The limits of procurement law - agency authoriity

This GAO decision is a short example of the limits of procurement law, or government contracting as the feds say. Procurement law is not part of the common law, it is statutorily imposed by the legislature, with regulations made by the executive branch, to allow the executive branch to acquire stuff to meet its operational and other legislatively allowed needs.

NB: I take liberties when presenting material in this blawg. You must read the source material at the link and not rely on this, or other, post(s) for information that comes from the horse's mouth. Some have characterized this matter as coming from the other end.

Matter of: A-Z Cleaning Solutions

DIGEST: The United States Mint, a federal agency within the Department of the Treasury, is not subject to the Government Accountability Office’s bid protest jurisdiction under the Competition in Contracting Act of 1984, because the Mint is statutorily exempt from all federal procurement laws and regulations.

A-Z Cleaning Solutions, of Pittsburg, California, protests the award of a contract to Clean Solutions Services, Inc., of San Francisco, California, under a solicitation issued by the Department of the Treasury, United States Mint for janitorial and laundry services in San Francisco. The protester contends that the agency erred in its evaluation of proposals and in its best-value tradeoff decision.

The United States Mint, an agency within the United States Department of the Treasury, asserts that it is statutorily exempt from our bid protest jurisdiction, and therefore this protest should be dismissed. We agree. We dismiss the protest for lack of jurisdiction.

Under the Competition in Contracting Act of 1984 (CICA), our Office has jurisdiction to resolve bid protests concerning solicitations and contract awards that are issued “by a Federal agency.” CICA provides that the term “Federal agency” has the meaning given in statute that defines the term “Federal agency” as including any “executive agency,” which is defined as any executive department or independent establishment in the executive branch of the government.” The Mint, as part of the Department of the Treasury, is an executive agency that otherwise would be subject to our bid protest jurisdiction under CICA.

In 1996, however, Congress established the United States Mint Public Enterprise Fund (USMPEF) to finance the programs and operations of the Mint. Of note, the establishing legislation for the USMPEF included the following proviso: “Provided further, That provisions of law governing procurement or public contracts shall not be applicable to the procurement of goods or services necessary for carrying out Mint programs and operations.” The same provision defines Mint programs and operations as follows:

(1) the activities concerning, and assets utilized in, the production, administration, distribution, marketing, purchase, sale, and management of coinage, numismatic items, the protection and safeguarding of Mint assets and those non-Mint assets in the custody of the Mint, and the Fund; and (2) includes capital, personnel salaries and compensation, functions relating to operations, marketing, distribution, promotion, advertising, official reception and representation, the acquisition or replacement of equipment, the renovation or modernization of facilities, and the construction or acquisition of new buildings.

The provision further contemplates that all receipts from Mint operations and programs be deposited in the USMPEF, and that all expenses incurred for operations and programs of the Mint that the Secretary of the Treasury determines to be ordinary and reasonable incidents of Mint operations and programs be paid out of the USMPEF. As a result of these provisions, the agency represents that the Mint is entirely funded by and operates within the USMPEF.

Because the establishing legislation provides that federal procurement laws and regulations do not apply to the procurement of goods or services necessary for carrying out the Mint’s operations and programs, and those operations and programs are defined broadly enough to encompass substantially all of the Mint’s activities, we conclude that the Mint is not subject to the terms of CICA. Furthermore, because the bid protest jurisdiction of our Office derives from CICA, we must conclude that the Mint is not subject to that jurisdiction.

Our Office reached a similar conclusion when considering whether our bid protest jurisdiction extended to the United States Postal Service (USPS). The USPS is an independent establishment of the executive branch, and thus it is a federal agency, like the Mint, that would otherwise be subject to our bid protest jurisdiction. However, by law, the USPS is expressly exempted from any “Federal law dealing with public or Federal contracts.”

Similarly, the Presidio Trust, a wholly-owned government corporation, would otherwise be subject to our jurisdiction, but is statutorily exempt from all federal procurement laws and regulations but for certain enumerated exceptions, which do not include CICA.

Thus, for an instrumentality of the executive branch to be free from the procurement requirements imposed on the executive branch by the legislature, the instrumentality must be given express leave by the legislature. 

We have seen on Guam, for instance, the Mayor's Council of Guam create a non-profit organization to take responsibility for operating the annual Liberation Day Carnival and festivities for the sole purpose of doing so without restrictions imposed by the procurement law. This case illustrates the wishful thinking of such action.

Exceptionalism

The procurement manifestation of NIMBY-ism is exceptionalism: I'm a unique critter and too precious to be subjected to the procurement rules.

I have previously posts concerning the expression of exceptionalism in the esteemed halls of academia, e.g., here.

This article is about the precious IT industry. Read the article at the link for fullness and accuracy and to avoid my editing for my own purposes. (FITARA is the acronym for the Federal Information Technology Acquisition Reform Act.)

National labs' FITARA exemption nixed in Senate funding bill

The Energy Department's national laboratories will likely lose their exemption to procurement rules in the Federal IT Acquisition Reform Act after just one year.

Under FITARA's enhanced CIO authorities, Cabinet-level IT chiefs typically have budget authority and some influence over hiring when it comes to the activities of their bureaus and agencies. The Senate's fiscal 2017 energy and water development appropriations bill would not renew a provision from last year's funding bill that allowed the national labs to conduct IT procurement without the involvement of DOE's CIO.

The labs and its contractors had sought the exemption because they believed their supercomputing programs should not be treated like garden-variety IT. They had a well-placed advocate on the Senate Appropriations Committee.

"Our national laboratories are building the fastest research supercomputers in the world and developing next-generation exascale machines," Sen. Lamar Alexander (R-Tenn.), chairman of the Appropriations Committee's Energy and Water Development Subcommittee, told FCW in June 2015. "One-size-fits-all models don't work well, and I am concerned that this well-intentioned law could make it more difficult to develop the technology we need to support the Department of Energy's research and national security missions."

In its budget request for fiscal 2017, the Obama administration advocated a rescission of the language that authorized the exemption.

In a June 2, 2015, letter to Senate Appropriations Committee Chairman Thad Cochran (R-Miss.), Director of the Office of Management and Budget Shaun Donovan called the exemption "highly problematic." He wrote that, if passed, the provision would "eliminate the administration's ability to ensure information technology resources effectively support the department's mission by reducing duplicative IT systems, implementing a comprehensive cybersecurity solution and addressing other IT management issues that support the president's goal to deliver a government that is more effective, efficient and accountable."

Office of Federal Procurement Policy Administrator Anne Rung echoed that sentiment during a House hearing that same month, saying, "It's our viewpoint that FITARA is a tremendous management tool for the agencies, and we are not carving out the Department of Energy labs."

Although the White House appears to have won the fight, there is a catch: If the government is funded on the basis of a continuing resolution for 2017, rather than by new appropriations bills, the exemption will likely remain in force. Given that the appropriations process for fiscal 2017 is taking place against the backdrop of a presidential election, a continuing resolution is a strong possibility.

How to distinguish a cooperative contract from a procurement contract in US federal law

The US Court of Appeals for the Federal Circuit case CMS Contract Mgmt. Servs. v. Mass. Hous. Fin. Agency 2013-5093 (Fed. Cir. Mar 25, 2014) is final; the US Supreme Court Petition for Certiorari was denied on April 20, 2015.  

The gist of this case, as I see it, is that an agency relationship created by the federal government and a third party to deliver the government's services to its clients is not a procurement contract; but, a contractor relationship created to enable the third party to assist the government to perform its task of serving its clients is a procurement contract.  Feel free to correct me if this interpretation is wrong.

As usual, you cannot rely on the rendition here; read the decision at the link if you really need to know about it.

The Federal Grant and Cooperative Agreement Act (FGCAA) sets forth the type of legal instrument an executive agency must use when awarding a federal grant or contract. 31 U.S.C. § 6301. In pertinent part, "[a]n executive agency shall use a procurement contract as the legal instrument . . . when . . . the principal purpose of the instrument is to acquire (by purchase, lease, or barter) property or services for the direct benefit or use of the United States government." 31 U.S.C. § 6303. When using a procurement contract, an agency must adhere to federal procurement laws, including the Competition in Contracting Act (CICA), 41 U.S.C. § 3301, as well as the Federal Acquisition Regulation (FAR).

In contrast, an "agency shall use a cooperative agreement as the legal instrument . . . when . . . the principal purpose of the relationship is to transfer a thing of value to the [recipient] to carry out a public purpose of support or stimulation authorized by a law of the United States instead of acquiring . . . property or services." 31 U.S.C. § 6305. The FGCAA notes that "substantial involvement is expected between the executive agency and the [recipient] when carrying out the activity contemplated in the [cooperative] agreement." 31 U.S.C. § 6305(2). When using a cooperative agreement, agencies escape the requirements of federal procurement law.

Section 8 of the Housing Act of 1937 authorized HUD to provide rental assistance benefits to low-income families and individuals. These benefits included payments to owners of privately-owned dwellings (project owners) to subsidize the cost of rent. Traditionally, HUD entered into Housing Assistance Program contracts (HAP contracts) directly with project owners and paid the subsidies directly. However, the 1974 amendment to the Housing Act gave HUD a second option—to enter into an Annual Contributions contract (ACC) with a Public Housing Agency (PHA). The PHA would then enter into HAP contracts with project owners. HUD provided the PHAs funds to pay the subsidies to the project owners.

In 1997, when many of the HAP contracts under the 1974 amendment were beginning to expire, Congress enacted the Multifamily Assisted Housing Reform and Affordability Act (MAHRA), which permitted HUD to renew existing HAP contracts. MAHRA defined "renewal" as the "replacement of an expiring Federal rental contract with a new contract." MAHRA was enacted at a time when HUD was facing extensive budget cuts.

It had just announced a plan to reduce staff by one-third by the end 2000. MAHRA's "Findings and Purposes" noted that HUD "lacks the ability to ensure the continued economic and physical well-being of the stock of federally insured and assisted multifamily housing projects." Thus the 1997 Act addressed this problem through "reforms that transfer and share many of the loan and contract administration functions and responsibilities of the Secretary to and with capable State, local, and other entities." MAHRA § 511(11)(C).

Accordingly, HUD began to outsource certain contract administration services. While outsourcing these services, HUD still had the obligation under the 1983 amendment to engage a PHA for any new HAP contracts. Thus, on May 19, 1999, HUD initiated a nationwide competition to award an ACC to a PHA. The ACCs were performance-based; that is, in addition to "basic" administrative fees, PHAs could earn "incentive" fees by entering into HAP contracts beyond the number specified in their contract. With existing HAP contracts, HUD's Request for Proposals (RFP) stated that it would assign such contracts to the PHA, and that "the PHA [would] assume[] all contractual rights and responsibilities of HUD pursuant to such HAP contracts."

The RFP stated that "[t]his solicitation is not a formal procurement within the meaning of the Federal Acquisition Regulations (FAR) but will follow many of those principles."

In response to the 1999 competition, HUD awarded 37 of the PBACCs. PBACCs were awarded in the remaining jurisdictions through later competitions. PHAs administering these PBACCs assumed the title of Performance-Based Contract Administrators (PBCAs).

On February 25, 2011, HUD chose to re-compete the PBACCs to ensure that the "Government was getting the best value." Many PBCAs adamantly opposed HUD's decision to re-compete and requested that, at a minimum, incumbent PBCAs get priority consideration. HUD denied this request on the ground that stricter competition would lead to greater savings for the government. In July 2011, HUD announced awards for all jurisdictions and stated that its decision to re-compete the PBACCs saved HUD more than $100 million per year.

Appellants were awarded multiple contracts in multiple states; however, a number of other PBCAs and PHAs were not as fortunate. This led to a total of 66 post-award protests being filed with the Government Accountability Office (GAO). Among other things, protestors argued that the PBACCs were procurement contracts and that HUD had not complied with federal procurement laws.

On March 9, 2012, HUD re-issued its solicitation for competition. However, for the first time, HUD expressly characterized the PBACCs as cooperative agreements, and thus, outside the scope of federal procurement law. HUD also announced that it was choosing not to allow PBCAs (including Appellants) to compete for PBACCs outside their home states. This change in policy excluded from consideration many applicants, including Appellants, who HUD previously determined in 2011 provided the government the best value.

Appellants filed pre-award protests with the GAO, arguing that the PBACCs under the NOFA are procurement contracts and thus subject to federal procurement laws.

The GAO agreed with Appellants that the PBACCs are procurement contracts. It rejected HUD's argument that the PBACCs "transfer a thing of value" under 31 U.S.C. § 6305 merely because HUD is required to provide funds to the PHAs to make subsidy payments to project owners. The GAO found that, although the payments are made through a depository account to the PBCAs, the PBCAs have no rights to, or control over, the payments and that any excess funds and interest earned on those funds must be remitted to HUD or invested on its behalf.

The GAO also rejected HUD's argument that the administrative fees paid to the PBCAs qualify as a "transfer [of] a thing of value." The GAO found that the purpose of the fee was not to assist the PHAs in carrying out a public purpose. "Rather, . . . the  administrative fees are paid to the PHAs as compensation for . . . administering the HAP contracts." In other words, the fees merely cover the PHAs' operating expenses.

The GAO determined that "the circumstances here most closely resemble the intermediary or third party situation, ... where the recipient of an award [i.e., a PBCA] is not receiving assistance from the federal agency but is merely used to provide a service to another entity which is eligible for assistance." As such, the principal purpose of the NOFA and ACCs to be awarded under the NOFA is for HUD's direct benefit and use. Thus, the GAO held that the PBACCs are procurement contracts. Specifically, these agreements procure the contract administration services of the PBCAs.

However, on December 3, 2012, HUD announced on its website that "[t]he Department has decided to move forward with the 2012 PBCA NOFA and plans to announce awards on December 14, 2012." An agency's decision to disregard a GAO recommendation is exceedingly rare. The Court of Federal Claims has explained that it "give[s] due weight and deference" to GAO recommendations "given the GAO's long experience and special expertise in such bid protest matters."

Soon after HUD's announcement, Appellants filed pre-award protests in the Court of Federal Claims asking it to enjoin HUD from proceeding with the NOFA. Appellants argued that the PBACCs under the NOFA are procurement contracts.

The Court of Federal Claims ruled in favor of HUD.   Appellants appealed.

This court agrees with Appellants that the PBAACs are procurement contracts and not cooperative agreements. Based on this record, the primary purpose of the PBACCs is to procure the services of the PBCAs to support HUD's staff and provide assistance to HUD with the oversight and monitoring of Section 8 housing assistance. HUD acknowledged its intention "to procure the services of contract administrators to assume many of these specific duties, in order to release HUD staff for those duties that only government can perform and to increase accountability for subsidy payments." HUD sought new ways to conduct its business[,] such as the Request for Proposals for outside contractors to administer HUD's portfolio of Section 8 contract[s]." HUD has also consistently described the role of the PBCAs as "support" for HUD's Field Staff.

The record belies HUD's argument that the housing assistance payments it makes to the PBCAs are a "thing of a value" within the ambit of 31 U.S.C. § 6305. HUD has a legal obligation to provide project owners with housing assistance payments under the HAP contracts. Transferring funds to the PBCAs to transfer to the project owners is not conferring anything of value on the PBCAs, especially where the PBCAs have no rights to, or control over, those funds. Likewise, the administrative fee paid to the PBCAs do not constitute a "thing of value" either. While money can be a "thing of value" under 31 U.S.C. § 6305 in certain circumstances, the administrative fee here appears only to cover the operating expenses of administering HAP contracts on behalf of HUD.

At most, HUD has merely created an intermediary relationship with the PBCAs "[w]here the [PBCAs are] not receiving assistance from the federal agency but [are] merely used to provide a service to another entity which is eligible for assistance." "The fact that the product or service produced by the intermediary may benefit another party is irrelevant." In the case of an intermediary relationship, "the proper instrument is a procurement contract."

Because the PBACCs at issue are procurement contracts, and because HUD concedes it did not comply with federal procurement laws, the decision of the Court of Federal Claims must be reversed and remanded for disposition consistent with this opinion.

To procure or not to procure: is that the question?

The U.S. Court of Federal Claims is a court of limited jurisdiction. It can hear some contract disputes, but not all contract disputes, for instance. If a case is brought to the court which is beyond its jurisdiction, however juicy the merits and what it may have to say about the merits, it cannot; it must dismiss the case.

Sometimes, though, the comments it makes in doing so are juicy in their own rights.

The case in this post is one of those, even though the juicy remarks may not be reported in this post.  I have presented it chopped, sliced and diced to my own ends, so do not rely on this rendition as an accurate reproduction of the case.  If you want to know what it really says, read the whole case at the link. 

And if you really want to understand the matter better, read the cases cited in this case. There have been many trying to resolve the simple question, "what is procurement?"  (And while at it, I added a word on "is procurement an inherently governmental action?" whilst reading one of the cases cited.)

In short (read the long version at the link), this is a protest about a decision of the government to use software it had developed and came to own, rather than go to the market to allow other software providers a crack at the work.

VFA, INC. v. USA, U.S. Court of Federal Claims No. 14-173C, (October 2014)

The DoD uses a particular software package in making decisions about sustainment, restoration, and modernization of its facilities. VFA owns and markets a similar software product. The Under Secretary of Defense for Acquisition, Technology, and Logistics issued a memorandum to standardize the use of the
program at all of DoD’s military installations.

VFA filed a bid protest in this Court, alleging that the DoD’s standardization decision excludes VFA and others from competing for contracts to provide facilities management software, in violation of the Competition in Contracting
Act, 10 U.S.C. § 2304 (“CICA”). Simply put, VFA contends that the DoD should be conducting competitive procurements for this software product. The Government argues that an internal standardization decision is not a “procurement” for purposes of the Court’s Tucker Act jurisdiction, and consequently VFA is not an interested party who may challenge such a decision.

In a federal agency as large as DoD, it became increasingly apparent that multiple and different facilities condition assessment tools across DoD installations generated inconsistent and incomparable data. A 2012 Senate Report noted that the DoD “does not have a set of standards or metrics that can be used to inform budget decisions and Congress on the minimal annual levels of funding required to recapitalize the physical plant at a rate that matches the design lives of facilities in the [DoD] inventory.” The report further noted, “[b]udget pressures and other priorities can result in funds appropriated for facility sustainment being used to fund other categories of base operating support. This leads to facilities that do not receive minimal levels of annual preventative maintenance, and are not modernized to current standards for safety, security, and technology.” The report concluded that, “[o]ver the long-term, underfunded maintenance on [DoD]’s facilities costs the Department more in eventual repairs and replacement.”

To address the concerns raised by the consultants and Congress, the DoD made a policy decision to standardize its facility condition assessments. As part of this policy, the DoD chose to standardize the software it developed and owns itself, which was widely used in almost all of its installations, and which had received recognition for cost savings.

The Court must determine whether a plaintiff has established subject matter jurisdiction before proceeding to review the merits of the complaint. The jurisdiction of this Court is limited and extends only as far as prescribed by statute. Where subject matter jurisdiction is challenged, the plaintiff must establish the Court’s jurisdiction by a
preponderance of the evidence. If the Court finds that it lacks subject matter jurisdiction, it must dismiss the claim.

Under the Tucker Act, this Court has “jurisdiction to render judgment on an action by an interested party objecting to . . . any alleged violation of statute or regulation in connection with a procurement or proposed procurement.” In this case, VFA has challenged the government’s actions under CICA and the FAR, but the key phrase for Tucker Act jurisdiction is that Plaintiff’s protest must be “in connection with a procurement or a proposed procurement.” Id. Since neither the Tucker Act nor CICA define the term “procurement,” the Federal Circuit has held that the term “procurement” includes “all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services and ending with contract completion and closeout.” See Distributed Solutions 539 F.3d at 1345-46.

While many courts have cited Distributed Solutions for the proposition that Tucker Act bid protest jurisdiction is broad, the holding remains limited by the facts of the case. Distributed Solutions involved an attempted circumvention of federal procurement law when the Government sought to acquire software for a joint program between the U.S. Agency for International Development (“USAID”) and the State Department. The Government delegated to a contractor the task of selecting private vendors to provide the software. The Government, along with the designated contractor, issued a Request for Information (“RFI”) which stated that the objective of the government’s effort was to “select and implement acquisition and assistance solutions that meet the unique functional requirements of both [USAID and the Department of State].” The RFI specifically stated that it was “for market research purposes only” and would “not result in a contract award.”

After reviewing the responses to the RFI, the Government told the vendors that it had “decided to pursue alternative courses of action.” But, the contractor then issued its own RFI, and used the responses to select the software vendors it wanted. The Government initiated a type of procurement competition without actually committing to award a contract to the best offeror, thereby circumventing applicable federal procurement laws. [NB. My take: The first RFI was used to develop the government's determination of need, an aspect of "procurement". Then, once that was done, the second RFI was used to narrow the field of competition to select the awardee.] Thus, the Federal Circuit concluded that a procurement existed and that a legally compliant competition was required.

The present case is much different in key respects. Here, the DoD never contemplated or initiated a procurement process. The Government did not issue an RFI, did not receive information from vendors, and did not plan to award any contract. From the DoD’s standpoint, it already possessed the SMS program it wanted to use, and there was no reason to acquire anything. VFA is requesting a competitive procurement in order to sell to the Government something it already possesses.

Plaintiff argues for the application of other standardization decisions where this Court has interpreted the breadth of § 1491 jurisdiction broadly. While these cases involved software standardization decisions by the Government, the Court finds that the similarities end there.

In Savantage, the Department of Homeland Security (“DHS”) conducted a solesource procurement for financial systems application software. DHS decided to standardize its software on the Oracle and SAP systems, signing a “Brand Name Justification” instead of conducting a competition. DHS then issued a solicitation for services to migrate to these systems. Plaintiff challenged the underlying standardization decision to use the software of Oracle and SAP, and this Court accepted jurisdiction of the protest. The Court found that DHS expanded its systems contracts with Oracle and
SAP without any competition for the new work. Specifically, the Court ruled that the “expansion of work fits squarely within the congressional definition of ‘procurement’ because it is an acquisition of additional property or services from Oracle and SAP.” The Court rightly held that acquiring new work from a private vendor is, by definition, a procurement action on the part of the Government.

Similarly, in Google, the Department of Interior “restricted competition exclusively to the Microsoft BPOS-Federal and the Microsoft Desktop and Service Software for messaging and collaboration solutions,” in effect standardizing on a single private vendor’s product instead of conducting a competition.

In all of these software standardization cases, the Government attempted to conduct asole-source procurement without any competition. The existence of a procurement triggered this Court’s jurisdiction.

VFA argues in the alternative that the Court should follow the reasoning of recent “insourcing” cases, positing that the DoD’s use of its own software to the exclusion of VFA and others constitutes “insourcing” and grants this Court jurisdiction. In all of the cited insourcing cases, the DoD was obligated to compare cost efficiency between civilian and contractor personnel under 10 U.S.C. § 129a (“The Secretary of Defense shall establish policies and procedures for determining the most appropriate and cost efficient mix of military, civilian, and contractor personnel to perform the mission of the Department of Defense.”).

Each of the cases involved a required cost comparison, and this fact alone distinguishes them from the present case. The fact that the DoD compared the cost of the private contractor to its own hiring of civilian personnel is a significant step in the procurement process, and one that was never taken in this case. Further, each of these cases required the hiring of civilian personnel, not just the use of existing personnel, and thus involved an acquisition process.

VFA has pointed to no regulation or guideline suggesting the DoD was under an obligation to compare the cost of the SMS to the software products offered in the commercial market. Because it was not so required, the Government did not solicit any commercial pricing proposals, did not issue an RFI, and did not conduct an internal review or comparison of products.

Allowing VFA to bring this case, where no procurement or cost comparison process was mandated or undertaken, would so broadly expand this Court’s jurisdiction as to eliminate any restrictions of the Tucker Act. Under VFA’s theory of
jurisdiction, every time the government chooses not to procure a good or service from a private contractor, and instead creates or develops something on its own, the providers of similar products and services would be able to challenge this decision, asking “why don’t you buy from us instead?” The Court is unwilling to open this “Pandora’s box.”

While reviewing the Distributed Solutions decision, I noted another twist on the question of what actions of a government are "inherently governmental" so as to not be delegatable to a non-government entity. Recall from the VFA decision the descriptions of facts in that case: "The Government delegated to a contractor the task of selecting private vendors to provide the software."

In Distributed Solutions, the Government sought

to dismiss the contractors' complaint for lack of jurisdiction, arguing that the protest was not viable, as the contractors were essentially protesting the award of subcontracts by a contractor with a federal agency, and not an award of a contract by an actual federal agency.

On appeal, the contractors contend that the trial court misinterpreted the basis for their complaint. Contrary to the focus of the trial court's analysis, the contractors are not contesting SRA's award of the subcontracts. Rather, they are contesting the government's decision to task SRA with awarding subcontracts for the purchase of software instead of procuring the software itself through a direct competitive process.

We agree, as the contractors' complaint confirms as much. For example, paragraph 8 of the complaint alleges that the government "improperly delegated an inherently governmental function." As another example, paragraph 52 of the complaint alleges that "[b]y initially soliciting information from prospective bidders, improperly inserting SRA into the procedure to do directly what the [government] could not do—select a vendor without being subject to the federal procurement laws—the [government has] attempted to circumvent the federal procurement laws and foreclose any attempt to challenge their actions."

Distributed Solutions is good authority not only for the broad, but limited, reach of the term "procurement", but also for the proposition that government contracting is an inherently governmental activity which cannot be hived off to the private sector.

The limits of procurement law

"If you only have a hammer, you tend to see every problem as a nail."
Abraham Maslow

This post concerns a controversy over the allocation of Low Income Housing Tax Credits ("LIHTCs"), specifically whether that controversy is cognizable under the procurement law. The basics of the story are reported in this online news item:

VIDEO: OPA Confirms Protest Halts GHURA Tax Credit Award; Cruz Concerned About Conflict of Interest.

The same news source, Pacificnewscenter.com, has a copy of the protest filed at http://www.pacificnewscenter.com/images/pdf/medallionprotestletter.pdf.

The article quotes the Guam Public Auditor as saying, "The form of tax credits is really a form of payment which is after the fact after a procurement has been made so the process is still a procurement issue”. As a consequence of the procurement characterization, she indicated that an automatic stay has been placed on the allocation of tax credits.

I want to speak to one element of the controversy, the procurement angle.

First, my disclosure. I am General Counsel for Jones & Guerrero Co., Inc., which is one of the principles behind the GREAT Homes, LLC, LIHTC application. I have not had much to do with this project, however, since specialized and experienced consultants and advisors have been retained to assist the application package. I am aware that the applicant has spent considerable time and money in the application process, however, my knowledge of the LIHTC program in general is rudimentary and I have had no direct participation in the planning or completion of this particular project application.

As reported in the media, Medallion Guam, LLC, has “protested” GHURA’s allocation of LIHTCs. Its attorneys, and others who should know better, have made the unsubstantiated claim that the allocation process is subject to the Procurement Act. I disagree, but, unlike the persons claiming such coverage, I will specifically detail why.

The Federal government has seen fit to grant federal income tax concessions to developers of certain low income housing developments to encourage such developments when profit is insufficient to the task. In no way does the procurement law apply to the process of qualifying for income tax breaks. That is a matter of tax law, US tax law.

If there is a dispute over the amount, timing or eligibility of the use of a tax credit, is that determined under the procurement code (see, 5 GCA § 5427 re contract controversies), or is it determined by the taxing authorities under the tax laws? It is a tax matter, not a procurement matter.

The procurement act applies to “procurement”, defined as “buying, purchasing, renting, leasing or otherwise acquiring any supplies, services or construction” (5 GCA § 5030(o)). The Government of Guam does not “acquire” anything under the LIHTC program. The project is designed, built, owned and managed by the developer. It is never bought, purchased, rented, leased or acquired by GovGuam.

The protest letter claims the procurement act is applicable because “[t]he Guam Procurement Code is meant to be construed broadly and cover territorial acts that include "federal assistance." 5 GCA §5004(b ).” This is not quite even half a truth. Yes, the procurement code is meant to be construed broadly, but only “to promote its underlying purposes and policies” (5 GCA § 5001(a)), and low income housing policy is not one of its purposes or policies. Yes, the procurement code does “cover” certain federal assistance, but it does not cover all “territorial acts”; it only covers certain local government “contracts”.

And it is at this point that the protest artfully fails to describe the whole truth, which contracts are covered by the procurement law? The unmentioned part of 5 GCA 5004(b) states, the procurement law “shall apply to every expenditure of public funds ... under any contract....” The scope of the procurement law is limited to expenditures of public funds under contract.

The award of tax credits is not an “expenditure”, and tax credits are not “public funds” (and it can be noted, the Public Auditor’s duty and authority extends to settling “the accounts of Disbursing Officers and Certifying Officers”, but “[t]his authority shall not extend to the collection of income taxes....” (1 GCA § 1909(b)).

Procurement law does not define what is meant by the term “expenditure” (in the phrase “expenditure of public funds”), but the funds management provisions of Guam law do. “Expenditures means all amounts of money, other than refunds authorized by law, paid out or encumbered for payment by a Territorial agency other than for investment securities or as agent or trustee for other governmental entities or private persons.” (5 GCA § 4117(g).)

Tax credits are not money. They are not the functional equivalent of money; you cannot pay your dinner tab with a tax credit. Tax credits are not money paid out by the government. They are conditional offsets of tax liabilities owed by a taxpayer to the government.

Likewise, the term “public funds” (in the phrase “expenditure of public funds”) is not defined in the procurement law, but it is a term used in the fiscal management provisions of Guam law.

14 GCA 14104(c) says, “ 'Fund' shall mean as used in this Chapter the General Fund and all special and trust funds. This includes impress fund cash held at personal risk.” Fund would not include tax credits.

14 GCA § 14105 says of “public funds”, “All public funds of the government of Guam shall not be disbursed, except ... by the persons designated or delegated....” This again speaks to the notion that public funds are amounts paid out by the Government. Tax credits are not public funds to be disbursed, paid or expended by the persons charged with the care and accounting of government money, as more fully detailed in Chapter 14, Title 4, GCA.

The expenditure of public funds must begin with budgets and approvals. The Governor must prepare “a financial plan which shall cover estimated receipts ... and expenditures of the government of Guam for the General Fund and all special funds....” (5 GCA § 4103.) 5 GCA § 4107(b)(4) requires the Governor to annually “present the proposed comprehensive program and financial plan “, to include a “summary of expenditures during the last fiscal year, those estimated for the current fiscal year and those recommended by the Governor for the succeeding fiscal year....”

Neither these plans nor reports discuss tax credits allowed under the tax laws, even though such credits do impact monies received. Why? Because tax credits are not “expenditures”.

How much does the Guam Legislature budget for these LIHTCs? Zero.

Why? Two reasons. First, the tax credits are discounted and syndicated to investors in the US and applied to tax liabilities to the US Treasury, not to the Government of Guam. Second, Gov
Guam does not "spend" any money on the LIHTCs. In the highly unlikely case that any of the credits are ever applied to a GovGuam tax liability, the credits act just like any other tax credit and simply reduce the liability; it does not require GovGuam to pay anything.

GHURA has never certified funds for these LIHTC allocations, because there are no funds to be spent. The Department of Administration has never certified funds for these allocations, because there are no funds to be spent. The Government of Guam has never cut a check for these allocations, because there are no funds to be spent.

The leading case to analyze whether the allocation of LIHTCs constitutes an “expenditure of public funds” is the California Court of Appeals case, State Building and Construction Trades Council of California v. Duncan (2008) 76 Cal.Rptr.3d 507, 162 Cal.App.4th 289.

Under California and federal Prevailing Wage Law, the prevailing wage must be paid to workers if the project on which they are employed is ‘paid for in whole or in part out of public funds’." The developer in that case argued the project was a private project, thus payment of prevailing wage was not required.

The issue in that case was whether the award of tax credits under a LIHTC program constituted an “expenditure of public funds”. The trial court ruled it did; the Court of Appeals reversed and ruled it did not. The Court held,

“Tax credits are, at best, intangible inducements offered from government, but they are not actual or de facto expenditures by government.” [Emphasis added.]

The Court of Appeals looked, in part, to tax decisions to describe the nature of LIHTCs.

“There is, moreover, an impressive body of authority, much of which was cited by the Director in his coverage decision, that excludes tax credits from the category of goods and services that amount to public assets or are treated as the equivalent of money. For example, within the context of California's personal income tax system, a credit is treated as something that "involves no expenditure of public moneys received or held ... but merely reduces the taxpayer's liability" at a future point in time. (Center for Public Interest Law v. Fair Political Practices Com, supra, 210 Cal.App.3d 1476, 1486, 259 Ca.Rptr. 21.) Federal tax law is to the same effect: it likewise does not recognize receipt of a tax credit as a taxable event, on the theory that the taxpayer "has received no money or other `income' within the meaning of the Internal Revenue Code." (Randall v. Loftsgaarden (1986),478 U.S. 647, 106 S.Ct. 3143, 92 L.Ed.2d 525 (Randall).) [Footnote omitted; emphasis added.] The credits "have no value in themselves," only the contingent benefit "to reduce the taxes otherwise payable." (Id. at pp. 656-657, 106 S.Ct. 3143; see also id., at pp. 657-659, 106 S.Ct. 3143 [credits have "economic value" only indirectly to extent they reduce tax liability].)”

The Court rejected the claim that convertibility of credits to cash made them an “equivalent of money”.

“The fact that LIHTCs may indeed be marketable by others, after they have been allocated by the state, does not establish that they have a realizable monetary worth to the state before they are allocated. (See Griffin, supra, 324 F.3d 330, 355 ["the only property interest the State has in the tax credits is purely abstract or theoretical, even after ... [the project] is completed"].)”

The Court rejected the argument that the State acquired or exchanged anything of value as a result of the tax allocation.

“[T]the operative point is that the purchase price is not paid to the state. The value for which would-be buyers pay accrues when the LIHTCs come within the disposition of the developer for the project, not the state. It is from the developer, not the state, that "persons or entities with tax liabilities" purchase an ownership interest in the underlying project. The buyer realizes the value of the tax credit only when – and if – the project is completed in a timely fashion, becomes operational, and remains so for a number of years.”

The Court acknowledged, as being beside the point, “that tax credits are an important mechanism for achieving objectives the Legislature deems in the public interest.” It said,

“But their undoubted importance and utility is not at issue here. Tax credits operate to reduce future tax liability, and cannot be used until the low-income project is built and operating. (26 U.S.C. § 42, subd. (f)(1); Cal.Code Regs., tit. 4, § 10328, subd. (a).) Further, any worth the credits may have is obviously predicated on the taxpayer having tax liabilities to offset. In other words, the worth of LIHTCS is, at the time they are allocated by the CTCAC, speculative and contingent upon future conditions. [Footnote omitted.]

“The United States Supreme Court has held that the mere receipt of a tax credit confers no economic benefit because the credits "have no value in themselves." (Randall, supra, 478 U.S. 647, 656-657, 106 S.Ct. 3143, 92 L.Ed.2d 525.)”

It concluded,

“LIHTCs are not property. Allocated LIHTCs represent only the possibility of future benefit that may be realized after construction or rehabilitation of the proposed project. (See Randall, supra, 478 U.S. 647, 656-657, 106 S.Ct. 3143, 92 L.Ed.2d 525; Griffin, supra, 324 F.3d 330, 355.) We therefore hold that they do not amount to either the "payment of money or the equivalent of money" within the scope of subdivision (b)(1) or the transfer of "an asset of value for less than fair market value" within the scope of subdivision (b)(3).” [Code references are to California Prevailing wage law; footnote omitted.]

The LIHTC program is part of the US Internal Tax Code, and is described by the US Department of Housing and Urban as an "an indirect Federal subsidy" underwritten by tax credits.

HUD further explains, "Each year, the IRS allocates housing tax credits to designated state agencies - typically state housing finance agencies - which in turn award the credits to developers of qualified projects. ... The state allocating agency must develop a plan for allocating the credits [a "QAP"] consistent with the state's Consolidated Plan. Federal law requires that the allocation plan give priority to projects that (a) serve the lowest income families; and (b) are structured to remain affordable for the longest period of time." (http://www.hud.gov/offices/cpd/affordablehousing/training/web/lihtc/basics/ )

One thing that stands out in the implementation of the LIHTC program is the lack of uniformity of application and implementation among and within the states and territories, due entirely to the broad discretion allowed to the administering agencies to tailor housing programs to address particular circumstances and answer different policies and needs.

The Guam QAP underscores that discretion:

• "The executive director shall have the right to defer the consideration of any application if, in his sole discretion, such deferral is deemed in the best interests of meeting housing needs."

• "The amount of tax credits reserved or allocated to a particular project will be limited to the amount GHURA, in its sole discretion, deems necessary to make the project feasible."

• "GHURA reserves the right to disapprove any application or project for any tax credit reservation or allocation, regardless of ranking under the criteria and point system as contained in section III of this allocation plan."

• "GHURA reserves the right, in its sole discretion, to (i) hold back a portion of the annual state and federal housing credit ceiling for use during later reservation cycles, (ii) carryover a portion of the current year's housing credit ceiling for allocation to a project which has not yet been placed in service, and (iii) under certain conditions, issue a reservation for the next year's housing credit ceiling."

I have to admit that these broad discretions do not sit comfortably with my sense of order under the procurement law. But the LIHTC program is not a procurement program, and we cannot judge it as such. It is simply a tax incentive, offered under limited conditions, to achieve a socially desired policy objective, like so many other tax credits, deductions and allowances.

The procurement law is not some over-arching paradigm against which other government activity must be governed. As broad as is its relevance in day-to-day government operation, it is nevertheless proscribed by application solely to contracts made by the government, involving the expenditure of public funds, to acquire for itself supplies, services and construction. It is to tax law, and here specifically US tax law, that parties must look to their rights and remedies as regards LIHTCs, not the procurement process.