OMB Circular A-76: Legal Reach and Proposed Modifications

CRS Report for Congress
Received through the CRS W eb
OMB Circular A-76: Explanation and
Discussion of the Recently Revised
Federal Outsourcing Po licy
JohnR.Luckey
Legislative Attorney
American Law Division
Summary
T h e O ffi ce of Managem ent and Budget has recent l y m odi fi ed i t s C i rcul ar A- 7 6 ,
which governs t he ex ecutive policy for the competition of commercial activities. This
report p rovides a brief h istory of OMB C ir. A-76, a d iscussion of its place in the l egal
implementation of t he Federal procurement policy, and a review of the m ai n
components o f t he Circular. Important for und e r s t anding the C ircular i s an
understanding of the concepts of “commercial activity” and “inherently governmental
activity.” These t wo concepts will be emphasiz ed i n t he discussion.
There are several b il l s p ending in the 108^th Congress which could affect the
implementation of C ircular A-76 generally, or as i t would apply t o a spec i fic
Department. These are: H.R. 2691, H.R. 2650 and S . 1363, placing limitations on the
Secretary o f Interior; H.R. 2658, placing rest r i c t i ons on the Department of Defense;
H.R. 2673, placing restrictions on the S ecret ary o f Agriculture; and H.R. 2989, placing
restrictions on the appropriations for t he D e partments o f Transportation and Treas ury
and i ndependent agencies (OMB is one of these i ndependent agencies).
Background
Since t he 1950's, it has b een the s tated policy o f t he Federal Government that Federal
departments and/or agencies should not be in competition with the p rivate sector. S ince

1966 this policy h as been ex pressed i n t he O ffice of Management and Budget’s (OMB)

Circular A-76. This Circular was s ubs tantially revised i n 1967, 1979, 1983, 1991, 1999,
and, most recently and m ost ex t ensively, i n M ay of 2003.¹ The 1999 amendment was

¹ T his policy was first officially stated by the Bureau of the Budget in a directive i ssued in 1955.
BOB Bulletin 55-4, January 15, 1955. T his directive was subsequently amended in 1957 and
1960. T he a uthority cited f or issuing t he Circular is the Budget and Accounting Act of 1921, 31
U.S.C. §§ 501 and 502, the Office of Federal Procureme nt Policy Act, 41 U.S.C. § 401 et seq,
(continued...)
Congressional Research Service ˜ The Library of Congress

issued to bring t he Circular into conformance with, and assist i m p l e m e n t ation of, the
Federal Activities Inventory R eform Act of 1998 (FAIR Act).² In the early 1990's m uch
of A-76 was i ncorporat ed into the Fed eral Acquisition R egulations (FAR).³
More parti c u l a r ly, OMB Circular A-76, al ong with its four attachments, sets forth
gu idelines and p rocedures for d e t e r mining whether an activity should b e p erformed in-
house b y t he agency with Government personnel o r whether it should b e contracted-out
to the p rivate sector. OMB Circular A-76 establishes t he Ex ecutive policy regarding the
performance of “commercial activities” to be that the Federal Government should not be
in competition with the private sector. The Government should rely o n t he private s ector
to supply t he products and s ervices the Government needs.⁴ Attachment A contains the
i n v e n t o r y p ro ces s f o r categorizing all activities as com m e rci a l o r i n h e ren t l y go v e rn m e n t al .
Attachment B s et s out the proces s t o be used for public-private competitions. Attachment
C gives the rules for calculating t he cost of these competitions. Attachment D s upplies
the d efinitions for t he circular.
Generally the C ircular applies t o all ex ecutive departments and independent
es tablishments. There are activities which are ex cepted as a cl as s and there are situations
where an activity which i s not ex cepted as a cl as s m ay b e ex cepted by t he Competitive
S ourci ng Offi ci al (C S O ) b ecause of t h e p art i cul ar ci rcum st ances.⁵ The t wo primary
cl asses of activiti es t o w h i c h t he Circular does not apply are: activities s peci fically
ex em pted by law; and activities which are i nherently governmental in nature.
Inherently Governmental Activi ty and Commercial Activity
The primary ex ception t o t he policy of contracting-out pertai ns to an activity which
is “inherently governmental.” Past definitions have been qu ite general i n n ature and were
accom p ani ed b y num erous ex am pl es.⁶ The n ew A-76 takes a more specific approach in
definition, but leaves out the lists of ex amples. The gen e r a l a pproach to inherently

¹ (...continued)
and Federal Activities Inventory Reform Act of 1998, Pub. L. 105-270. See CRS Report
RL31024, The Federal Activities I nventory Reform Act and Ci rcular A- 76 , a nd CRS Report
RL32017, Circular A-76 Revisi on 2003: Selected Issues .
² Pub. L. 105-270, 112 Stat. 2382 (1998). T he FAIR Ac t generally requires each executive agency
to annually inventory its activities t hat are not inherently governmental and submit this inventory
toOMB.
³ See , 48 C.F.R. § 7.3. It should be noted that not all of t he subsequent amendments to A-76
have been incorporated into the FAR. T herefore, A-76 a nd the FAR provisions are not identical.
T he c urrent proposed modifications are t o A-76, not the FAR.
⁴ OM B Circular A-76, § 4.
⁵ OM B Circular A-76, § 5a. T he Department of Defense CSO i s given discre t i on as t o t he
applicability of the Circular t o t he Department in times of declared war or military mobilization.
⁶ See , f or example, the FAIR Act, Office of Federal Procureme nt Policy Letter 92-1, and OMB
Cir.A-76,§6(1999).

governmental activities i s, also, s ignificantly altered under t he revisio n .⁷ T h e l evel of
discr e t i o n required t o m ake a function i nherently governmental has been significantly
raised. Under t he modified ci rcular o n l y activities requiring “ substantial offi ci al
discretion i n t he application o f governmental authority and/or in making decisions for t he⁸
government” would b e considered inherently governmental. The revi s ed C i rcul ar A-76
states:
An inherently Go v e rn m e ntal activity is an activity that is so
intimately related t o the public interest as to mandate performance by
Government personnel. These activities require the ex ercise o f
substantial discretion i n a p p l ying Government authority and/or in
making decisi o n s for t he Govern ment. Inherently Governmental
activities normally fall into two cat egories: the ex ercise of s overeign
Government authority or t h e est abl i s hm ent o f p rocedures and p rocess
related t o t he oversight of monetary transactions or entitlements. An
inherently governmental activity involves:
(1) Binding the United S tates t o t ake o r n o t take some
action by contract , policy, regu lation, authoriz ation, order,
orotherwise;
(2) Det ermining, protectin g, and advancing economic,
political , t erritorial , property, or other i nteres ts by military
or diplomatic action, civil or criminal judicial proceeding,
contract management, o r o therwise;
(3) S ignificantly affecting t he life liberty, or property of
private p ersons; o r
(4) Ex erting ultimate control over t he acquisition, use, or
disposition of United S tates property (real or personal,
tangible or intangible), incl uding es tablishing policies or
procedures for collection, control, or disburs e m e nt of
appropriated and other Federal funds.⁹
Congress has s peci fically, by s tatute, decl ared certain activities or functions to be¹⁰
“in h e rently governmental” i n t he contex t o f OMB Circular A-76. In making these

⁷ Although, the bigge st change , t he proposed requi reme nt that Agencies would presume that all
activities are commercial i n nature unless an activity is j ustified as being i n h e r e n tly
governmental, was dropped from t he final version of the Circular. See , 67 Fed. Reg. 69769 (Nov.

19,2002).

⁸ OMB Circular A-76, Attachme nt A, § B(1)(a). (Emphasis a dded.).
⁹Id.
¹⁰ See, e.g. T he V olunteers i n t he Parks Act of 1969, Amendments, Pub. L. No. 98-540, 98 Stat.
2718, 98th Cong., 2nd Sess. (1984), which declared that regulation a nd ma nage me nt of natural
resources on Federal l ands ar e i nherently Gove rnme nt functions and s hould be performed by
Federal e mployees; t he Water Resources De ve lopment Act of 1990, Pub. L. 101-640, § 314, 104
Stat. 4605, 4641, 101st Cong., 2nd Sess. (1 990), c odi fied at 33 U.S.C. § 2321, which declared
the operation and maintenance of hydroelectric power generating f acilities at Corps of Engi neers
water r esources proj ects are to be considered inherently governmental; and the Government
Performa n c e a n d Results Act of 1993, Pub. L. 103-62, 107 Stat.285, 103rd Cong., 1st Sess.
(continued...)

declarations, C ongress does not appear to have ex panded t he sco p e of “inherently
governmental” b eyond that of the C ircular. Th ese d ecl arat i ons are not i n consi s t ent wi t h
OMB C ircular A-76. For i nstance, the regulation and management of natural resources
was one of the C ircular’s ex amples of the act of governing under t he old C ircular.¹¹ The
i n t ent i o n o f t hese provi si ons appears t o b e t o requi re t h at a great er em phasi s b e p l aced on
the purpose of t he function or activity being p erformed as opposed to cost savings t o t he
Government in making the d ecision as what should o r s hould not be contracted-out and
to gi ve Congress more direct control o f contracting-out in this area.
The revi s ed C i rcul ar defi nes “com m e rci al act i v i t y” as “a recurri ng servi ce t hat
coul d b e p erform ed by t h e p ri vat e sect or and i s resourced, p erform ed, and cont rol l ed b y
t h e agency t hrough a cont ract or a fee-for-servi ce agreem ent . ”¹²
The Legal E ffect of OM B Ci r . A-76
Fi rst i t s hould b e s tated what t his C ircular i s and what it is not. It i s a statement
of Ex ecutive policy. It is not a l aw or regu lation, in the u sual sense o f t he word.¹³ The
E x e c u t i v e B r a n ch h as cause t o i ssue m any t yp es of regu l at i ons or, for l ack of a b et t er
word, directives . These directives may be s ubstantive i n nat ure or t hey m ay be
i n t erpret i v e rul es, general st at em ent s of pol icy, or rules of agency o rgani z at i on, procedure,
or practice. In order t o b e found to have the force and effect of law, ex ecutive d irectives,
be t h ey ex ecut i v e o rders, regu l at i ons, o r OMB C i rcul ars, m u st m eet a t wo-pronged t est .
Fi rst, the d irective m ust b e t he product o f a Congressional grant of legi slative authority,
p r o m u l gated i n conformity with any procedural requirements imposed by Congress.
Second, it must be a “substantive” or “legislative t yp e” rule affecting i ndividual rights and
obligations.¹⁴

¹⁰ (...continued)
(1993), which required t he head of each Federal a ge ncy a nd the U.S. Post Office to deve lop a nd
submit certain strategi c plans, performance plans, and performance reports, declared the
preparation and drafting of t hese plans and repor ts to be inherently governmental function only
to be performed by Federal employees.
¹¹ OMB Circular A-76, § 6(e)(1) ( 1999).
¹² OM B Circular A-76, Attachment A, § B(2).
¹³ T here i s no general s t a t u t e which establishes t he general policy f or contracting-out by the
Federal government i n t he civilian procurement sector. T here is a s tatutory statement of policy
in this area for defense procurement, 10 U.S.C. § 2462(a), which states:
(a) In ge n eral. Except as otherwi se provided by law, the Secretary of
Defense s hall procure each supply or s ervi ce necessary for or beneficial t o
the accomplishment of t he functions of the Department of Defense (other
than functions which t he Secretary of Defense determines must be
performed by military or Governme ntal personal) from a source in the
private s e c t o r i f such a s ource can provide s uch s upply or s ervi ce to the
Department at a cost t hat i s l ower (aft e r including any cost differential
required by l aw, Executive order, or r egulation) than the cost at which the
Departme nt can provide t he same supply or s ervi ce.
¹⁴ Chrysler Corp. v. Brown , 441 U.S. 281, 295-302 (1979). See also, Morton v. Rui z , 415 U.S.
(continued...)

The first pro n g of the t es t i s bas ed in the constitutional grant of al l l egislative
power to Congress. The S upreme C ourt h as stated;
T h e l egislative power of the United S tates i s vested i n
Congress, and the ex ercise of quasi-legislative authority by
governmental departments and agencies must be rooted in
a grant of s u ch power by Congress and s ubject to
limitations which t hat body imposes.¹⁵
Therefore, if a d irective i s t o h ave t he force and effect of law, the underlyi ng authority for
the directive m ust have come from C ongress.
Fo r a directive t o m eet the s econd prong requirement, t hat t he directive b e
“substantive” o r “ l e g islative t yp e,” i t m ust b e one which affects i ndividual rights and
obligations and i t m ust provide meaningf u l s t an d a rds s usceptible to third party review.
The S upreme C ourt h as called t he requirement for t he creation o f rights and obligations
“an important touchstone for d istingu ishing those rules that may b e ‘binding’ o r h ave t he
‘force o f l aw’.”¹⁶ If the directive does not creat e a righ t o r o b ligation, the courts have
nothing to enforce. If the d irective i s p remised upon discretionary standards i t p rovides
no basis for, nor is it amenable to, j udicial review.¹⁷
Although i t i s possible t o imagi ne a s itua tion where Congress authoriz es the OMB
to issue regulations to ca rry out speci fic l egislation and OMB doing so in a substantive
or legi slative m anner, this is not the u sual background to an OMB circular. OMB i s t he
Pres ident’s principal arm for the ex ercise of his managerial functions.¹⁸ It was i ntended
as “a managerial tool for impleme nting t he President’s p ersonnel . . . policies and not as
a l egal framework enforceable by private litigation.”¹⁹ This is to say t hat i n t h e u s u a l
circumstance OMB circulars are i ssued upon ex ecutive authority, not legi slative.
Courts have speci fically held that OMB C ircular A-76 does not have the force and
effect of l aw.²⁰ The authority for t his circu l a r c a m e f rom t he President, not Congress.

¹⁴ (...continued)

199(1974).

¹⁵ Id. a t 302. See also, Y oungstown Sheet & Tube Co. v. Sawyer , 343 U.S. 579, 587-88 (1952)
¹⁶ Id. at 302, citing, Morton v. Rui z , 415 U.S. 199, at 235-36 (1974).
¹⁷ U.S. Dept. of Health and Human Services v. Federal Labor Relations Authority, 844 F.2d 1087
(4th Cir. 1988). See also, Defense Language Institute v. FLRA, 767 F.2d 1398, 1401 (9th Cir.

1985), cert. dis., 476 U.S. 1110 (1986).

¹⁸ Reorga niza tion Plan No. 2 of 1970, Mess a ge o f t he President, reprinted i n 1970 U.S. Code
Cong. & Ad. News 6315, 6316.
¹⁹ U.S. De p t . of Health and Human Services v. FLRA, 844 F.2d 1087 at 1096 (4th Cir. 1988),
citing, Independent Meat Packers Ass. v. But z , 526 F.2d 228 at 236 (8th Cir. 1975), cert. den.,

424 U.S. 966 (1976).

²⁰ See , U.S. Dept. of He a l t h a nd Human Services ,v. FLRA, 844 F.2d 1087 (4th Cir. 1988) and
Defense Language Institute v. FLRA, 767 F.2d 1398 (9t h C i r. 1985), cert. dis., 476 U.S. 1110
(continued...)

OMB C ircular A-76 i s a managerial document.²¹ Even if A-76 could b e found to pass the
first p art o f t he test, i t h as been consistent l y f ound not to be a “substantive” directive.²²
By i t s own t erm s A-76 does not cr e a t e a n y enforceabl e ri gh t s i n t h i rd p art i es.²³ The
C i rcul ar i s not am enabl e t o t h i rd p art y r e v i ew because i t fai l s t o provi de j u st i ci abl e
standards. In short, it provides n o “law” to apply.²⁴
Cur r e nt Legi sl ati on
There are several bills pending in the 108^th Congress which cou ld affect the
implementation of t he revised C ircular A-76 generally, or as i t would apply t o a speci fic
Department. S ection 335 of H. R. 2691( Making appropriations for t he Department of the
In terior and related agenci es for t he fiscal year ending S e p t ember 30, 2004) would
prohibit t he use o f any funds appr o p r i a t e d by t he bill to initiate any new public/private
competitions. H.R. 2650 and S . 1363 would, also place limitations on the S ecretary o f
Interior, prohibiting t he study or implementation of any plan that would privatize, divest
or transfer any act i v i t i es associated with the mission, function o r responsibility of the
National P ark S ervice. Section 8014 of H. R. 2658 (DOD fiscal year 2004 appropriation)
would p rohibit t he use o f funds appropriated under t he bill for conversion o f a function
em ploying m ore t han t en ci vilians to the private sect or unless a most effi ci en t
organization p lan h as been developed. T itle I o f H.R. 2673,(Department of Agriculture
fiscal year 2004 appropriation)states that no funds made available by t his appropriation
may be obligat ed for FAIR Act or Circular A-76 activities until the S ecret ary h as
submitted t o t he Committees on Appropriations of both Houses of Congress a report on
the Department’s contracting out policies, including agency budgets for contracting out.
On September 10, 2003, the House p assed H.R . 2989 (fiscal year 2004 appropriation for
the Departments o f Transportation and Treasury and independent agencies) with an
a m e n dment which prohibits the u se of funds appropriated b y t he bill to implement the
May 29, 2003 revision of OMB Circular A-76. The OMB is one of these independent
agencies. T herefore, OMB could not spend funds to enforce t he Circular if this legi slation
isenacted.

²⁰ (...continued)
(1986).
²¹ U.S. Dept. of Health and Human Services , a t 1092.
²² Id. T he T hird Circuit has f ound that some aspects of existing practice an d p r o cedure under
OM B A-76 have been elevated to the s tatus of l aw by statute. Even so, questions regarding its
application i nvolved manageria l choices inhere ntly unsuitable f or the j udiciary t o consider.
American Federation of Governmental Employees, Local 2017 v. Brown , 680 F.2d 722 (3rd Cir.

1982).

²³ OMB Circular A-76 at § 7(c)(8), which s tates t h a t i t “ s h a l l not be construed t o create any
substantive or procedural basis f or anyone to challenge any agency action or i naction on t he basis
that such action or i naction was not in accordance with” A-76. T here a r e c e r t a in appeals
authorized under t he FAIR Act of A-76 c ost c omparisons.
²⁴ U.S. Dept. of Health and Human Services ,v. FLRA, 844 F.2d 1087, 1096 (4th Cir. 1988),
Defense Language Institute v. FLRA, 767 F.2d 1398, 1401 (9th Cir. 1985), cert. dis., 476 U.S.
1110 (1986), a nd American Federation of Governmental Employees, Local 2017 v. Brown , 680
F.2d 722 (3rd Cir. 1982). But s ee, CC Di stributors, Inc. v. United States, 883 F.2d 146 (D.C. Cir.

1989).