B-164908(1), JANUARY 31, 1969, 48 COMP. GEN. 494

B-164908(1): Jan 31, 1969

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EQUIPMENT - AUTOMATIC DATA PROCESSING SYSTEMS - LEASE-PURCHASE AGREEMENTS - APPROPRIATION AVAILABILITY AN INSTALLMENT PURCHASE PLAN FOR A COMPUTER REPLACEMENT PROJECT THAT PROVIDES FOR PAYMENT OVER A PERIOD OF YEARS IS A PROPOSAL FOR A SALE ON CREDIT THAT CONTEMPLATES A CONTRACT EXTENDING BEYOND THE CURRENT FISCAL YEAR. A CONTRACT THAT WOULD CONTINUE UNLESS AFFIRMATIVE ACTION IS TAKEN BY THE GOVERNMENT TO TERMINATE IT AND. WHICH PROHIBIT A CONTRACT OR PURCHASE UNLESS AUTHORIZED BY LAW AND UNLESS ADEQUATE FUNDS ARE AVAILABLE FOR THE FULFILLMENT OF THE AGREEMENT. PROPOSALS HAVE BEEN RECEIVED FROM THREE VENDORS OFFERING TO FURNISH THE REQUIRED EQUIPMENT AND SERVICES FOR THE PROJECT AS REQUESTED IN THE REQUEST FOR PROPOSALS.

B-164908(1), JANUARY 31, 1969, 48 COMP. GEN. 494

EQUIPMENT - AUTOMATIC DATA PROCESSING SYSTEMS - LEASE-PURCHASE AGREEMENTS - APPROPRIATION AVAILABILITY AN INSTALLMENT PURCHASE PLAN FOR A COMPUTER REPLACEMENT PROJECT THAT PROVIDES FOR PAYMENT OVER A PERIOD OF YEARS IS A PROPOSAL FOR A SALE ON CREDIT THAT CONTEMPLATES A CONTRACT EXTENDING BEYOND THE CURRENT FISCAL YEAR, A CONTRACT THAT WOULD CONTINUE UNLESS AFFIRMATIVE ACTION IS TAKEN BY THE GOVERNMENT TO TERMINATE IT AND, THEREFORE, SUCH A PLAN WOULD BE IN CONFLICT WITH SECTIONS 3732 AND 3679. REVISED STATUTES, WHICH PROHIBIT A CONTRACT OR PURCHASE UNLESS AUTHORIZED BY LAW AND UNLESS ADEQUATE FUNDS ARE AVAILABLE FOR THE FULFILLMENT OF THE AGREEMENT. NOTWITHSTANDING THE ECONOMIC ADVANTAGE OF PURCHASE OVER RENTAL, THE LACK OF SUFFICIENT FUNDS TO PURCHASE THE EQUIPMENT OUTRIGHT CANNOT BE USED TO FRUSTRATE THE STATUTORY PROHIBITION AGAINST CONTRACTING FOR PURCHASES IN EXCESS OF AVAILABLE FUNDS, ABSENT CONGRESSIONAL AUTHORITY.

TO THE SECRETARY OF THE AIR FORCE, JANUARY 31, 1969:

WE REFER TO THE LETTER DATED OCTOBER 1, 1968, FROM YOUR DEPUTY GENERAL COUNSEL, REQUESTING ADVICE CONCERNING A FINANCIAL ARRANGEMENT WHICH HAS BEEN OFFERED BY A PROSPECTIVE VENDOR TO THE DEPARTMENT OF THE AIR FORCE IN CONNECTION WITH THE PROPOSED COMPUTER REPLACEMENT PROJECT FOR THE AIR FORCE ACCOUNTING AND FINANCIAL CENTER (ESQ PROJECT 42-67).

PROPOSALS HAVE BEEN RECEIVED FROM THREE VENDORS OFFERING TO FURNISH THE REQUIRED EQUIPMENT AND SERVICES FOR THE PROJECT AS REQUESTED IN THE REQUEST FOR PROPOSALS. EACH OF THE PROPOSALS INCLUDES THE USUAL OPTION OFFERING THE EQUIPMENT ON THE BASIS OF A LEASE WITH AN OPTION TO PURCHASE OR OUT-RIGHT PURCHASE.

ONE VENDOR (VENDOR X) HAS OFFERED AN ADDITIONAL ALTERNATIVE WHICH IS DESCRIBED AS AN INSTALLMENT PURCHASE PLAN. THIS PLAN HAS BEEN OFFERED BY VENDOR X IN CONNECTION WITH VARIOUS OTHER PROCUREMENTS OF AUTOMATIC DATA PROCESSING EQUIPMENT (ADPE).

THE BASIC FEATURES OF THE PLAN ARE SET FORTH AS FOLLOWS:

1. THE GOVERNMENT PAYS FOR THE EQUIPMENT INSTALLED BY MAKING A DOWN PAYMENT OF 10 PERCENT OF THE PURCHASE PRICE AND MONTHLY PAYMENTS OF THE REMAINING 90 PERCENT OF THE PURCHASE PRICE OVER A PERIOD OF YEARS, PLUS INTEREST ON THE UNPAID BALANCE AT THE RATE OF 6.5 PERCENT. (YOU REPORT THE GOVERNMENT WOULD ACTUALLY MAKE ONE ANNUAL PAYMENT EACH FISCAL YEAR.)

2. A DEPOSIT OF 5 PERCENT OF THE PURCHASE PRICE IS REQUIRED AT INSTALLATION TO BE APPLIED AGAINST THE UNPAID BALANCE IN THE FORM OF CREDITS AT THE END OF THE CONTRACT PERIOD. THE DEPOSIT WHICH IS RETAINED BY THE VENDOR ACCUMULATES SIMPLE INTEREST AT A RATE OF 6.5 PERCENT PER ANNUM IN FAVOR OF THE GOVERNMENT.

3. THE GOVERNMENT MAY TAKE TITLE TO THE EQUIPMENT EITHER AT THE END OF THE SERIES OF PAYMENTS OR AT THE TIME OF THE INITIAL PAYMENT, WHICHEVER IT DESIRES. (THE PRESENT INTENTION IS TO HAVE TITLE VEST AT THE END OF THE SERIES OF PAYMENTS.)

4. THE SECRETARY OF THE AIR FORCE MAY TERMINATE THE CONTRACT WITH RESPECT TO ANY OR ALL EQUIPMENT AT THE END OF ANY FISCAL YEAR. HOWEVER, THE TERMINATION FOR CONVENIENCE CLAUSE DOES NOT APPLY. INSTEAD THE CONTRACT PROVIDES THAT UPON TERMINATION THE VENDOR RETAINS THE 10 PERCENT DOWN PAYMENT AND THE 5 PERCENT DEPOSIT IN ANY CASE; AND, IN ADDITION, IF AT THE TIME OF TERMINATION THIS AMOUNT, PLUS ANY ACCUMULATED MAINTENANCE CHARGES DUE THE GOVERNMENT UNDER THE CONTRACT AND THE PERIODIC PAYMENTS MADE, IS LESS THAN WHAT THE CUMULATIVE RENTAL CHARGES WOULD OTHERWISE HAVE BEEN IF THE GOVERNMENT HAD LEASED FROM THE BEGINNING, THE GOVERNMENT MUST PAY THE DIFFERENCE TO THE COMPANY. ALSO, THE GOVERNMENT MUST PAY THE CHARGES SET FORTH IN THE CONTRACT TO EFFECT RETURN OF THE EQUIPMENT TO THE COMPANY.

IN THIS CONNECTION, IT IS STATED THAT THE VENDOR WOULD NOT ALLOW THE GOVERNMENT TO APPLY ANY PART OF THE AMOUNT PAID UNDER A CONTRACT TO THE PURCHASE PRICE OF NEW EQUIPMENT IN THE EVENT THE GOVERNMENT DESIRES TO UPGRADE OR ALTER THE COMPONENTS OF THE CONFIGURATION DURING THE TERM OF THE CONTRACT. YOUR DEPARTMENT ESTIMATES THAT THE COST OF CONFIGURATION CHANGES WOULD AMOUNT TO ROUGHLY 10 TO 15 PERCENT OF THE PURCHASE PRICE. IF THE GOVERNMENT COULD NOT REDEPLOY THE REPLACED EQUIPMENT, IT WOULD HAVE THE OPTION OF CONTINUING THE INSTALLMENT PURCHASE OR DEFAULTING AND RETURNING SUCH REPLACED EQUIPMENT TO THE VENDOR.

BASED ON EVALUATION OF THE THREE ACCEPTABLE PROPOSALS RECEIVED IN CONNECTION WITH ESQ PROJECT 42-67, IT IS REPORTED THAT VENDOR X'S PROPOSAL IS LOWEST IN COST ON A PURCHASE BASIS, AND LOWER STILL IF THE INSTALLMENT PURCHASE PLAN IS USED. BUT X'S INSTALLMENT PURCHASE PLAN IS NOT LOWER THAN THE OTHER BIDS IF THE EQUIPMENT IS LEASED FOR THREE OR MORE YEARS AND THEN PURCHASED; NOR IS X THE LOW BIDDER ON A STRAIGHT LEASE BASIS. IT IS NOTED, ALSO, THAT UNDER THE INSTALLMENT PLAN THE TOTAL AMOUNT PAID FOR AN ITEM OF EQUIPMENT DOES NOT BECOME LOWER THAN THE RENTAL COST UNDER THE STRAIGHT LEASE PLAN UNTIL NEAR THE END OF THE THIRD CALENDAR YEAR OF PAYMENT.

WE ARE ADVISED THAT YOUR DEPARTMENT DOES NOT HAVE SUFFICIENT FUNDS AVAILABLE TO PURCHASE X'S SYSTEMS AT THE OUTSET; BUT THAT IT IS POSSIBLE TO MAKE SUFFICIENT FUNDS AVAILABLE TO COVER THE INITIAL FUNDING OF THE INSTALLMENT PURCHASE METHOD OF PROCUREMENT. IT IS FELT BY YOUR DEPARTMENT THAT THE PROCUREMENT COULD BE ACCOMPLISHED EITHER BY THE USE OF FUNDS THAT WOULD ORDINARILY BE AVAILABLE FOR RENTAL OF ADPE (I.E., THE 1-YEAR APPROPRIATION,"OPERATION AND MAINTENANCE, AIR FORCE"), OR BY THE USE OF FUNDS THAT WOULD ORDINARILY BE AVAILABLE FOR A STRAIGHT PURCHASE OF SUCH EQUIPMENT (I.E., THE NO-YEAR APPROPRIATION,"OTHER PROCUREMENT, AIR FORCE"). AT THIS TIME IT IS CONTEMPLATED THAT YOUR OPERATION AND MAINTENANCE APPROPRIATION WOULD BE USED.

YOUR COUNSEL RECOGNIZES THAT THERE ARE CERTAIN AREAS OF DOUBT AS TO THE LEGALITY OF THE INSTALLMENT PURCHASE PLAN OFFERED BY X AND, IN VIEW OF THE PENDING AWARD, HAS REQUESTED OUR DECISION ON THE MATTER. SPECIFICALLY, HE ASKS (1) WHETHER THE AIR FORCE HAS THE AUTHORITY TO ENTER INTO THE INSTALLMENT PURCHASE PLAN OFFERED BY VENDOR X, AND (2) IF SO, WHETHER FUNDS AVAILABLE FOR THE RENTAL OF ADPE COULD BE USED TO ACCOMPLISH THE PROCUREMENT.

THE PROPOSAL TO SELL THE EQUIPMENT TO THE GOVERNMENT WITH PAYMENT THEREFOR TO BE MADE OVER A PERIOD OF YEARS IS A PROPOSAL FOR A SALE ON CREDIT. IT THUS CONTEMPLATES A CONTRACT EXTENDING BEYOND THE CURRENT FISCAL YEAR AND WOULD CONTINUE AS SUCH UNLESS AFFIRMATIVE ACTION IS TAKEN BY THE GOVERNMENT TO TERMINATE. THIS OSTENSIBLY IS THE ONLY WAY SUCH EQUIPMENT CAN BE PURCHASED AT THIS TIME BECAUSE OF INSUFFICIENT FUNDS. PURCHASE OF THE EQUIPMENT UNDER THESE CIRCUMSTANCES IN THE MANNER PROPOSED WOULD BE IN DIRECT CONFLICT WITH SECTIONS 3732 AND 3679, REVISED STATUTES, AS AMENDED, CODIFIED AS 41 U.S.C. 11 AND 31 ID. 665 (A), RESPECTIVELY, WHICH PROVIDE IN PERTINENT PART AS FOLLOWS:

NO CONTRACT OR PURCHASE ON BEHALF OF THE UNITED STATES SHALL BE MADE, UNLESS THE SAME IS AUTHORIZED BY LAW OR IS UNDER AN APPROPRIATION ADEQUATE TO ITS FULFILLMENT * * *.

NO OFFICER OR EMPLOYEE OF THE UNITED STATES SHALL MAKE OR AUTHORIZE AN EXPENDITURE FROM OR CREATE OR AUTHORIZE AN OBLIGATION UNDER ANY APPROPRIATION OR FUND IN EXCESS OF THE AMOUNT AVAILABLE THEREIN; NORSHALL ANY SUCH OFFICER OR EMPLOYEE INVOLVE THE GOVERNMENT IN ANY CONTRACT OR OTHER OBLIGATION, FOR THE PAYMENT OF MONEY FOR ANY PURPOSE, UNLESS SUCH CONTRACT OR OBLIGATION IS AUTHORIZED BY LAW.

THE ECONOMIC ADVANTAGES OF A PURCHASE OVER RENTAL CANNOT BE USED TO FRUSTRATE THE STATUTORY PROHIBITION AGAINST THE CONTRACTING FOR PURCHASES IN EXCESS OF AVAILABLE FUNDS AND ANY DEPARTURE FROM SUCH STATUTES MUST BE AUTHORIZED BY CONGRESS. THE FIRST QUESTION IS THEREFORE ANSWERED IN THE NEGATIVE, AND THE SECOND QUESTION IS NOT ANSWERED, IT BEING BASED UPON AN AFFIRMATIVE REPLY TO THE FIRST.

IN VIEW OF THE DISPOSAL OF YOUR QUESTIONS ON OTHER GROUNDS IT DOES NOT APPEAR NECESSARY TO CONSIDER THE PROPRIETY OF PAYMENT OF INTEREST. THIS CONNECTION, HOWEVER, SEE 22 COMP. GEN. 772.