Quasi-Government: Hybrid Organizations with Both Government and Private Sector Legal Characteristics

Prepared for Members and Committees of Congress

This report provides an overview of federally related entities that possess legal characteristics of
both the governmental and private sectors. These hybrid organizations (e.g., Fannie Mae,
National Park Foundation, In-Q-Tel), collectively referred to in this report as the “quasi
government,” have grown in number, size, and importance in recent decades.
A brief review of executive branch organizational history is followed by a description of entities
with ties to the executive branch, although they are not “agencies” of the United States as defined
in Title 5 of the U.S. Code. Several categories of quasi governmental entities are defined and
discussed: (1) quasi official agencies, (2) government-sponsored enterprises (GSE), (3) federally
funded research and development corporations, (4) agency-related nonprofit organizations, (5)
venture capital funds, (6) congressionally chartered nonprofit organizations, and (7)
instrumentalities of indeterminate character.
The quasi government, not surprisingly, is a controversial subject. To supporters of this trend
toward greater reliance upon hybrid organizations, the proper objective of governmental
management is to maximize performance and results, however defined. In their view, the private
and governmental sectors are alike in their essentials, and thus subject to the same economically
derived behavioral norms. They tend to welcome this trend toward greater use of quasi
governmental entities.
Critics of the quasi government, on the other hand, tend to view hybrid organizations as
contributing to a weakened capacity of government to perform its fundamental constitutional
duties, and to an erosion in political accountability, a crucial element in democratic governance.
They tend to consider the governmental and private sectors as being legally distinct, with
relatively little overlap in behavioral norms.
Congress is increasingly engaged with the quasi government. The issues run the gamut from
enacting legislation to encourage the creation of nonprofit organizations to promote individual
national parks, to proposals to strengthen regulation of government-sponsored enterprises such as
Fannie Mae, to oversight hearings respecting national security issues at Los Alamos Laboratory.
There is nothing modest about the size, scope, and impact of the quasi government.
Time will tell whether the emergence of the quasi government is to be viewed as a symptom of
decline in our democratic government, or a harbinger of a new, creative management era where
the purportedly artificial barriers between the governmental and private sectors are breached as a
matter of principle.
This report will be updated at the beginning of each Congress.

Context ........................................................................................................................ .................... 1
In Search of a Definition.................................................................................................................2
Spectrum or Categories...................................................................................................................2
Federal Organization and Management: The Traditional View Under Question............................3
Quasi Governmental Organizations.................................................................................................6
Quasi Official Agencies............................................................................................................6
Government-Sponsored Enterprises..........................................................................................7
Federally Funded Research and Development Centers (FFRDCs).........................................12
Agency-Related Nonprofit Organizations...............................................................................14
Adjunct Organizations Under the Control of a Department or Agency............................14
Organizations Independent of, But Dependent Upon, Agencies.......................................18
Nonprofit Organizations Affiliated with Departments or Agencies..................................20
Venture Capital Funds.............................................................................................................20
Congressionally Chartered Nonprofit Organizations..............................................................24
Instrumentalities of Indeterminate Character..........................................................................28
American Institute in Taiwan............................................................................................28
National Endowment for Democracy...............................................................................29
U.S. Investigation Services...............................................................................................30
Conclusion: Paradigms in Conflict................................................................................................33
Author Contact Information..........................................................................................................35

In recent years, both Congress and the President have increasingly used hybrid organizations for
the implementation of public policy functions traditionally assigned to executive departments and 1
agencies. Instead, their preference has often been to assign administrative responsibilities to
newly created independent agencies or to hybrid organizations possessing legal characteristics of
both the governmental and private sectors. Hybrid organizations attract both support and
criticism. There are today, associated with the federal government alone, hundreds of hybrid 2
entities that have collectively been called the “quasi government.” The relationship of this
burgeoning quasi government to elected and appointed officials is a subject of growing concern,
as it touches the very heart of democratic governance: to whom are these hybrids accountable,
and how is the public interest being protected over and against the interest of private parties?
The scope and consequences of these hybrid organizations have not been extensively studied.
Basic definitional issues resist resolution. Even the language to be used in discussing the quasi
government is in dispute. Should government management be discussed in the language of law, of
economic theory, or of the business school? The traditional tools for holding executive agencies
accountable, such as the budget and general management laws, are inapplicable in most instances,
often leaving these hybrids with the freedom to pursue their own institutional interests, which
may or may not conform to the public interest as defined by the nation’s elected leadership.
The current popularity of the quasi government option can be traced to at least four major factors
at work in the political realm:
(1) the current controls on the federal budget process that encourage agencies to develop new
sources of revenues;
(2) the desire by advocates of agencies and programs to be exempt from central management
laws, especially statutory ceilings on personnel and compensation;
(3) the contemporary appeal of generic, economic-focused values as the basis for a “new
public management;” and
(4) the belief that management flexibility requires entity-specific laws and regulations, even
at the cost of less accountability to representative institutions.
This report introduces the reader to the quasi government, suggests categories of entities within
this sector, and examines their legal characteristics, behavior, and possible policy consequences.
The report will be revised and updated as new information and analyses become available.

1 This report was originally written by Ronald C. Moe, who retired from CRS. It has been revised a number of times by
the current author. Readers with questions about quasi governmental organizations may contact Kevin R. Kosar.
2 Harold Seidman, “The Quasi World of the Federal Government,” The Brookings Review, vol. 2, Summer 1988, pp.

The quasi government, virtually by its name alone and the intentional blurring of the
governmental and private sectors, is not easily defined. In general, the term is used in two ways:
to refer to entities that have some legal relation or association, however tenuous, to the federal
government; or to the terrain that putatively exists between the governmental and private sectors.
For the most part, this report will use the term quasi government in the former context, referring
to entities with some legal relationship to the federal government. The one common characteristic
to this melange of entities in the quasi government is that they are not agencies of the United
States as that term is defined in Title 5 of the U.S. Code.
If a quasi governmental entity is not an agency of government, what is it? For this report’s
purposes, it is a hybrid organization that has been assigned by law, or by general practice, some of
the legal characteristics of both the governmental and private sectors. While different categories
of quasi governmental organizations can be described and found useful as an analytic tool, such
categories are artificial, with porous lines of distinction and differentiation, and tend to be
imposed upon the disparate entities after the fact.

Two rough models suggest themselves as ways of looking at these entities.
First, there is the linear spectrum model where the existence of a quasi government between the
governmental and private sectors is designated and categories of organizations (e.g., government-
sponsored enterprises) and their relationship to the executive branch (and Congress) are described
on a descending scale from closest to the most distant.
Second, there is the categoric organization model involving, in this instance, the suggestion of
four categories: pure government organization; quasi governmental organization (“quago”); quasi
nongovernmental organization (“quango”); and pure private. A quago is essentially a government
organization that is assigned some, or many, of the attributes normally associated with the private
sector. A quango, on the other hand, is essentially a private organization that is assigned some, or 3
many, of the attributes normally associated with the governmental sector. Under this schema, the
Legal Services Corporation, for example, would be a quago, while the Red Cross would be a
Whatever the value of the quago/quango designations, especially in the comparative international
literature on corporate organizations, it shall not be used here. This report follows the linear
spectrum approach in describing the elements within the quasi government. It is possible to begin

3 There is a burgeoning comparative international literature on the quasi government as it functions today in various
countries. In many instances, the literature stresses the problems raised by these bodies for democratic theory.
Organization for Economic Cooperation and Development (OECD), Distributed Public Governance: Agencies,
Authorities and Other Government Bodies (Paris: OECD, 2002). Matthew Flinders and M.J. Smith, eds., Quango,
Accountability and Reform: The Politics of the Quasi Government (London: Macmillan, 1999). S. Weir, “Quangos:
Questions of Democratic Accountability,” in F. Ridley and D. Wilson, eds., The Quango Debate (London: Oxford
University Press, 1995), pp. 128-145; and Jonathan G.S. Koppell, The Politics of Quasi Government: Hybrid
Organizations and the Control of Public Policy (New York: Cambridge University Press, 2003).

with what are referred to in the U.S. Government Manual as “Quasi Official Agencies,” those
entities, arguably, closest to the executive branch, and move on to the other end of the spectrum,
“congressionally chartered nonprofit organizations,” those entities, arguably, the furthest from the
executive branch.

It was the intent of the framers of the Constitution that the authority and organization of the
executive branch be as much as possible unified under the President, and that Congress be the
source to which accountability was rendered. This theoretical proposition was put into practice
when the first Congress convened in 1789. One of the first orders of business was the
establishment of executive departments. Three “organic” statutes were enacted creating three 4
“great” departments; Treasury, State and War. The heads of these departments were directly
responsible to the President and were his agents (and thus the agency chiefs were removable by
him), but ultimately accountable for policy purposes to Congress. All the particular functions of
the newly created executive branch, save that of delivering the mails, were entrusted to these
With respect to fundamental authorities and lines of accountability, however, the executive branch
has never been a pristine unity. From the decision in the first Congress to give the comptroller in 5
the Department of the Treasury a substantial degree of legal autonomy within the department,
down to the more recent “independent counsels” functioning in an uneasy relationship with the 67
executive branch, not all officers have been directly accountable to the President. These
exceptions notwithstanding, the prevailing organizational norm has historically been toward an 8
executive accountable to the President.
Reinforcing the hierarchical concept of the accountable executive has been the view that authority
ought to be assigned by delegation from the President or department heads to subordinate 9
officers, rather than being assigned directly by Congress to a nondepartment head. The first

4 Discussion of the acts creating the threegreat departments may be found in James Hart, The American Presidency
in Action, 1789: A Study in Constitutional History (New York: Macmillan, 1948), chapter 7. See also: Leonard D.
White, The Federalists: A Study in Administrative History (New York: Macmillan, 1948).
5 1 Annals of Congress (1789), p. 614.
6 The federal law governing the appointment of independent counsels expired June 30, 1999. CRS Report RL31246,
Independent Counsel Law Expiration and the Appointment ofSpecial Counsels, by Jack Maskell. See also Katy J.
Harriger, “Separation of Powers and the Politics of Independent Counsels,” Political Science Quarterly, vol. 109,
Summer 1994, pp. 261-86; and Louis Fisher, “The Independent Counsel Statute, in Mark Rozell and Clyde Wilcox,
eds., The Clinton Scandal and the Future of American Government (Washington: Georgetown University Press, 2000),
pp. 60-80.
7 Charles Tiefer, “The Constitutionality of Independent Officers as Checks on Abuses of Executive Power,” Boston
University Law Review, vol. 63, 1983, pp. 59-103.
8 Peri E. Arnold, Making the Managerial Presidency: Comprehensive Reorganization Planning, 1905-1996, 2nd ed.
(Lawrence, KS: University Press of Kansas, 1999). Ronald C. Moe, Administrative Renewal: Reorganization th
Commissions in the 20 Century (Lanham, MD: University Press of America, 2003).
9 In the administration of James Monroe (1817-1825), the President objected to a proposal to establish the Patent Office
as an agency independent of any executive department. He argued that such a proposal would result in a usurpation of
his powers as President. “I have always thought that every institution of whatever nature soever it might be, ought to be

substantial breaks with this concept did not occur until the creation of the Civil Service
Commission in 1883 and the Interstate Commerce Commission in 1887. Subsequently, more th
independent regulatory commissions would be added. In the 20 century, an increasing number of
“independent” agencies were established, the term “independent” meaning that an agency was not
established within a department (e.g., Tennessee Valley Authority; National Aeronautic and Space
Administration). Nonetheless, the independent agencies generally remained full government 10
agencies operating under all the general management laws, except where exempted.
The view that all government activities should be accountable in some manner to politically th
responsible officials received its most forceful iteration in the 20 century in the Hoover
Commission report of 1949:
[The] organization and administration of the Government ... must establish a clear line of
control from the President to these department and agency heads and from them to their
subordinates with correlative responsibility from these officials to the President, cutting
through the barriers which in many cases made bureaus and agencies partially independent of 11
the Chief Executive.
Through the 1950s the organization and management of the executive branch generally followed
some basic rules. If an entity was established by Congress to accomplish a public purpose, the
probability was that it was an agency of the United States operating under the general
management laws enforced by the President. These values, originating with the founding fathers,
as reinterpreted by the Progressives, featured the centrality of public law, departmental integration
and political accountability. The President was viewed as the Chief Manager of the administrative 12
system. The governmental and private sectors cooperated, but were kept legally distinct in the
interests of protecting citizens’ rights against a potentially arbitrary government.
These values began to be challenged in the 1960s as evidenced in the establishment of the
Communications Satellite Corporation (ComSat) in 1962. Congress, in this instance, created a
private, for-profit corporation indicating a more flexible attitude towards organizational
innovation. Additional organizations appeared that were intentionally mixed in their legal
characteristics. The term “quasi governmental” began to appear in legislation, and unusual
structures would be constructed to promote “flexibility,” even when flexibility sometimes resulted
in less accountability. This was one of the arguments made for creating the Corporation for Public 13
Broadcasting in 1967 (81 Stat. 365; 47 U.S.C. 396). Other factors began to further erode the
accountable executive model, such as greater dependence upon third parties, usually private 14
contractors, for the performance of governmental functions. The number of full-time civil

comprised within some one of the Departments of the Government, the chief of which only should be responsible to the
Chief Executive magistrate of the Nation. The establishment of inferior independent departments, the heads of which
are not, and ought not be, members of the administration, appears to me to be liable to many serious objections, which
will doubtless occur to you.” (2 American State Papers, Mis., p. 192).
10 CRS Report RL30795, General Management Laws: A Compendium, coordinated by Clinton T. Brass.
11 U.S. Commission on Organization of the Executive Branch of the Government, The Hoover Commission Report
(New York: McGraw-Hill Book Company, 1949), p. 7.
12 Ronald C. Moe, “At Risk: The Presidents Role as Chief Manager,” in James Pfiffner, ed. The Managerial
Presidency, 2nd ed. (College Station, TX: Texas A&M Press, 1999), pp. 265-84.
13 Robert K. Avery and Robert Pepper, “An Institutional History of Public Broadcasting, Journal of Communications,
vol. 30, Summer 1980, pp. 126-38.
14 Donald F. Kettl, “Managing Indirect Government,” in Lester M. Salamon, ed., The Tools of Government: A Guide to

servants in the federal government as a percentage of the workforce began what was to become a 15
substantial decline, a decline accelerated in recent years.
In the late 1980s, the concept of legally distinctive governmental and private sectors began to be 16
seriously questioned. In its place a “new public management” concept emerged that argued that
the governmental and private sectors were essentially alike and subject to the same, economic 17
based, behavioral norms and practices. Internationally, the New Public Management (NPM)
movement, coupled with the movement toward privatization of governmental agencies and
programs, became the reigning orthodoxy. Many elements of NPM were to be found in Vice 18
President Al Gore’s National Performance Review (NPR) which sought to “reinvent” some 19
executive branch units and create corporate style, entrepreneurial structures.
The purported, and often realized, strength of entrepreneurial management lies in the flexibility it
provides managers to improve the performance of their agencies. Performance in the
entrepreneurial context, is usually measured in “output” or “results” terms, rather than in
conformance to process regulations. Hence, risk-taking by managers to achieve improved
performance is to some degree accepted and encouraged. The evidence thus far available suggests
that the new, entrepreneurial management has resulted in improved management in many
executive agencies. On the other hand, simply improving performance, as was the case with the
Internal Revenue Service in the early 1990s, has occasionally proven politically
counterproductive to the agency if the improved performance (in this case increased tax
collections) came at the apparent expense of other values, such as due process of law. The rapid 20
ascendency of these “new” values in the United States has not been without challenge and has

the New Governance (New York: Oxford University Press, 2002), pp. 490-511.
15 In 1970, federal civilian employment was 2,997,000, or 3.8 percent of the U.S. employment total. By 2004, federal
civilian employment had been reduced to 2,743,000, or 2 percent of the U.S. employment total. U.S. Bureau of the
Census, Statistical Abstract of the United States (Washington: GPO, 2004), p. 321. Meanwhile, there are at least 7
million government contractors. See Paul C. Light, The New True Size of Government (New York: New York
University, Aug. 2006), p. 11, available at http://wagner.nyu.edu/performance/files/True_Size.pdf.
16 See, for example: Barry Bozeman, All Organizations Are Public: Bridging Public and Private Organizational
Theories (San Francisco: Jossey-Boss, 1987); Robert D. Behn, Rethinking Democratic Accountability (Washington:
Brookings Institution, 2001); Ronald C. Moe,The Emerging Federal Quasi Government: Issues of Management and
Accountability,” Public Administration Review, vol. 61, May/June 2001, pp. 290-312.
17 The termNew Public Management” (NPM) gained currency in part through its use by the Organization for
Economic Cooperation and Development (OECD) to refer to the literature, propositions, and practices promoting
conceptual convergence of the governmental and private sector management. OECD, Governance in Transition: Public
Management Reforms in OECD Countries (Paris: OECD, 1995); and Larry Terry,Administrative Leadership, Neo-
Managerialism, and the Public Management Movement,” Public Administration Review, vol. 58, May/June 1998, pp.
18 The term National Performance Review (NPR) refers both to a report and to an organization. In 1993, under Vice
President Al Gore’s leadership, the NPR issued a report titled: From Red Tape to Results: Creating a Government That
Works Better and Costs Less (Washington: GPO, 1993). The NPR, a nonstatutory organization, continued to issue
reports through 1997 (e.g., Businesslike Government: Lessons Learned from America’s Best Companies, 1997). In
1998, the NPR organization changed its name to the National Partnership for Reinventing Government. For a critical
overview of the “reinventing government” exercise, see Michael E. Norris, Reinventing the Administrative State
(Lanham, MD: University Press of America, 2000).
19Public entrepreneurship is a management approach developed by the reinventing government movement.... The
transformation of existing, outdated bureaucratic organizations into agile, anticipatory, problem-solving entities is what
reinventionists call ‘entrepreneurial government.’” Steven Cohen and William Eimicke,Is Public Entrepreneurship
Ethical? A Second Look at Theory and Practice, Public Integrity, vol. 1, Winter 1999, p. 55.
20 The debate between those supporting the entrepreneurial government management paradigm and those supporting a

had consequences with respect to the quasi government, as will be discussed more fully later in
the report.

Within the quasi government, it is possible to begin with those entities that are, arguably, closest
to the executive branch. The United States Government Manual, 2006-2007, contains a section
titled; “Quasi Official Agencies,” listing some four entities: Legal Services Corporation; the
Smithsonian Institution; State Justice Institute; and the United States Institute of Peace. In prior
years, other entities have been accorded this designation, for example, the National Railroad
Passenger Corporation (AMTRAK); the National Consumer Cooperative Bank; and the National
Academy of Sciences. The category is something of a “catchall” designation to include entities
the National Archives and Records Administration (NARA), compilers of the Manual, find
difficult to comfortably fit elsewhere. Insofar as NARA provides a defining characteristic for
quasi official agencies, it is that they “are not agencies under the definition of 5 U.S.C. 105 but
are required by statute to publish certain information on their programs and activities in the 21
Federal Register,” also published by NARA.
The issues associated with quasi official agencies tend to be related to their legal status. Because
they occupy a realm between the private and the public, a quasi governmental entity may find it
in its interest to assert its private or governmental status. Quasi official agencies, like other
elements of the quasi government, may exist in what has been called “the twilight zone” between 22
the governmental and private sectors. This status, while presumably permitting considerable
autonomy from regular lines of accountability to managerial agencies (e.g., the Government
Accountability Office) is not, as is often argued in their defense, protection from “political
influences.” Quasi official agencies, like other forms of quasi governmental institutions, may
sometimes be highly “political,” and subject to pressures not dissimilar to that encountered by 23
regular executive agencies.

public law management paradigm occupies a good deal of the current public management literature. See, for example:
David Osborne and Ted Gaebler, Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public
Sector from Schoolhouse to State House, City Hall to the Pentagon (Reading, MA: Addison Wesley, 1992); H. George
Frederickson, The Spirit of Public Administration (San Francisco: Jossey-Bass, 1997); and Ronald C. Moe,The
Importance of Public Law: New and Old Paradigms of Government Management,” in Phillip J. Cooper and Chester A.
Newland, eds., Handbook of Public Law and Administration (San Francisco: Jossey-Bass, 1997), 41-57.
21 U.S. Office of the Federal Register, National Archives and Records Administration, United States Government
Manual, 2006-2007 (Washington: GPO, 2006), p. 555.
22 Harold Seidman, Politics, Position and Power: the Dynamics of Federal Organization, 2nd ed. (Oxford University
Press, 1975), ch. 9.
23 One argument often made when proposing independence, autonomy, or quasi governmental status for an agency is
that such a move will result in less political and interest group pressures being brought to bear on the agency. That such
an assertion is often not the case is illustrated by a study of the Social Security Administration (SSA), made
independent of the Department of Health and Human Services (HHS) in 1994. “Few if any putative benefits from
reorganization have been realized by the SSA. Removing the agency from HHS has meant, of course, independence
from the agencys policy tendencies, but it has left the SSA more exposed to its various clientele or constituency groups
and to congressional and executive branch politics of divided government.” David G. Smith, “Organizational Models

Distinctions between the governmental and private sectors are especially blurred with respect to a
category of organization known as “government-sponsored enterprises” (GSE). There is no
established criteria defining standards to be met prior to the establishment of a GSE, nor is there a
listing of GSEs in the U.S. Code. Each GSE is created sui generis with its attributes defined by
Congress in its enabling legislation. For the purpose of budgetary treatment, Congress has defined
the term “government-sponsored enterprise” in the Omnibus Reconciliation Act of 1990 to refer
a corporate entity created by a law of the United States that
(A) (i) has a Federal charter authorized by law;
(ii) is privately owned, as evidenced by capital stock owned by private entities or
(iii) is under the direction of a board of directors, a majority of which is elected by
private owners;
(iv) is a financial institution with power to
(I) make loans or loan guarantees for limited purposes such as to provide credit for
specific borrowers or one sector; and
(II) raise funds by borrowing (which does not carry the full faith and credit of the
Federal Government) or to guarantee the debt of others in unlimited amounts; and
(B) (i) does not exercise powers that are reserved to the Government as sovereign (such as
the power to tax or to regulate interstate commerce);
(ii) does not have the power to commit the Government financially (but it may be a
recipient of a loan guarantee commitment made by the Government); and
(iii) has employees whose salaries and expenses are paid by the enterprise and are not 24
Federal employees subject to title 5.
Few scholars of public administration and finance are likely to argue that this definition is
incorrect. However, some have argued that the above definition omits an essential
characteristic—a GSE “benefits from an implicit federal guarantee to enhance its ability to 25
borrow money.”

for Restructuring Fee-for-Service Medicare,” in Robert D. Reischauer, Stuart Butler, and Judith Lave, eds., Medicare: st
Preparing for the Challenges of the 21 Century (Washington: National Academy of Social Insurance, 1998), p. 230;
and J.L. Mashaw, “Reinventing Government and Regulatory Reform, Studies in the Neglect and Abuse of
Administrative Law, University of Pittsburgh Law Review, vol. 57, 1996, pp. 405-22.
24 104 Stat. 1388-607, Sec. 13112; 2 U.S.C. 622(8).
25 Ronald C. Moe and Thomas H. Stanton, “Government-Sponsored Enterprises as Federal Instrumentalities:
Reconciling Private Management with Public Accountability,” Public Administration Review, vol. 49, July/Aug. 1989,
p. 321.

Historically, the federal government has been involved in few commercial enterprises on an
equity basis. There were some early instances of the federal government participating in
otherwise private corporate enterprises on a shared ownership basis, most notably the first and 26
second Bank of the United States. This practice came into question, however, as a consequence 27
of a Supreme Court ruling in 1819. From that time to the present, the federal government, with
few exceptions, has consciously avoided shared ownership involvement with private,
nongovernmental entities.
Congress created GSEs to help make credit more readily available to sectors of the economy 28
believed to be disadvantaged in the credit markets. There are presently five GSEs, properly
defined. Three of the GSEs—Federal National Mortgage Association (Fannie Mae), Federal
Home Loan Mortgage Corporation (Freddie Mac), and the Federal Agricultural Mortgage
Corporation (Farmer Mac)—are investor owned; the two others—the Federal Home Loan Bank
System and the Farm Credit System—are owned cooperatively by their borrowers. In addition,
two institutions—the Financing Corporation and the Resolution Funding Corporation—are
governmental bodies that were given GSE status so that their funding would not appear to be
federal borrowing for purposes of the federal budget. Finally, one well-known GSE, Sallie Mae
(Student Loan Marketing Association), has recently shed its GSE status and become a wholly 29
private firm.
Defenders of the current GSEs and the economic concepts upon which they are based argue that
GSEs continue to meet a national need that would not otherwise be met or be met poorly by
corporations fully in the private sector. Further, they contend that the current GSEs are generally
well managed, financially sound, and assist less-advantaged mortgage borrowers. They maintain
that the subsidy retained from the presence of the federal implied guarantee of GSE obligations is
passed on to the consumer in the form of lower mortgage rates. Fannie Mae, in its national
advertising campaign, suggests that its special GSE status is worth a quarter of a percent in
mortgage interest and thus 400,000 families are provided mortgages that would not otherwise be
qualified to do so. “At Fannie Mae, we have one job. One mission. One purpose. To do whatever 30
we can to lower the cost of home ownership.”
Contemporary GSEs are part of a tradition of mercantilist financial institutions in that the
government assigns them benefits and privileges in their charters that are not available to fully 31
private corporations. In return, the government is able to limit the activities and lines of business

26 Bray Hammond, Banks and Politics in America From the Revolution to the Civil War (Princeton, NJ: Princeton
University Press, 1957); John T. Holdsworth and David Dewey, The First and Second Banks of the United States, S. stnd
Doc. 571, 61 Cong., 2 sess. (Washington: GPO, 1910); and Leonard D. White, The Jacksonians (New York:
Macmillan, 1954), chapter 24.
27 McCulloch v. Maryland (17 U.S. (4 Wheat.) 315, (1819)). The Supreme Court’s ruling implied that partial federal
ownership of a corporation, in this instance the Bank of the United States, assigned the corporation certain attributes
normally reserved to the sovereign authority (e.g., non-taxable status in the several states). See also: Osborn v. Bank of
the United States (17 U.S. (4 Wheat.) 738, (1824)).
28 Thomas H. Stanton, Government Sponsored Enterprises: Mercantilist Companies in the Modern World
(Washington: AEI, 2002).
29 J. E. Dean, S. L. Moskowitz, and K. L. Cipriani, “Implications of Privatization of Sallie Mae, Journal of Public
Budgeting, Accounting and Financial Management, vol. 11, Spring 1999, pp. 56-80; and J. Kevin Corder and Susan M.
Hoffman, “Privatizing Federal Credit Programs: Why Sallie Mae?” Public Administration Review, vol. 64, March/April
2004, pp. 180-191.
30 Fannie Mae advertisement, Washington Post, May 11, 1999, p. A4.
31 Thomas H. Stanton, “Nonquantifiable Risks and Financial Institutions: The Mercantilist Legal Framework of Banks,

of GSEs and require them to promote selected public policy objectives. The present GSEs are 32
traceable in concept to several enterprises created during the Great Depression. GSEs provide
financial services such as issuing capital stock and short and long term debt instruments,
guaranteeing mortgage-backed securities (MBS), purchasing loans and holding them in their own
portfolio, funding activities (e.g., subsidized mortgages in selected areas), and collecting fees for 33
guarantees and other services.
While the details may vary from one instance to the next, Congress provides that GSEs typically
have four characteristics:
• private ownership;
• implicit federal guarantee of obligations;
• activities limited by congressional charter; and
• limited competition.
The economic rationale for GSEs is the belief that without such a government sponsored
institution, a critical area of necessary debt financing would go unserved, or would be serviced at
an expensive or inefficient level. Government, according to this rationale, should use some of its
sovereign powers (e.g., full faith and credit of the U.S. Treasury) to encourage the development of
private financial intermediaries to serve selected markets. In terms of meeting their original
congressional objective, that was to liquify the mortgage credit markets on a national rather than
regional or state basis, the GSEs have been remarkably successful. But with this success have
come reservations and questions.
There is nothing modest about the size and scope of GSEs. Due to the implicit federal backing for 34
their notes, GSEs have become some of the largest financial institutions in the United States. In

2005, Freddie Mac reported outstanding debt of nearly $749 billion; in 2003, Fannie Mae 35

reported outstanding debt of approximately $962 billion. Meanwhile, the Federal Home Loan 36
Bank System reported $816 billion in consolidated debt outstanding in mid-2004.
Two issues stand out when discussing the finances of GSEs; safety and soundness, and the utility
and accountability resulting from their status as a government instrumentality. GSEs primarily act
as financial intermediaries to assist borrowers in housing, education, and agriculture. Although
they are privately owned, they benefit financially from government sponsorship. Their securities

Thrifts, and Government-Sponsored Enterprises, in Charles A. Stone and Anne Zissu, eds., Global Risk-Based Capital
Regulations (Burr Ridge, IL: Irwin Professional Publishing, 1994), vol. 1, pp. 57-97.
32 The Farm Credit Banks, however, pre-date the Depression, having been established in 1916. (39 Stat. 360).
33 U.S. General Accounting Office, Financial Services Institutions: Information for Assessing the Government’s
Potential Financial Exposure, GAO/GGD-98-125, (Washington: GAO, 1998), p. 3.
34 There is no explicit guarantee in law for GSE liabilities. Whether correct or not, the specific liabilities incurred by
GSEs are considered by the market as contingent or potential liabilities of the federal government. There is a general
presumption that the federal government would not let the GSEs fail and declare bankruptcy.
35 Due to accounting difficulties at Fannie Mae, the most recent data available are from 2003. Office of Federal
Housing Enterprise Oversight, 2006 OFHEO Report to Congress (Washington: OFHEO: 2006), Tables 14 and 4,
respectively, available at http://www.ofheo.gov/media/pdf/annualreport2006.pdf.
36 Office of Finance, Federal Home Loan Banks, Federal Home Loan Banks (Reston, VA: FHLB, 2004), p. 24,
available at http://www.fhlb-of.com/specialinterest/finreportframe.html.

can collateralize public deposits (e.g., Social Security Administration deposits), and can be held
in unlimited amounts by most banks and thrifts. They are not subject, with one exception (Farmer 37
Mac), to Securities and Exchange Commission (SEC) registration, and their corporate earnings
are exempt from state and local income taxes, the latter practice attracting particular 38
controversy. They may borrow virtually unlimited amounts of money in the federal agency
credit market on favorable terms and directly from the Treasury, at the latter’s discretion. Most
importantly, the credit market perceives this federal sponsorship as an implied federal guarantee
of their corporate debt and obligations. These factors enable GSEs to borrow monies at a
significantly lower interest rate than competitors. Reviewing these special privileges (subsidies),
it is not surprising that some argue that GSEs grow rapidly at the expense of would-be 39
Despite their successes, GSEs have faced operational turbulence. In 1988, the federal government
thought it prudent to authorize $8 billion of financial assistance for one insolvent GSE, the Farm
Credit System. Also, Fannie Mae was in trouble in the early 1980s, when its capitalization
dropped until the corporation had a negative net worth of $11 billion. These instances, plus the
sheer size and growth of a putative unfunded liability upon the Treasury, has prompted some to be
concerned about the risks GSEs pose to the political as well as economic system. As early as

1991, Thomas Stanton voiced the opinion that:

Such huge institutions represent an uncomfortable concentration of risk. If anything happens
to management quality or prudence (for example, if Fannie Mae is again tempted to play the
interest-rate yield curve or if a lower-quality management team took control of one of the
enterprises), the financial consequences could rival those of the thrift industry. The federal 40
government is clearly better protected if it diversifies this kind of risk.
GSEs also have been accused of mission creep. GAO has questioned the housing GSEs for 41
moving into non-mortgage investment programs.
In recent years, both Congress and the housing GSE regulator (the Office of Federal Housing
Enterprise Oversight (OFHEO) have expressed concern respecting the size, the systemic risk to 42
the nation’s financial system, and the accounting practices of the GSEs. Concern over the

37 In July 2002, Fannie Mae and Freddie Mac announced they would voluntarily register their common stock with the
SEC. CRS Report RS21263, Fannie Mae, Freddie Mac, and SEC Registration and Disclosures, by Mark Jickling.
38 CRS (archived) Report 95-952E, Unfunded Mandates and State Taxation of the Income of Fannie Mae, Freddie
Mac, and Sallie Mae: Implications for D.C. Finances, by Dennis Zimmerman, available from the author of this report.
39 U.S. Congressional Budget Office, Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac,
(Washington: CBO, 1996), p. xii. The value of the subsidy has been a source of intense debate between the GSEs and
their overseers. CBO reported that the subsidy was worth $23 billion in 2003, up almost 70 percent from $13.6 billion
in 2000. With respect to Fannie Mae and Freddie Mac, CBO estimated that they retained $6.2 billion of the perceived
subsidy while $13.6 billion was passed along to borrowers in the form of lower mortgage costs. Congressional Budget
Office, Updated Estimate of the Subsidies of the Housing GSEs (Washington, CBO: April 2004).
40 Stanton, A State of Risk, p. 196.
41 U.S. General Accounting Office, Federal Oversight Needed in Nonmortgage Investments, GAO/GGD-98-48
(Washington: GAO, 1998). A number of critics believe that GSEs have accomplished their original purpose to rectify
imperfections in the secondary mortgage market and are no longer necessary or desirable. These individuals tend to
advocate privatizing the GSEs and allowing them to compete against private firms. For example, see Peter J. Wallison
et. al., Privatizing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks: How and Why (Washington: The
AEI Press, 2004).
42 CRS Report RL32069, Improving the Effectiveness of GSE Oversight: Legislative Proposals in the 108th Congress,
by Loretta Nott and Mark Jickling; and CRS Report RL32795, Government-Sponsored Enterprises (GSEs): Reform

condition of the housing GSEs was heightened in 2003 and 2004 when significant accounting
irregularities were discovered at both Freddie Mac and Fannie Mae. Both companies had to 43thth
restate their earnings. In response, the 108 and 109 Congresses held hearings and considered
legislation that would fundamentally alter the regulations and regulatory agencies for overseeing 44
The political accountability issues raised by GSEs’ hybrid character resist generalization. GSEs
are instrumentalities, not agencies, of the United States and this distinction is both legally and
administratively important. The federal government’s control over an institution differs
significantly depending upon whether that institution is an agency or instrumentality.
An agency (as defined in Title 5) is managed directly through the federal management hierarchy.
As a general rule, an agency is subject to all general management laws and regulations provided
in the U.S. Code unless exempted from such coverage in either its enabling statute, or by virtue of
being part of an exempted class of agency. Thus, an agency is subject to federal appointment of
its senior officers (often requiring Senate confirmation), to civil service and federal procurement
laws, and to the federal budget and other direct federal management controls, unless exempted.
An instrumentality of government, on the other hand, is a privately-owned institution not subject
to any of the general management laws and regulation unless so indicated in its enabling
legislation (charter). An instrumentality is assigned in its charter limited prerogatives (e.g.,
immunity from state taxation) normally associated with the government’s sovereign authority. In
return for this limited assignment of governmental powers, an instrumentality cannot on its own
authority alter the charter or conduct activities contrary to the intent of the charter. A GSE is
supervised but not directly managed by the federal government.
Primary accountability of GSE management is not to the federal government, or to the borrowers,
but to the corporation’s shareholders. Investors come first. As Sallie Mae’s then-Chief Executive
Officer told a Senate oversight subcommittee some years ago: “We are a private corporation and
as such, with stockholders and bondholders, we have a fiduciary responsibility to those
individuals .... We are not charged with subsidizing the guaranteed student loan program or 45
subsidizing the students.”
The accountability issue for GSEs, and for much of the quasi government, involves the allocation
of benefits and risks between private parties and the federal government and taxpayer. One
observer, Harold Seidman, has remarked: “Intermingling of public and private purposes in a

Legislation in the 109th Congress, by Mark Jickling, pp. 2-3.
43 CRS Report RS21567, Accounting and Management Problems at Freddie Mac, by Mark Jickling; and CRS Report
RS21949, Accounting Problems at Fannie Mae, by Mark Jickling.
44 In testimony before the Senate Banking Committee, Federal Reserve Board Chairman Alan Greenspan, noted a
paradox facing Congress in “fixing the regulatory apparatus for GSEs. “[W]orld-class regulation, by itself, may even
worsen the situation if market participants infer from such regulation that the government is all the more likely to back
GSE debt.” Testimony of the Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, in U.S.
Congress, Senate Committee on Banking, Housing, and Urban Affairs, Proposals for Improving the Regulation of the thnd
Housing Government Sponsored Enterprises, hearings, 108 Cong., 2 sess., Feb. 24, 2004, p. 9.
45 Statement of Edward A. Fox, President and CEO of Sallie Mae, before the Subcommittee on Education, Arts and
Humanities, Committee on Labor and Human Resources of the U.S. Senate, Oversight of Student Loan Marketing ndnd
Association (Sallie Mae), Hearings, 102 Cong., 2 sess. (Washington: GPO, 1982), p. 135.

profit making corporation almost inevitably means subordination of public responsibilities to
corporate goals. We run the danger of creating a system in which we privatize profits and 46
socialize losses.” Supporters would respond to this assertion by contending whatever profits
they make are ultimately returned to benefit the public through lower mortgage rates.
One category of organization in the quasi government is largely a World War II and immediate 47
postwar phenomenon, the federally funded research and development center (FFRDC). The
FFRDC is a hybrid organization designed to meet a federal need through the use of private
organizations. In World War II, there was a national emergency requirement that scientific and
engineering talent be rapidly assembled and put to work. National laboratories such as those at
Oak Ridge and Los Alamos were created to be government owned, but operated by non-federal
organizations which were not fettered by civil service rules or most general management laws.
Under wartime conditions, these government-owned, contractor operated (GOCO) facilities
worked quite well. Immediately after the war, the new Department of Defense, and particularly
the Air Force, was reluctant to part with this talent base they had assembled, and sought ways and
means to keep them in service to the government. The decision was to establish some private,
nonprofit corporations to do contract work for the Armed Services. These corporations would be
solely or largely dependent upon the federal government contracted projects.
The first FFRDC was RAND, created by the Air Force in California in 1947.48 This pioneer was
followed over the years by such well-known FFRDCs as Mitre Corporation, Aerospace, and the
Institute for Defense Analyses. Of the 37 FFRDCs functioning in 2006 (down from 41 in 1988), 49
most were established in the 1950s and 1960s. Various FFRDCs have ceased to be listed,
although not all those unlisted have ceased to exist; in several instances they have been
transformed into private organizations. This, though, does not mean that FFRDCs are fading
away. In the past decade, a new FFRDC was established by the Internal Revenue Service and
Congress authorized the Department of Homeland Security to establish an FFRDC (P.L. 107-396, 50
Title III). Although the Departments of Defense and Energy account for the bulk of the
FFRDCs, other federal entities have FFRDCs, including the National Science Foundation, the
Federal Aviation Administration, and the Department of Homeland Security, to name just a few.
According to the most up-to-date data available, annual federal obligations to FFRDCs were 51
approximately $7-$8 billion in FY2003, FY2004, and FY2005.

46 Harold Seidman, Politics, Position, and Power: The Dynamics of Federal Organization, 5th ed. (New York: Oxford
University Press, 1998), p. 213.
47 For a brief history of FFRDCs, consult: James S. Hostetler, Federally Funded Research and Development Centers: A
Proper Role in the 1990s (Vienna, VA: Professional Services Council, 1990).
48 Bruce L. R. Smith, The RAND Corporation: A Case Study of a Nonprofit Advisory Corporation (Cambridge, MA:
Harvard University Press, 1966).
49 A list of FFRDCs may be found in Ronald L. Meeks, Master Government List of Federally Funded R&D Centers
(Washington: National Science Foundation, 2006), available at http://www.nsf.gov/statistics/nsf06316/.
50 Mitre IRS FFRDC website, available at http://www.mitre.org/about/ffrdcs/cem/about/overview.html; and CRS
Report RS21542, Department of Homeland Security: Issues Concerning the Establishment of Federally Funded
Research and Development Centers (FFRDCs), by Michael E. Davey.
51 National Science Foundation, Division of Science Resources Statistics, Federal Funds for Research and
Development: Fiscal Years 2003—05, NSF 06-313, Project Officer, Ronald L. Meeks (Arlington, VA: NSF, 2006),
Tables 11-13, available at http://www.nsf.gov/statistics/nsf06313/tables.htm#group1.

Critics have complained that FFRDCs provide fertile grounds for activities that inappropriately
mix public funds and private interests. Critics see favoritism when FFRDCs receive large
contracts without competitive bidding. Critics have also pointed to the interflow of personnel
between government agencies, FFRDCs, and companies that work for FFRDCs. Critics say there
is a revolving door between these entities and they decry “interlocking directorships” that arise
(such as when a former Secretary of Defense took board positions at RAND and General 52
Dynamics Corp.) This latter charge is particularly significant because FFRDCs are supposed to
be expertise-based organizations that are to impartially oversee the use of federal funds that are to
advance a governmental purpose.
The great strength of FFRDCs appears to lie in their flexibility to assemble teams of technical
experts on a project basis. High on the list of positive results supporters claim for FFRDCs is
their ability to promote technology transfers between the governmental and private sectors. The
knowledge base created by the agencies’ use of FFRDCs often serves as a foundation for
commercially relevant efforts in the private sector. The U.S., many contend, is not as effective as
other nations in taking the results of basic research and transforming them into commercially 53
viable products to be sold in world markets. FFRDCs are intended to promote and facilitate this
transfer and development process.
Congress has been interested in FFRDCs almost from their inception. Some in Congress have
viewed the FFRDCs as a means to circumvent civil service hiring practices and salary limitations.
While they operate as nonprofit entities, FFRDCs can be a substantial source of revenue for 54
associations and contractors, and there have been problems with conflict of interest issues.
FFRDCs are often difficult to hold accountable. They can have an advantage in competing with
private firms for contracts: as nonprofit corporations, they are exempt from most taxation; their
facilities and equipment are owned or financed, for the most part, by the federal government, and
they receive fees for operating expenses without having to assume business risks or costs
associated with competing for most federal work.
Questions by Congress have led to hearings, warnings, and some changes in law (e.g.,
Competition in Contracting Act of 1984; 98 Stat. 1175) that reduced the scope of contract work
available to FFRDCs, making more outsourced work available to competitive contracting. Also,
Congress has limited the power of the Secretaries of Defense, Army, Navy, Airforce, and the
heads of some other agencies to create FFRDCs (10 U.S.C. 2367).
Unusual and sensitive issues of conflict of interest may be present with FFRDCs, particularly
when a FFRDC is an affiliate of a non-FFRDC corporation. FFRDCs often have privileged access
to government information, plans, data, employees, and facilities which may be difficult to
insulate from private partners involved in for-profit activities. Critics maintain that unbiased
advice may also be difficult to provide when the future or fate of the advising FFRDC may be
adversely affected.

52 Steven Pearlstein, “Reining In Pentagons Think Tanks,Washington Post, July 28, 1991, p. H-1.
53 CRS Report RL33527, Technology Transfer: Use of Federally Funded Research and Development, by Wendy H.
Schacht; and Michael M Cow, Mark A. Emmert, and Carol I. Jacobson, “Government-Supported Industrial Research
Institutes in the United States,” Policy Studies Journal, vol. 19, Fall 1999, pp. 59-74.
54 E.g., interlocking directorships and the co-mingling of FFRDC and contractor interests in ways that compromise the
FFRDC’s objectivity in overseeing the contractor work.

Federal management of FFRDCs is based upon the Federal Acquisition Regulation (FAR,
35.017). FAR provides guidelines to be followed in establishing, organizing, and managing
FFRDCs and limits agencies’ use of FFRDCs to meet “some long-term research or development
need which cannot be met effectively by existing in-house or contractor resources.” (FAR,


The term, “agency-related nonprofit corporations,” represents an attempt to classify under one
heading a number of different types of organizations that share one characteristic: a legal
relationship with a department or agency of the federal government. These relations may differ
greatly from one situation and organization to the next. To assist our review, however, nonprofit
organizations with legal relationships to departments and agencies will be considered under three
categories: (1) adjunct organizations under the control of a department or agency; (2)
organizations independent of, but dependent upon, departments and agencies; and (3) nonprofit
organizations voluntarily affiliated with departments and agencies. Generally, the latter category
of organizations are established under state or District of Columbia law. These three categories
are not pure by any means. While these distinctions have an arbitrary character imposed after the
fact, there is nonetheless some utility in beginning the review of the agency-related nonprofit
organization category within the quasi government as being of three essential types.
There are, at this point, an indeterminate number of organizations under the control of a
department or agency; this review must therefore be illustrative, rather than comprehensive.
Nonetheless, a survey of several such departmental or agency controlled organizations facilitates
an understanding of the scope and nature of such organizations.
The Department of Agriculture makes extensive use of adjunct organizations. Congress has
chartered through statute at least 17 agricultural commodity organizations (e.g., National Pork 55
Board, National Dairy Promotion and Research Board). These entities engage in the generic
promotion of, research on, and information activities for agricultural commodities, thereby, it is
hoped, increasing the total market for a commodity separate from the promotion of any specific
brand name of that commodity. The Secretary of Agriculture is assigned varying degrees of
authority over these boards individually. In an effort to make uniform the oversight of such
boards and the processes for creating additional boards, Congress passed the Commodity
Promotion, Research, and Information Act of 1996 (P.L. 104-127; 7 U.S.C. 7411).
The law permits the Secretary to establish new commodity organizations (usually referred to as
“boards” or councils”) under departmental orders. The Commodity Promotion Act of 1996 is
similar to a general incorporation act containing specific provisions to be included in the
individual charters approved by the Secretary.
The provisions in the act respecting the annual activities and budget of the boards illustrate the
type and level of secretarial and agency involvement with the boards.

55 CRS Report 95-353, Federal Farm Promotion (Check-Off) Programs, by Geoffrey S. Becker.

SEC. 515 (e) Activities and Budgets
(1) ACTIVITIES—Each [secretarial order to create a board] shall require the board
established under the order to submit to the Secretary for approval plans and projects for
promotion, research, or information relating to the agricultural commodity covered by the
(A) SUBMISSION TO SECRETARYEach order shall require the board
established under the order to submit to the Secretary for approval a budget of its
anticipated annual expenses and disbursements to be paid to administer the order. The
budget shall be submitted before the beginning of the fiscal year and as frequently as
may be necessary after the beginning of the fiscal year.
(B) REIMBURSEMENT OF SECRETARYEach order shall require that the
Secretary be reimbursed for all expenses incurred by the Secretary in the
implementation, administration, and supervision of the order, including all referenda
costs incurred in connection with the order.
The concept behind these “independent” boards and councils is to encourage the commodity
interests themselves to organize and propose to the Secretary that such an organization be
chartered to promote a product (e.g., milk) generically, rather then by brand-name. These boards
and councils are authorized by law to finance their activities by collecting “assessments” from
members according to a rate structure that has received the approval of the Secretary. Once a
producer is in one of the commodity promotion organizations, however, it is difficult to withdraw 56
or ignore the assessments.
The element of private influence and ultimate participation in these hybrid organizations resides
in an elaborate process of referenda. As a practical matter, the commodity promotion
organizations are under the supervision of the Agricultural Marketing Service (AMS), a relatively
small unit within the department. The referendum provisions of the 1996 Act are detailed. The
boards are not established in perpetuity, but must be subject to renewal referenda no later than
seven years after assessments first begin. Even the definition of a majority is complex. For
instance, the referendum majority provides : “A [secretarial] order may provide for its approval in
a referendum—(1) by a majority of those persons voting; (2) by persons voting for approval who
represent a majority of the volume of the agricultural commodity; or (3) by a majority of those
persons voting for approval who also represent a majority of the volume of the agricultural
commodity.” Advance registration procedures are spelled out in the law, thereby requiring
subsequent changes to also be made by law. Finally, it is the AMS that is charged with helping the
boards administer the referendum process.
Notwithstanding this mandated oversight, the promotion programs, which cost producers and 57
importers hundreds of millions of dollars a year, have been criticized by policy opponents and

56 William Claiborne, “Hog Farmers Given Vote on Marketing Fee Rules,” Washington Post, Feb. 29, 2000, p. A3.
57 For example, thebeef, pork, soybean, wool/lamb, and mohair check-off programs generate over $200 million
annually in assessments collected from producers or growers. AMS website, available at http://www.ams.usda.gov/
lsg/mpb/lsrp.htm. In 2003, AMS reported that the assessments for all promotion programs came to over $700 million.
Agricultural Marketing Service,AMS Commodity Research and Marketing Boards (Washington: Apr. 28, 2004).

media critics for inappropriate spending, lax accounting, and lavish entertainments.58 One
consequence of this publicity was that the Secretary instituted a task force to make
recommendations on how the department might better oversee the boards and their programs. The
report, issued in December 1999, called for implementation of 21 recommendations, all of which
then-Secretary Dan Glickman endorsed. Proposed changes were submitted to the Federal
Register for public comment on December 17, 1999, but as of spring 2005 have not been formally 59
Some of the agricultural advertising (check-off) programs have also faced court challenges. Small
farmers providing “boutique” products have sued the Department of Agriculture, claiming the
fees were “government compelled speech”—a violation of the First Amendment of the U.S. 60
Constitution. In some of these cases, the plaintiffs have won.
Over the years, departments and agencies have found it useful and advantageous to ask Congress
to create, or authorize a department to create, nonprofit organizations to perform functions that
the department itself finds difficult to integrate into its regular policy and financial processes.
This is true, for example, when a department or agency receives gifts of real property and
monetary gifts. The National Park Foundation is the most prominent example of such an
organization, but there are others, such as the National Fish and Wildlife Foundation.
The Department of the Interior, and especially the National Park Service, received gifts of land
and monies from time to time to promote the programs of the department. With respect to the
National Park Service (NPS), a National Park Trust Fund was established by Congress in 1935 to
receive and hold such gifts. In 1967, the Trust was superseded by the National Park Foundation
(NPF), established pursuant to law (81 Stat. 656; 16 U.S.C. 19e-19n). The NPF is a
congressionally chartered nonprofit corporation organized to accept and administer gifts given to
the NPS. The board of the NPF has as its members the Secretary of the Interior, the Director of
the NPS, ex-officio, and “no less than six private citizens appointed by the Secretary.” In recent
years, the board has had more than 20 members. The term for private citizens on the board is six
years. The Secretary of the Interior is chairman of the board and the Director of NPS is secretary
to the board. The board elects a president of the foundation who serves at its pleasure.
Membership on the board is not deemed to be an office of the United States. The NPF has
perpetual succession.
Funding for the NPF comes from private gifts. One of the main initial purposes of the foundation
was to permit the NPS to have a means whereby it might receive gifts and invest these funds in
something other than federal government securities. The foundation is not on-budget and its
employees are not federal employees. In 2005, the NPF provided over $29 million in cash and in-61
kind support to the National Park Service.

58 Sharon Walsh, “Government Oversight? USDA Asks: The Promotion Programs Have Been Criticized for
Inappropriate Spending,” Washington Post, Dec. 16, 1999, p. E1.
59 See Department of Agriculture, Agricultural Marketing Service,Guidelines for AMS Oversight of Commodity
Research and Promotion Programs,” 65 Federal Register 5853, Feb. 7, 2000.
60 E.g., Joseph S. Cochran v. Anne Veneman, Department of Agriculture Secretary (3rd Cir. 03-2522, Feb. 24, 2004),
Michigan Pork Producers Association, Inc. v. Veneman (348 F. 3d 157 (6th Cir. 2003)), Livestock Marketing th
Association v. U.S. Department of Agriculture (335 F.3d 711 (8 Cir. 2003)), and United States v. United Foods, Inc.
(533 U.S. 405 (2001)) In other instances, these programs have been found to be constitutional. See Johanns, Secretary
of Agriculture, et. al. v. Livestock Marketing Association (125 S. Ct. 2055(2005))
61 National Park Foundation, Annual Report2005 (Washington: NPF, 2006), pp. 2-3.

The foundation is viewed as an adjunct activity of the department and NPS, and is controlled by
these agencies. The appointment process to the board is the Secretary’s principal insurance that
the NPF will adhere to the general policy framework of the department.
Finally, the situation of the Securities and Exchange Commission (SEC) and its two adjunct
organizations is worth noting. Congress established the Securities Investor Protection Corporation
(SIPC) in 1970 (84 Stat. 1636) to assure that cash and securities held in brokerage firms are
protected from loss caused by securities firms’ failures. The SIPC is a nonprofit corporation under
the District of Columbia Nonprofit Act, which provides that it “shall not be an agency or
establishment of the United States Government....” Of the seven-member board of directors, one
is appointed by the Secretary of the Treasury from among the Department’s officers and
employees; one is appointed by members of the Federal Reserve Board from among its officers
and employees; five directors are appointed by the President subject to the advice and consent of
the Senate. The President designates the chairman, who is also the corporation’s chief executive
Although the SIPC is a nonprofit corporation under the D.C. law, it is effectively a subsidiary of
the SEC. The corporation’s bylaws are subject to the SEC’s adoption, amendment, or rejection.
The hybrid nature of the SIPC is revealed by various legal characteristics. The SIPC is not under
any of the general management laws, including the Government Corporation Control Act (31
U.S.C. 9102). However, to the extent that the bylaws and rules of the SIPC are approved or
disapproved by the SEC, they are subject to the Administrative Procedure Act (5 U.S.C. 551 et
seq.). The corporation also has borrowing authority and a line of credit from the Treasury.
Congress, in 2002, established the Public Company Accounting Oversight Board (PCAOB) (116
Stat. 745) to oversee the audit of public companies that are subject to securities laws. The board is
also a nonprofit corporation under the DC Nonprofit Corporation Act. Officers of the board are
not officers of the United States. Yet the board is required, under supervision of the SEC, to
“establish or adopt, or both, by rule, auditing, quality control, ethics, independence, and other
standards relating to the preparation of audit reports by issuers.” The SEC appoints the five
members of the full-time board, after consultation with the chairman of the Board of Governors
of the Federal Reserve System and the Secretary of the Treasury. The Commission may remove
members of the board “for good cause.” The rules of the board are subject to the approval of the
Commission. Some observers were troubled that at the organizing meeting of this “private” board
on January 9, 2003, the board voted themselves annual salaries of $452,000, or $52,000 more
than the President of the United States and $207,000 more than the chairman of the SEC. Similar 62
private sector salaries were set for staff.
The stories of the SIPC and the PCAOB illustrate how the government can create a hybrid
organization, in these instances organizations with predominately private-sector legal
characteristics, to implement government policies and regulations. Ultimately, the SPIC and the
PCAOB are agents of and accountable to the government through the SEC. The wisdom (and for
some the legality) of this practice of delegating governmental functions to ostensibly private
parties is a legitimate subject of debate.

62 Stephen Labaton,Six Months Later, New Audit Board Holds First Talk: Sets Own Pay at $452,000, New York
Times, Jan. 10, 2003, p. 1.

The Henry M. Jackson Foundation provides an example of an organization independent of, but
dependent upon, an agency of the federal government. In 1982, Congress passed legislation to
establish a Foundation for the Advancement of Military Medicine (P.L. 98-36; 97 Stat. 200). Five
months later, the foundation was renamed the Henry M. Jackson Foundation after a Senator with
a long record of support for military medicine. The enabling legislation provided that the
shall not for any purpose be an agency or instrumentality of the United States Government.
The Foundation shall be subject to the provisions of this section and, to the extent not
inconsistent with this section, the Corporations and Associations Act of the State of
This language indicates there is intended to be legal distance between the nonprofit organization
and the United States government.
The mission of the foundation, by contrast, emphasizes that a close organizational relationship be
established between the foundation and the Uniformed Services University of the Health Sciences
(USU) of the Department of Health and Human Services.
It shall be the purpose of the Foundation (1) to carry out medical research and education
research projects under cooperative agreements with the USU; (2) to serve as a focus for
interchange between military and civilian medical personnel, and (3) to encourage the
participation of the medical, dental, nursing, veterinary, and other biomedical sciences in the
work of the Foundation for the mutual benefit of military and civilian medicine. (10 U.S.C.
The nine-member board of the foundation includes two current Senators and two Representatives
serving in an ex-officio capacity.
The foundation works to develop a research infrastructure involving federal military medical
personnel and private medical personnel and facilities. It is affiliated with the USU and receives
funding from private sources as well as the USU. The foundation provides research and grants
management services to military medical researchers; manages clinical trials and develops
private-public partnerships; and provides general support for military medical education. In 2004,
the foundation employed 1,400 persons and supported or administered over 650 research 63
The question arises: why is such a foundation needed? The foundation has said:
Because government employees cannot accept money or in-kind gifts from private sources,
the Foundation serves a vital function by facilitating collaborative relationships between
private industry, academia, and military medicine. One way we do this is securing private 64
funding to support military medical educational programs....

63 Henry M. Jackson Foundation, HJF Overview Sheet, Dec. 2004, available at http://www.hjf.org/about/
64 Henry M. Jackson Foundation website, available at http://hjf.org/about/privatesupporters.html.

Similarly, the Department of Veterans Affairs (VA) has a network of nonprofit corporations
attached to its medical centers. By law (P.L. 100-322; 102 Stat. 487), the Secretary may authorize
the establishment at any VA medical center of a nonprofit research and education corporation
(NPC), to be chartered under the resident state law, “to provide a flexible funding mechanism for 65
the conduct of approved research.” The law reads: “Except as otherwise required in this
subchapter or under regulations prescribed by the Secretary, any such corporation, and its
directors and employees, shall be required to comply only with those Federal laws, regulations,
and executive orders and directives which apply generally to private nonprofit corporations.” (38 66
U.S.C. 7361(a)).
As of 2004, the latest data available, 92 VA medical centers had received approval for the
formation of nonprofit research corporations. Approximately 87 NPCs exist and are located in 40 67
states. They derive their funds from both federal and non-federal sources. In 2004, “NPCs
reported $186.8 million in revenues including interest income and other miscellaneous 68
The Secretary appoints the boards of all corporations, which must in each instance include the
director of the medical center, the chief of staff and assistant chief of staff of the medical center,
and such other public members as the bylaws of the corporation direct. Each of the corporations
has an executive director appointed by the board of directors with the concurrence of the Chief
Medical Director of the Department. The corporation may employ such employees as it considers
necessary and fix their compensation. The corporations come under the jurisdiction of the
Department’s Inspector General. The directors and employees of the corporation “shall be subject
to Federal laws and regulations applicable to Federal employees with respect to conflicts of
interest in the performance of official functions” (38 U.S.C. 7366(c)(1)).
The medical center research organizations concept is not without its critics. Some NPCs have
been faulted for expending funds on items not directly related to research (such as gifts and
entertainment) and have been cited as in need of improved “accountability and oversight related 69
to the administration of funds.” However, GAO has also reported that NPCs, have enhanced VA
research efforts. Funds
collected by these nonprofits have been used to renovate laboratory space, purchase
equipment, maintain VA research libraries, and cover travel expenses to conferences. In turn,

65 These entities have also been referred to as medical center research organizations.
66 VA regulations for these entities may be found in VA Handbook 1200.17, VA Research and Education Corporations
(Washington: VA, 2001), available at http://www1.va.gov/vhapublications/ViewPublication.asp?pub_ID=371; and VA
Handbook 1400.2, VA Education Corporations authorized by Title 38 United States Code (U.S.C.) Sections 7361
Through 73 (Washington: VA, 2001), available at http://www.navref.org/about/mem_handbook_14002.htm.
67 These data were drawn from National Association of Veterans Research and Education Foundations
(NAVREF),2004 VA-Affiliated Non-Profit Research and Education Corporations Annual Report (Bethesda, MD:
NAVREF, 2005), p. 2, at http://navref.org/library/word/Summary%20Annual%20Reports%202004.doc.
68 Ibid., p. 4.
69 Statement of Michael Slachta, Jr., Assistant Inspector General for Auditing, in U.S. Congress, Subcommittee on
Oversight and Investigation and Subcommittee on Health, House Committee on Veterans’ Affairs, VA Research and thnd
NonProfit VA Research and Education Corporations, 107 Cong., 2 sess., May 16, 2002 (Washington, GPO, 2003),
pp. 4-6, quote at p. 5.

the research environment has been able to attract highly qualified physicians, who often 70
provide patient care, as well.
There are also nonprofit organizations, chartered under state law, that voluntarily affiliate with a
departmental or agency program. This option has recently been reflected in law and applied by
the Department of the Interior. As discussed above, the National Park Foundation (NPF) is
appropriately viewed as an “adjunct organization under the control of a department or agency,” in
this case the National Park Service of the Department of the Interior. The NPF was authorized by
the National Park Omnibus Management Act of 1998 (P.L. 105-391; 16 U.S.C. 19o) to encourage
the creation of nonprofit organizations with state charters to “assist and promote [philanthropy] at
the individual national park unit level.” The intent of this program is to create a large number
(“the greatest number of national park units practicable”) of local fund-raising partner
organizations (“Park Partners”), each tied to a specific national park or national park program.
For purposes of this report, it is worth noting that these Park Partners are to be created by persons
within a community under their own state laws.
It is intended that the Park Partners will voluntarily “affiliate” with the foundation. The law
instructs the foundation to include in its program encouraging the creation of Park Partners:
(1) a standard adaptable organizational design format to establish and sustain responsible
management of a local nonprofit support organization for support of a national park unit;
(2) standard and legally tenable bylaws and recommended money-handling procedures that
can easily be adapted as applied to individual national park units; and
(3) a standard training curriculum to orient and expand the operating expertise of personnel
employed by local nonprofit support organizations. (16 U.S.C. 19o(d)).
A number of Park Partner organizations, some in existence prior to the law, are operating today in
support of specific parks such as Grand Teton, Glacier, and Sequoia. Since there are over 375
park properties within the system, the number of possible Park Partner nonprofit corporations is
considerable. Although the clear intention of the legislation is that the local nonprofit corporations
become affiliated with the Park Partner program of the foundation, the ultimate authority and
accountability of the corporations remains with the local organization. The law provides: “An
affiliation with the Foundation shall be established only at the discretion of the governing board
of a nonprofit organization.” (16 U.S.C. 19o (f)(2))
Hybrid organizations assigned by Congress to the quasi government perform a wide variety of
functions in both the domestic and international arenas. With respect to the latter, the case of

70 Testimony of Cynthia A. Bascetti, Director HealthcareVeteran’s Health and Benefits Issues, U.S. General
Accounting Office, Subcommittee on Oversight and Investigation, House Committee on Veterans’ Affairs, VA thnd
Research and NonProfit VA Research and Education Corporations, 107 Cong., 2 sess., Sept. 19, 2002 (Washington,
GPO, 2003), pp. 19-21.

“venture capital funds” is especially interesting, a term which encompasses more narrowly 71
defined “enterprise funds” and “investment funds.”
The fall of Communism in eastern Europe and elsewhere in 1989 prompted interest by the United
States, and especially Congress, in assisting those nations committed to a transition from a
centrally planned to a market economy. The Support for Eastern European Democracy Act of
1990 (SEED) (P.L. 101-179; 22 U.S.C. 5401) authorized the establishment of two “enterprise
funds,” one in Poland and the other in Hungary. Later the legislation was amended to authorize
the creation of enterprise funds in other eastern European countries, including the republics of the
former Soviet Union, and the southern Africa region. By the end of 1995, there were 11 such
The impetus for the enterprise fund concept came about from the belief that a non-governmental
entity was needed to implement this kind of program. The intent of Congress in SEED was to
create venture capital funds that would be designed along private sector lines, managed by private
sector executives, and be free of most government administrative constraints.
The enterprise funds are chartered as private nonprofit corporations under the laws of the state of
Delaware, but are funded by government appropriations. Their purpose is to develop the
respective national private sectors through “loans, grants, equity investments, feasibility studies,
technical assistance, training, insurance, guarantees and other measures.” Further, the act states
that funding for the enterprises shall “be made available ... and used for the purposes of this
section notwithstanding any other provision of law.” (22 U.S.C.A. 5421(a)(c)). The SEED
Coordinator in the Department of State and AID’s General Counsel and Inspector General
interpreted this “notwithstanding” clause as exempting the funds from customary U.S. assistance
program regulations.
At the same time as the enterprise funds were being established, the Overseas Private Investment 72
Corporation (OPIC), a wholly owned federal government corporation, was itself becoming
involved in promoting private investments through “investment funds” established in the former
communist states. OPIC’s principal mission is to provide political risk insurance and loan
guarantees to U.S. corporations that make investments in selected developing countries. Although
OPIC is prohibited from making direct equity investments, it may achieve approximately the
same results by guaranteeing loans made to private, profit-seeking corporate investment funds.
“OPIC-supported funds are among the largest providers of private equity capital to emerging
markets. Since 1987, OPIC has committed (as of FY2005) over $2.6 billion in funding to 32 73
private equity funds.”
In the case of both the enterprise funds and OPIC’s investment funds, the intent was to have a
pool of money to be assigned by a private management team to promising new or existing
ventures. It is not the intent of this Report to evaluate the programmatic success or failure of these

71 A discussion of venture capital funds is to be found in: Jonathan G.S. Koppell,The Challenge of Administration by
Regulation: Preliminary Findings Regarding the U.S. Government Venture Capital Funds,” Journal of Public
Administration Research and Theory, vol. 9, Oct. 1999, pp. 641-66.
72 CRS Report 98-567, The Overseas Private Investment Corporation: Background and Legislative Issues, by Danielle
Langton. Eric Schmitt, “Development Agency’s Survival Tale: A Symbol of Corporate Welfare Becomes a Beacon of
Enterprise,” New York Times, Jan. 12, 2000, p. C2.
73 OPIC website, available at http://www.opic.gov/investment/index.asp.

investment programs, that is best found elsewhere.74 Principal attention here is directed to some
of the organizational characteristics of these venture capital funds and how they relate to the
executive and legislative branches.
With respect to enterprise funds, it was the intention of Congress that executive branch oversight
of the funds be limited, a “hands off” policy. Initially, State Department and AID oversight of the
enterprise funds consisted principally of an annual review by the AID IG, audits performed by
certified public accounting firms selected by the enterprises, monthly reports on grant cash
balances, semiannual reviews of the investment portfolios, and brief visits to both the U.S. and
overseas fund offices. Various news accounts of alleged excesses and failures of the funds
prompted both Congress and the executive branch, however, to subsequently strengthen the 75
oversight of AID, although the funds still retain most of their autonomy.
Enterprise funds are chartered as nonprofit corporations under the laws of the state of Delaware
and are governed by a board of directors “designated” by the President of the United States and
elected by the existing board members. They are not “officers” of the United States and hence are
not subject to Senate confirmation. The directors must be citizens of the United States or of the
host country (or countries) and can be designated only after “consult(ing) with the leaders of each
House of Congress.” (22 U.S.C. 5421(a)(1)). Although Congress and the existing directors have a
role to play in the selection process, the reality is that this process has largely become a
presidential prerogative and, according to critics, involves a certain amount of presidential
patronage. Contractors are selected to manage the funds in the name of the boards. Thus, the
determination of which firm ultimately receives the capital is made by third, and occasionally
fourth, parties. In the latter instances, the enterprise fund establishes a subsidiary to make the final
loan or grant determinations.
The key element for protecting the government’s interests in the enterprise funds is to be found in
the provisions agreed to in the loan or grant. Once in operation, it is difficult for AID to alter the
course of the enterprise fund, although there remain several negative controls available, such as 76
suspension of funds. In practice, however, such controls may be difficult to implement.
The OPIC investment funds are not in the business of directly providing capital themselves,
rather they provide guarantees to private lenders who, in turn, lend money to recipients. OPIC is a
government corporation enumerated in the Government Corporation Control Act and, as such, is
a regular agency of the United States subject to the general management laws, except where
exempted. It is governed by a 15-member board of directors, a number that includes in an ex
officio capacity various senior presidential appointees, as well as seven direct presidential
appointees (22 U.S.C. 2193(b)). The board is chaired by the Administrator of AID. It is the
President who appoints OPIC’s President, subject to Senate confirmation.
Congress requires OPIC to undergo annual budgetary review, and the office is sometimes
criticized on the basis that its insurance programs amount to a subsidy to some prosperous

74 U.S. General Accounting Office, Enterprise Funds: Evolving Models for Private Sector Development in Central and
Eastern Europe, GAO/NSIAD-94-77 (Washington: GAO, 1994).
75 Peter Maas, “Congressman Charges Aid Effort Goes Awry: Hungary Enterprise Fund Pays Fat Salaries,”
Washington Post, July 29, 1993, p. A15; and Doug Bandow, Uncle Sam as Investment Broker, Cato Institute Policy
Analysis No. 260 (Washington: CATO Institute, 1996).
76 Koppell, “Managing the U.S. Government’s Venture Capital Portfolio,” p. 12.

American corporations at taxpayers’ expense.77 OPIC has been able to keep relatively close
oversight of its investment funds through its active role in selecting fund management and in
negotiating terms of the loan guaranty agreements, terms that generally provide for favorable
returns to OPIC. The objective of OPIC’s investment fund oversight is to insure compliance with
the loan agreement, not necessarily to review or evaluate the fund’s investments in terms of good
economic returns. Thus, compliance, rather than performance, is the primary focus of OPIC’s
fund oversight.
In reviewing the comparative experience of enterprise and investment funds as part of a larger
national venture capital promotion exercise, Koppell concludes that the federal government has
the best opportunity to maintain a modicum of accountability over these institutions through
enforcement of regulatory practices, rather than attempting to run these quasi governmental
bodies through direct administrative means. Koppel does not award the board of directors concept 78
high marks as an effective method to promote accountability.
The issue of tenure is pertinent to venture capital funds. Are they intended to be permanent or
temporary? Although Congress did not address this question directly with respect to enterprise
funds, it was generally viewed that they would be a temporary arrangement. The length of time
that each venture fund exists would depend on the specific country circumstances. For example,
in September 2001, the Polish-American Enterprise Fund (PAEF) returned $120 million of its
assets to the U.S. Treasury and transferred $180 million of its assets to the newly created Polish
American Freedom Foundation—an entity which had previously received $80 million from
PAEF. The funds are to be used to provide grants to promote economic reform, leadership
development among Polish citizens, a stronger civil society, improved local government, and 79
Venture capital funds are not exhausted by discussion of international enterprise and investment
funds. In the past decade, venture capital funds have been established to fund research into
technology. The first of these was “In-Q-Tel.” The announced purpose of In-Q-Tel is to permit the
Central Intelligence Agency (CIA) to invest in, and thereby encourage, corporations producing
technology the agency believes it will need to perform its mission in the future. Capitalized by
$150 million in government funds, this nonprofit corporation is expected to be self-sufficient. On
the board of directors are private corporate executives from firms such as Lockheed Martin. In the
words of Gilman Louie, In-Q-Tel’s former CEO:
The best thing about In-Q-Tel, to me, is that its risky. The CIA and the rest of the
government need to catch the entrepreneurial, risk-taking spirit that’s driving the Silicon
Valley technology revolution. The CIAs new venture may fall flat, but so what. Washington
has been a zero-defect culture for too long. If we want a CIA that performs better, well need 80
to take more risks—and give our government freedom to fail.
In-Q-Tel is not the only domestic entity of this type. In January 2002, Congress authorized the
Department of the Army to create a “non-profit venture capital corporation” (P.L. 107-117, sec.

77 Leslie Wayne, “Spreading Global Risk to American Taxpayers,New York Times, Sept. 20, 1998, p. 1.
78 Koppell, “Managing the U.S. Government’s Venture Capital Portfolio,” pp. 25-34.
79 U.S. White House Office, Office of the Press Secretary, “Fact Sheet: Polish American Freedom Foundation
(Washington: June 15, 2001), available at http://www.whitehouse.gov/news/releases/2001/06/20010615-11.html.
80 David Ignatius,The CIA as Venture Capitalist,” Washington Post, Sept. 29, 1999, p. A1.

8150). The Army subsequently established OnPoint Technologies.81 The National Aeronautics
and Space Administration has hatched its own venture capital fund, Red Planet Capital. One of
the organizers of this latter entity explained, “We will invest with others in companies making 82
products that aren’t being made elsewhere and that NASA might be able to use.” Reportedly, the
ultimate objective is to produce technologies that may be developed further by NASA and be
used to explore Mars.
Venture capital funds in which the federal government participates, either as the only party, or in
cooperation with other parties, are often controversial. This is so because such funds require the
government to participate in the private equity market and, in the eyes of some, to pick
“winners.” Being a sovereign entity, the government cannot act as a private party seeking to
maximize its fiduciary interests.
Within the quasi government, a category of entities can be collectively identified as
“congressionally chartered nonprofit organizations,” also referred to popularly as “title 36 83
corporations.” The chartering by Congress of private organizations with a patriotic, charitable, th
historical, or educational purpose is essentially a 20 century practice. There are 92 organizations 84
listed under Subtitle II, “Patriotic and National Organizations.” Typical among these chartered
organizations is the Agricultural Hall of Fame; Big Brothers and Sisters of America; and the
American Legion.
Congress has authority to establish organizations within both the governmental and private
sectors. In the governmental sector, the authority and responsibility to establish all agencies and
all offices to be filled by appointed officers of the United States is clear. The actions of all
agencies and officers of the United States are determined by public law. Congress also has
authority to charter (establish) new private corporations, both for-profit and nonprofit. While
Congress has exercised its prerogatives to charter for-profit corporations infrequently, there have
nevertheless been several important instances, such as the establishment of the fully private,
stockholder-owned Communications Satellite Corporation (ComSat) in 1962 (76 Stat. 419; 47
U.S.C. 701). Much more frequently, Congress has chartered nonprofit organizations, either in the
first instance, or as a rechartering of an existing state chartered nonprofit organization.
Title 36 corporations can, and generally do, function simultaneously under both federal and state
charters. Indeed, in most instances, organizations were chartered and functioned under state laws
before, often long before, receiving federal charters. Congressional authority with respect to
organizations functioning essentially under state law, however, has not been free of controversy.
The basis of the controversy often comes down to fundamental issues of managerial
accountability, fiduciary responsibility, and rights that inhere to governmental organizations, but

81 See the website of OnPoint, available at http://www.onpoint.us/.
82 Marc Kaufman, “NASA Invests in Its Future With Venture Capital Firm,” Washington Post, Oct. 31, 2006, p. A19.
83 CRS Report RL30340, Congressionally Chartered Nonprofit Organizations (“Title 36 Corporations”): What They
Are and How Congress Treats Them, by Kevin R. Kosar.
84 Title 36 of the U.S. Code, where congressionally chartered nonprofit corporations are listed with their charters, was
recodified by law in 1998 (P.L. 105-225).

not to private organizations, such as the right to the full faith and credit of the United States 85
In chartering patriotic, charitable and professional organizations under Subtitle II, such as the
National Academy of Public Administration (36 U.S.C. 1501), Congress does not make these
organizations “agencies of the United States,” nor does it confer any powers of a governmental
character, or assign any benefits. These organizations do not receive direct appropriations, they
exercise no federal powers, their debts are not covered by the full faith and credit of the United
States, and they do not enjoy original jurisdiction in the federal courts.
In effect, the federal chartering process is honorific in character. This honorific character may be
misleading to the public, however, when such organizations feature statements or display logos
that they are “chartered by Congress,” thus implying a direct relationship to the federal
government that does not, in fact, exist. In addition, there may be an implication that Congress
approves of the organizations and is somehow overseeing their activities, which is not the case.
Recently, the non-agency character of Title 36 corporations may have been breached. The
“privatization” of the Defense Department’s Civilian Marksmanship Program and its assignment
to a newly created Title 36 corporation, the Corporation for the Promotion of Rifle Practice and
Firearms Safety (36 U.S.C. 407), raises questions about the limits, if any, to Congress’ authority 86
to assign a “private” label to functions of a governmental character. While the Corporation has
some admittedly governmental attributes (e.g., upon the dissolution of the Corporation, its assets
would be sold and the proceeds revert to the U.S. Treasury), Congress has declared in its enabling
statute that “the corporation is a private corporation, not a department, agency, or instrumentality
of the United States Government.” Furthermore, the law provides that “an officer or employee of
the corporation is not an officer or employee of the Government.” Whether Congress has the
constitutional authority to establish an entity “private,” when in fact it has “governmental” 87
attributes, has been subject to debate and judicial opinion.

85 See discussion of the legal status of the earlier, now defunct, entry in the quasi government, the Federal Asset
Disposition Association (FADA) established by the Federal Home Loan Bank Board in 1985 under the incorporation
act of the state of Colorado in U.S. General Accounting Office, Failed Thrifts: No Compelling Evidence of a Need for
the Federal Asset Disposition Association, FFO/FFD-89-26 (Washington: GAO, 1989); and U.S. Congress, Senate,
Committee on Governmental Affairs, Managing the Publics Business: Federal Government Corporations, by Ronald thst
C. Moe, committee print 104-18, 104 Cong., 1 sess. (Washington: GPO, 1995), pp. 22-26.
86 The 2004 omnibus appropriation act (P.L. 108-447, Div. K, Sec. 146) declared that the National Veterans Business
Development Corporation (NVBDC), thought by some to be a wholly government corporation, to be wholly private.
On NVBDC as a government corporation, see Office of the Legal Counsel, United States Department of Justice,
Memorandum for Jennifer Newstead, General Counsel, Office of Management and Budget, March 19, 2004.
87 The Supreme Court in a 1995 case (Michael Lebron v. National Railway Passenger Corporation; 513 U.S. 374)
addressed the question of whether Congress can declare, by statutory language, that a corporation created by Congress
and assigned attributes of the state, is a “private corporation.” The National Railway Passenger Corporation
(AMTRAK), established by Congress (45 U.S.C. 451) and, at that time, enumerated as a “mixed-ownership
corporation” under 31 U.S.C. 9101(2), was sued by Michael Lebron for rejecting on political grounds an advertising
sign he had contracted with them to display. Lebron claimed that his First Amendment rights had been abridged by
AMTRAK because it is a government corporation, and therefore an agency of the United States. AMTRAK argued, on
the other hand, that its legislation provides that it “will not be an agency or establishment of the United States
government” and thus is not subject to constitutional provisions governing freedom of speech. The Court decided that
while Congress can determine AMTRAKs governmental status for purposes within Congress’ control (e.g., whether it
is subject to statutes such as the Administrative Procedure Act), Congress cannot make the final determination of
AMTRAKs status as a government entity for purposes of determining constitutional rights of citizens affected by its

Private, nonprofit organizations seeking federal charters under Title 36 presumably perceive value
behind such charters, and indeed, such may be the case. Less apparent, however, are possible
risks that might result from private, nonprofit organizations of having such a charter. A chartered
private organization may lose some of its private rights and be made subject to management laws
and regulations generally applicable only to agencies of the United States. Such a situation came
about in 1997 when Congress amended the Federal Advisory Committee Act (5 U.S.C. Appendix;
86 Stat. 700) so as to include two Title 36 corporations, the National Academy of Public
Administration and the National Academy of Sciences, under specific provisions involving the
appointment, permissible activities, and reports of corporation committees doing work for
executive agencies. (P.L. 105-153)
This is the first instance in which Congress has made Title 36, Subtitle II corporations subject to
the provisions of a general management law, and, while the action may be supportable on public
policy grounds, it does, to the extent of applicable provisions, diminish the private character of
the affected organizations. As such, it constitutes a precedent with implications.
Congress and the President have raised questions in the past about the consequences of granting
charters to private organizations. In vetoing a corporate charter in 1965, the President raised
several questions about the wisdom of continuing to grant charters on a case-by-case basis 88
“without the benefit of clearly established criteria as to eligibility.” Congress, in 1969,
responded to this presidential concern by setting out five “minimum standards” to be met by a 89
private organization seeking a federal charter from Congress. These standards, however, did not
resolve all of the questions concern the process of granting a charter, or of overseeing nonprofit
At present, federal supervision of congressionally chartered nonprofit organizations is limited.90
All “private corporations established under federal law,” as defined and listed in Subtitle II, are
required to have independent audits annually, and to have the reports of the audits submitted to 91
Congress (36 U.S.C. 10101). In practice, the House Subcommittee on Immigration and Claims
receives the audit reports of listed corporations, and, where corporations have not submitted
reports in a timely manner, makes every effort to communicate with said organizations and
remind them of their legal responsibility. The House Judiciary Committee refers all received 92
audits to the Government Accountability Office for review. The committee’s current role is
strictly ministerial. Public access to the records and reports of Title 36 corporations varies. For
example, the charter of the National Ski Patrol (36 U.S.C 1527) requires that its annual report be

88 A copy of the veto message is printed as H. Doc. 292, 89th Cong., 1st sess. (Washington: GPO, 1965), p. 1.
89 U.S. Congress, House, Committee on the Judiciary, Standards for Granting of Federal Charters to Non-Profit
Corporations, committee print, 91st Cong., 1st sess. (Washington: GPO, 1969).
90 With most generalizations concerning congressional chartered nonprofit organizations, there are exceptions. An
exception to the general rule that Congress rarely becomes actively involved in overseeing these bodies is provided by
the U.S. Olympic Committee (36 U.S.C. 2205). Amy Shipley,Senators Scold USOC Leaders: Congressional
Oversight Urged as Part of Restructuring, Washington Post, Jan. 29, 2003, p. D-1.
91 Exceptions to this rule exist. The Corporation for the Promotion of Rifle Practice and Firearms Safety, created in
1996 by Congress, and not incorporated first in a state, is exempted (36 U.S.C. 40707) from the audit requirements
otherwise applicable to Title 36 corporations (36 U.S.C. 101).
92 See, for instance, U.S. General Accounting Office, Federally Chartered Corporation: Review of the Financial
Statement Audit Report for the United States Capitol Historical Society for Fiscal Year 1997, B-280210, directed to the
Chairman of the House Judiciary Committee, Henry Hyde, June 16, 1998.

submitted each year to Congress but forbids the public printing of it. The Senate Judiciary
Committee has tended to defer to the House committee on these matters.
It is not the intention of the Judiciary Committees of Congress or the General Accounting Office
to “look over the shoulder” of these organizations, or to conduct audits on their own authority.
Congress is understandably ambivalent with respect to chartered organizations; it attempts to
protect the public interest against abuse by these corporate bodies while simultaneously seeking
to limit its involvement in the internal affairs of these private organizations. Thus far, in no
instance has the charter of a Title 36 organization been revoked or placed at serious risk through
non-compliance with reporting requirements.
Hearings held by subcommittees of the respective judiciary committees of the House and Senate
in the early 1970s raised a number of questions by Members of Congress respecting the intent and
practice of congressional chartering of private, nonprofit organizations. More organizations,
through sympathetic members of Congress, were requesting charters, and the requesting
organizations were often extending the definition of congressional chartered corporations beyond
that typically associated with patriotic and service organizations.
In April 1992, House Subcommittee on Immigration and Claims chairman Barney Frank
announced that the subcommittee would no longer consider requests for charters. The reason,
Frank reportedly said, was that the charters were “a nuisance,” a meaningless act; granting
charters implied that Congress was exercising some sort of supervision over the groups and it was
not. “When I first raised the issue, ‘What is a federal charter?’ The answer was, a federal charter
is a federal charter is a federal charter.... You could make up an organization for the preservation 93
of Albert De Salvo, the Boston Strangler. We’d have no way of checking into it.”
Continuing to review applications on the basis of merit with the possibility of rejection, it was
asserted, was subjecting the subcommittee to pressures and the potential for embarrassment to
both the requester and Congress. By indicating an end altogether of the practice of chartering, it
was hoped the subcommittee would be “leveling the playing field” among worthy organizations. th
This view was formalized in the 104 Congress when the subcommittee issued an internal policy
directive that it would no longer consider any legislation to grant new federal charters because
such charters were unnecessary for the operations of any charitable, nonprofit organization and
falsely implied to the public that a chartered organization and its activities somehow enjoyed
congressional approval.
This subcommittee moratorium did not, however, stop all requests for, or consideration of, charter
requests. Notably, it remains possible for another committee, or for the full Congress in its
plenary capacity, to “charter” nonprofit organizations and have them listed in Title 36. This has th
happened in at least six instances in recent years. Nonetheless, in the 109 Congress, the
Subcommittee on Immigration, Borders, and Claims reasserted the moratorium on March 10, 94
2005. It remains to be seen, however, how effective this moratorium will be against the many
attractions of the chartering practice.

93 Bill McAllister, “Congressional Charters Abolished: Laws Recognizing Organizations Seen as Meaningless
Nuisance,Washington Post, Apr. 9, 1992, p. A25.
94 U.S. Congress, Subcommittee on Immigration, Borders, and Claims, Subcommittee Organizational Meeting to
Consider the Subcommittees Rules of Procedure for Private Immigration Bills, Rules of Procedure for Private Claims
Bills, and Policy on Federal Charters for Private, Non-Profit Organizations, Mar. 10, 2005. Video of this committee
meeting may be found at http://boss.streamos.com/real/hjudiciary/immigration/immi0310.smi. At the time of

Not all the hybrid organizations fit into categories within the quasi government. Some
organizations are sui generis while others partake of so many varied characteristics that they are
best viewed and considered separately. Illustrative of quasi governmental entities are three
examples that arguably merit discrete review.
(1) American Institute in Taiwan
(2) National Endowment for Democracy
(3) United States Investigation Services
In December 1978, President Jimmy Carter decided to establish full diplomatic relations with the
People’s Republic of China, and did so effective January 1, 1979; the two countries exchanged
ambassadors on March 1, 1979. As part of the arrangement, the President agreed to end the 1954
mutual defense treaty with Taiwan and close the U.S. embassy in Taipei, the capital of the 95
Republic of China (Taiwan). This decision was strongly objected to by a number of Senators, 96
who maintained that treaties could not be terminated unilaterally by the President.
The Congress, presented with a presidential fait accompli, prepared legislation that would permit
a continuing relationship with Taiwan (Republic of China) without the relationship being 97
officially diplomatic in character. The decision was to establish a hybrid body that would
provide a de facto rather than de jure representation. Congress enacted the Taiwan Relations Act
(P.L. 96-8; 22U.S.C. 3301), signed by the President on April 10, 1979, a key provision of which
was the establishment of the American Institute in Taiwan (Institute) as a private, nonprofit
corporation under the laws of the District of Columbia.
The Institute, to be principally located in Taiwan, was nonetheless directed to maintain its
headquarters in the United States. The officers and employees of the Institute are officers and
employees of the United States who are “separated” from their agency during the specified period
of employment within the Institute. As a practical matter, most employees are Foreign Service
officers “separated” from the Department of States, who remain entitled to governmental benefits
during the separation period. It was anticipated that Taiwan would establish a similar organization
to the Institute, which it did.

publication of this report, the Subcommittee on Citizenship, Refugees, Border Security, and International Law had not th
released its rules of procedure for the 110 Congress.
95 For a discussion of the political elements behind the President’s decision to recognize the Peoples Republic of China
(and the consequent withdrawal of recognition from the Republic of China), seeNew Relationship with Taiwan
Approved,” 1979 CQ Almanac (Washington: CQ Press, 1980), pp. 99-117.
96 Louis Fisher, Constitutional Conflicts Between Congress and the President (Lawrence, KS: University Press of
Kansas, 1997), pp. 242-45; and Susan Grayburn, “Goldwater v. Carter,” Brooklyn Journal of International Law, vol. 7,
Winter 1998, pp. 111-33.
97 For a discussion of recent relations between the United States and the Republic of China (Taiwan) generally, see
Lester Wolff, Jon D. Holstine, and David J. Lewis, eds., A Legislative History of the Taiwan Relations Act, vol. 3,
(New York: Pacific Community Institute, 1999).

In subsequent years, political relations between the United States and the Peoples Republic of
China have had their ups and downs, a situation with tangential impact on United States-Taiwan
relations. These political strains have, to all appearances, not adversely impacted the functioning
of the Institute. The Institute has generally provided an effective channel for government to
government relations. Although the legal status of the Institute remains intentionally ambiguous,
this has not yet resulted in any major public conflicts.
In 1983, the Reagan Administration requested Congress to pass legislation for “Project
Democracy” to promote and support the building of democratic institutions abroad, especially in
countries newly emergent from totalitarian or dictatorial rule. Although the specific
Administration proposal was not adopted, Congress did enact legislation that included approval
for creating a National Endowment for Democracy (NED, or Endowment). The NED proposal
was included in Title V of the State Department Authorization Act, FY1984 and FY1985 (P.L. 98-

164; 22 U.S.C. 4411).

The National Endowment for Democracy Act reads: “The Congress finds that there has been
established in the District of Columbia a private, nonprofit corporation known as the National
Endowment for Democracy, which is not an agency or establishment of the United States.”
(4411(a)). The purpose of NED is to encourage the development of free and democratic
institutions throughout the world using the two major American political parties and labor and
business organizations as the tools for promoting this policy.
Although the law did not specify the creation of grantee organizations, it was generally
understood at the time that four “core organizations” representing the two major political parties,
American labor organizations, and American business organizations would be created as private,
nonprofit organizations. The NED would not conduct democracy programs itself but would rely
on core grantees. Grantees include the National Democratic Institute of International Affairs
(NDI); the International Republican Institute (IRI); the American Center for International Labor 98
Solidarity (ACILS); and the Center for International Private Enterprise (CIPE), which is
affiliated with the U.S. Chamber of Commerce.
The rationale given for creating a hybrid status for the Endowment was that for NED to support
democracy building programs, especially in inhospitable countries (countries where the U.S. is
banned by law from providing direct foreign aid, such as the People’s Republic of China and
Myanmar (Burma)), it must not be viewed as an arm of the U.S. government. Additionally, the
core grantee organizations are one step further removed from the government, and thus provide a
fourth-party administration of the infrastructure promotion system. The Endowment was
envisioned principally as a conduit for funds to the grantee organizations, but has developed on
its own a network for funding of other private organizations.
Under the by-laws of the organization as registered in the District of Columbia, NED has a board
of officers and directors, which has ranged over time between 13 and 30 members, the number

98 The American Council for International Labor Solidarity, an organization created in 1997, was the result of the
merger of the Free Trade Union Institute and three other AFL-CIO regional labor institutes. CRS Report 96-222,
National Endowment for Democracy: Policy and Funding Issues, by Susan B. Epstein.

being 30 in FY2007.99 The directors elect the president of NED and fill vacancies among their
own number. The NED board is not subject to extensive government oversight and has retained
the same individual, Carl Gershman, as president since the inception of the Endowment in 1983.
The current chairman of the board of directors is Vin Weber, a former Member of Congress.
Funding of NED is provided by an earmarked appropriation in the Commerce, Justice, State
Appropriations Act whereby the Department of State awards these funds to NED. The total NED
appropriation for FY2006 was $75 million (P.L. 109-108, Title IV; 119 Stat. 2325).
While the NED considers itself to be private, it must be managed under requirements of several
general management laws. For instance, the Endowment must comply with the provisions of the 100
Freedom of Information Act. Also, while the accounts of the Endowment are audited by
independent firms, they are subject to review, and may be audited, by the Government
Accountability Office.
There has been debate in Congress over whether the United States government should be funding
these types of organizations to “promote democracy.” The arguments pro and con necessarily
impact NED as well as its core grantee organizations. From the perspective of the quasi
government, NED is a classic example of a hybrid organization functioning under both private
and public law. There is a range of opinion as to whether such a hybrid arrangement is necessary 101
to achieve the results intended by the lawmakers. Furthermore, critics have accused NED of
mission creep and asserted that NED has been associated with efforts to influence the outcomes 102
of ostensibly democratic elections.
As part of Vice President Gore’s “reinvention” program, a substantial downsizing of the civil 103
service was ordered. Agencies were expected to be “creative” in making sure the work
continued to be done, but with less personnel and less funds. Cuts in the mission, capacity,
funding, and personnel of the central management agencies (i.e., Office of Management and
Budget; General Services Administration; and Office of Personnel Management) were
particularly significant. At OPM, the security and investigations unit of the agency was a potential
target for downsizing because its securities clearance workload was declining due to the end of
the Cold War and because there were fewer new hires generally throughout the executive branch.
The Director of OPM, James King, created a first, the establishment by the government of a
private corporation whose employees would be persons transferred from a federal agency, the
Federal Investigations Division of OPM, to a private firm to be eventually owned by its

99 Website of the National Endowment for Democracy, available at http://www.ned.org/about/who.html#board.
100 “Notwithstanding the fact that the Endowment is not an agency or establishment of the United States Government,
the Endowment shall fully comply with all of the provisions of section 522 of Title 5.” (22 U.S.C. 4415(a))
101 Despite being a not-for-profit chartered under the District of Columbia, NED is viewed by some as governmental. If
this perception is widespread in other nations, then a major justification for NEDs status as a quasi governmental
entity comes into question. NED, recall, was created as a quasi because it was not supposed to be viewed as an
independent, nongovernmental entity.
102 Juan Forero, “The Chavez Victory: A Blow to the Bush Administration,New York Times, Aug. 20, 2004, p. 1; and
Max Boot, “Exporting the Ukraine Miracle,Washington Times, Jan. 3, 2005, p. A12.
103 National Performance Review, Report, p. 14.

employees in what is known as a Employee Stock-Owned Plan (ESOP).104 The stated rationale
was that it would save the jobs of the approximately 700 investigators who would no longer be
needed and that it would save the federal government money by contracting with this new
corporate body the investigations formerly performed in-house.
Director King of OPM let a contract to ESOP Advisors, Inc. for a feasibility study of the concept,
a study that reported that the privatization process culminating in an ESOP was feasible. King
then announced his intention to move forward rapidly. Two hearings were held by congressional 105
committees. The principal points argued by the opposition dealt with civil rights and privacy
issues associated with private parties conducting and storing sensitive investigatory reports, and
the propriety and legality of having government agencies creating privately owned corporations
with special, financially advantageous relations, with the sponsoring agency. To the surprise of
some, OPM, however, determined to move on its own initiative and without explicit statutory 106
To launch the corporation, OPM choose American Capital Strategies (ACS) to develop a business
plan. ACS selected Marine Midland Bank of New York as a financial trustee and together with
Washington law firm, Arnold and Porter, began to recruit a management team. They selected,
with King’s agreement, Philip Harper, a former security industry official, to take the first step,
incorporating the company to be known as the US Investigation Service (USIS) under the laws of
the state of Delaware in April 1996. The corporation at this point had a single share and a single 107
The corporation was reincorporated in August 1996, at which time the 700 former Office of
Federal Investigations employees were separated from the government and became private
employees. In April 1997, it was reported:
[The] 700 employee-shareholders own about 91 percent of a company valued at $28.2
million. Harper and the other 11 company officers, who together put up an initial seven-
figure investment, hold the remaining shares. Under the terms of its corporate charter, USIS
is governed by a nine-member board of directors. The boards fiveinside members include
Harper and two others elected by employees; the three of them in turn nominate the two
remaining members. However, as with most private companies, the boards role is limited. It
does not run USISthats Harper’s job, along with his immediate staffinstead concerning
itself strictly withownership issues like oversight. For example, it ensures that company
resources are allocated in the best interests of employee shareholders, and it also approves

104 Stephen Barr, “OPM, In a First, Acts to Convert an Operation Into Private Firm, Washington Post, Apr. 14, 1996,
p. A4.
105 U.S. Congress, House, Committee on Government Reform and Oversight, Subcommittee on Civil Service,
Oversight of Federal Investigations Policy, Hearings, 104th Cong., 1st sess. June 14, 1995 (Washington: GPO, 1995);thst
—-. Outsourcing of OPMs Investigations Program, Hearings, 104 Cong., 1 sess. June 15, 1995 (Washington: GPO,
106 USISs official public website says: “On July 8, 1996, USIS was formed on the initiative of the President and
Congress as an employee-owned company (see http://www.usis.com/history/history.html). USIS, unlike ComSat or
the American National Red Cross, has no congressional or federal charter. For its part, OPM told Congress that[w]ith
respect to contracting with an ESOP trustee to establish an ESOP corporation, we determined that no statute prohibited
OPM from contracting for these services and that expending funds to enter into such a contract was a necessary
expense pursuant to applicable fiscal law authority.... Therefore, OPM’s decision to contract with an ESOP trustee does
not require legislation.” Outsourcing of OPMs Investigations Program, Hearings, 1995, p. 54.
107 Ronald P. Sanders and James Thompson, “Reinventing Government: Live Long and Prosper, Government
Executive, Apr. 1, 1997, pp. 51-53.

key strategic decisions. Of course, such issues are made easy when you begin a business with 108
the federal government as a guaranteed customer.
OPM then awarded USIS a noncompetitive three-year contract under a “public interest” 109
exemption in federal contracting law. It was reported that the OPM employees would not have
moved to the new private corporation without a guaranteed, sole-source contract providing a
modicum of security. USIS has free access to government computer databases not otherwise
available to the public or possible competing corporations. By any account, this government-
sponsored, private corporation was given advantages and incentives not available to other private 110
start-up corporations.
Critics of USIS and the privatization process followed in its creation tend to argue that
background investigations are an inherently governmental function to be conducted by regular
federal employees operating under all government management and security protection laws.
They believe that legal accountability should be direct up through the agency, departmental and
central management agency line to the President, and through the President to Congress. From
their point of view, policy considerations, such as seeking to find jobs for otherwise underutilized
or redundant employees, seeking lower unit costs, and the desirability of “profitability” for
governmental activities, while of academic and political interest, are essentially not relevant as
justifications for creating and supporting this hybrid organization. The critics argue that not all
personnel investigations are alike and assert that the needs and requirements of the government
(and indirectly of the public giving information to the government) are distinctive in legal terms
from those applicable in the private sector. In their view, the issues are not economic in their
fundamentals, but constitutional and legal. Moreover, the question arises: if OPM is free to
transfer a portion of its workload and employees to the private sector, may other agencies do
The Clinton Administration and supporters of OPM’s decision to “privatize” this activity, saw, on
the other hand, in the USIS experience, a creative response to a changing situation regarding a
government agency and its activities. This perspective views USIS as a successful exercise, one
with lessons to be applied in other situations. USIS’s moves into the private sector market,
including extensive contracts with the casino industry, were seen as the logical progression of a
generic activity: personnel investigations.
The more recent activities of USIS have raised new questions as to the appropriateness of the
privatization process and the mixing of the governmental and private sectors. Exactly which
assets were transferred to the USIS in the first place is not clear, but whatever they were was
deemed to be worth $28 million. The inadequacy of this figure became apparent as the Carlyle
Group soon was able to purchase a substantial block of shares. Its purchase of shares in USIS
appears to have been wise, timely, and fortuitous because the now private corporation underwent 111
an incredible surge in business. In 1999 alone, the share value increased 702 percent.

108 Ibid.
109 Stephen Barr, “OPM, In a First, Acts to Convert an Operation Into Private Firm, Washington Post, Apr. 14, 1996,
p. A4. In 2001, USIS won the contract again with OPM in an open competition.
110 Sanders and Thompson,Reinventing Government,” p. 53.
111 Website of USIS, available at http://www.usis.com (2003).

In January 2003, venture capital firm, Welsh, Carson, Anderson, and Stowe, purchased the stock 112
owned by original ESOP employees for a reported $545 million.
This brief description of USIS, concludes this selective review of entities within the quasi
government. Each category and entry has certain general characteristics worth noting as well as
distinctive features. What is evident from this review is that certain basic philosophical issues are
being debated, occasionally in direct terms but more often indirectly through the process of
reorganization of the executive branch. This process is taking two forms: the reorganization of 113
departments into agencies with agency-specific management laws, and the assignment of
agencies and functions, both new and existing, to entities outside the executive branch, to the
quasi government discussed in this report. This process has not been without its consequences for
both the institutional presidency and Congress.

Many observers believe that the underlying attraction of the quasi government organizational
option can be traced to an innate desire of organizational leadership, both governmental and 114
private sector, to seek maximum autonomy in matters of policy and operations. With respect to
the governmental sector, however, this natural centrifugal thrust of organizational management
has been historically held in check by a set of strong counter or centralizing forces. The
constitutional paradigm (model) of management was, and remains, based on laws and
accountability structures. The President is chief manager of the executive branch and manages
through the appointment of officers, the administration of general management laws, and the
budgetary process. The highest value in this public law model of management is political 115
accountability for the exercise of governmental power.
A unitary executive structure, coupled with hierarchical lines of authority and accountability, was
a theoretical product of the founding fathers. The President was viewed as the chief manager of
the administrative system. The governmental and private sector cooperated, but were kept legally 116
distinct in the interests of protecting citizens’ rights against a potentially arbitrary government.
Institutions not in the executive branch, but partaking of the attributes of governmental status
were looked upon with suspicion as aberrations breaching the constitutional wall between the
governmental and private sectors. These management values, however, were challenged in the

112 Stephen Barr,For Once-Federal Background Investigator, Privatization Leads to Its Own Kind of Check.”
Washington Post, Apr. 24, 2003, p. B2.
113 An example of the disaggregation of the management authorities in the executive branch is provided by the current
exercise of excluding the Department of Defense, Department of Homeland Security, and other select agencies (e.g.,
Federal Aviation Administration) from most elements of Title V (Government Organization and Employees) of the
U.S. Code.
114 “There is a persistent, universal drive in the executive establishment for freedom from managerial control and policy
direction.... The desire for autonomy characterizes the operating administration and bureaus. As one observer has
remarked, every agency wishes to be outside departmental structure or in the executive office of the President.... This
desire for independence is an apparently innate characteristic of administrative behavior.” Herbert Emmerich, Federal
Organization and Administrative Management (University, AL: University of Alabama Press, 1971), p. 17.
115 Robert S. Gilmour and Laura S. Jensen, “Reinventing Government Accountability: Public Function, Privatization
and the Meaning of ‘State Action,’” Public Administration Review, vol. 58, May/June 1998, pp. 247-58.
116 Ronald C. Moe and Robert S. Gilmour, “Rediscovering Principles of Public Administration: The Neglected
Foundation of Public Law, Public Administration Review, vol. 55, Mar./Apr. 1995, pp. 135-46.

1960s by a new management theory (public choice theory) emanating from academia, and found
expression in the election of political leaders, here and abroad, committed to market principles.
The underlying premise of the entrepreneurial management paradigm is that the governmental
and private sectors are essentially alike in the fundamentals, and thus subject to many of the same 117
economically derived behavioral norms. The supporters of this position promoted their values
and concepts of management internationally under the rubric of New Public Management (NPM) 118
and domestically as part of the National Performance Review (NPR).
Skeptics of the new entrepreneurial management paradigm say the centrality of public law is
displaced by the centrality of economic axioms; the focus of management, once the citizen, is
now the customer; and departmental integration as the norm is replaced by agency dispersion and
managerial autonomy. They see political accountability and due process being superseded by the
primacy of performance and results, however defined. Critics believe that the historic wall
between the governmental and private sectors is being breached not merely as a managerial
convenience, but as a matter of policy; so rather than a wall, government entrepreneurs are
forging a web of public/private partnerships.
Given the great differences between the basic premises guiding the two schools of thought, those
favoring traditional public law principles versus those favoring entrepreneurial approaches, it is
not surprising that their attitudes towards the quasi government are also at odds. Those
advocating entrepreneurial management tend to place high value on managerial flexibility and the
setting of numerical performance standards. Many are opposed in principle to hierarchical
leadership structures and emphasize the desirability of change and managerial risk-taking. This
set of values with respect to governmental management makes the hybrid organization within the
quasi government an attractive option.
Those favoring the public law approach to management, on the other hand, argue that the purpose
of government management is to implement the laws passed by Congress, not necessarily to
maximize performance or to satisfy customers. While accountability and effective performance
are generally compatible objectives, in those unusual instances where these values come into
conflict, they believe that the democratic value of political accountability should take precedence
over the managerial value of maximizing efficiency and outcomes. Many of the public law
advocates, not unexpectedly, tend to see quasi governmental entities as instruments of relatively
small constituencies whose interests are promoted over the interests of the whole people as
represented in their democratic institutions. Thus, they often oppose such quasi governmental
hybrid entities as GSEs because they believe those who benefit (shareholders and management)
are separate and apart from those who stand at risk (the taxpayers).
Supporters of performance based criteria for government management stress the need for
flexibility, competition, and performance as desirable goals. The pre-eminence of these values, in
their view, provides the critical elements in developing creative and successful management. In
this respect, therefore, many believe that the quasi government is where much of the future lies,
away from what they characterize as the stultifying impact of alleged micromanagement, both
congressional and executive, general management laws (e.g., personnel regulations), and

117 Barry Bozeman, ed., Public Management: The State of the Art (San Francisco: Jossey-Bass, 1993); and Hugh
Stretton and Lionel Orchard, Public Goods, Public Enterprise, Public Choice: Theoretical Foundations of the
Contemporary Attack on Government (New York: St. Martin’s Press, 1994).
118 U.S. Office of the Vice President, National Performance Review: From Red Tape to Results: Creating Government
That Works Better and Costs Less (Washington: GPO, 1993).

budgetary constraints. In the quasi government, some argue, management can do whatever is not
forbidden to do by law, thus providing the basis for innovation and partnerships. Accountability
will be for performance, however it may be defined and measured, rather than to strict
conformance to law. In the new entrepreneurial management paradigm, success, proponents say,
will be measured by polling the customers on their trust and satisfaction of the delivery of
governmental services.
Thus, the emergence and growth of the quasi government can be viewed as either a symptom of a
decline in our democratic system of governance or as a harbinger of a new, creative management
era where the principles of market behavior are harnessed for the general well-being of the 119
nation. One thing is for sure, however: debate between the competing management paradigms
is over important issues, such as the legitimacy and utility of the quasi government, and is likely
to continue into the foreseeable future.
Kevin R. Kosar
Analyst in American National Government
kkosar@crs.loc.gov, 7-3968

119 Elaine Ciulla Kamark, “The End of Government As We Know It,” in John D. Donahue and Joseph S. Nye, Jr., eds.,
Market-Based Governance: Supply Side, Demand Side, Upside, and Downside (Washington: Brookings Institution,
2002), pp. 227-63; and Ronald C. Moe,The Emerging Federal Quasi Government: Issues of Management and
Accountability,” Public Administration Review, vol. 61, May/June 2001, pp. 290-312.