Judgment Fund: Treasury's Estimates of Claim Payment Processing Costs under the No FEAR Act and Contract Disputes Act
Published: 2004-04-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Notification and Federal Employee Antidiscrimination and Retaliation (No FEAR) Act, which took effect October 1, 2003, requires agencies to repay discrimination settlements and judgments paid on their behalf. The No FEAR Act is similar to the Contract Disputes Act (CDA) of 1978, which holds agencies accountable for payment in contract disputes. Under both laws, federal agencies must reimburse the Judgment Fund, which is administered by the Treasury Department. Before the No FEAR Act, agencies did not have to repay the fund. The No FEAR Act requires GAO to review the financial impact on Treasury of administering that law and CDA. Based on this requirement, this report provides information on (1) Treasury's estimates of its costs to process discrimination claim payments and CDA payments in fiscal year 2003 and its costs to process and seek reimbursement for claim payments under lawsuits covered by the No FEAR Act beginning in fiscal year 2004, (2) differences in claims processing and reimbursement efforts under CDA and the No FEAR Act, and (3) the extent of federal agency compliance with CDA's reimbursement requirements and Treasury's view of how effective its No FEAR Act collection efforts may be. We make no recommendations in this report. Treasury officials had no official comment on the report.
section_title: What GAO Found
paragraphs: Treasury estimates that it cost about $334,000 to certify, pay, and seek reimbursement for CDA claim payments in fiscal year 2003, and about $240,000 to certify and pay discrimination claims that year. For fiscal year 2004, assuming relatively constant case and processing cost levels, and agency compliance with reimbursement requirements similar to that experienced under CDA, Treasury estimates that it will incur about $171,500 in personnel costs in order to seek reimbursements for No FEAR claim payments. These include recurring costs to set up and administer accounts receivable and seek reimbursement from agencies for claims paid out of the Judgment Fund and a one-time cost for in-house personnel to upgrade computer systems. Although the certification, payment, and accounting processes that Treasury uses for the No FEAR Act are virtually the same as those used for CDA, the procedures Treasury is required to use to seek reimbursement for claims paid under the No FEAR Act will differ. For example, as part of Treasury's effort to seek reimbursement for No FEAR Act claims paid, No FEAR Act regulations require Treasury to record on its public Web site the failure of agencies to make reimbursement or arrange to make reimbursement within a specified time limit. There is no similar requirement under CDA claims. During fiscal years 2001, 2002, and 2003, federal agencies reimbursed Treasury for fewer than one of every five dollars owed under CDA, with at least 18 agencies having unpaid amounts at the end of each fiscal year. According to Treasury, while its No FEAR Act collection efforts are just beginning, reimbursement rates under the act may be as low as under CDA because the No FEAR Act, like CDA, does not impose reimbursement deadlines on agencies, and Treasury has very little authority to enforce reimbursement.

section_title: Letter
paragraphs: Before the Notification and Federal Employee Antidiscrimination and  Retaliation (No FEAR) Act of 2002 was enacted on May 15, 2002, we and  others expressed concern that federal agencies had an incentive to avoid  settling discrimination and whistleblower protection complaints in order to  have any final judgment against the agency rendered by a court. This  incentive arose from the fact that agencies paid costs from their  appropriations when such complaints were settled without a lawsuit being  filed, but that any money awarded after a suit was filed (whether by  settlement or court judgment) was generally paid from the Judgment Fund,  a permanent, indefinite appropriation administered by the Department of  the Treasury. We estimated that the Judgment Fund paid almost  $43 million for discrimination claims in fiscal year 2000 on behalf of  agencies.
The Judgment Fund continues to pay money awarded for settlements and  judgments under lawsuits covered by the No FEAR Act. But beginning on  October 1, 2003, the effective date of the act, each federal agency must  reimburse the Treasury for the amounts paid from the fund. As we noted in  testimony describing how the No FEAR Act addresses the need for federal  agency accountability with respect to discrimination and whistleblower  protection cases, Congress faced a similar situation when lawmakers  passed the Contract Disputes Act (CDA) of 1978. Before CDA was enacted,  agencies had an incentive to avoid settling contract disputes so that any  final judgments against an agency occurred in court because the Judgment  Fund paid such court judgments. Under CDA, however, agencies must  reimburse the fund from available appropriations or, if they are not  adequate, seek additional appropriations for this purpose.
From fiscal year 2001 through 2003 under the Judgment Fund, 1,140  discrimination claim payments were processed and about $656 million was  paid. All of these claims were for court judgments and settlements. During  this period, the fund also processed 304 CDA claim payments and paid  about $713 million. This included payments for court judgments and  settlements and board of contract appeals awards. The fund did not make  any payments for whistleblower protection claims as these payments were  typically made by agencies.
The No FEAR Act requires that we review the financial impact on the  Treasury of administering both the No FEAR Act and CDA. Based on this  requirement and discussions with committee staff, this report provides  information on (1) Treasury’s estimates of costs to process CDA and  discrimination payments for fiscal year 2003 and its estimates to process  and seek reimbursement for No FEAR Act claim payments in fiscal year  2004, (2) differences in payment processing under CDA and the No FEAR  Act, and (3) the extent of federal agencies’ compliance with CDA’s  reimbursement requirement and Treasury officials’ view of how effective  the reimbursement collection efforts under the No FEAR Act may be.
We obtained information from Treasury’s Financial Management Service  (FMS), which administers the Judgment Fund, on the costs of processing  Judgment Fund reimbursement payments in fiscal year 2003 and estimated  costs in fiscal year 2004. Since FMS does not track the cost of processing  Judgment Fund claim payments, agency officials could only provide us  with estimates of the costs, based primarily on staff time spent processing  these claims. We reviewed supporting documentation, interviewed  Judgment Fund officials, and compared the estimated personnel costs to  the percentage of claims paid to determine the reasonableness of the cost  estimate (that is, if the estimated costs were disproportionately large when  compared to the number of claims processed). On the basis of our  assessment, we determined that the data provided by Treasury in its  estimates were sufficiently reliable for the purposes of our report. We  interviewed FMS officials to determine the differences between the No  FEAR Act’s and CDA’s payment processing and to obtain the officials’ views  of how effective the reimbursement collection efforts allowed under the No  FEAR Act may be. To determine the extent of federal agency compliance  with CDA’s reimbursement requirement, we obtained from FMS  information on the amount of money sought and received from agencies in  fiscal years 2001, 2002, and 2003. (See app. I for more detailed information  on our scope and methodology.) We conducted our work from November  2002 to February 2004 in accordance with generally accepted government  accounting standards.
subsections: section_title: Background
paragraphs: In 1956, Congress established the Judgment Fund—a permanent, indefinite  appropriation—to pay judgments against federal agencies that are not  otherwise provided for in agency appropriations. Among other things, the  fund is intended to allow for more prompt payments to claimants, thereby  reducing the assessment of interest against federal agencies (where  allowed by law) during the period between the rendering and payment of  an award. In 1961, legislation was enacted allowing the fund to pay Department of Justice settlements of ongoing or imminent lawsuits against  federal agencies.
The No FEAR Act requires federal agencies to reimburse the Judgment  Fund for payments of judgments, awards, or settlements that the fund  makes to employees, former employees, or job applicants in connection  with litigation alleging violation of certain federal laws. The Senate  committee report accompanying the No FEAR Act explains that the act is  intended to prompt federal agencies to pay more attention to their equal  employment opportunity and whistleblower complaint activities and act  more expeditiously to resolve complaints before they get to court.  Accordingly, No FEAR Act cases include those brought before federal  courts under discrimination statutes and certain cases brought before the  Merit Systems Protection Board (MSPB), including discrimination and  whistleblower protection claims. These latter cases, however, typically  result in either a settlement while the case is pending at MSPB or an award  issued by MSPB, both of which are paid out of agency funds, not the  Judgment Fund.
As provided for under the No FEAR Act, the President designated OPM to  issue regulations to carry out the agency reimbursement provisions of the  law. OPM’s interim final regulations issued earlier this year state that the  procedures that agencies must use to reimburse the Judgment Fund are  those prescribed by FMS.
Under procedures prescribed by Treasury, FMS Judgment Fund branch  analysts, in consultation with FMS’s Office of the Chief Counsel, certify  whether a judgment, award, or settlement is appropriate for payment and  whether the agency on whose behalf payment was made must reimburse  the fund. FMS does not review the merits underlying the claim nor certify  the merits of the judgment or award.
section_title: Treasury Expects to Incur Additional Costs under the No FEAR Act to Seek Reimbursement for Discrimination Claims
paragraphs: FMS estimates that in fiscal year 2003 it spent about $334,000 to certify, pay,  and seek reimbursement for CDA claim payments and about $240,000 to  certify and pay discrimination claims (see tables 1 and 2).
FMS estimates that it will have to allocate approximately $171,500 for  personnel costs to seek reimbursement for discrimination claims under the  No FEAR Act in fiscal year 2004 (see table 3). This estimate includes about  $119,500 in costs to set up and administer accounts receivable and seek  reimbursement for No FEAR Act payments. FMS estimates that it will also  incur a one-time start-up cost of about $52,000 for its information  technicians to upgrade computer systems to create and track No FEAR Act  accounts receivable. FMS expects no increase in either the number of  personnel or budgeted funds to handle No FEAR Act reimbursements.
FMS’s estimates assume that it will pay the same number of discrimination  claim payments under the No FEAR Act in fiscal year 2004 as it paid the  previous year. FMS estimates also assume there will be no increase in the  cost for processing discrimination claim payments in fiscal year 2004.  Treasury’s estimate of fiscal year 2004 costs for No FEAR Act claim  payments also assumed that agency compliance with the No FEAR Act  would be similar to that under CDA. According to the Judgment Fund  branch, actual costs to Treasury may vary from the estimate because of  differences in the nature of the claims under the two laws.
section_title: Processes for Certifying and Paying CDA and No FEAR Act Claim Payments Are the Same, but Collection Efforts Will Differ
paragraphs: Although the certification, payment, and accounting mechanisms that FMS  uses for No FEAR Act and CDA payments are virtually the same, some of  Treasury’s current and anticipated procedures to seek reimbursement from  federal agencies for claims paid under the two laws differ.
subsections: section_title: Accounting for Payments Is the Same under the Two Laws
paragraphs: For both No FEAR Act and CDA payments, the Judgment Fund branch  analysts ensure that all documents submitted by the agency and other  parties have (1) the proper signatures and court seals, (2) contact name  and telephone number, and (3) an appropriate address. Payment from the  Judgment Fund is then certified by FMS and made through Treasury’s  Philadelphia Financial Center by check or electronic funds transfer. Once  payment is made, FMS reduces the fund’s balance, records an expense by  the fund, and records an account receivable in its recoveries account for  the federal agency on whose behalf the payment was made. The debtor  federal agency is required to record an account payable to the Judgment  Fund. Those amounts remain a receivable on FMS’s books and a payable on  the agency’s books until it reimburses the fund. FMS sends letters to  agencies to verify account balances quarterly. The agencies must also  review their balances and confirm them to FMS.
According to FMS, on the basis of the cash receipts history for federal  agencies and the age of some of the Judgment Fund’s accounts receivable,  it expects that a percentage of the money owed by federal agencies will  probably not be paid back. To allow for this, FMS calculates a percentage,  which it calls an allowance factor, based on the age of the receivable and  the agency’s payment history. According to FMS, it applies the allowance  factor to an agency’s outstanding accounts receivable to arrive at a dollar  amount that FMS puts into an allowance account, which is used by FMS to  report on the status of the Judgment Fund in its financial statement.  According to FMS, although it records the debt in the allowance account as  an uncollectible loss, the debt is not written off. FMS expects each agency  to record the amount of unreimbursed debt as a liability, which will remain  until the agency repays Treasury or Congress provides write-off authority.
section_title: Reimbursement Efforts for CDA and the No FEAR Act Differ
paragraphs: For CDA reimbursements, FMS sends a letter to the head of the agency  contracting unit or budget officer seeking reimbursement for payments  made either the same day or the day after payment is made from the fund.  If the agency fails to contact FMS within 30 business days of this letter, a  follow-up letter is sent to the agency. If the agency fails to respond within  60 business days of the initial contact letter, FMS sends a letter to the  agency’s Chief Financial Officer (CFO). The agency CFO has 30 business  days to contact FMS.
For No FEAR Act reimbursements, as provided under the OPM regulations,  FMS provides notice to the agency’s CFO within 15 business days after  payment for the No FEAR Act claim from the Judgment Fund. It further  requires an agency to either reimburse the Judgment Fund or work out a  payment arrangement with FMS within 45 business days of being notified  by FMS.
Under OPM’s No FEAR Act regulations, FMS is required to annually post on  Treasury’s public Web site those agencies that either fail to make  reimbursements or fail to contact FMS within 45 business days of notice to  make arrangements in writing for reimbursement. There is no similar  posting requirement for CDA reimbursements, and FMS said it has no plans  to post CDA reimbursement information on Treasury’s public Web site.
section_title: Reimbursement Rates for Contract Dispute Payments Have Been Low, Similar Rates Expected under the No FEAR Act
paragraphs: Reimbursement rates for CDA payments were low for the 3 years we  examined and, despite promises of repayment, at least 18 agencies had not  repaid amounts owed to the fund by the end of each of these years.  According to Treasury, while its No FEAR Act collection efforts are just  beginning, reimbursement rates under the act may be as low as under CDA  because the No FEAR Act, like CDA, does not impose reimbursement  deadlines on agencies, and Treasury has very little authority to enforce  reimbursement.
subsections: section_title: Amounts Owed to the Judgment Fund Have Increased in the Last 3 Fiscal Years
paragraphs: The Judgment Fund was reimbursed for fewer than one of every five  dollars agencies owed for each of the 3 fiscal years (see table 4). Further,  the total unpaid amounts to the Judgment Fund increased as of each fiscal  year end. The total amount and percentage collected was at its highest in  fiscal year 2001 and was lowest in fiscal year 2002. While the total amount  and percentage collected increased in fiscal year 2003, they remained less  than in fiscal year 2001.
Our review of a sample of agencies’ correspondence in response to the  Judgment Fund branch’s requests for CDA reimbursement showed that  agencies most often deferred payment because of the adverse effect they  said it would have on their programs and mission-critical activities. The  agencies promised to continue to seek opportunities to provide repayment  through the budget and appropriation process.
section_title: Because Enforcement Authority Is Limited under Both Laws, Reimbursement Rates Are Expected to Be Similarly Low
paragraphs: Neither CDA nor the No FEAR Act set deadlines for reimbursement. We  have acknowledged that agencies are allowed to exercise reasonable  discretion in determining the timing of CDA reimbursements so as not to  cause the disruption of ongoing programs or activities. Similar flexibility  exists under the No FEAR Act. While the No FEAR Act states that  “agencies are expected to reimburse the  within a reasonable time,”  the statute also states that an agency may need to extend reimbursement  over several years to avoid reductions in force, furloughs, other reductions  in compensation or benefits for the agency workforce, or an adverse effect  on the mission of the agency. Recognizing that agencies are often  confronted with practicalities of this sort, we have suggested that while an  agency may not be in a position to make CDA reimbursements during the  year in which the fund made payment, we would expect the agency to  manage its budgetary resources to accommodate reimbursement of the  fund before the beginning of the second fiscal year following the fiscal year  in which the award is paid.
According to FMS, the lack of a reimbursement deadline under CDA and  the No FEAR Act may be one reason that reimbursement rates under the  No FEAR Act may be as low as they have been under CDA. Another key  reason that FMS officials cite for this possibility is that Treasury has very  little authority to enforce reimbursement. Like CDA, the No FEAR Act  provides no sanctions that would compel agencies to reimburse the  Treasury, and no Treasury authority to take money owed directly from the  agency. FMS officials recognize that the requirement for FMS to annually  post the names of agencies that fail to make No FEAR Act reimbursements  or make arrangements for reimbursement may provide an incentive for  agencies to comply with the regulations. Because posting has yet to begin,  it remains to be seen what impact this requirement will have.
section_title: Agency Comments
paragraphs: On March 18, 2004, we provided a draft of this report to Treasury for review  and comment. Treasury officials had no official comment on this report,  but provided technical and clarifying comments, which we have  incorporated as appropriate.
We will send copies to Representative James F. Sensenbrenner,  Representative John Conyers, other interested congressional committees,  the Secretary of the Treasury, and the Commissioner, Financial  Management Service. We will also make copies available to others upon  request. In addition, the report will be available at no charge on GAO’s Web  site at http://www.gao.gov. If you or your staff have questions about this  report, please call me at (202) 512-6806 or Belva Martin, Assistant Director,  on (202) 512-4285. Key contributors to this report are listed in appendix II.
section_title: Scope and Methodology
paragraphs: To address our objectives, we reviewed relevant laws, procedures, and  guidelines, and interviewed officials in FMS, its Judgment Fund branch,  and FMS’s Office of the Chief Counsel. Judgment Fund officials provided us  with the number and amount of CDA and discrimination claims paid from  the Judgment Fund from fiscal year 2001 through 2003. Since FMS does not  track the cost of processing Judgment Fund claim payments, agency  officials could only provide us with estimates of the costs for processing  payments and reimbursements for CDA and discrimination payments and  the estimated increase in costs for fiscal year 2004 for processing  discrimination and any other No FEAR Act claim payments. The Judgment  Fund's cost estimates do not include costs for processing payments of  whistleblower protection claims because the fund generally does not pay  these claims. To arrive at their estimate of the personnel costs involved,  Judgment Fund officials used the percentage of staff time spent processing  CDA and discrimination payments. To determine the extent of federal  agencies’ compliance with CDA’s reimbursement requirement, we obtained  data through FMS from Treasury’s central accounting system on the  amount of money sought and received from agencies in fiscal years 2001,  2002, and 2003. We interviewed Judgment Fund and FMS officials to obtain  their views of how effective the reimbursement collection efforts allowed  under the No FEAR Act may be.
To assess the reliability of the data from Treasury’s financial system, we  reviewed available supporting documentation and interviewed Judgment  Fund officials and the FMS accountant. In addition, we tested the  reasonableness of the fiscal year 2003 estimated personnel costs of  processing CDA and discrimination claims by calculating the percentage of  personnel costs in the fund’s total fiscal year 2003 estimate and comparing  this to the percentage of CDA and discrimination claims in fiscal year 2003  to determine if they were disproportionately large when compared to the  total number of claims processed. On the basis of our test of the  reasonableness of the personnel cost estimates provided by FMS and our  assessment of the reliability of the data generated by the accounting system  used by FMS and the Judgment Fund branch database, we determined that  the data for fiscal years 2001 through 2003 were sufficiently reliable for the  purposes of our report.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the person named above, Karin Fangman, Amy Friedlander,  Domingo Nieves, and Michael Rose made key contributions to this report.
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