Our experience leads us to conclude that the nonprofit health care organization which does actually produce a zero bottom line in accounting terms cannot and will not survive. How long can a business survive when it is required to sell its services below actual cost? The primary method which the Federal Government proposes implementation of Public Law 93-638 is cost reimbursement type contracts. Cost reimbursement type contracts cannot provide for inflation, technological improvement, expansion, alteration of services, and, most importantly existence of the organization.

Our management effort has been directed to providing more benefits to our Native community ownership than we could independently provide for ourselves. This effort is what constitutes the maximization of wealth for our community owned institution. Without redirecting our effort toward maximization of financial integrity, we face the prospects of bankruptcy and loss of community ownership.

Why does the Federal Government insist upon cost reimbursement contracts to tribal not-for-profit health care organizations? I do not know, but I do know that cost reimbursement type contracts are in effect Federal taxation of our nonprofit organization. Taxation is a direct result of a reimbursement system which pays less than full charges for services delivered in the form of payment on the basis of "allowable costs" or at less than 100 percent of all charges.

Inflation and the shortfall of cost reimbursement type contracts will force our tribal institution to seek foundation support and fundraising activities in lieu of accessing the capital market. Without these donations, the result will be a dangerous amount of new corporate debt, and interest which is disallowed cost, unless we take the unpopular decision to reject cost reimbursement contracts for much needed services. In order to implement Indian self-determination through cost reimbursement type contracts, the Federal Government must first acknowledge the tax aspects of the system. Along with recognizing the tax aspects of this system, some simple things such as allowing carryback and carry-forward provisions like those of the U.S. corporate income tax code, would have important impacts on cushioning Native organizations in economic downturns or retrenching periods. It is also important to recognize the legitimate capital needs of tribal organizations in the lack of debt capacity. With inflation, continued financing is important. This can be done through the allowance of a reasonable level of net income and management fee. Alternatively, it may be necessary to create a composite contract allowing for a fixed level of effort with reimbursable costs and fixed management fee.

Otherwise, I must forewarn mv people that cost reimbursement type contracts are an imposition of Federal taxation on established treaty rights, and are intended to oppose the development of financial responsibility that would enable Indian self-determination to materialize. Conclusively, I commend the efforts of the Federal Government to assist in creating some uniformity with the tribes in which it contracts, and I can only express again, the opinion of the Tanana Chiefs Conference that if the tribes standardize, then so should the Government. Much time and money would be saved if there were a standard contracting procedure for all departments. Staff time, both program

matic and management on both contracting parties would be reduced so that much more time and money could be spent on delivering the services intended by the enabling Federal legislation.

And, I would like to say that at the conclusion, that what you heard before would be, if we do not get the contract like we intend, we are not asking for anything special, may I point, but without the 60 contracts, we have no alternative but to refuse it because eventually in time, we will go bankrupt. There's no way in God's given world that we can survive the way that the IHS, PHS, and BIA is demanding that we contract with them. This is-it's an impossible thing that they want and expect us to do. And, gentlemen, we seek your help.

Senator GRAVEL. You gave a very powerful bottom line about the taxation, the indirect taxation situation, and I think it's very forceful. Is it possible-do you have any extra copies of those regulations? We can obviously pick them up in Washington, but

Senator STEVENS. That's his own. You put together working papers for your trips into the village, haven't you?

Mr. RICHARDS. This is what we got from the Sterling Institute people.

Senator GRAVEL. And, the other?

Mr. RICHARDS. That's Sterling Institute. We've got copies of the regulations, but I don't know if we have them with us.

Senator GRAVEL. We probably can chase that down. Steve, I have some questions. Ted, do you have any questions?

Senator STEVENS. I have one question, what kind of audit have you had on your performance?

Mr. RICHARDS. We have a program evaluation that was conducted within the past 2 weeks, and the results of that will be available the first part of October.

Mr. KETZLER. The auditors came in and done the auditing late in May and early June. We didn't get a copy of their letter for the audit exceptions until Clay came up. The last time I asked him if he got it, and he said they did, so I asked them to send us a copy so that we would be prepared to substantiate our expenditures, but we haven't gotten back together. Like I say, we have no indirect cost rates set because we do have the problem of contracts or grants being negotiated that did not have the appropriate levels of overhead for administration.

Senator STEVENS. What interest rate are you paying-10 percent— 8 percent?

Mr. KETZLER. We don't have any loans.

Senator STEVENS. I thought Steve said that you borrowed money and the interest wasn't considered?

Mr. KETZLER. Well, we can't borrow money because interest is disallowed. It's not an allowable cost under our contract. See, what happens is that if we go into a cost reimbursable program and we don't get an advance, an appropriate advance, we work into the contract for 30 days, bill, it takes about 2 months to get our costs for the first month reimbursed, so we're 25 percent into the contract and we're OD'd at the bank.

Senator STEVENS. Where did you get the money for the bank? Mr. KETZLER. We don't have any. We're in an OD condition at the

bank, that's why I say, unless we can get contracts of either fixed-fee or else cost reimbursable with appropriate advance with a management fee attached, we will be going out of businesses just like fire,

it

Senator GRAVEL. Thank you.

Commissioner BORBRIDGE. How is the rate allowed for indirect costs, the overhead determined?

Mr. KETZLER. You take-what they like you to do is get an accounting firm and you go in and take all your overhead costs and figure out what they will cost you totally for the year as far as management, and then they prorate each to-like, my salary is prorated so much a percent to the Bureau contract and so many percent by IHS and whoever else we contract with, and they take that percentage of the cost and set a rate which will be anywhere from 15 to 30 percent over the total contract.

Commissioner BORBRIDGE. So, it's a separate rate?

Mr. KETZLER. It's a separate negotiation.

Commissioner BORBRIDGE. Separate negotiation?

Mr. KETZLER. Right, but we get into problems of having different regulations from different agencies. Now, like with the DOL (ph), that we have a contract so we can use a certain portion of that contract now for administration, but we can't, under the Bureau regulations and their audit, that didn't come out of it, except from business. We're using direct moneys to pay indirect costs because that's a-it's considered direct from DOL, but it's considered indirect by the Bureau, so they're the

Mr. RICHARDS. It's no standard Federal procedure for contracting. Mr. KETZLER. If they're going to go into self-determination, I think we're just halfway, I think we've got to sit down and standardize the contracting procedures because this creates many problems for us in accounting. One program is allowable and the next one is not, and so, you know, our bookkeeper is in the backroom and working this across the board, so we come up with audit exceptions just from errors. Mr. RICHARDS. One thing I've always wondered is how-when the BIA was operating the programs and when the Indian Health Service was operating programs, how they handled the audit exceptions. One of the key principles that we learn from the Self-Determination Act is that we're not supposed to be treated any more restrictive than the BIA or IHS treated themselves, but they never dealt with audit exceptions.

Senator STEVENS. Well, they do, but in a different way, and-
Mr. RICHARDS. They come back to you.

Senator STEVENS. And, with us, we then write in prohibitions which we fire the police. Gentlemen. we thank you very much, you've given us a lot to think about. And, I can assure you we want to work with you, particularly be willing to work with you and the regional director and see if we can have some sort of a meeting of the minds here sometime when we've got a statewide gathering anyway, to eliminate as much as possible, the conflicts that seem to be arising out of the procedural aspects of the Self-Determination Act. That isn't really the subject of this hearing, but I would like to see, perhaps if we could head off a necessity to have hearings on any further changes

that might be necessary because of misunderstandings of the act. I do thank you very much.

Mr. KETZLER. Thank you kindly.

Mr. RICHARDS. Thank you.

Senator STEVENS. Senator Gravel has asked me to extend his apologies, he had, as you recall we were delayed because of winds and other problems and we got in here late, he had to keep his schedule and leave on an airplane. John Borbridge will be the chairman of the hearing during the balance of the period.

Commissioner BORBRIDGE [presiding]. Yes; I think Mitch had a

statement.

Mr. DEMIENTIEFF. Yes; thank you.

STATEMENT OF MITCH DEMIENTIEFF, PAST VILLAGE COUNCIL CHIEF, VILLAGE CORP.

Mr. DEMIENTIEFF. Senator Stevens, Chairman Borbridge and guests; I'm delivering this testimony as a past Village Council Chief, Village Corp. chairman of the board, Village Corp. president, president of Tanana Chiefs and chairman of the AFN Human Resources Committee. I know it appears that I can't hold a job, but I am intending to show my experience in relationship to Public Law 93-638. I was raised in the belief that the Tanana Chiefs is the tribal government for the Athabascan people since I first attended the reor ganization of the chiefs in 1962, at Tanana as a 10-year-old boy.

To think that the villages individually are a power to deal with is one thing, but the chiefs villages have long since realized that in unity there is strength, thus, we have the chiefs.

During my terms as chief of Nenana we contracted for services with the Government and some of those contracts exist today. However, there is no doubt that we never circumvented the chiefs and in fact, the chiefs provided solid support in obtaining those contracts.

I can only urge the adoption of the Alaska amendments and let the Tanana Chiefs Conference do its job as our only real village advocate.

Thank you. That's all I have to say.

Senator STEVENS. We have studied and, of course, that's one of the main reasons we're here.

Mr. DEMIENTIEFF. Right.

Commission BORBRIDGE. Thank you for your testimony. Is Lucy Carlo here?

STATEMENT OF LUCY CARLO, DIRECTOR, FAIRBANKS NATIVE

ASSOCIATION

Ms. CARLO. Good afternoon, my name is Lucy Carlo, and I'm director of the Fairbanks Native Association, and the Fairbanks Native Association thanks you and your committee for this opportunity to express our opinion and relate our experiences with Government contracting and with Public Law 93-638.

The Fairbanks Native Association is a private nonprofit organization of Native people residing in the Fairbanks area.

The Fairbanks Native Association has traditionally served the Natives of Fairbanks for the past 15 years. We are recognized by the Tanana Chiefs Conference as a "village" and sit on its 43-member board of directors. In March of this year, the Tanana Chiefs Conference full board of directors passed a resolution recognizing the Fairbanks Native Association as the tribal governing body and/or representative association for the Fairbanks Natives and, therefore, eligible to contract with the Federal agencies to provide services in education, employment, social services and other programs benefiting our people.

We, also, have a resolution from FNA's general membership recognizing FNA as the true representative of the Fairbanks Natives and, therefore, eligible to contract for services on their behalf.

The Bureau of Indian Affairs would not accept these resolutions in their discretionary powers to define who will and who will not contract with them. Under protest, FNA submitted a resolution from Doyon, the profitmaking regional corporation established under the Land Claims Act, which simply stated that they endorsed, recognized and supported our intent to contract with the Bureau. The Bureau failed to recognize that the Fairbanks Native Association is the tribal government which represents the Alaska Natives of the Fairbanks area, and that it was recognized as an Indian tribe for BIA contracting purposes under BIA regulations prior to the implementation of regulations pursuant to the Indian Self-Determination Act.

It is our belief and knowledge that we can and do provide the best service to our own and that the system of contracting services in most cases is the correct means to accomplish this.

Gentlemen, I also believe that any system as complex as contracting, can be improved. In this light, I would like to relate specific examples which we feel could be improved based on our past experiences.

NEGOTIATIONS

Negotiations in the past with the Bureau of Indian Affairs are untimely and at the convenience of the Bureau. Oftentimes, contracts are negotiated after the time they have expired, forcing us to more than compromise and subsequently lose program moneys because we are operating without a contract and hence, no moneys.

For example, the present BIA general assistance contract we are currently managing has 11 modifications to the original contract signed in November of 1973. This averages out to a new contract every 3 months. These modifications include requests by the Bureau to: (1) decrease program amounts; (2) decrease indirect amounts; and (3) provide extension of 2 to 3 months in duration.

Because of these modifications, financial problems are experienced as without a contract the Bureau ceases reimbursement of funds. FNA then operates with limited or no money in the bank to provide general assistance to eligible Natives as well as meeting payroll for its staff. The problem with money flow controls numbers of clients we actually can provide services to.

On another occasion, we submitted on May 25, our proposal to continue the BIA general assistance contract for 1 year starting October 1.