Order Code RL30533
The Quasi Government: Hybrid Organizations
with Both Government and Private Sector
Legal Characteristics
Updated February 13, 2007
Kevin R. Kosar
Analyst in American National Government
Government and Finance Division

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The Quasi Government: Hybrid Organizations with Both
Government and Private Sector Legal Characteristics
Summary
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.

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Contents
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Quasi Official Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Government-Sponsored Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federally Funded Research and Development Centers (FFRDCs) . . . . . . . 14
Agency-Related Nonprofit Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Adjunct Organizations Under the Control of a Department
or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Organizations Independent of, But Dependent Upon, Agencies . . . . . 21
Nonprofit Organizations Affiliated with Departments or Agencies . . 23
Venture Capital Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Congressionally Chartered Nonprofit Organizations . . . . . . . . . . . . . . . . . . 28
Instrumentalities of Indeterminate Character . . . . . . . . . . . . . . . . . . . . . . . . 32
American Institute in Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
National Endowment for Democracy . . . . . . . . . . . . . . . . . . . . . . . . . . 33
U.S. Investigation Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Conclusion: Paradigms in Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

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The Quasi Government:
Hybrid Organizations with Both
Government and Private Sector
Legal Characteristics
Context
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 agencies.1 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 entities that
have collectively been called the “quasi government.”2 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;
1 This report was originally authored 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. 23-27.

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(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.
In Search of a Definition
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.
Spectrum or Categories
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

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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 many, of the
attributes normally associated with the governmental sector.3 Under this schema, the
Legal Services Corporation, for example, would be a quago, while the Red Cross
would be a quango.
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 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.
Federal Organization and Management:
The Traditional View Under Question
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 “great”
departments; Treasury, State and War.4 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 departments.
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 the Department of the Treasury a substantial
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).
4 Discussion of the acts creating the three “great 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).

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degree of legal autonomy within the department,5 down to the more recent
“independent counsels” functioning in an uneasy relationship with the executive
branch,6 not all officers have been directly accountable to the President.7 These
exceptions notwithstanding, the prevailing organizational norm has historically been
toward an executive accountable to the President.8
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 officers, rather than being assigned directly by
Congress to a nondepartment head.9 The first 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 independent
regulatory commissions would be added. In the 20th 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 agencies operating under all the general
management laws,10 except where exempted.
The view that all government activities should be accountable in some manner
to politically responsible officials received its most forceful iteration in the 20th
century in the Hoover Commission report of 1949:
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 of
‘Special 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 Commissions in the 20th 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
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, Clinton Brass,
coordinator.

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[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 the Chief Executive.11
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 system.12 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 Broadcasting in 1967 (81 Stat. 365; 47 U.S.C. 396).13 Other factors began to
further erode the accountable executive model, such as greater dependence upon third
parties, usually private contractors, for the performance of governmental functions.14
The number of full-time civil servants in the federal government as a percentage of
the workforce began what was to become a substantial decline, a decline accelerated
in recent years.15
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 President’s 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 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
Y o r k: N e w Y o r k U n i ve r s i ty, Aug. 2006), p. 11, availab l e a t
(continued...)

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In the late 1980s, the concept of legally distinctive governmental and private
sectors began to be seriously questioned.16 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 based, behavioral norms and
practices. Internationally, the New Public Management (NPM)17 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
President Al Gore’s National Performance Review (NPR)18 which sought to
“reinvent” some executive branch units and create corporate style, entrepreneurial
structures.19
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
15 (...continued)
[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 term “New 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. 194-200.
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).
19 “Public 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.

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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 ascendency of these “new” values in the United States has not been
without challenge20 and has had consequences with respect to the quasi government,
as will be discussed more fully later in the report.
Quasi Governmental Organizations
Quasi Official Agencies
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 Federal
Register,” also published by NARA.21
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 the governmental and
private sectors.22 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
20 The debate between those supporting the entrepreneurial government management
paradigm and those supporting a 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.

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“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 regular executive agencies.23
Government-Sponsored Enterprises
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 to
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 individuals;
(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 Federal employees subject to title 5.24
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 agency’s 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 for Restructuring Fee-for-Service Medicare,” in Robert D. Reischauer, Stuart Butler,
and Judith Lave, eds., Medicare: Preparing for the Challenges of the 21st 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).

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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 borrow money.”25
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 second Bank of the United States.26 This
practice came into question, however, as a consequence of a Supreme Court ruling
in 1819.27 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 believed to be disadvantaged in the credit markets.28 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 private firm.29
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.
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. Doc. 571, 61st Cong., 2nd 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.

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CRS-10
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 we can to lower the cost of home
ownership.”30
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 private corporations.31 In return, the government is able to limit
the activities and lines of business of GSEs and require them to promote selected
public policy objectives. The present GSEs are traceable in concept to several
enterprises created during the Great Depression.32 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 guarantees and other services.33
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
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, 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.

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CRS-11
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 their notes,34 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 reported outstanding debt of approximately
$962 billion.35 Meanwhile, the Federal Home Loan Bank System reported $816
billion in consolidated debt outstanding in mid-200436.

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 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 Mac), to Securities and Exchange Commission (SEC)
registration,37 and their corporate earnings are exempt from state and local income
taxes, the latter practice attracting particular controversy.38 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
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].
37 In July 2002, Fannie Mae and Freddie Mac announced they would voluntarily register
their common stock with the SEC. CRS Report RS2163, Fannie Mae, Freddie Mac, and
the SEC Registration and Disclosures, by Mark Jickling and Barbara Miles.
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.

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CRS-12
these special privileges (subsidies), it is not surprising that some argue that GSEs
grow rapidly at the expense of would-be competitors.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 government is
clearly better protected if it diversifies this kind of risk.40
GSEs also have been accused of mission creep. GAO has questioned the
housing GSEs for moving into non-mortgage investment programs.41
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 the nation’s financial system, and the accounting
practices of the GSEs.42 Concern over the 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 restate their
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 by Loretta Nott and Mark Jickling; and CRS Report RL32795, Government-
Sponsored Enterprises: Regulatory Reform Legislation in the 109th Congress, by Mark
Jickling, pp. 2-3.

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CRS-13
earnings.43 In response, the 108th and 109th Congresses held hearings and considered
legislation that would fundamentally alter the regulations and regulatory agencies for
overseeing GSEs. 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 subsidizing the
students.”45
43 CRS Report RS1567, 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 Housing Government
Sponsored Enterprises, hearings, 108th Cong., 2nd 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.
(continued...)

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CRS-14
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 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 socialize losses.”46
Supporters would respond to this assertion by contending whatever profits they make
are ultimately returned to benefit the public through lower mortgage rates.
Federally Funded Research and Development
Centers (FFRDCs)
One category of organization in the quasi government is largely a World War
II and immediate postwar phenomenon, the federally funded research and
development center (FFRDC).47 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), most were established in the 1950s and
1960s.49 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
45 (...continued)
Senate, Oversight of Student Loan Marketing Association (Sallie Mae), Hearings, 102nd
Cong., 2nd sess. (Washington: GPO, 1982), p. 135.
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/].

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CRS-15
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, Title III).50 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 approximately $7-$8
billion in FY2003, FY2004, and FY2005.51

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 Dynamics
Corp.)52 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 viable products
to be sold in world markets.53 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
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].
52 Steven Pearlstein, “Reining In Pentagon’s 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 Crow, 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.

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CRS-16
can be a substantial source of revenue for associations and contractors, and there
have been problems with conflict of interest issues.54 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.
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, 35.017)
Agency-Related Nonprofit Organizations
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.
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.

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CRS-17
Adjunct Organizations Under the Control of a Department or
Agency. 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 Board, National Dairy Promotion and Research
Board).55 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.
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 order.
(2) BUDGETS —
(A) SUBMISSION TO SECRETARY — Each 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 SECRETARY — Each 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
55 CRS Report 95-353, Federal Farm Promotion (“Check-Off”) Programs, by Geoffrey S.
Becker.

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CRS-18
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 or ignore
the assessments.56
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 importers hundreds of millions of dollars a year,57 have been criticized
by policy opponents and 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 adopted.59
56 William Claiborne, “Hog Farmers Given Vote on Marketing Fee Rules,” Washington
Post, Feb. 29, 2000, p. A3.
57 For example, the “beef, 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).
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.

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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. Constitution. In some of these cases, the
plaintiffs have won.60
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-kind support to the National
Park Service.61
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.
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 Association v. U.S. Department of Agriculture
(335 F.3d 711 (8th 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 Report — 2005 (Washington: NPF, 2006), pp. 2-3.

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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 officer.
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 private sector salaries were set for staff.62
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.

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Organizations Independent of, But Dependent Upon, Agencies. 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 foundation
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 Maryland.
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. 178)
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 projects.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
63 Henry M. Jackson Foundation, HJF Overview Sheet, Dec. 2004, available at [http://www.
hjf.org/about/factsheet12_04.pdf].

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medicine. One way we do this is securing private funding to support military
medical educational programs....64
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 the conduct of
approved research.”65 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 U.S.C. 7361(a)).66
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 states.67 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 receipts.”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)).
6 4 H e n r y M . J a c k s o n F o u n d a t i o n w e b s i t e , a v a i l a b l e a t
[http://hjf.org/about/privatesupporters.html].
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.

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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 to the administration of funds.”69 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, the research environment has been able to attract highly
qualified physicians, who often provide patient care, as well.70
Nonprofit Organizations Affiliated with Departments or Agencies.
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
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 NonProfit VA Research and
Education Corporations, 107th Cong., 2nd sess., May 16, 2002 (Washington, GPO, 2003),
pp. 4-6, quote at p. 5.
70 Testimony of Cynthia A. Bascetti, Director Healthcare — Veteran’s Health and Benefits
Issues, U.S. General Accounting Office, Subcommittee on Oversight and Investigation,
House Committee on Veterans’ Affairs, VA Research and NonProfit VA Research and
Education Corporations, 107th Cong., 2nd sess., Sept. 19, 2002 (Washington, GPO, 2003),
pp. 19-21.

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(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))
Venture Capital Funds
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 “venture capital funds” is especially interesting, a term which
encompasses more narrowly defined “enterprise funds” and “investment funds.”71
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 funds.
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
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.

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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 Corporation (OPIC), a wholly owned federal government
corporation,72 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 private equity funds.”73
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 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 oversight of AID, although the funds still retain most of their
autonomy.75
72 CRS Report 98-567E, The Overseas Private Investment Corporation: Background and
Legislative Issues, by James K. Jackson. 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].
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).

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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 suspension of funds. In practice,
however, such controls may be difficult to implement.76
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 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
76 Koppell, “Managing the U.S. Government’s Venture Capital Portfolio,” p. 12.
77 Leslie Wayne, “Spreading Global Risk to American Taxpayers,” New York Times, Sept.
20, 1998, p. 1.

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CRS-27
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 high
marks as an effective method to promote accountability.78
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 more.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 it’s 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 CIA’s 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, we’ll need to take more risks — and give our
government freedom to fail.80
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. 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 products that
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.
81 See the website of OnPoint, available at [http://www.onpoint.us/].

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aren’t being made elsewhere and that NASA might be able to use.”82 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.
Congressionally Chartered Nonprofit Organizations
Within the quasi government, a category of entities can be collectively identified
as “congressionally chartered nonprofit organizations,” also referred to popularly as
“title 36 corporations.”83 The chartering by Congress of private organizations with
a patriotic, charitable, historical, or educational purpose is essentially a 20th century
practice. There are 92 organizations listed under Subtitle II, “Patriotic and National
Organizations.”84 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 not to private
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).

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organizations, such as the right to the full faith and credit of the United States
treasury.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 to assign a “private” label
to functions of a governmental character.86 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”
attributes, has been subject to debate and judicial opinion.87
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 Public’s
Business: Federal Government Corporations, by Ronald C. Moe, committee print 104-18,
104th Cong., 1st 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
(continued...)

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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 “without the benefit of clearly
established criteria as to eligibility.”88 Congress, in 1969, responded to this
presidential concern by setting out five “minimum standards” to be met by a private
organization seeking a federal charter from Congress.89 These standards, however,
did not resolve all of the questions concern the process of granting a charter, or of
overseeing nonprofit organizations.
87 (...continued)
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
AMTRAK’s 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 AMTRAK’s status as a government entity for purposes of
determining constitutional rights of citizens affected by its actions.
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).

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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 Congress (36 U.S.C. 10101).91 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 audits to the Government Accountability Office for review.92 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 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
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.

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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
of Albert De Salvo, the Boston Strangler. We’d have no way of checking into it.”93
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. This view was formalized
in the 104th 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 happened in at least six
instances in recent years. Nonetheless, in the 109th Congress, the Subcommittee on
Immigration, Borders, and Claims reasserted the moratorium on March 10, 2005.94
It remains to be seen, however, how effective this moratorium will be against the
many attractions of the chartering practice.
Instrumentalities of Indeterminate Character
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
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 Subcommittee’s 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 publication of this report, the Subcommittee on Citizenship, Refugees,
Border Security, and International Law had not released its rules of procedure for the 110th
Congress.

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American Institute in Taiwan. 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 Republic of China (Taiwan).95 This decision was strongly objected to by a
number of Senators, who maintained that treaties could not be terminated unilaterally
by the President.96
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 officially diplomatic in character.97 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.
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.
National Endowment for Democracy. In 1983, the Reagan Administration
requested Congress to pass legislation for “Project Democracy” to promote and
95 For a discussion of the political elements behind the President’s decision to recognize the
People’s Republic of China (and the consequent withdrawal of recognition from the
Republic of China), see “New 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).

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CRS-34
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
Solidarity (ACILS);98 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 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.
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 Epstein.
99 Website of the National Endowment for Democracy, available at
[http://www.ned.org/about/who.html#board].

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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 Freedom of Information Act.100 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 to
achieve the results intended by the lawmakers.101 Furthermore, critics have accused
NED of mission creep and asserted that NED has been associated with efforts to
influence the outcomes of ostensibly democratic elections.102
U.S. Investigation Services. As part of Vice President Gore’s
“reinvention” program, a substantial downsizing of the civil service was ordered.103
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 employees in what is known as a Employee Stock-
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 NED’s 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.

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CRS-36
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 committees.105 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 authority.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
employee — Harper.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
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);——-. Outsourcing of OPM’s Investigations
Program, Hearings, 104th Cong., 1st sess. June 15, 1995 (Washington: GPO, 1995).
106 USIS’s 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 OPM’s 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.

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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 board’s five “inside” 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 board’s role is limited. It does not
run USIS — that’s Harper’s job, along with his immediate staff — instead
concerning itself strictly with ‘ownership issues’ like oversight. For example,
it ensures that company resources are allocated in the best interests of employee
shareholders, and it also approves key strategic decisions. Of course, such issues
are made easy when you begin a business with the federal government as a
guaranteed customer.108
OPM then awarded USIS a noncompetitive three-year contract under a “public
interest” exemption in federal contracting law.109 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
start-up corporations.110

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
likewise?
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
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.

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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 an
incredible surge in business. In 1999 alone, the share value increased 702 percent.111
In January 2003, venture capital firm, Welsh, Carson, Anderson, and Stowe,
purchased the stock owned by original ESOP employees for a reported $545
million.112
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 departments into agencies
with agency-specific management laws,113 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.
Conclusion: Paradigms in Conflict
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 private sector, to seek maximum autonomy in matters of
policy and operations.114 With respect to the governmental sector, however, this
111 Website of USIS, available at [http://www.usis.com] (2003).
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
(continued...)

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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 accountability for the exercise of governmental power.115
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 distinct in the interests of protecting
citizens’ rights against a potentially arbitrary government.116 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 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
economically derived behavioral norms.117 The supporters of this position promoted
their values and concepts of management internationally under the rubric of New
Public Management (NPM) and domestically as part of the National Performance
Review (NPR).118
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
114 (...continued)
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.
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).

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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 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

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are harnessed for the general well-being of the nation.119 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.

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.

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