NOTE: This article contains a big, fat, factual error. Please see the UPDATE AND CORRECTION link at the bottom for a correction and an apology.

Readers of this blog might be wondering why we have not been all over the stories of the General Services Administration “conferences” like white on rice. After all, the story is relevant to many themes which form the basis for article after article on this site—themes such as lax oversight, the importance of instilling a culture of compliance, and holding management accountable for investing in adequate internal controls. More fundamentally, the stories of waste and abuse at the GSA are further evidence (if further evidence was even needed) that a monocular focus on fraud, waste and abuse by government contractors is misplaced and ignores the similar levels of fraud, waste and abuse within the Federal government itself. So why have we not been gloatingly reporting these stories, diving into slice after slice of Schadenfreude pie?

Well, let’s answer that oh-so-reasonable question. We’ve been holding-off on this one for two reasons. The first reason is that the story is still developing. We’re pretty sure we have the waste and abuse parts of the picture, but we’re still missing the third part of the triumvirate: we need the fraud/corruption part. And while there have been tantalizing hints of bribery and kick-backs, we haven’t yet seen anything solid. So there’s that.

The second reason we’ve been holding-off is that we’ve been listening to Vern Edwards. Vern Edwards, for those who may not know, is a demi-god in the pantheon of government contracting experts. We don’t always agree 100% with Mr. Edwards—but when he speaks, we listen. And this is what he said about the GSA spending spree—

Before you start trashing GSA with comments about how you are shocked, shocked by their behavior, keep in mind that what happened was a direct result of the rise of entrepreneurship in government that has been going on at all levels, federal, state, and local. … GSA's mistake in this case was in operating like a firm in the private sector trying to reward and motivate its people to get more business. This is what they had been led to believe that they ought to do. It is a natural outcome of the acquisition reform movement that sprung up during the 1990s during the Clinton Administration's "Reinventing Government" phase and the growing use of clueless political appointees to run agencies. Their mistake was in failing to recognize what is going on in America and realize that they were still functioning within the public sector. … GSA is a good outfit. They'll bounce back. The question now is whether entrepreneurial government was a mistake.

So we’ve been holding-off and watching and reading. Now we’re ready to offer some comments, keeping in mind that the story is still developing and we’ll likely have more to say about it in the near future.

Let’s start with this USA Today story, written by Andy Medici of the Federal Times and published on April 17, 2012. Mr. Medici (he of that noble Firenze ruling family) wrote that the Las Vegas conference debacle was part of a pattern, part of a culture of waste and abuse that was endemic to GSA Region 9. He reported that the Region 9 executive in charge of organizing that $822,000 “conference” in Vegas, Mr. Jeff Neely, “also spent thousands of taxpayer dollars on a variety of wasteful trips and events, according to lawmakers and GSA's top investigator.” Mr. Medici wrote—

In October, Neely took a nine-day trip to Hawaii to attend a one-hour ribbon cutting. He went on another five-day trip to Atlanta in November to attend a conference of questionable value. He also organized a four-day trip to Napa Valley in Northern California that cost more than $40,000 and a $150,000 intern conference in Palm Springs, Calif. [Brian Miller, GSA’s Inspector General, reported that] ‘Spending was part of the culture of Region 9.’ In addition, Miller's office found that thousands of dollars of equipment — iPods, gift cards and other items — Neely's Region 9 office bought for an employee awards program went missing or was stolen. Miller said his office tracked one of the missing iPods to Neely's daughter.

Among the investigations still in the pipeline: possible waste and mismanagement concerning the intern conference in California and another conference that Miller declined to discuss. Neely's office organized both.

In an email Neely wrote in preparation for the 2010 Las Vegas conference, he said, ‘Why not enjoy it while we have it?’ …

Even after top GSA officials became aware in May 2011 of the inspector general's concerns about Neely's spending, they awarded him a $9,000 bonus.

Just to add some fuel to the Neely funeral pyre, this article reported that his wife accompanied him on several official trips he took on behalf of the GSA. That fact would be meaningless, except (according to the report), “The government picked up her tab and she directed event planners to spend government money and arrange lodging for relatives during a trip to Las Vegas in 2010.”

Having been now duly sensitized to the management decisions of Mr. Neely, let us also note that he did not act alone or in a vacuum. Here’s a link to a Fox News report that discusses how GSA officials were “grilled” by members of the House Oversight and Government Reform Committee. Fox News reported that—

Members of the House Oversight and Government Reform Committee at times yelled at the representatives from the General Services Administration called to testify Monday, demanding strict punishment. The acting chief of the agency later assured lawmakers that he's ordered a few GSA officials to repay the government for their personal expenses and will refer any ‘criminal activity’ that is uncovered to law enforcement. …

Rep. Elijah Cummings, D-Md., top Democrat on the panel, said the allegations against Neely document an ‘indefensible and intolerable pattern of misconduct.’ 

Cummings, referring to internal documents allegedly showing Neely gloating about the money he was spending, accused Neely and his wife of blowing through federal dollars, as if they believed they were ‘some kind of agency royalty who used taxpayer funds to bankroll their lavish lifestyle.’ 

‘They violated one of the most basic tenets of government service. It's not your money,’ Cummings said. 

Other agency officials, both current and former, apologized for the 2010 Western Regions Conference and condemned the over-the-top spending documented in the inspector general's report. 

Martha Johnson, the administrator who resigned after the report was made public, called the Western Regions Conference -- which had been escalating in cost for years -- a ‘raucous, extravagant, arrogant, self-congratulatory event that ultimately belittled federal workers.’ 

She personally apologized, while defending the work of the GSA as a whole. ‘I am extremely aggrieved by the gall of a handful of people to misuse federal tax dollars, twist contracting rules and defile the great name of the General Services Administration,’ she said. 

David Foley, a GSA official who was captured on video joking about the agency's spending at the 2010 conference, also apologized at the hearing. Foley said that he didn't know the ‘over-the-top’ expenses were being paid for with government money. …

Two other GSA officials were fired after the inspector general report found the agency spent more than $820,000 on the 2010 conference. 

Miller said Monday that investigations are ongoing, and that his department is looking at possible bribery and kickback schemes. 

Here’s an Associated Press video.

Let’s conduct an investigation of our own. Let’s look at how the GSA was able to afford such lavish parties. After all, every other Federal agency is having a budget crisis; cutbacks are everywhere. Although the Vegas “conference” took place in 2010, that was not so long ago. Federal spending has been under scrutiny since 2009. So we wonder: where did GSA get the money?

Astute readers might already know or have guessed the answer. GSA obtained its funds from contractors as a condition of contract award. It’s called the Industrial Funding Fee (IFF). Since 1995, GSA has required contractors with Multiple Award Schedule (MAS) contracts to pay a quarterly fee, based on sales generated by the MAS contract(s), in order to fund the cost of administering the contracts and providing goods and services to the rest of the Executive Branch. The IFF has generated so much money for the GSA that it no longer needed to reply on funds appropriated by Congress. Seems like a great success!

The problem is that the IFF has been too successful for GSA. In 2002, the U.S. General Accounting Office (now called the Government Accountability Office) reported that "from fiscal year 1999 to 2001, the revenue generated by [IFF] fees exceeded [FSS] program costs by 53.8%, or $151.3 million. Program customers are, in effect, being overcharged for the contract services they are buying. Nevertheless, program officials have not adjusted the fee." When Congress learned about this finding, hearings were scheduled. GSA then decided to lower the IFF from 1.0% to 0.75% on its own. Since 2003, the IFF rate has been 0.75%.

In addition, GAO issued a 2011 report that discussed the interagency fees charged by GSA to other agencies to recover its administrative costs on non-MAS acquisitions, which ranged from 1 to 12 percent. (The report looked at many interagency support services but we are focusing here only on GSA.) GAO reported—

According to agency officials, the fee revenue generated from the sales orders of the interagency contract programs is intended to cover costs and contributions to reserves, where permitted; however, the programs are not required to break even on an annual basis. As such they are permitted to have excess revenue or costs that exceed their revenue in a given year. According to officials from the selected programs we reviewed, each program is managed with a goal of having its revenues and costs, including contributions to reserves, break even over a period oup to 5 years. We observed, however, that four of the six programs generated excess revenue over their costs for almost every fiscal year since fiscal year 2007.

While not all GSA interagency programs generated “excess revenue over their costs,” GAO reported that the GSA MAS program generated an average of $62 million in excess revenue over costs each year between 2007 and 2010. Even though the IFF had been lowered in 2003, GSA continued to generate tremendous cash income from its MAS program sales. And GSA retained all of its excess revenue in its “reserves”—and gave nothing back to the U.S. Treasury or to the taxpayers.

In February 2012, the GAO reiterated its 2011 findings about the GSA MAS program and reiterated its recommendation that—

… the Administrator of General Services direct the Federal Acquisition Service Commissioner to develop and implement guidance for evaluation of current fee rates when an individual program consistently transfers excess revenue to the reserve funds. Such an evaluation would allow GSA to determine whether a reduction in the fee rate of any of its programs might be warranted. A reduction of the fee rate for the MAS program alone would provide federal agencies potentially significant cost savings.

In our view, when examined in this context, the now infamous Las Vegas “conference” of 2010 was simply a symptom of an agency culture that took every opportunity to generate income. And then the agency took that income and kept it in its own pockets, even though it was clearly excess to current and future needs. To make things worse, there was an actual incentive to spend lavishly on any activity that could possibly be called “business-related”—since spending lavishly would tend to reduce the “excess revenue” figures being reported by GAO to Congress.

So that’s the deal. If the excess IFF funds weren’t spent on conferences and award programs, then GAO and Congress would want the excess funds given to the Treasury. Worse yet, there would be pressure to reduce the IFF rate in order to move to a break-even state. And then the high-living days would come to an end.

Remember Mr. Edwards’ words. And remember that the MAS program had generated profits since inception, and had lived off the Congressional appropriation grid all the while. Though Congressman Cummings wagged his finger and asserted that it was not GSA’s money, he was actually mistaken. It was the agency’s money, because they generated it without Congressional appropriations. The problem was, GSA was too successful at income generation, and all that “excess revenue” created incentives to spend the money, lest Congress want its piece of the action.

Neely didn’t act alone or in a vacuum. And GAO and Congress knew about the excessive IFF rates for years. So when everybody is acting shocked and appalled at the wasteful spending, remember what you’ve learned in this article. There are very few clean hands in this mess.

UPDATE AND CORRECTION