Whether Canteen Service Provided Through the
             Veterans’ Canteen Service Is Exempt From
                 Review Under the Federal Activities
                    Inventory Reform Act of 1998
Canteen service provided through the Veterans’ Canteen Service is not exempt from review under the
  Federal Activities Inventory Reform Act of 1998.

                                                                               January 31, 2003

      MEMORANDUM OPINION FOR THE DEPUTY DIRECTOR FOR MANAGEMENT
                 OFFICE OF MANAGEMENT AND BUDGET

   You have asked for our opinion whether canteen service provided through the
Veterans’ Canteen Service (“VCS”) is exempt from review under the Federal
Activities Inventory Reform Act of 1998, Pub. L. No. 105-270, 112 Stat. 2382
(“FAIR Act”). As interpreted by the Office of Management and Budget (“OMB”),
the FAIR Act requires each Executive Branch agency to determine whether non-
governmental functions currently performed for the agency by the government
could be performed more cost-effectively in the private sector. The Department of
Veterans Affairs (“VA”) believes that VCS canteen service is exempt from this
cost-comparison process. See Letter for Jay S. Bybee, Assistant Attorney General,
Office of Legal Counsel, from Tim S. McClain, General Counsel, Department of
Veterans Affairs, Re: Veterans’ Canteen Service and the FAIR Act (Dec. 11, 2002)
(“VA Letter”). We have considered VA’s arguments and conclude that VCS
canteen service is not exempt.

                                                I.

   In 1946, Congress established the VCS “as an independent unit in the [VA],”
38 U.S.C. § 7808 (2000), “for the primary purpose of making available to veterans
of the Armed Forces who are hospitalized or domiciled in hospitals and homes of
the [VA], at reasonable prices, articles of merchandise and services essential to
their comfort and well-being,” 

(2000); see also 

(2000)
(“canteens at hospitals and homes of the [VA] shall be primarily for the use and
benefit of veterans hospitalized or domiciled at such hospitals and homes”). In
particular, the VCS statute provides that the VA Secretary shall “establish,
maintain, and operate canteens where deemed necessary and practicable at
hospitals and homes of the [VA] and at other [VA] establishments where similar
essential facilities are not reasonably available from outside commercial sources.”

(2000). It vests the Secretary with additional authority needed to
carry out this function. See 

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       Canteen Service Under the Federal Activities Inventory Reform Act of 1998


   The FAIR Act was enacted in 1998 “[t]o provide a process for identifying the
functions of the Federal Government that are not inherently governmental
functions.” 112 Stat. at 2382. The FAIR Act generally defines the term “inherently
governmental function” as “a function that is so intimately related to the public
interest as to require performance by Federal Government employees,” FAIR Act,
§ 5(2)(A), and it states that that term “does not normally include . . . any function
that is primarily ministerial and internal in nature (such as . . . . operation of
cafeterias),” 

Section 2(a) of the FAIR Act provides that each
fiscal year “the head of each executive agency shall submit to [OMB] a list of
activities performed by Federal Government sources for the executive agency that,
in the judgment of the head of the executive agency, are not inherently govern-
mental functions.” Section 2(d), entitled “Competition Required,” states in part:

      Each time that the head of the executive agency considers contract-
      ing with a private sector source for the performance of [a listed] ac-
      tivity, the head of the executive agency shall use a competitive pro-
      cess to select the source (except as may otherwise be provided in a
      law other than this Act, an Executive order, regulations, or any exec-
      utive branch circular setting forth requirements or guidance that is is-
      sued by competent executive authority).

Section 2(d) also directs OMB to “issue guidance for the administration of this”
process.
    Pursuant to section 2(d)’s directive, OMB revised Circular A-76 (“A-76”) and
its Supplement to A-76. A-76 implements the FAIR Act by mandating that “the
Government shall not start or carry on any activity to provide a commercial
product or service if the product or service can be procured more economically
from a commercial source.” A-76, ¶ 5(c). This general prohibition does not apply
under the conditions specified in paragraph 8 of A-76—where, for example, “no
commercial source is capable of providing the needed product or service”;
“Government performance of a commercial activity is required for national
defense reasons” or “would be in the best interests of direct patient care” at
hospitals operated by the Government; or where studies show that “the Govern-
ment is operating or can operate the activity on an ongoing basis at an estimated
lower cost than a qualified commercial source.” 

It also does not apply
“when contrary to law, Executive Orders, or any treaty or international agree-
ment.” See 

A-76 defines a “commercial activity” as “one which is
operated by a Federal executive agency, . . . which provides a product or service
that could be obtained from a commercial source,” and which does not “meet the
definition of an inherently Governmental function.” 

In terms virtually
identical to the FAIR Act, it defines an “inherently Governmental function” as “a
function which is so intimately related to the public interest as to mandate
performance by Government employees.” 

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                      Opinions of the Office of Legal Counsel in Volume 27


                                                   II.

    VA argues that VCS canteen service is exempt from the requirements of the
FAIR Act, as implemented by A-76. VA does not assert that canteen service is an
inherently governmental function or that it meets any of the conditions specified in
paragraph 8 of A-76. Instead, VA maintains that application of the FAIR Act
“would be inconsistent with the plain language, as well as the legislative history,
of the VCS statute.” VA Letter at 1. That is, VA essentially claims that canteen
service is exempt from the competitive process of A-76 because subjecting
canteen service to that process would violate the VCS statute and thus be “contrary
to law” under paragraph 7(c)(1) of A-76.1
    We therefore address whether the competitive process provided by A-76 con-
flicts with the VCS statute. The VCS statute provides that the VA Secretary shall
“establish, maintain, and operate canteens where deemed necessary and practica-
ble at hospitals and homes of the [VA] and at other [VA] establishments where
similar essential facilities are not reasonably available from outside commercial
sources.” 38 U.S.C. § 7802(1) (emphasis added). VA argues, with considerable
force, that the second italicized “where” clause modifies only “other [VA]
establishments,” not “hospitals and homes of the [VA].” But even if we were to
read the second “where” clause in this way, the first “where” clause—“where
deemed necessary and practicable”—plainly qualifies the Secretary’s obligation to
operate canteens at VA hospitals and homes. We believe that the question whether
VCS canteen service at VA hospitals and homes is “necessary and practicable,” far
from precluding consideration of competitive alternatives, is plainly broad enough
to permit such consideration.
    VA apparently reads this same provision to mean that VA must itself establish
and operate canteens at VA hospitals and homes where the Secretary deems them
to be necessary and practicable, “regardless of the reasonable availability of
similar facilities in the private sector.” VA Letter at 4. Under this view, VA would
be required to run a canteen itself, even if contracting out would be dramatically
less expensive. Indeed, if, in a given hospital, the Secretary were to deem a
canteen to be necessary but prohibitively costly (and hence not practicable), VA
could neither establish a canteen itself nor permit a cost-effective private party to
do so. In short, veterans in such a hospital would be deprived entirely of canteen
services. Thus, VA’s view would produce absurd results that would undermine the
stated purpose of the VCS statute. See 38 U.S.C. § 7801 (stating that the “primary

    1
      We note that the FAIR Act might be read to require cost comparisons only when an agency head
“considers contracting with a private sector source for the performance of [a listed] activity.” FAIR Act
§ 2(d). On that reading, the agency head, by never considering such private sector contracting, could
avoid triggering any obligation on the part of his agency to engage in cost comparisons. OMB,
however, in the exercise of its authority to implement the FAIR Act, has rejected this interpretation, see
A-76, ¶ 9(e) (requiring consideration “of all existing in-house commercial activities”) (emphasis add-
ed), and VA does not dispute this point.




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         Canteen Service Under the Federal Activities Inventory Reform Act of 1998


purpose [of the VCS statute is to] mak[e] available to veterans of the Armed
Forces who are hospitalized or domiciled in hospitals and homes of the Depart-
ment, at reasonable prices” certain essential merchandise).
   VA also argues that canteens should not be considered as individual units,
because “[s]eparating canteens in this fashion would dilute the operational control
contemplated in the VCS law,” and interfere with the cross-subsidization that
enables certain canteens to survive. VA Letter at 6. We are unable to locate any
textual support in the VCS statute for the notion that all canteens should be
considered as a single unit. Indeed, the pivotal language of section 7802(1),
requiring the Secretary to establish canteens “where deemed necessary and
practicable,” appears to contemplate a location-by-location decision process.2 We
further note that although some legislative history may suggest that Congress
intended the VCS to be financially self-sustaining, see, e.g., S. Rep. No. 79-1701,
at 4 (1946), the VCS statute explicitly authorizes appropriations needed to run
VCS, see 38 U.S.C. § 7804 (2000), and requires VCS to submit estimates of any
funds it may need “to restore any impairment of the revolving fund resulting from
operations of the current fiscal year,” 

(2000). Although the VCS statute
does contemplate financial interdependence among individual VCS canteens,
nothing in the statute supports VA’s conclusion that this interdependence pre-
cludes contracting out to the private sector where appropriate.

                                                  III.

  We conclude that VCS canteen service is not exempt from the FAIR Act’s
competitive process.

                                                    M. EDWARD WHELAN III
                                             Principal Deputy Assistant Attorney General
                                                       Office of Legal Counsel




   2
      Nor does the legislative history on which VA relies run counter to this conclusion. To say that the
VCS “as a whole is to function as a unit,” VA Letter at 4 (quoting S. Rep. No. 79-1701, at 5 (1946)), is
not to say that every canteen operated in a VA facility is part of that unit.




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