Assignment of Losses Incurred by the Library of Congress FEDLINK Revolving Fund, B-301714, January 30, 2004

B-301714 Jan 30, 2004 Jump To VIEW DECISION DOWNLOADS RELATED PAGES GAO CONTACTS Highlights The Library of Congress has requested our decision concerning the assignment of losses incurred by the Federal Library and Information Network (FEDLINK) revolving fund as a result of advance payments made to a defaulting contractor. Letter from Elizabeth Pugh, General Counsel, The Library of Congress, to Anthony Gamboa, General Counsel, General Accounting Office, August 15, 2003 (Pugh Letter). Specifically, the Library asks whether the revolving fund or the specific agencies on whose behalf the Library had placed orders with the defaulting contractor should bear the cost of the losses, the Library would use the fund's reserve accumulated through the assessment of administrative fees to all of FEDLINK's customers. We conclude that the FEDLINK revolving fund should cover the losses. The loss resulting from RoweCom's bankruptcy is related to the operation of the FEDLINK program, and is an appropriate expense of the revolving fund. The history of revolving funds in the federal government and the legislative history of the statue creating the FEDLINK fund reveal a clear intent for FEDLINK to operate similar to private enterprise. In the private sector, losses associated with a defaulting contractor are legitimate business costs of the enterprise, not costs to individual customers. The revolving fund, rather than the subscribing agency of customers, should bear the loss associated with RoweCom's default, and the library should utilize FEDLINK's administrative reserve to cover this deficit. If the library wishes to allocate the costs differently in the future, it should add a clause dealing with contractor defaults to the interagency agreements. View Decision B-301714, Assignment of Losses Incurred by the Library of Congress FEDLINK Revolving Fund, January 30, 2004 Decision Matter of: File: Date: DIGEST Decision The Library of Congress has requested our decision concerning the assignment of losses incurred by the Federal Library and Information Network (FEDLINK) revolving fund as a result of advance payments made to a defaulting contractor. Letter from Elizabeth Pugh, General Counsel, The Library of Congress, to Anthony Gamboa, General Counsel, General Accounting Office, August 15, 2003 (Pugh Letter). Specifically, the Library asks whether the revolving fund or the specific agencies on whose behalf the Library had placed orders with the defaulting contractor should bear the cost of the losses associated with the default. If the revolving fund, as opposed to the specific customer agencies, bears the losses, the Library would use the funds reserve accumulated through the assessment of administrative fees to all of FEDLINKs customers. As explained below, we conclude that the FEDLINK revolving fund should cover the losses. BACKGROUND The Library of Congress operates the FEDLINK intragovernmental revolving fund pursuant to 2 U.S.C. 182c. FEDLINK is a cooperative procurement, accounting, and training program designed to provide access to online databases, periodical subscriptions, books, and other library and information support services from commercial suppliers with which the Library has negotiated contracts. 2 U.S.C. 182c(f)(1). Federal agencies place orders for these products and services with FEDLINK and are able to take advantage of volume discounts. At issue here are orders for periodical subscriptions that agencies sought to acquire through FEDLINK. Once a federal agency customer executes an interagency agreement with FEDLINK, the Library issues a purchase order to a subscription vendor authorizing the vendor to place the agencys subscription orders with the appropriate publishers. Section 182c(c)(2) authorizes the Library to collect advance payments from its customer agencies, and the Library forwards the advance payments to the subscription vendor, pursuant to 31 U.S.C. 3324(d)(2).[1] In fiscal year 2003, the Library became aware that RoweCom, a subscription vendor to which it had made advance payments, had neither placed subscription orders nor made the required payments to publishers. Pugh Letter. Since RoweCom was not fulfilling the terms of its FEDLINK contracts, the Library terminated the contracts for default under Federal Acquisition Regulation procedures.[2] Id. Subsequently, RoweCom filed for Chapter 11 bankruptcy protection. FEDLINK filed a claim of approximately $3.5 million in the bankruptcy proceeding. Of that amount, the Library expects approximately $3 million will be satisfied by the delivery of subscriptions by RoweCom or by publishers to whom a corresponding portion of the claim will be subrogated. Id. Although RoweComs creditors will ultimately receive some payment from the bankruptcy estate, FEDLINK is unlikely to be reimbursed the full amount of the remaining $500,000 of its claim.