforcement of debarment and suspension for failure to report would apply to all contractors, even without this bill. While it

may or may not be good policy to apply all or some of the internal

programs to overseas or commercial contractors, the frenzy accompanying the bill hardly seems justified.

This does not make a significant change to the substance of the

proposed rule, but it does leap from the statutorily designated process for writing acquisition regulations and in statute a novel reporting scheme yet to be completely vetted.

The concept of mandatory reporting by contractors of possible

criminal violations based on reasonable grounds is unprecedented

and controversial. The rule is the subject of more than 70 comments, and only two of those commentators are present today. We

expected many of the firms subject to the rule to express serious

concerns. They argue a company could well face the loss of the ability to do business with the Government based on highly technical

interpretations of what constitutes a criminal law violation.

I admit that debarment and suspension are to protect the Government, not to punish companies. That has always been the underlying policy. None of the witnesses today, including the Department of Justice, support this bill, and they urge justifiable statutorily mandated regulatory process to take its course.

We understand the new proposed rules to be issued any day now,

which will, among other things, correct the exemptions and internal ethics awareness and control programs and call for another

round of comments.

In stark contrast to open and very deliberate and open process,

today is the first and the only hearing on this bill. Tomorrow at

9:30 a.m. members of the full committee will be asked to consider

and approve this proposal, which appears designed to close more

political holes than legal ones.

Thank you. Thank you, Mr. Chairman.

[The prepared statement of Hon. Tom Davis follows:]

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Mr. TOWNS. Thank you.

On that note I yield to the author of the bill, Mr. Welch.

Mr. WELCH. Thank you, Mr. Chairman. There are really two very

simple questions. One, how is it that the original rule was proposed

that would require reporting for domestic contracts but not for foreign contracts? And then the second is the need for the statutory

protection to give the benefit of protection to the taxpayer.

Mr. Denett, I am going to ask you a little bit about this. The

original rule that was proposed had a requirement for fraud reporting if it was a domestic contract, correct?

Mr. DENETT. Yes.

Mr. WELCH. And it did not include a requirement for reporting

if that taxpayer dollar was spent abroad, correct?

Mr. DENETT. Well, the work group of career people that worked

on it, when they looked at the fact that Defense Department had

exempted overseas for earlier requirements, such as these posters,

they decided not to include overseas in it.

Mr. WELCH. OK. Let me ask you this: in your mind, does a taxpayer dollar spent abroad deserve any less protection from waste,

fraud, or mismanagement than a taxpayer dollar that is spent here

in the United States?

Mr. DENETT. Well, as I stated in my opening remarks, I am inclined to remove the exemption, but I am not comfortable——

Mr. WELCH. I’m asking a simple question: does the taxpayer dollar abroad deserve the same degree of protection as a taxpayer dollar spent here at home?

Mr. DENETT. All our tax dollars, regardless of location——

Mr. WELCH. All right. We all agree on that, I take it. All right?

So isn’t it your job, among other things, at OMB to take appropriate action, including rulemaking, to protect all taxpayer dollars,

regardless of where those taxpayer dollars are being spent?

Mr. DENETT. That is, in fact, what we are doing.

Mr. WELCH. And now, you have proposed this rule, and you are

now suggesting that you want to amend it so that it does incorporate suggestions that were made to you by the Department of

Justice to include foreign contracts, correct?

Mr. DENETT. That is correct.

Mr. WELCH. All right. I want to know, if you can explain it, how

it is in this rulemaking process where you sent out for comment

the rule that had this exception for foreign contracts—you sent it

to Homeland Security, the SBA, the Department of Labor, Veterans

Affairs, Defense, Housing and Urban Development, Transportation,

Agriculture, Health and Human Services, State, Interior, Treasury,

and so on, 18 different agencies. None of them comment, with the

exception of Justice, about the oversight of leaving outside the protection of taxpayer dollars that were spent abroad?

Mr. DENETT. That is what I am told.

Mr. WELCH. All right. We have, thanks to documents that have

been provided, a couple of e-mails that were sent out probably to

50 to 80 people who had an opportunity to comment, and with the

exception of one comment from the Social Security Administration,

nobody in this extensive process that you go through flagged this

failure to include subject to the rule foreign contracts?

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Mr. DENETT. That is correct. The focus was on creating ethics

standards for the first time ever, requiring mandatory——

Mr. WELCH. Wait a minute. The focus is on protecting taxpayer

dollars. How did we get from here to there? You did have a comment from the Social Security Administration, of all places, that

stated very explicitly under this proposed rule contracts performed

by a U.S. company on foreign soil would be exempt. Did you respond to that comment by the Social Security Administration?

Mr. DENETT. I did not. I don’t know if GSA, who had members

on there——

Mr. WELCH. So the answer is no. Why did you take the advice

offered by the Department of Justice?

Mr. DENETT. As I said earlier, our focus was on making major

improvements, which in fact we did. This group of career civil servants that labored over this for many weeks put forth to us something that did not include overseas contracting.

Mr. WELCH. Mr. Drabkin, what about the GSA? We went

through this extensive process, e-mails and comments from people

all across Government, and no one, with the exception of somebody

from Social Security Administration, flagged this separation between domestic and foreign?

Mr. DRABKIN. Yes, sir. What happened at the CAAC meeting

when the rule was discussed, a Social Security representative—and

I was informed of this today, not when I spoke with your staff

members on Friday—but the Social Security member to the CAAC

did raise the issue. There was a brief discussion, and that same

member withdrew the issue and the rule went forward. At the

time——

Mr. WELCH. This is the first——

Mr. DRABKIN. If I may, Mr. Welch——

Mr. WELCH. No. You have answered it.

Mr. DRABKIN. No, sir, I haven’t.

Mr. WELCH. You actually haven’t is right, but do you support

change in the rule so that it includes foreign contracts as well as

domestic contracts?

Mr. DRABKIN. Sir, I support the process, and the process we are

going through now, and I support taking public comments. Since I

am one of three people that get to vote on the rule and sign it, it

would be inappropriate for me in advance of that process being

complete to tell you where I sit, although Mr. Denett has made it

clear to us what the administration’s policy is, and we generally

follow the administration’s policy at this point.

Mr. WELCH. Fair enough. Thank you.

Ms. Preston, you represent the Professional Services Council. It

is over 300 contractors.

Ms. PRESTON. Yes, sir.

Mr. WELCH. And your boss, I think, was on record as saying that

they do not want this rule; is that correct?

Ms. PRESTON. Yes, sir, that is correct.

Mr. WELCH. I listened to your testimony, and, frankly, I think we

are talking about, in some respects, two different things. This rule

and this legislation does not require any of your member companies

to become private Inspector Generals. This requires them to report

when they have knowledge about waste, fraud, or abuse. I mean,

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what are you so afraid of if, let’s say, Bechtel and the $150 million

that went to $160 million and $169 million contract in building the

Basrah Children’s Hospital, if they become aware of fraud why

wouldn’t we have an expectation, on behalf of the taxpayers, that

they would report that?

Ms. PRESTON. The reason that there is concern is because of the

standard and creating a standard for when it is. That——

Mr. WELCH. I hate to interrupt, but I don’t have much time. That

goes to the terms and conditions and perhaps the language of the

statute or the rule, but why would any of your contracting entities

that you work for—Blackwater, Triple Canopy, KBR—companies

that have received billions of dollars in taxpayer dollars, why

would they have any reservation about sharing with the Government knowledge that they have when they have it that taxpayers

are being ripped off?

Ms. PRESTON. There isn’t any question that they would share

that information if they knew it. The question is: how is it drafted

in terms of particularly the legislation, and what are the risks that

they incur? So they——

Mr. WELCH. So you don’t want any statutory either rulemaking

obligation. You want them to have voluntary capacity to do this, so

when in doubt they make the final decision?

Ms. PRESTON. Because if they voluntarily can report, then they

will report when they understand something. It is the practicalities

of what happens. So if you are the contractor—and many of these

contracts, as you said, are over in Iraq—you are the contractor who

has five levels of subcontractors. The subcontractor that is doing

the plumbing on that building, they probably——

Mr. WELCH. Or not doing the plumbing on that building.

Ms. PRESTON. The prime contractor is not in privity of contract

with that subcontractor and may not have——

Mr. WELCH. I don’t have much time, so——

Ms. PRESTON. Say one of those employees——

Mr. WELCH. I yield the balance of my time. I’m sorry.

Ms. PRESTON. Say one of those employees overhears one of the

Iraqi nationals saying to a friend, I just got someone to work for

me at $10 an hour and I was able to charge the Government or

charge my prime contractor $15 an hour. An employee of the prime

contractor hears that. Does he then immediately report that as

being a case of fraud? He doesn’t know if the person was bluffing.

He doesn’t know whether or not there has been a violation of law.

He doesn’t know if that is unethical behavior. He doesn’t really

know what happened.

The concern is that if he doesn’t immediately report it and it

later turns out to be some type of fraudulent or unethical behavior,

that company could be debarred, the whole company, for something

that someone overheard in a conversation out on the——

Mr. WELCH. Mr. Sabin, would you debar that company?

Mr. SABIN. It would look to the specific facts and circumstances

relating to the matter. We have limited resources, and we would

use our enforcement and investigative resources appropriately. I

think we could have common ground at what could be appropriate

standards and manners in which disclosures could be made subject

to internal investigation by the company to root out the particular

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facts so that expeditiously the referral was made in a thoughtful

and proper manner.

Mr. WELCH. Thank you.

Thank you, Mr. Chairman.

Mr. TOWNS. I now yield to the gentleman from Virginia, Mr.

Davis.

Mr. DAVIS OF VIRGINIA. We seem to have different philosophies

here. My philosophy in Government contracting is: you want to get

the best deal for the taxpayer, and to do that, you want as many

bidders in the process or as many companies and ideas coming in

as possible.

What I hear coming from some other Members is, we want to reduce this. We want to debar people. We want to put up restrictions

so you have fewer people, and that means less competition, which

at the end of the day means we end up paying more and getting

less.

Ms. Preston, you have a long record in this, going back to when

I was a Government contracts attorney back in the 1980’s. You remember the procurement integrity certifications and everything

that came out. You note that many commercial companies would

be unwilling to accept the risk level that is levied upon them by

the mandatory self-reporting requirements in this bill. Do you

think the self-reporting regime will cause such companies to walk

away from the Federal market, or parts of it?

Ms. PRESTON. I do believe that there are many companies now

who sell commercial products to the Government who are very concerned that——

Mr. DAVIS OF VIRGINIA. The downside is raised so much.

Ms. PRESTON. That the costs of doing business with the Government are increasing, and every single provision that gets added on,

there will come a time when there is the straw that breaks the

camel’s back.

Mr. DAVIS OF VIRGINIA. Is there a high cost of compliance with

the proposed self-reporting regime, and is this high cost or is this

a very marginal cost for a company as you look at it?

Ms. PRESTON. No. I believe that when you put on the threat of

debarment, suspension in the way this legislation is drafted, that

it will cause companies to increase dramatically some of the costs

of doing business, but it is the risk that is the biggest factor. It is

the unknown that really causes people concern.

Mr. DAVIS OF VIRGINIA. We did a hearing a couple of years ago

that noted some of the largest companies in America still refuse to

do business with the Federal Government. They will work through

intermediaries, re-sellers, and the like, but they are very nervous

for a number of reasons. Some of it is the liability, some was protection of IP, some of it is separate accounting systems. We tried

through time to try to attract these companies—many of them are

very large—into the Federal marketplace so we can get better deals

for taxpayers instead of having to go through re-sellers.

But this is just another, it seems to me, lower of the unintended

consequence of trying to protect consumers. In point of fact, it may

drive away competitors.

Ms. PRESTON. Exactly. We believe that it will. We believe that

the voluntary process works well. It is an incentive to companies.

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Companies have tremendous incentives to report. One is if they do

they avoid the potential of a suit. They get leniency under the U.S.

sentencing guidelines. That has been a dramatic factor in

incentivizing companies to voluntarily report.

We think that process is working well and allows them to operate within the context of the ethics programs that they have established within their companies.

Mr. DAVIS OF VIRGINIA. Mr. Drabkin, let me ask, do you have

any reason or any evidence that the alleged loophole for the contracts performed overseas or for commercial items was nefariously

slipped in the proposed rule at the 11th hour to try to give contractors a free ride to defraud taxpayers?

Mr. DRABKIN. No, sir. Quite frankly, I am offended that the suggestion was made without a scintilla of evidence that suggested

that was the case. In fact, for many months prior to this hearing

there have been suggestions floating around that somehow someone influenced one of these career civil servants to put that in.

That is absolutely not true.

The truth of the matter is they made a drafting error. They copied and cut and pasted language from 2006–007. They put it into

2007–006. They didn’t give any great thought to whether or not the

exemption made sense or not. They were in a hurry and they processed a rule. Quite frankly, sir, the suggestion that has been made

by some folks around town that these folks did wrong is just horrible. It is an offense.

Mr. DAVIS OF VIRGINIA. In point of fact, in procurement in general, whether it is contract managers, procurement officials, we are

having a hard time recruiting good people into this business, aren’t

we?

Mr. DRABKIN. Sir, we are not meeting what anybody calls a recruitment goal. We are barely staying even. We add additional requirements each day to what a contracting officer does, and then

we impugn their honor and their integrity without a scintilla of evidence, not a single bit of evidence. Why would they do this? Ask

yourself why would they sign up to do this. You don’t pay them any

extra. They’re not the ones that get to go and travel. They are not

the ones that get to go to big, giant institutions for education. They

work 60 to 80 hours a week to get the job done. They don’t ask for

overtime, and we impugn their honor and integrity because we—

well, I had better stop.

Mr. DAVIS OF VIRGINIA. I represent 5,400 Federal employees and

a number of contractors, as well, and most of them are very hard

working and try to do their job, and once in a while you make a

mistake, as we do, I might add, up here. We make a lot of them.

Hence, we have a $9 trillion deficit.

Thank you very much.

Mr. TOWNS. Thank you very much.

At this time I will go a second round.

Ms. Preston, what do you feel could be done to fix this legislation? What do you feel, or is it a fact that you just feel that we

should not be involved in the process at all?

Ms. PRESTON. Well, I don’t believe the legislation is necessary at

this time. I think the regulatory process is working well. We have

concerns about the regulations the way they have been drafted,

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and particularly the new exclusions. We will get the opportunity to

comment on those, as well.

But, certainly we think that, at least in the regulatory process,

you have an opportunity to have every voice heard and to explore

further the particular impact of changes that we don’t necessarily

get in the legislative process.

Mr. TOWNS. Right. You know, it is interesting, though, that most

people just oppose legislation, period. Sarbanes-Oxley, I will never

forget in terms of people coming up and opposing it and opposing

it and opposing it, and at the same time they were saying there

were some problems. So if we have some problems, how do we fix

the problems?

Now, I think with Mr. Sabin, who indicated that those 46 cases—

anyway, I think, going back to the money, I think there was $102

billion we spent over the last 5 years to help rebuild Iraq and Afghanistan, and, of course, they cover at least $14 million in contract bribes. Well, even with this structure we are finding bribes.

So, I think that there are some serious problems, and I think that

we cannot sit back and just sort of ignore the problem. I think

something needs to be done.

Now, if H.R. 5712 is not the answer, then I think we should talk

about what needs to be done, but to say that legislation is not necessary, I can’t quite accept that. I think that it is too serious to just

sort of pass off the fact that making a decision to volunteer the information they give to you. I don’t think that we can really move

forward with that in mind, with the fact that the kind of money

that is being spent and knowing—and everybody sitting at that

table knows there are some problems. Nobody said there are no

problems.

Ms. PRESTON. And, Mr. Chairman, we certainly do not advocate

any of the activity that is going on that is unethical in any form

whatsoever. The fact that it is being found and prosecuted is, I

think, a good news story that people are finding out about what is

happening and prosecuting those people who have acted

unethically. That should definitely happen.

What we are talking about here is not whether or not people will

be prosecuted for fraudulent behavior; it is a question of a reporting mechanism to—what people believe is the tool to make sure

that we do, in fact, find out about whether or not there is fraud.

That is the issue. It is not whether or not people are being prosecuted or not; it is how you get there.

We are saying that you are more likely to get companies to selfreport if you don’t hit them with punishment and other things in

addition to the penalties that already are associated with whatever

activity occurred. That is the only question is how you get there.

Mr. TOWNS. Well, I think that we need to help them get there,

and I think that H.R. 5712 sort of helps them to get there.

You know, I think that we need to do something, and if this is

not the answer I want to hear something from you other than,

‘‘continue to trust them.’’ That is what I really say, because, you

know, we are spending a lot of money. That is $102 billion. That

is B as in Boy. That is a lot of money.

Ms. PRESTON. I certainly agree, Mr. Chairman, and I am not asking to trust them. I am pointing out that there are incentives alVerDate 11-MAY-2000 10:46 Jan 09, 2009 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 C:\DOCS\45945.TXT KATIE PsN: KATIE
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ready in place that are much more powerful than a mandatory reporting requirement, which has many pitfalls associated with it;

that there are so many more incentives that would cause a company to report a violation if they found one.

If you are knowingly violating the law, you are not likely to selfreport. The chances are if somebody is embezzling in one of your

companies, they are not going to tell anybody else. They are not

going to self-report. They are not going to report themselves. If

someone else finds out about it, they are much more likely to report it in a system where they know the company won’t be punished in a way that hits them instead of the offending person.

If it is your colleague next door and you find out that they are

embezzling, you want that colleague punished. You want them

thrown out of the company. You want them prosecuted, but you

don’t want yourself and the rest of your fellow colleagues hurt, like

you would be if you were debarred or suspended.

Mr. TOWNS. Let me say that it does not appear to me that the

Federal contractors are being asked to do anything that is not already expected for their counterparts in other industries. To me, it

doesn’t appear to be any different. I guess I need to yield to the

author of it, but it seemed to me that when I look at SarbanesOxley and others, you know that we are asking the same thing

really. I don’t understand the resistance here.

Yes, sir, Mr. Sabin?

Mr. SABIN. I think Ms. Preston’s points—we share some common

ground there with respect to the desire that sentencing guidelines

provide a foundation by which risk is taken out of the equation for

corporations in terms of their reporting. I think we share common

ground that we want to increase incentives so that corporate individuals, both employees and management, understand the consequences and understand the process. Process is important, as

well as substance. So we get to, as she indicated, the mechanism

by which that can occur so that we can achieve, both in terms of

corporate culture as well as other appropriate goals and objectives,

including law enforcement, that goal.

I think the flaw in her analysis is that the present system is

working in terms of that kind of information flowing either to the

contracting officer or to the Inspectors General, because the indication that was received when we looked at this matter through our

interagency process is that those referrals were not coming, even

though there has been an extraordinary increase in terms of Government spending, and that the idea is that there needs to be

thoughtful prosecutional discretion that it not linger in terms of the

investigation or the prosecution, that we make real-time decisions,

but that the referrals and that information could assist the Government in greater means of addressing a problem we believe exists,

and that we believe that additional enforcement efforts, as appropriate—there may be declinations. There may be matters that are

inappropriate for Federal prosecution.

Again, we are not seeking to go very wide in that. It has to be

fraud in connection with the contract or subcontract. It has to be

material over-billing, not just routine contract administration. So,

our objective is to make sure that those enforcement efforts are

thoughtful and productive so that there is a culture, both in the

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corporate community as well as in their interaction between private and public sector.

Mr. TOWNS. I yield to Congressman Bilbray.

Mr. BILBRAY. Thank you.

As followup on that, doesn’t the DOD contractors have the ability

to go to the Defense Contractor Management Agencies, the Inspector General for the DOD? Now, does the Inspector General report

to these other agencies so that they can be informed that reports

have shown up there?

Mr. SABIN. If I understand the question, there is a referral process from DOD IG to prosecutorial enforcement, as well as an interagency process so that we are vetting so that there isn’t overlap between what DOD is doing and another Inspector General. So there

is, as they say in Washington, deconfliction occurring with respect

to the investigative matter.

Mr. BILBRAY. The fact that DOD has this different system, is it

possible that those reports are going over there and not double

backing, not being reported?

Mr. SABIN. The information that we received in the task force is

that those referrals are not occurring, whether in DOD or elsewhere.

Mr. BILBRAY. OK. Now, you deferred to the FAR. Why do you

defer to the FAR?

Mr. SABIN. On certain matters they certainly have the expertise

and the Justice Department doesn’t profess to be experts in all nuances of Government contracting. All they are primarily is the enforcement. But our task force members, many of whom are steeped

in the specifics, recommended that this was an appropriate vehicle

by which to address a problem that needed addressing.

Mr. BILBRAY. Now, the FAR sort of indicated that this was sort

of a clerical error that had created a loophole here?

Mr. DRABKIN. The exception language was a drafting error, and

we now have a draft proposed rule without that language in it for

the comment process. I didn’t get a chance to explain it fully, but

we can’t add new requirements to a rule after we have gone out

for public comment without going out for public comment again,

and so we have to go back through the proposed process. And actually, we have more in this proposed rule than is in Mr. Welch’s legislation, including some additional recommendations from the Department of Justice, which have been incorporated in the proposed

rule and is currently being cleared within the Government. But, we

have provided copies to members of your staff so you can see what

is in there.

Mr. BILBRAY. So Mr. Welch’s legislation is actually addressing a

concern you have; it is just that you are saying we created the

problem with a clerical error, we are now going through the process, as mandated by Federal law, to not only address this but to

address other related items or more extensive coverage within the

system where the problem originally occurred, rather than doing it

through the legislative process?

Mr. DRABKIN. I want to be clear, because I don’t want there to

be any mistake. We did not knowingly, thinkingly, put in the exception.

Mr. BILBRAY. OK.

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Mr. DRABKIN. We have taken that exception out in the proposed

rule. Even though it was mentioned by the Social Security Administration person at the CAAC meeting, it got no real thought. It

wasn’t examined. It was never raised, and it never went any further.

We understand as a result of the comment process, which Congress told us to use when it set up the procurement rulemaking

process in title 41—we have gone through that process. It has

worked. It has identified this issue and a number of others, which

are really important to making this work and work well.

I think it is fair to say there is not a member of the FAR Council

that is not concerned with procurement fraud, with people stealing

from the Government or the taxpayers, particularly in a time of

war, but generally as a whole—I am probably the only person in

this room who has actually been a fraud counsel and ran a fraud

program as part of the Defense Contract Management Agency—

none of us like fraud. We all want to address it. How we address

it is a process we go through. We are going through that process.

We certainly don’t disagree with Mr. Welch that we should have

a process, but we are going through the process——

Mr. BILBRAY. Title 41, what year did we implement title 41?

Mr. DRABKIN. The rulemaking process in title 41 was part of the

OFPP Act, and I believe it was passed in 1970.

Mr. BILBRAY. OK. Now, your position is that it is not with title

41, it is not with the legislation, the enabling legislation. The problem was basically in the rulemaking itself, and you are going back

and revisiting that within the rulemaking process?

Mr. DRABKIN. Yes, sir, and we have made that clear to the staff.

As I said, we have provided you with copies of——

Mr. BILBRAY. But the intention of the gentleman’s legislation—

this is the vehicle you are using, saying the problem was not in the

original legislation, it was in a process of rulemaking, and so that

is why you feel you should keep it in the rulemaking process to correct it?

Mr. DRABKIN. Yes, sir, and it also gives us greater flexibility. If

we discover we have made a mistake in implementing it, we can

fix it faster than the legislative process normally is able to respond.

That is not a criticism, it is just a reflection of the way Government

works.

Mr. BILBRAY. Thank you very much.

Mr. Chairman, I just think that—remember, we are legislators.

We are taking the vehicles that we have available to us. Obviously,

with the rulemaking the way it is, they are looking at directing the

same issue from their jurisdiction because they say it came out of

their camp.

I yield back, Mr. Chairman.

Mr. TOWNS. Thank you very much.

Mr. WELCH. Thank you very much, Mr. Chairman.

You know, I am hearing two things that are contradictory. We

are hearing that we don’t really need legislation because the rule

is being fixed, but I don’t think it is a coincidence that there was

no action toward fixing the rule until the chairman held a hearing

and we introduced legislation. Also, nobody on the panel is committing to when that final rule is going to be published and impleVerDate 11-MAY-2000 10:46 Jan 09, 2009 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 C:\DOCS\45945.TXT KATIE PsN: KATIE
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mented, so it raises significant questions, certainly on my part, as

to whether, if we drop the pressure, the ball is going to be dropped.

The other issue that is really of concern to me, Mr. Drabkin, you

know, I have absolutely no doubt about the quality and integrity

of the folks that work for our entire Federal Government.

Mr. DRABKIN. Thank you, sir.

Mr. WELCH. They work hard. They don’t get paid. But, what we

have here since 2000 is an explosion in these contracts, including

foreign contracts, including no-bid contracts, and the contracting

procurement process has gone from $200 billion to $400 billion.

And, I bet your department and OMB haven’t received a comparable increase in personnel that they need to review contracts.

Mr. DRABKIN. Sir, the number of contracting specialists in the

Government in 1990 was 33,000 doing $150 billion worth of work.

Today it is 28,000 doing $450 billion worth of work. The problem

is we don’t have enough people.

Mr. WELCH. That is my point. What you have said, with all due

respect, is that the fix wasn’t in. This wasn’t a conspiracy, it was

a mistake.

Mr. DRABKIN. Yes, sir.

Mr. WELCH. Well, that is not reassuring for taxpayers, and we

need a remedy. On the other hand, while your numbers to do your

job have been declining, the membership in the professional contractors or services, Ms. Preston’s group, has been increasing, and

there has been some suggestion here by my friend from Virginia

that it is getting to be a hassle to do work with the Government.

But, there is a lot of contractors that are doing just fine. We had

Blackwater in here who testified they have done $1 billion worth

of contracts and have made at least 10 percent of profit. That is

not a bad take.

Mr. DRABKIN. Sir, our concern isn’t with Blackwater. In terms of

access to the market, it is not with being able to access Blackwater;

it is being able to access the IT companies who don’t do business

with the Government, who have solutions we would like to buy but

who don’t want to sell to us because of our terms and conditions

and the fact that we have turned contracting into a criminal matter, not a contractual business matter. Although that is no excuse

for cheating the Government and no one should ever be allowed to

do it.

Mr. WELCH. It is something that is very simple here where we

protect the taxpayer dollars when they are spent abroad as well as

at home. There has been an acknowledgement on the part of three

of the four panelists that there, at least, has to be a rule, some debate about whether you need legislation. I absolutely want to give

the benefit of the additional protection to the taxpayer, particularly

when the agencies that are reviewing these contracts are getting

squeezed on the personnel required to protect the taxpayers.

I have some confidence that Justice can use appropriate discretion so that it will be used wisely and well on behalf of the goal

of protecting the taxpayers. I reject the position of the contractees,

the ones who have been paid $400 billion and above, that they

don’t want ‘‘the burden’’ of having to accept as part of the benefit

of $400 billion in taxpayer dollars the obligation to share in a timeVerDate 11-MAY-2000 10:46 Jan 09, 2009 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6633 C:\DOCS\45945.TXT KATIE PsN: KATIE
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ly way with the Government their knowledge that taxpayers are

being ripped off.

I yield the balance of my time.

Mr. TOWNS. Thank you very much.

Let me thank all of you for your testimony. Of course, we look

forward to working with you, because I think we agree on one

thing: something needs to be done. It is not perfect. I think we all

agree on that. Of course, I think we can try to move from there.

So thank you so much, all of you, for your testimony.

Yes, Mr. Denett?

Mr. DENETT. Chairman Towns, we will expedite this proposed

rule. I heard Congressman Welch say he’s concerned that we might

drop the ball. We won’t drop the ball. It is a high priority to us.

We will move it. We will get it out soon. I hope you give us the

opportunity to get input from all interested parties. We do not need

this legislation. Give us a turn at bat. You will be pleased with the

outcome.

Mr. TOWNS. Well, we thank you very much for your comment. Of

course, as you know, it takes things a while to move around here,

so we will be watching you as we continue to move, because it

doesn’t happen overnight around here. It really doesn’t. I wish it

did a lot of times.

Thank you so much, Mr. Denett, Mr. Sabin, Mr. Drabkin, and

Ms. Preston. I thank all of you.

I would like to welcome our second panel to H.R. 5787, the

Moore-Duncan Property Bill. I think it will fix the problem that we

should not have. A lot of Federal agencies are sitting on property

that they aren’t using, old buildings, antennas, and plenty of land.

GAO says that agencies have almost $14 billion in land that they

do not need, and there is also about $4 billion in land that no one

in the Government can use. These agencies should dispose of the

property. There are better uses for the money.

The problem is that to get the property ready to be sold there

are a lot of up-front costs. You have to do environmental cleanup,

demolition, historical preservation, things like that. This would cost

the agencies a lot, so they just hold on to the property, especially

since they don’t keep the proceeds from selling it. The money just

goes back into the Treasury.

Representative Moore from Kansas’ bill will allow agencies to

keep all of the proceeds from selling the property and would give

GSA funds to take care of the things that have to be done first. The

agencies would reimburse GSA for those expenses after the property is sold.

I think the bill will go a long way to helping agencies get rid of

this unneeded property.

As with the first panel, it is our committee policy that all witnesses are sworn in.

Before we do that, let me yield for an opening statement by

Ranking Member Bilbray.

Mr. BILBRAY. Thank you, Mr. Chairman.

Mr. Chairman, I think that this is an issue that both sides can

work on. I think that one of the sides that really is not talked

enough about in Washington is the mistakes that have been made

in the past and try to build onto it. There are a few of you that

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might have been around during the so-called savings and loan debacle. I just know for one, as somebody that saw the way the Federal Government handled that issue, that the real crisis in that situation was not that the savings and loans had problems, but that

the Federal Government inherited huge amounts of real estate assets, and then basically sold it for 10 or 20 cents on the dollar.

The taxpayer was literally ripped off, not by somebody violating

the law, but by agencies not having an incentive to get every dollar

of value out of real estate assets. There is where the real loss of

the savings and loan was. And one way to be able to point that out

is you look around through the tax codes of how many people made

a fortune off of buying up the RTC property and then selling it and

managing the property in an appropriate way and how much successes were built on the backbone of us losing huge amount of resources in real estate.

So I am encouraged to go through the hearing, take a look at the

bill as recently introduced, and hopefully we can work on this.

I think that assets unused are assets wasted, and so let’s see

how well we can work this.

The challenge is for any bureaucracy to be responsive and address this issue in a way that will maximize the benefit for the taxpayer.

With that, I appreciate the hearing, Mr. Chairman.

Mr. TOWNS. Thank you very much.

I would like to ask unanimous consent that Congressman Dennis

Moore be allowed to sit in on this hearing. Of course, it is his legislation.

At this time I would like to yield to Congressman Moore.

Mr. MOORE. Mr. Chairman and Mr. Bilbray, thank you very

much for the opportunity to be here to join the subcommittee today

for this hearing to discuss new legislation, H.R. 5787, that I have

introduced with Mr. Duncan of Tennessee that would help address

the disincentives that are currently keeping some Federal agencies

from disposing of assets and property they no longer need.

Last June, the OMB released a report, which found there is currently a backlog of more than 21,000 excess and surplus Federal

properties worth a total of $18 billion. Holding on to these properties has serious implications for the a motion taxpayer, as it costs

Federal agencies billions of dollars each year to maintain secure

properties that are under-utilized or simply not needed.

Investigations by the GAO have also pointed out that the administrative requirements and cost preparing the property for transfer

or sale continue to hamper some agencies’ efforts to address their

backlog of unneeded properties.

Because it can be difficult for agencies to secure the resources

they need to prepare a property for disposal, these costs serve as

a disincentive, because it makes more sense in the short term for

them to simply hold on to a property, particularly if they do not

expect to receive the proceeds of a transfer or sale.

Fortunately, over the past several years the administration and

Federal agencies have made progress toward strategically managing Federal real property by establishing asset management plans,

standardizing data reporting, and adopting performance measures,

but I believe there are common sense steps that we can take now

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to ensure that all Federal agencies have the proper incentives to

dispose of property they no longer need.

H.R. 5787, the Federal Real Property Disposal Enhancement Act,

is designed to do that. First, the legislation would move to help

agencies deal with the administrative requirements and costs of

preparing under-utilized properties for transfer or sale by allowing

the GSA, in cooperation with agencies, to use its resources and expertise to cover these up-front costs and help agencies ensure that

title records, property descriptions, and environmental clearances

are in order. GSA would then be reimbursed for all the costs it incurs from the proceeds that agencies receive from the transfer or

sale of these properties.

The legislation would also provide agencies with another incentive to reduce their inventory of unneeded properties by allowing

them to keep all the proceeds received from the sale of surplus

properties, which they could then use for future disposal and asset

management activities.

Over half of all land-holding agencies, including the three largest

land-holding agencies in our Government—Department of Defense,

GSA, and the Veterans Administration—already have this authority to retain proceeds, and it has been shown to be a tremendous

incentive for some agencies to dispose of property they no longer

need.

As we are all aware, the Federal Government faces huge fiscal

challenges, which is why we must increase our efforts both to manage our existing assets more effectively and to significantly reduce

the inventory of under-utilized Federal properties. We should no

longer waste precious taxpayer funds on maintaining and holding

properties that are not needed by our Government.

Again, Mr. Chairman, thank you for the invitation to join the

subcommittee today. I look forward to hearing from the witnesses.

Thank you, sir.

[The prepared statement of Hon. Dennis Moore follows:]

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Mr. TOWNS. Thank you very much.

It is a longstanding policy that we swear in our witnesses, so

please stand and raise your right hands.

[Witnesses sworn.]

Mr. TOWNS. Let the record reflect that they answered affirmatively.

Danny Werfel is the Acting Comptroller of the Office of Federal

Financial Management at OMB, so we ask that you go first.

STATEMENTS OF DANNY WERFEL, ACTING COMPTROLLER,

FEDERAL FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET; AND STAN KACZMARCZYK, ACTING

DEPUTY ASSOCIATE ADMINISTRATOR, OFFICE OF GOVERNMENT-WIDE POLICY, GENERAL SERVICES ADMINISTRATION

STATEMENT OF DANNY WERFEL

Mr. WERFEL. I would like to begin by thanking Chairman Towns,

Ranking Member Bilbray, Representative Moore, and other members of this subcommittee for having the hearing today and inviting

me to speak.

The Federal Government is achieving measurable results as we

work to meet the President’s goals of right-sizing the Federal real

property inventory. In 2004, before the President launched the real

property initiative, the Federal Government lacked a comprehensive inventory of its real property holdings and could not effectively

identify which assets to target for investment or disposal. Today we

have a comprehensive inventory of more than 1.1 million individual

assets with a replacement value exceeding $1.5 trillion.

Agencies are using performance measures, such as whether the

property is mission critical, the utilization rate of that property, the

cost and condition of that property, to identify assets in need of investment and those unneeded assets suitable for disposal.

Agencies have disposed of more than $7 billion in unneeded Federal real property since 2004, and we are moving toward the President’s goal of disposing $15 billion in unneeded assets by the year

2015.

While we are proud of these accomplishments, there is more

work to be done. Our inventory shows many surplus assets remaining on our books. As long as these assets remain on our books,

agencies are investing resources to maintain them. Of note, our

most recent report to Congress shows over 21,000 surplus and excess assets on the Federal inventory.

Also importantly, our inventory shows that we have mission critical assets with a backlog of repairs and maintenance. These backlogs degrade our facilities over time and cause us to spend more

on maintenance and repairs in the long run. One of the anecdotal

examples we would like to give is that a roof repair may cost

$7,000 today to address, but if we don’t do that and wait, it could

cost us $7 million in the near future to go ahead and replace that

roof.

As reported by GSA in their written testimony for this hearing,

six of our largest property-holding agencies have backlogs that exceed $16 billion.

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Federal agencies need additional tools and resources to address

these ongoing challenges. Agency efforts to manage and dispose of

real property are governed predominately by the Real Property Act

of 1949. Two critical updates to this legislation are needed: first,

allowing agencies to retain a portion of the net proceeds of sale of

unneeded assets and requiring those proceeds be reinvested to help

fund disposal activities and fund our maintenance backlog; and,

second, expediting the disposition process for our targeted assets.

I would like to talk briefly about these two reform proposals.

First of all, retention of proceeds. Many agencies do not have the

authority to retain proceeds, and such proceeds can be converted

into significant savings for taxpayers. Let me explain how: First,

proceeds can be used to cover up-front costs associated with the

disposing of unneeded assets. As these assets are removed from the

inventory, the costs to maintain them are avoided. Second, proceeds can be used to address repair and maintenance backlogs,

avoiding the inevitable higher costs incurred by agencies when

these backlogs are not addressed timely.

On to the issue of expedited disposals. The disposition process

that we operate under today is lengthy and complex. Our goal is

to streamline that process so that parties interested in an asset for

a possible no-cost conveyance have greater visibility and more

timely access to the assets, and properties that are not a good fit

for a no-cost conveyance can be quickly demolished or sold at market so that agencies can more immediately terminate the ongoing

maintenance costs associated with these assets.

Both of these reforms were proposed as part of a pilot program

in the 2009 President’s budget. We believe that enactment of this

pilot would both facilitate the disposal of surplus property in the

short term and help inform Congress and the executive branch on

our longer-term, permanent reform approaches.

While the administration prefers to enact these two reforms, retention of proceeds and expedited disposals, together, we are open

to working with Congress to consider alternative paths. Ultimately,

we believe that reform in both of these areas is essential and necessary for agencies to improve the management of their real property portfolio.

After my written testimony for this hearing was submitted, OMB

completed its review of the draft property bill provided to us by

staff from this committee. I understand that bill has now been introduced yesterday and is H.R. 5787. We appreciate you and your

staff’s willingness to consult with us on the draft bill, and we respectfully offer the following observations for your consideration.

The draft bill would allow agencies to retain 100 percent of the

sale’s proceeds, a very positive step that we applaud; however, the

draft bill contains additional language that such proceeds ‘‘shall

only be expended as authorized in annual appropriations acts.’’

If we understand the impact of this particular language correctly,

proceeds will only be expended for agency real property needs if

congressional appropriators prioritize such funding within their existing spending caps, which are sometimes referred to as 302-B allocations. In this regard, Federal agencies will face the same challenges they face today; that is, dollars needed for real property will

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be directly competing with dollars needed for other discretionary

priorities.

The intent of the administration’s real property proposal was not

only to allow agencies to retain proceeds from property disposal,

but to also provide agencies with the incentive for increased flexibility to reinvest those proceeds in the properties that have the

highest priorities.

I thank you again for the opportunity to testify today, and I look

forward to answering your questions.

[The prepared statement of Mr. Werfel follows:]

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Mr. TOWNS. Thank you very much, Mr. Werfel.

Mr. Kaczmarczyk.

STATEMENT OF STAN KACZMARCZYK

Mr. KACZMARCZYK. Chairman Towns, Ranking Member Bilbray,

and members of the subcommittee. I am Stan Kaczmarczyk, Principal Deputy Associate Administrator for the General Services Administration’s Office of Government-wide Policy. I am pleased to

appear before you today to discuss GSA’s policy support for and

operational success in real property asset management.

President Bush signed Executive Order 1327, Federal Real Property Asset Management, on February 4, 2004. From the outset,

GSA has fully supported and participated in the implementation of

the Executive order. GSA has taken a prominent role on the Federal Real Property Council established by the Executive order. As

one of the Federal Government’s many land-holding agencies, GSA

was proud to be recognized by the administration for achieving and

maintaining green status on the PMS scorecard, the first agency to

attain that status.

In support of the Council, the Office of Government-wide Policy

developed and maintains the Federal Real Property Profile, a centralized real property data base that compiles data on more than

1.1 million real property assets with a total replacement value of

more than $1.5 trillion. The FRPP collects 24 major data elements,

including 4 key performance measures.

Since 2004, using existing authorities, Federal agencies have reported through the FRPP, as Danny mentioned, the disposal of

more than $7 billion of surplus real property.

One of the significant asset management challenges confronting

the Federal Government is the lack of incentives to dispose of

unneeded real property. For example, some agencies are unable to

retain and reinvest the proceeds from the sale of surplus assets.

With a limited amount of financial resources, too often the real

property inventory becomes a secondary priority. This creates a

backlog of repair needs and deferred maintenance. As Danny mentioned, in 2007 the Government Accountability Office found that

six land-holding agencies reported a backlog for repair and maintenance that totaled over $16 billion. If agencies could retain and reinvest the proceeds from the sale of surplus real property assets,

the funds could be used to help addresses this significant backlog.

In 2005 GSA received the authority to retain all proceeds from

sales of its surplus properties. Since enactment of this authority,

GSA has disposed of 42 surplus real property assets, with the total

sales amount of $155 million. We believe that providing all Federal

land-holding agencies with the authority to retain net proceeds of

sale will provide an incentive for sound asset management decisionmaking.

The administration’s fiscal year 2009 budget includes proposed

legislation that would allow agencies, those not previously authorized to retain proceeds, the ability to retain 20 percent of proceeds

from the sale of unneeded assets.

Another disincentive to sound real property asset management is

that some agencies retain unneeded real properties because they

cannot afford the up-front costs of disposal. A general provision in

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the administration’s fiscal year 2009 budget recommends authorizing GSA to pay for and provide up-front redeployment services to

other agencies to help them decide whether to retain and reuse the

property or to place the asset in the disposal process.

Federal agencies, under the leadership of the Federal Real Property Council, have taken the initial steps to promote the efficient

and economical use of Federal real property resources and to increase agency accountability, but without funds necessary to reinvest in or dispose of these assets, they will continue to deteriorate

as part of the Federal inventory.

We ask that you consider our legislative proposals to improve the

real property asset management.

Mr. Chairman, this concludes my statement. I will be pleased to

respond to any questions.

[The prepared statement of Mr. Kaczmarczyk follows:]

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Mr. TOWNS. Thank you very much. I want to thank you Mr.

Werfel and Mr. Kaczmarczyk for your testimony.

At this time I would like to yield to the ranking member, Mr.

Bilbray.

Mr. BILBRAY. Thank you, Mr. Chairman.

Just quickly, the fact is we also don’t talk about the fact that if

we put this back into the private sector, the local government benefits from the tax base—not that the Speaker would have appreciated us taking the Presidio in San Francisco and putting it back

on the market, which you can imagine the resources we could have

gotten for that.

You made a recommendation, though, and I would ask the author of the bill to consider the fact that allowing the assets to go

back into either the support for maintenance or the purchase of

new—and keep it within that maintenance and that property management side, and I think that the authors should keep a real open

mind to keep that from getting lost. I don’t think the intention was

for this to get buried. That was the whole reason to try to make

the maximum on this.

That is one recommendation we could make up there, and I think

that we can followup on that working with the author and trying

to focus the staff. It may not be 100 percent, it may be 85, like we

do with drug asset seizures for the local government, but at least

focus the resources over on to that maintenance aspect of where we

are getting this.

I think there is a way to work this out. I think the bill being

drafted yesterday just gives us a foundation to work with, and I appreciate the positive recommendations from both of you.

Mr. TOWNS. I would like to yield to the authors of the legislation,

Mr. Duncan and Mr. Moore.

Mr. MOORE. Thank you, Mr. Chairman. As I mentioned before in

my statement, in June 2007 OMB reported there is currently a

backlog of more than 21,000 Federal assets and properties worth

$18 billion. Does OMB have an estimate of how much Federal

agencies are spending each year to hold and maintain excess and

surplus properties they no longer need?

Mr. WERFEL. We do. It is $130 million per year.

Mr. MOORE. That is $130 million?

Mr. WERFEL. Yes, sir.

Mr. MOORE. All right. You also have an estimate for how many

more Federal properties are unneeded or under-utilized but are not

yet characterized as excess?

Mr. WERFEL. That we don’t have. I think what you are talking

about, Mr. Kaczmarczyk has it.

Mr. MOORE. As you mention in your testimony, OMB has been

supportive of proposals to create a pilot program that would allow

agencies to take excess properties directly to sale, essentially allowing them to avoid the required screenings for transfer to another

Federal agency, homeless use, and public benefit conveyance. It

seems this proposal is based on the premise that the screening requirements are the primary factor keeping agencies from disposing

of property they no longer need. Does OMB have any evidence that

this is, indeed, the case?

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Mr. WERFEL. What we have discussed in the Federal community

through the Federal Real Property Council are the major obstacles

that we confront in disposing real property, and two themes

emerged. One is the agencies look at the process, which takes

about 240 days to go through, to go through all the various public

benefit conveyance steps that are necessary, and that is, in many

cases, a deterrent to having the agencies push their properties

through for sale.

In addition, as has been mentioned several times, there are upfront costs associated with getting a property ready for sale. It can

be as simple as moving a large dirt pile from the property before

they get it ready for sale, but removing that dirt pile could cost a

couple of thousand dollars that the agency doesn’t have.

So really seeing both these obstacles, the length of time, the 240

days for public benefit conveyances on average, and the proceed

issue both present obstacles for agencies.

Mr. MOORE. Thank you.

Are you aware of the legislation by Senators Carper and Coburn

that would create a pilot program that would allow agencies that

disposed of properties through the pilot to keep only 20 percent of

the proceeds of their sales? Are you aware of that?

Mr. WERFEL. We are aware of it. It is very similar to a pilot proposal that has been in the President’s budget for the last few years.

Mr. MOORE. My question then is if most agencies can already

keep 100 percent of the proceeds, what incentive would they have

to take part in the pilot program?

Mr. WERFEL. Representative Moore, one clarification about your

question. First, it is my understanding that a minority of our agencies currently have the authority to retain proceeds. For example,

Veterans Affairs and the State Department have such authorities,

but many of our agencies, such as Transportation, Department of

Homeland Security, and many other agencies, including the Defense Department for their non-BRAC properties, do not have such

authority.

So the 20 percent retention would be a much better improvement

than what they face today, and that 20 percent proceeds could

help. I used the dirt pile example—help the agencies remove that

just for the environment work that is necessary. We believe that

20 percent would have a big impact.

Clearly, 100 percent would go a much further way. It would not

only allow you to do the up-front cost to get the property ready for

disposal, which, relatively speaking, would be smaller in amount

than addressing our real property maintenance backlog. So, when

you start getting up into the 100 percent range, now you are talking about the opportunity to really make investments into our infrastructure that not only will improve the condition of our facilities, but, as I mentioned, will be a positive return on investigation

for taxpayers because the sooner you repair those facilities the less

expensive the life cycle cost of those facilities are.

Mr. MOORE. May I ask some very brief questions of the gentleman from GSA, Mr. Chairman?

Mr. TOWNS. Sure.

Mr. MOORE. Could you describe the trend in the disposal of GSA

properties that we have seen since the agency was given the auVerDate 11-MAY-2000 10:46 Jan 09, 2009 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 C:\DOCS\45945.TXT KATIE PsN: KATIE
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thorization to retain the proceeds of its sales in 2004? Has the

agency seen a significant increase in the number of properties disposed of since this authorization was given?

Mr. KACZMARCZYK. The authorization applies to GSA properties.

Mr. MOORE. Right.

Mr. KACZMARCZYK. I don’t know if I would say there has been a

significant increase, but it has certainly been a boon to us in being

able to retain the proceeds and to reinvest them.

There has been an increase in recent years, but it has basically

been as a result of a tiering process that was put in by GSA, but

we restructured our portfolio to three tiers. The ones that we really

have a continuing need for that are our top priority investments,

ones that could reach that category with some additional investment, and then a third tier that we really should get rid of, we

have no use for. That has been the real driver for the increase in

disposals.

Mr. MOORE. Does GSA have any evidence that the screening requirements for homeless use and public benefit conveyance are

keeping agencies from disposing a property they no longer need?

Mr. KACZMARCZYK. I wouldn’t say evidence. I agree with Danny

that it is a real concern that comes up in the Federal Real Property

Council, which is all the Federal land-holding agencies getting together to try to increase or improve asset management. I am of the

mind that if you should get rid of it, you should get rid of it, especially if it is costing you money to maintain it, even if it takes time

to go through the proper channels.

Mr. MOORE. Last question, Mr. Chairman.

Do you feel that another important factor is that it is often difficult for agencies to secure the resources they need to fund disposal efforts, and that not all agencies are allowed to keep the proceeds from sales they do complete? Is that a concern?

Mr. KACZMARCZYK. Yes, that is definitely a concern, and the legislation would be a big help in that area.

Mr. MOORE. Thank you, witnesses. Thank you, Mr. Chairman.

Mr. TOWNS. Let me thank you for sponsoring the legislation, and,

of course, let me thank both of you for your testimony. Thank you

very much.

On that note, the committee is adjourned.

[Whereupon, at 4 p.m., the subcommittee was adjourned.]

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