30:1282(140)AR - Health Care Financing Administration and AFGE Local 1923 -- 1988 FLRAdec AR

 30 FLRA NO. 140
 30 FLRA 1282

     29 JAN 1988

HEALTH CARE FINANCING ADMINISTRATION

                    Agency

          and

AMERICAN FEDERATION OF GOVERNMENT
EMPLOYEES, AFL-CIO, LOCAL 1923

                    Union

Case No. 0-AR-1346

DECISION

I. Statement of the Case

     This matter is before the Authority on an exception to the
award of Arbitrator Elmer C. Flounders. The Arbitrator concluded
that the Agency erred when it contracted out certain functions
without having conducted a comparative cost study, as required by
the Office of Management and Budget (OMB) Circular A-76. The
Arbitrator ordered the Agency to reconstruct the requisite study
and to provide the Union with information necessary to ascertain
any harm that the affected employees may have suffered.

     The exception was filed by the Agency under section 7122 (a)
of the Federal Service Labor - Management Relations Statute (the
Statute) and part 2425 of the Authority's Rules and Regulations.
For the reasons discussed below, we find that the Arbitrator did
not make all of the findings necessary to support his award.
Therefore, the award is deficient and must be set aside.

II. Background

     The dispute arose on March 23, 1983, when the Agency
announced that it had decided to contract out certain functions
performed by the Agency's Office of Direct Reimbursement (ODR)
within the Medicare Program. At that time, the work was being
performed by approximately 230 ODR employees.

     On March 31, 1983, the Union filed a grievance concerning
the Agency's contracting out decision. The Agency denied the
grievance on the ground that the issue was not grievable or
arbitrable. The Union referred the grievance to arbitration in
accordance with the parties' negotiated grievance procedure.
However, the Agency refused to participate in the arbitration
proceeding.

     The Union then filed an unfair labor practice charge against
the Agency. A complaint was issued alleging that the Agency
violated section 7116(a)(1) and (8) of the Statute by refusing to
participate in arbitration of the grievance. On July 9, 1986, the
Authority decided that the Agency had violated the Statute as
alleged. Health Care Financing Administration, 22 FLRA  437
(1986). As a remedy for the Agency's unfair labor practice, the
Authority ordered the Agency, among other things, to proceed to
arbitration of the union's grievance.

III. Arbitrator's Award

     The grievance which was submitted to arbitration alleged
that the Agency's decision to contract out the ODR functions was
arbitrary, capricious and contrary to Federal procurement law and
regulations, including OMB Circular A-76. The central issue was
whether the Circular required the Agency to conduct a cost
comparison study when it contracted out the work of the ODR.

     The Agency argued that it was not required to conduct such a
cost comparison. In support of this argument, the Agency asserted
that under section 8 of the Circular, a cost comparison study was
required only if the Agency decided to continue performing the
work of the ODR "in house." 1 The Agency further asserted that a
study was not required if it decided to contract the work out to
the private sector. The Agency presented testimony and evidence
that procurement officials of the Department of Health and Human
Services (HHS) and OMB had agreed with its interpretation.

     The Agency also argued that the determination whether or not
to conduct a cost study was within the scope of its right to
contract out under section 7106(a)(2)(B) of the Statute. The
Agency asserted that since it had an  "uncontestable"
right under the Statute to contract out, it also had a right to
decide whether or not to conduct a cost comparison under OMB
Circular A-76.

     The Agency also maintained that it had done everything
possible to ensure that the decision to contract out the work of
the ODR would not have a harmful impact on the employees
involved. The Agency argued that its position was supported by
the fact that only 2 of the 230 employees involved testified that
they were disadvantaged as a result of the decision and that
those 2 employees voluntarily selected lower-graded positions.

     The Arbitrator noted that it was undisputed that the Agency
did not make a cost comparison study in accordance with the
provisions of OMB Circular A-76. Award at 6-7. He rejected the
Agency's assertions that it was not required to do so. He found
that the Agency had ignored or was unaware of a requirement in
section 9d of the Circular that an existing in-house activity
will not be converted to contract performance on the basis of
economy unless it will result in savings of at least 10 percent
of the estimated Government personnel cost for the period of the
comparative analysis. 2 Award at 7. The Arbitrator also found
that the Agency misinterpreted and erroneously paraphrased
section 8 of the Circular. Award at 7. He determined that under
the Circular, a cost comparison was required. Award at 7-9.

     The Arbitrator concluded that the Agency erred when it
contracted out the work of the ODR without an A-76 comparative
cost study. Award at 8 and 10. The Arbitrator also expressed
concern over the impact of the Agency's action on unit employees,
noting the Union's position that at least eight former ODR
employees were working at lower pay grades than they were prior
to the Agency's decision to contract out. Award at 9.

     The Arbitrator, therefore, sustained the grievance. As a
remedy, the Arbitrator ordered the Agency to "reconstruct a cost
study to compare the cost of performing the functions of the ODR
by contracting out to the private sector with the cost of
performing the functions in-house," as required by section 9d of
OMB Circular A-76. The Arbitrator also ordered the Agency to make
the cost study available to the Union for study and review. The
Arbitrator further directed the Agency to cooperate with the
Union and provide it with all records and information
necessary to enable the Union to ascertain whether any employees
of ODR suffered any loss of grade or pay as a result of the
Agency's decision.

IV. Agency Exception

A. Contentions

     The Agency contends that in sustaining the grievance the
Arbitrator exceeded his authority on two grounds. The Agency
first contends that the Arbitrator exceeded his authority in
ordering it to conduct an OMB A-76 cost comparison study. In
support of this contention, the Agency makes a number of
arguments. The Agency argues that the Arbitrator ignored the
testimony of the Agency's A-76 expert and instead was influenced
by subjective impressions of the meaning and intent of sections 8
and 9 of OMB Circular A-76. The Agency states that its witness
testified that he had communicated by telephone with procurement
officials at HHS and OMB who agreed with his opinion that the
decision to contract out could be made without a comparative cost
study. The Agency indicates that it also presented a memorandum
from HHS which supported the Agency's position. The Agency also
claims that there was no evidence submitted by the Union to
establish that the contracting out decision was contrary to
procurement law or regulation.

     The Agency further asserts that the Arbitrator exceeded his
authority because sections 8 and 9 of OMB Circular A-76 did not
provide the Arbitrator with sufficiently specific criteria to
enable him to objectively determine whether the Agency complied
with the intent of the Circular. The Agency argues that by
evaluating the Agency's interpretation of the Circular, the
Arbitrator substituted his judgment for that of the Agency in the
exercise of a management right. The Agency concludes that the
Arbitrator's award is inconsistent with the Authority's decision
in Headquarters, 97th Combat Support Group (SAC), Blytheville Air
Force Base, Arkansas and American Federation of Government
Employees, AFL - CIO, Local 2840, 22 FLRA  656 (1986), and
section 7106(a)(2)(B) of the Statute.

     Second, the Agency contends that the Arbitrator exceeded his
authority by ordering the Agency to provide the Union with the
records and information necessary to enable it to ascertain
whether any employees of the ODR suffered any loss of grade or
pay as a result of the Agency's decision to contract out. The
Agency argues that the Arbitrator's order improperly transforms
the grievance into a class action and extends a remedy to former
ODR employees who are similarly  situated to the grievant
and the employees who testified at the arbitration hearing.

     The Agency also argues that: (1) the Arbitrator ignored the
evidence presented at the hearing; (2) the only harm to unit
employees was speculative; and (3) those employees who were
reduced in grade were reduced voluntarily in order to get into
new career fields with the possibility of advancement to higher
grade levels.

B. Analysis and Conclusion

     We find that the Arbitrator's award is deficient and must be
set aside.

     In Blytheville Air Force Base, the Authority held that an
arbitrator may sustain a grievance challenging a contracting out
decision only on the basis that the agency failed to comply with
mandatory and nondiscretionary provisions of applicable
procurement law or regulation. With regard to the remedial
authority of an arbitrator, the Authority held that while an
arbitrator is not authorized to cancel a procurement action, the
arbitrator may order a reconstruction of the action if the
arbitrator finds that an agency's noncompliance materially
affected the final procurement decision and harmed bargaining
unit employees.

     We conclude that while the Arbitrator established that the
Agency failed to comply with a mandatory and nondiscretionary
provision of the applicable procurement regulation, he failed to
find that the Agency's noncompliance materially affected the
final procurement decision and harmed unit employees.

     The Arbitrator sustained the Union's grievance on the ground
that the Agency failed to comply with OMB Circular A-76. The
Arbitrator specifically found that section 9d of the Circular set
forth a requirement that an existing function will not be
converted to contract performance for reasons of economy unless
the conversion will result in the requisite savings of the
estimated Government personnel costs "for the period of the
comparative analysis." The Arbitrator's conclusion that section
9d required the Agency to conduct a cost comparison study in
deciding whether to contract out the ODR functions is supported
by the plain language of the provision. The Agency fails to
establish otherwise. 

     Section 9d clearly applies to decisions whether to contract
out existing Agency functions. Under that provision, the Agency
could not make the necessary determination as to any savings in
Government personnel costs without a comparative cost analysis.
The Agency's argument that it was required to conduct a cost
comparison only if it decided to continue to perform the ODR
function "in house" is not supported by the plain language of the
Circular. To read the Circular as requiring a cost comparison
study after a decision is made and then only if the decision is
to perform the particular work within the Agency is inconsistent
with section 9d. We also note that one of the policies of the
Circular, set forth at section 4c, is:

     Aim for Economy; Cost comparisons. When private performance
is feasible and no overriding factors require in-house
performance, the American people deserve and expect the most
economical performance and, therefore, rigorous comparison of
contract costs versus in-house costs should be used, when
appropriate, to decide how the work will be done.

     We conclude that the Arbitrator established that the Agency
failed to comply with a mandatory and nondiscretionary provision
of the applicable procurement regulation, namely, section 9d of
OMB Circular A-76.

     We find that the Agency's assertion that the Arbitrator
exceeded his authority by rejecting the opinions of the HHS and
OMB procurement officials who had agreed with the Agency's
interpretation of OMB Circular A-76 is without merit. It is well
established that such advisory opinions do not constitute rules
or regulations; they are entitled to consideration, but are not
binding on agencies or arbitrators. See, for example, American
Federation of Government Employees, Local 1568 and U.S.
Department of Housing and Urban Development, 21 FLRA  781, 783-84
(1986). We further find, contrary to the Agency's assertions,
that sections 8 and 9 are sufficiently specific to enable the
Arbitrator to objectively determine whether the Agency complied
with the provisions.

     We note, in agreement with the Union, that there was no
provision of OMB Circular A-76 in effect at the time of the
Agency's decision to contract out the functions of the ODR which
would allow it to seek a waiver from the requirement to conduct a
cost comparison. See OMB Circular A-76, paragraph 9, effective
May 1, 1979. A waiver provision was included in the August 1983
revision of the Circular. The revision provides that a
waiver may be granted by the assistant secretary or his designee
after a determination is made that effective price competition is
available and the reasons why the in-house performance would not
prevail. See Supplement to OMB Circular A-76, Part 1, Chapter 2,
subpart A, effective August 1983. However, even if the waiver
provision had been in effect at the time of the Agency's decision
to contract out the functions of the ODR, it does not appear that
the Agency would have qualified for a waiver under the
revision.

     As previously indicated, if an arbitrator finds that an
agency failed to comply with a mandatory and nondiscretionary
provision of applicable procurement law or regulation, the
arbitrator may order the defective procurement action
reconstructed only if the arbitrator also finds that the Agency's
noncompliance materially affected the final procurement decision
and harmed unit employees.

     In this case, the Arbitrator did not find that the Agency's
failure to comply with the terms of OMB Circular A-76 materially
affected its final procurement decision. Rather, the Arbitrator,
without any such finding, simply concluded that the Agency had
erred when it converted the functions of the ODR based on economy
without conducting an A-76 comparative cost study. Award at 8-9.
Such a conclusion does not satisfy the requirement established in
Blytheville Air Force Base that an arbitrator must find that the
agency's noncompliance materially affected its final procurement
decision.

     Moreover, the Arbitrator did not find that the Agency's
failure to comply with the terms of OMB Circular A-76 harmed unit
employees. The Arbitrator noted both the Union's argument that
eight employees were adversely affected by the defective
procurement action in that they were working at lower pay grades
than they were prior to the Agency's decision to contract out and
the Agency's argument that employees voluntarily chose
lower-graded positions. Award at 9. He ordered the Agency to
provide the Union with the records and pay grades of all former
ODR employees "to determine if they have improperly suffered any
loss of pay or grade as a result of the Agency's action." Award
at 9-10. The Arbitrator's findings are susceptible to differing
interpretations. It is clear that he did not find that the
Agency's noncompliance with the terms of OMB Circular A-76 harmed
unit employees as required by the Authority's decision in
Blytheville Air Force Base. 

     We conclude, therefore, that the Arbitrator's award is
deficient under the standards enunciated in Blytheville Air Force
Base.

     In finding the award deficient, we note that the
Arbitrator's order that the Agency furnish the Union with
information concerning the affected employees is so closely
related to his findings concerning the cost comparison study and
his deficient order directing reconstruction of the study, that
this portion of his remedy also must be set aside. There is no
indication in the record before us that the Agency denied a Union
request for information and there was no such allegation in the
grievance ruled on by the Arbitrator. Therefore, we do not decide
whether the Union might be entitled to such information under the
parties' agreement or section 7114(b)(4) of the Statute.

V. Decision

     For the above reasons, the Arbitrator's award is set
aside.

     Issued, Washington, D.C., January 29, 1988.

     Jerry, L. Calhoun, Chairman

     Jean McKee, Member

     FEDERAL LABOR RELATIONS AUTHORITY


FOOTNOTES

     Footnote 1 Section 8 of OMB Circular A-76, dated March 29,
1979,   is quoted, in pertinent part, in the Appendix to this
decision.

     Footnote 2 Section 9 of OMB Circular A-76, dated March 29,
1979,   is quoted, in pertinent part, in the Appendix to this
decision.