oversight

Grants to State and Local Governments: An Overview of Federal Funding Levels and Selected Challenges

Published by the Government Accountability Office on 2012-09-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States Government Accountability Office

GAO              Report to Congressional Requesters




September 2012
                 GRANTS TO STATE
                 AND LOCAL
                 GOVERNMENTS
                 An Overview of
                 Federal Funding
                 Levels and Selected
                 Challenges




GAO-12-1016
                                              September 2012

                                              GRANTS TO STATE AND LOCAL GOVERNMENTS
                                              An Overview of Federal Funding Levels and Selected
                                              Challenges
Highlights of GAO-12-1016, a report to
congressional requesters




Why GAO Did This Study                        What GAO Found
Grants are a form of federal assistance       Federal outlays for grants to state and local governments totaled more than $606
consisting of payments in cash or in          billion in fiscal year 2011. Over the last three decades, these grants have
kind for a specified purpose and they         consistently been a significant component of federal spending, but the focus of
represent an important tool for               this spending has changed over time. For example, during this period the
achieving national objectives. They           proportion of federal outlays to state and local governments dedicated to
vary greatly, including in the types of       Medicaid grants more than tripled, rising from 2.4 percent of total federal
programs they fund, the methods they          government outlays in 1980 to 7.6 percent in 2011. The increase in federal
use to allocate funds to recipients, and      outlays for Medicaid and other health-related grant programs was offset by an
the amount of discretion they give to
                                              approximately equivalent decrease in grants to state and local governments
the grant recipient on how the funds
                                              targeted for other areas such as transportation, education, and regional
are spent. The Office of Management
and Budget (OMB) has previously
                                              development.
estimated that grants to state and local
governments represent roughly 80              GAO’s prior work and the work of others have also shown that the number of
percent of all federal grant funding,         federal grant programs directed to state and local governments has generally
with the balance going to recipients          increased over the last three decades. However, definitively determining the
such as nonprofit organizations,              number of such grant programs presents difficulties. The lack of consensus on a
research institutions, or individuals. In     methodology for how to define and count grant programs and data limitations in
a time of fiscal constraint, continuing to    the Catalog of Federal Domestic Assistance further complicates this effort.
support the current scope and breadth
of federal grants to state and local          GAO and federal inspectors general (IG) have previously reported on a variety of
governments will be a challenge.              management challenges involving federal grants to state and local governments,
In response to a request, this report         many of which can be grouped into the following five topic areas:
(1) provides information regarding the
amount of grant funding to state and          •   Challenges related to effectively measuring grant performance: A lack of
local governments for fiscal year 2011,           appropriate performance measures and accurate data can limit agencies’
how such funding has changed over                 ability to effectively measure grant program performance. This can affect the
the last three decades, and difficulties          ability of federal agencies to ensure that grant funds are effectively spent.
related to identifying the exact number
of such grant programs; and                   •   Uncoordinated grant program creation: Numerous federal grant programs
(2) identifies selected grants                    have been created over time without coordinated purposes or scope. This
management challenges that have                   can result in grants management challenges such as unnecessary
been identified in previous work by               duplication across grant programs and unnecessary overlap in funding.
GAO and federal IGs over the last
                                              •   Need for better collaboration: A lack of collaboration among grant program
several years. Towards this end, GAO
analyzed data from OMB and the                    participants can impede effective grant implementation in areas such as
Catalog of Federal Domestic                       knowledge sharing and defining clear leadership roles.
Assistance and conducted a review of          •   Internal control weaknesses: When internal controls in grants management
previous reports from GAO and federal             and oversight are weak, federal grant-making agencies face challenges in
IGs.                                              achieving program goals and assuring the proper and effective use of federal
What GAO Recommends                               funds. Effective controls can help to avoid improper grant payments.

GAO is not making any                         •   Lack of agency or recipient capacity: Capacity reflects the organizational,
recommendations in this report                    financial, and human capital resources available for the implementation of
                                                  grant programs. A lack of capacity can adversely impact an agency’s or
                                                  recipient’s ability to manage and implement grant programs.
View GAO-12-1016. For more information,
contact Stanley J. Czerwinski at (202) 512-
6806 or czerwinskis@gao.gov or Beryl H.
Davis at (202) 512-2623 or davisbh@gao.gov.
                                                                                     United States Government Accountability Office
Contents


Letter                                                                                                         1
                                 Background                                                                    2
                                 Grants to State and Local Governments Have Consistently Been a
                                   Significant Component of Federal Spending but the Focus of
                                   Grant Spending Has Changed Over the Last Three Decades                      7
                                 Grants Challenges Reflect the Diversity and Complexity of Grants
                                   Management for State and Local Governments                                15

Appendix I                       Objectives, Scope, and Methodology                                          32



Appendix II                      Sources of Information on Grants                                            35



Appendix III                     Cross-cutting Grants Legislation and OMB Circulars/Agency Grants
                                 Regulations                                                                 39



Appendix IV                      GAO Contact and Staff Acknowledgments                                       46



Selected GAO Products on Grants Management Issues                                                            47



Tables
                                 Table 1: Government-wide and Program-Specific Grant
                                          Requirements                                                         7
                                 Table 2: Information about the Sources for Data on Federal
                                          Spending on Grants                                                 37


Figures
                                 Figure 1: Grant Life Cycle of Federal Grant-making Agency and
                                          Grant Recipient                                                      5
                                 Figure 2: Amount and Percentage of Federal Outlays for Grants to
                                          State and Local Governments by Top Five Agencies,
                                          Fiscal Year 2011 (Dollars in Billions)                               8



                                 Page i                         GAO-12-1016 Grants to State and Local Governments
Figure 3: Federal Outlays for Grants to State and Local
         Governments and Medicaid, in 2011 Constant Dollars,
         Fiscal Years 1980 to 2011                                             9
Figure 4: Federal Outlays for Grants to State and Local
         Governments and Medicaid as a Percentage of Total
         Federal Outlays, Fiscal Years 1980 to 2011                          10
Figure 5: Federal Outlays for Grants to State and Local
         Governments by Top Five Functions as a Percentage of
         Total Federal Grants Outlays, Fiscal Years 1980 to 2011             12
Figure 6: Selected Federal Grants-Related Legislation Timeline               39




Page ii                         GAO-12-1016 Grants to State and Local Governments
Abbreviations

ACIR              U.S. Advisory Commission on Intergovernmental Relations
CFDA              Catalog of Federal Domestic Assistance
CFFR              Consolidated Federal Funds Report
CMS               Centers for Medicare & Medicaid Services
COFAR             Council on Financial Assistance Reform
CRS               Congressional Research Service
DHS               Department of Homeland Security
DOE               Department of Energy
Education         Department of Education
EECBG             Energy Efficiency and Conservation Block Grant
FAADS             Federal Assistance Awards Data System
FFATA             Federal Funding Accountability and Transparency Act
FEMA              Federal Emergency Management Agency
GDP               gross domestic product
GSA               General Services Administration
HHS               Department of Health and Human Services
HUD               Department of Housing and Urban Development
IG                Inspector General
JAG               Justice Assistance Grant
Justice           Department of Justice
NARA              National Archives and Records Administration
OMB               Office of Management and Budget
Recovery Act      American Recovery and Reinvestment Act of 2009
SHSP              State Homeland Security Program
UASI              Urban Areas Security Initiative



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Page iii                               GAO-12-1016 Grants to State and Local Governments
United States Government Accountability Office
Washington, DC 20548




                                   September 25, 2012

                                   Congressional Requesters

                                   Federal grants fund a wide array of activities. They help build and
                                   maintain our nation’s infrastructure by funding highways, bridges, and
                                   mass transit systems. Grants help educate young people by supporting
                                   the construction of school buildings, the hiring of teachers, and increasing
                                   student access to higher education. They also help care for the sick and
                                   economically disadvantaged by funding medical services, nutrition
                                   programs, and housing assistance. Federal grants are diverse, varying
                                   greatly in both size and the grantees who receive them. Some can be
                                   small, such as a research grant from the National Science Foundation for
                                   less than a couple of thousand dollars, or they can be very large, such as
                                   Medicaid grants to individual states, which are worth billions of dollars.
                                   Grant recipients may include states and their agencies, local
                                   governments, tribal governments, nonprofit organizations, research
                                   institutions, or individuals. Regardless of these differences, Congress
                                   created the many varieties of grants to help meet national objectives.
                                   However, as the federal government faces deepening, long-term fiscal
                                   challenges, its ability to continue to support the current scope and breadth
                                   of federal grants will be a challenge.

                                   In response to your request regarding the operation of federal grants,
                                   funding levels, and the challenges grant programs have faced, in this
                                   report we provide information on (1) the amount of grant funding to state
                                   and local governments for fiscal year 2011, how such funding has
                                   changed over the last three decades, difficulties related to identifying the
                                   number of such grant programs; and (2) selected grant challenges
                                   involving federal grants to state and local governments that have been
                                   identified in our previous work and that of federal inspectors general (IG)
                                   over the last several years. In scoping the research objectives for this
                                   work we limited our review to federal grants involving state and local
                                   governments because reliable historical data exist for this group of grants
                                   and according to the Office of Management and Budget (OMB) they
                                   represent roughly 80 percent of all federal grant funding. We could not
                                   identify a similarly reliable data source for the wider universe of all federal
                                   grants.




                                   Page 1                            GAO-12-1016 Grants to State and Local Governments
             To determine key information regarding grant funding for fiscal year 2011,
             the growth in grant funding over the last three decades, and shifts in the
             focus of grant funding during that time, we used data from OMB. 1 We
             obtained the data for fiscal years 1980 through 2011 and converted them
             to 2011 constant dollars for a more accurate comparison of grant
             spending from year to year. We determined the data were sufficiently
             reliable for the purposes of this report. In addition to OMB, we identified
             other sources of data on federal grant funding, and then analyzed and
             described how the data in each source differs. In an effort to identify the
             number of grant programs, we looked at the Catalog of Federal Domestic
             Assistance (CFDA), a data base containing information on federal
             assistance programs. We also reviewed our prior work, and the work of
             others, on federal grants in the CFDA, reviewed studies by the
             Congressional Research Service, and discussed the issue with OMB and
             the General Services Administration (GSA). To identify key issues and
             challenges related to the structure and operation of grants management,
             we reviewed our previous reports and audits as well as those from federal
             IGs and others. We also searched various federal, public policy, and
             research organizations’ websites to identify relevant reports and other
             literature regarding federal grant programs and how they are structured
             and managed. Finally, we discussed various issues related to federal
             grants and data on grant funding and programs with OMB and GSA, as
             these agencies have government-wide responsibilities related to grants,
             grants management, and grants data. Appendix I contains further
             information on our scope and methodology.

             We conducted this performance audit from March 2012 to September
             2012 in accordance with generally accepted government auditing
             standards. Those standards require that we plan and perform the audit to
             obtain sufficient, appropriate evidence to provide a reasonable basis for
             our findings and conclusions based on our audit objectives. We believe
             that the evidence obtained provides a reasonable basis for our findings
             and conclusions based on our audit objectives.


             Grants constitute one form of federal assistance consisting of payments
Background   in cash or in kind to a state or local government or a nongovernmental


             1
               See Office of Management and Budget, Fiscal Year 2013, Historical Tables, Budget of
             the U.S. Government. Specifically, Table 12.3, Federal Outlays for Grants to State and
             Local Governments, by Function, Agency, and Program: 1940–2013.




             Page 2                                GAO-12-1016 Grants to State and Local Governments
recipient for a specified purpose. 2 Taken as a whole, federal grant
programs are extremely diverse. They can vary greatly in numerous ways
including size, the nature of their recipients, and the type of programs
they fund. Grant programs can also vary in two important dimensions—
the amount of discretion they give to the recipient in how the funds will be
used, and the way they are allocated or awarded. Typically, grants are
grouped into three types based on the amount of discretion given to the
recipient for the use of funds: categorical grants, block grants, and
general purpose grants.

•   Categorical grants are the most restricted, permitting funds to be used
    only for specific activities related to their purpose, such as funding for
    the narrowly defined purpose of nutrition for the elderly.

•   Block grants are less restrictive, funding broader categories of
    activities, such as community development or public health, and
    generally give greater discretion to recipients in identifying problems
    and designing programs to address those problems.

•   General purpose grants, such as revenue sharing, offer the greatest
    amount of discretion to the recipient, as they require only that the
    funds be spent for government purposes.

However, grant categories with regard to categorical grants and block
grants are not rigid and sometimes overlap occurs. 3 Each of these grants
strikes a different balance between the interests of the federal grant-
making agency that funds be used efficiently and effectively to meet
national objectives, and the interests of the recipient to use the funds to
meet local priorities and to minimize the administrative burdens
associated with accepting the grant.




2
 GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP
(Washington, D.C.: September 2005) and “Chapter 10, Federal Assistance: Grants and
Cooperative Agreements” in GAO, Principles of Federal Appropriations Law, Third Edition,
Volume II, GAO-06-382SP (February 2006).
3
 For example, some block grants have characteristics normally associated with
categorical grants. This type of variation in the characteristics of specific block grants
explains why there is some disagreement concerning precisely what constitutes a block
grant and how many of them exist.




Page 3                                  GAO-12-1016 Grants to State and Local Governments
Grant programs also vary in the methods they use to allocate or award
funds, that is, by formula or through discretionary project grants.

•   Formula grants allocate funds based on distribution formulas
    prescribed by legislation or administrative regulation.

•   Project grants are generally awarded on a competitive basis to eligible
    applicants for specific projects. OMB has emphasized the use of
    competitive grants as a means of increasing innovation in grant
    proposals.

While these labels help classify grants based on prominent
characteristics, they should not be understood to be mutually exclusive
definitions, as more than one can apply to a given grant program. For
example, the federal government distributes Community Development
Block Grant funds to states using a formula, but states redistribute the
funds to localities, sometimes as project grants.

While there is substantial variation among grant types, competitive grants
generally follow a life cycle that includes announcement, application,
award, post-award, and closeout, as seen in figure 1. Once a grant
program is established through legislation, which may specify particular
objectives, eligibility, and other requirements, a grant-making agency may
impose additional requirements on it. For competitive grant programs, the
public is notified of the grant opportunity through an announcement, and
potential recipients must submit applications for agency review. In the
award stage, the agency identifies successful applicants or legislatively
defined grant recipients and awards funding. The implementation stage
includes payment processing, agency monitoring, and recipient reporting,
which may include financial and performance information. The closeout
phase includes preparation of final reports, financial reconciliation, and
any required accounting for property. Audits may occur multiple times
during the life cycle of the grant and after closeout.




Page 4                          GAO-12-1016 Grants to State and Local Governments
                         Figure 1: Grant Life Cycle of Federal Grant-making Agency and Grant Recipient




Federal Grant Programs   Federal agencies do not have inherent authority to enter into grant
Are Established by Law   agreements without affirmative legislative authorization. In authorizing
and Subject to Many      grant programs, federal laws identify the types of activities that can be
                         funded and the purposes to be accomplished through the funding.
Different Legal          Legislation establishing a grant program frequently will define the
Requirements             program objectives and leave the administering agency to fill in the details
                         by regulation.


                         Page 5                             GAO-12-1016 Grants to State and Local Governments
Grant programs are typically subject to a wide range of accountability
requirements under their authorizing legislation or appropriation and
implementing regulations so that funding is spent for its intended purpose.
For example, the Department of Housing and Urban Development (HUD)
administers grants to aid states and localities in providing affordable
housing for low-income families. Congress mandated that HUD
administer these grant programs in a manner that furthers fair housing.
HUD regulations direct grant recipients to prepare planning documents
and maintain certain records proving the legislation’s fair housing
requirements as a condition to receiving funds. Congress may also
impose requirements on specific funding for grant programs. The
American Recovery and Reinvestment Act of 2009 (Recovery Act)
required increased reporting and oversight on both grant-making
agencies and recipients for many different grant programs receiving
additional funding under the Recovery Act.

In addition, grant programs are also subject to cross-cutting requirements
applicable to most assistance programs (see table 1 for more
information). For example, recipients of grant funds are prohibited from
using those funds to lobby members and employees of Congress and
executive agency employees. OMB is responsible for developing
government-wide policies to ensure that grants are managed properly
and that grant funds are spent in accordance with applicable laws and
regulations. For many decades, OMB has published guidance in various
circulars to aid grant-making agencies with such subjects as audit and
record keeping and the allowability of costs. For a detailed discussion of
grants management legislation and OMB’s role in developing grants
policy, see appendix III.




Page 6                          GAO-12-1016 Grants to State and Local Governments
Table 1: Government-wide and Program-Specific Grant Requirements

                                   Grant-making Agency                              Grant Recipient
Specific to individual grant       Grant program’s authorizing statute              Grant program regulations issued by grant-
programs                                                                            making agency
                                   Appropriation act providing funding for grant
                                   program                                          Grant agreement (terms and conditions)
Applicable to all grant programs   Government-wide funding requirements             Government-wide grant regulations:
                                   Executive orders and OMB circulars on grants     (1) Administrative requirements (“common rule”)
                                   management                                       (2) Cost principles
                                                                                    (3) Drug-free workplace
                                                                                    (4) Suspension and debarment
                                                                                    (5) Anti-lobbying requirements
                                                                                    (6) Audit and reporting requirements
                                            Source: GAO.




                                            Grants are an important tool used by the federal government to provide
Grants to State and                         program funding to state and local governments. OMB has previously
Local Governments                           estimated that grants to state and local governments represent roughly 80
                                            percent of all federal grant funding, with the remaining approximately 20
Have Consistently                           percent going to recipients such as nonprofit organizations, research
Been a Significant                          institutions, or individuals. Federal outlays for grants to state and local
Component of                                governments totaled more than $606 billion in fiscal year 2011, equivalent
                                            to 4.1 percent of the gross domestic product (GDP) in that year. For
Federal Spending but                        comparison, federal outlays for national defense were 4.7 percent of GDP
the Focus of Grant                          during the same period.

Spending Has                                With outlays of $275 billion in fiscal year 2011, Medicaid is by far the
Changed Over the                            federal government’s largest single grant program and by itself accounted
                                            for 45 percent of federal grant outlays to state and local governments in
Last Three Decades                          that year. The Department of Health and Human Services (HHS), which
                                            administers the Medicaid program, is the largest grant-making agency,
                                            with grant outlays of almost $348 billion in fiscal year 2011, or about 57
                                            percent of the total federal grant outlays to state and local governments.
                                            However, even when Medicaid is excluded, HHS remains the largest
                                            federal grant-making agency. While many federal agencies award grants,
                                            the large majority of grant outlays to state and local governments are
                                            made by just a few agencies, with the top five accounting for more than
                                            90 percent of those grant outlays in fiscal year 2011. Following HHS, the
                                            next four agencies with the largest amount of grant outlays to state and
                                            local governments in fiscal year 2011 were the Departments of Education
                                            (Education), Transportation, HUD, and Agriculture. Figure 2 shows the


                                            Page 7                                 GAO-12-1016 Grants to State and Local Governments
amount of, and percentage of, grant outlays to state and local
governments for the top 5 grant-making agencies.

Figure 2: Amount and Percentage of Federal Outlays for Grants to State and Local
Governments by Top Five Agencies, Fiscal Year 2011 (Dollars in Billions)




Federal outlays for grants to state and local governments increased from
$91 billion in fiscal year 1980 (about $221 billion in 2011 constant dollars)
to more than $606 billion in fiscal year 2011. 4 Figure 3 shows the total
federal outlays for grants to state and local governments over the period
from fiscal years 1980 to 2011, in constant dollars, and the increasing
amount of this total that went to Medicaid over time.




4
  Constant dollar amounts reflect adjustments for inflation (e.g., the purchasing power of
the $91 billion spent in 1980 represents about $221 billion in fiscal year 2011 dollars).




Page 8                                 GAO-12-1016 Grants to State and Local Governments
Figure 3: Federal Outlays for Grants to State and Local Governments and Medicaid, in 2011 Constant Dollars, Fiscal Years
1980 to 2011




                                         While the past three decades have witnessed a dramatic growth in
                                         federal grants to state and local governments in absolute dollar terms, the
                                         same is not true when one considers these grant outlays as a proportion
                                         of total federal spending. As shown in figure 4, grant outlays to state and
                                         local governments as a percentage of total federal outlays in fiscal year
                                         2011 were at a roughly comparable level to what they were more than 30
                                         years earlier (16.8 percent versus 15.5 percent). 5 However, during this
                                         period the proportion of federal grant outlays to state and local


                                         5
                                           Another way to understand federal grant outlays during this period is to consider them as
                                         a percentage of the nation’s GDP. Federal grants to state and local governments were
                                         equivalent to 3.4 percent of GDP in 1980 and 4.1 percent of GDP in 2011. While this
                                         figure has fluctuated somewhat over the last 30 years, it has not demonstrated the
                                         dramatic growth seen in federal grant outlays when viewed in constant dollar terms that is
                                         shown in figure 3.




                                         Page 9                                 GAO-12-1016 Grants to State and Local Governments
                                         governments dedicated to Medicaid more than tripled, rising from 2.4
                                         percent of all federal outlays in 1980 to 7.6 percent in 2011. The increase
                                         in outlays for Medicaid and other health-related grant programs was offset
                                         by an approximately equivalent decrease in the share of outlays for other
                                         grants to state and local governments.

Figure 4: Federal Outlays for Grants to State and Local Governments and Medicaid as a Percentage of Total Federal Outlays,
Fiscal Years 1980 to 2011




                                         The dip in federal grant outlays to state and local governments as a
                                         percentage of total outlays during the 1980s, seen in figure 4, was likely
                                         due to a variety of factors, including efforts undertaken at the time to
                                         merge categorical grant programs in several functional areas into block
                                         grants and also reduce funding levels. For example, as part of the
                                         Omnibus Budget Reconciliation Act of 1981, nine block grants were
                                         created from about 50 of the 534 categorical programs in effect at that
                                         time. Overall, funding for the categorical grants bundled into these block
                                         grants was reduced 12 percent, about $1 billion, from their combined
                                         funding level the previous year. State officials believed that funding



                                         Page 10                            GAO-12-1016 Grants to State and Local Governments
reductions would not result in the loss of services for recipients because
the reductions would be offset by administrative efficiencies, although in
our subsequent work we found that the administrative cost savings were
difficult to quantify. 6 Figure 4 also shows the upturn in federal grant
outlays in 2009 and 2010 that were the result of the Recovery Act.

Grant outlays can also be analyzed historically using OMB’s grant
programs’ functional categories. In fiscal year 2011, the five largest grant
program categories by government function were health; income security;
education, training, employment, and social services; transportation; and
community and regional development. Figure 5 shows federal grant
outlays to state and local governments broken out by these five
governmental functions, from fiscal year 1980 to fiscal year 2011.




6
 GAO, Block Grants: Characteristics, Experience, and Lessons Learned,
GAO/HEHS-95-74 (Washington, D.C.: Feb. 9, 1995).




Page 11                             GAO-12-1016 Grants to State and Local Governments
Figure 5: Federal Outlays for Grants to State and Local Governments by Top Five Functions as a Percentage of Total Federal
Grants Outlays, Fiscal Years 1980 to 2011




                                         Health function grant outlays were 17 percent of total grant outlays to
                                         state and local governments in fiscal year 1980—lower than either
                                         income security or education. 7 By fiscal year 2011, outlays for health-
                                         related grant functions increased to almost 50 percent of these total grant
                                         outlays. While outlays for health-related grants experienced a relatively
                                         steady increase in the last three decades—more than doubling in 30
                                         years—outlays for other grant functions generally decreased relative to
                                         the total of all federal grants to state and local governments during the
                                         same period.



                                         7
                                          The government function grant program categories do not necessarily overlap with
                                         program groupings by grant-making agency.




                                         Page 12                              GAO-12-1016 Grants to State and Local Governments
                          OMB and others have noted that the relative growth and contraction of
                          grant outlays for different purposes reflects a broader shift in the focus of
                          federal outlays for grant programs. According to OMB data, since the
                          1980s, funding has shifted from providing grants to state and local
                          governments for physical capital and societal activities (e.g., highways,
                          mass transit, sewage treatment plants, public education, government
                          administration and community development), toward grants for payments
                          for the benefit of individuals or families. These grants benefitting
                          individuals are primarily entitlement programs such as Medicaid,
                          Temporary Assistance for Needy Families, child nutrition programs, and
                          housing assistance. In fiscal year 1980, the percentage of grant outlays
                          for the benefit of individuals and families was just under 36 percent. By
                          fiscal year 2011, federal outlays for grants benefitting individuals and
                          families, a major component of which is Medicaid, had grown to almost
                          two-thirds (64 percent) of all grant outlays to state and local governments.

                          There are various sources for data on the amount the federal government
                          spends on grants, including OMB budget data, USAspending.gov, and
                          Census Bureau surveys of state and local governments. See appendix II
                          for more detail about these data sources and their differences. The
                          various differences in each data source can create challenges for those
                          examining federal grants management issues and for congressional
                          oversight of grants administration.


While the Number of       Our prior work and the work of others have shown that the number of
Federal Grant Programs    federal grant programs to state and local governments has generally
Has Generally Increased   increased over the last three decades. However, determining a definitive
                          number of federal grant programs presents certain difficulties. Efforts to
over the Last Three       accurately track the number of federal grant programs over time have
Decades, a Definitive     been complicated by the fact that different entities have counted grant
Figure Is Not Available   programs differently for decades. Both OMB and the former U.S. Advisory
                          Commission on Intergovernmental Relations (ACIR) periodically
                          published counts of the total number of federally funded grant programs
                          during the 1980s and 1990s, but because they used different
                          methodologies to determine which grant programs to include, they came
                          up with different results. For example, in 1995 OMB identified 608




                          Page 13                          GAO-12-1016 Grants to State and Local Governments
federally funded grant programs compared to ACIR’s count of 633. 8 OMB
no longer issues formal counts of federally funded grant programs and
there is no current consensus on the methodology used to count federal
grant programs.

Although the CFDA is the single authoritative, government-wide
compendium and source document for descriptions of federal programs
that provide assistance or benefits to the public, as the experiences of
OMB and ACIR suggest, a simple tally of the CFDA database will not
provide an accurate count of the number of federally funded grant
programs. 9 This is due to a number of reasons. First, according to GSA
officials, there is not a one-to-one relationship between individual grant
program opportunities and overarching CFDA programs. Multiple grant
programs can trace their legal authority back to a single CFDA program
description and CFDA number. CFDA programs contain broader
objectives than individual grant opportunities. Second, not all of the
programs listed in the CFDA have current appropriations. CFDA is a
catalog containing active funded and inactive non-funded programs which
have been archived at an agency’s request. Third, officials from GSA told
us that each agency determines how to organize and describe their
programs for publication in the CFDA, as long as the agency adheres to
the underlying requirement to describe the program’s legal authority,
administering office, funding, purpose, benefits, and beneficiaries. These
are among the many factors that complicate efforts to accurately count




8
  As another example of different methodologies, ACIR included in its counts all direct
cash grants to state or local governmental units, other public bodies established under
state or local law, or their designee; payments for grants-in-kind, such as purchases of
commodities distributed to state or local governmental institutions; payments to
nongovernmental entities when such payments result in cash or in-kind services or
products that are passed on to state or local governments; payments to state and local
governments for research and development that is an integral part of their provision of
services; and payments to regional commissions and organizations that are redistributed
at the state or local level to provide public services. In contrast, OMB counted only those
federal grants for traditional governmental operations, as defined in OMB Circular A-11.
The definition covered only grants that “support state or local programs of government
operations or provision of services to the public.” Accordingly, it excluded federal grants
that went directly to individuals, fellowships, most grants to nongovernmental entities, and
technical research grants.
9
  As of the end of May 2012, the CFDA listed a total of 2,240 federal assistance programs,
including 239 items under a search for formula grants and 1,530 items under a search for
project grants. CFDA data are available on the Web at http://www.CFDA.gov.




Page 14                                GAO-12-1016 Grants to State and Local Governments
                            the number of federal grant programs using the information included in
                            the CFDA database.


                            Over time, growth of both the numbers of grant programs for state and
Grants Challenges           local governments and their level of funding has created greater diversity
Reflect the Diversity       and complexity in federal grants management. Substantial variation in the
                            way federal agencies administer these programs has further increased
and Complexity of           their complexity. As a result, the management of grants to state and local
Grants Management           governments presents both grant-making agencies and grant recipients
                            with a variety of challenges. We and others have previously reported on
for State and Local         many of these issues which can be grouped into the following broad
Governments                 themes: (1) challenges related to effectively measuring grant
                            performance; (2) uncoordinated program creation; (3) need for better
                            collaboration; (4) internal control weaknesses in grants management and
                            oversight; and (5) lack of agency or recipient capacity.


Lack of Appropriate         In our past work, we have reported that effective performance
Performance Measures        accountability provisions are of fundamental importance in assuring the
and Accurate Data Limit     proper and effective use of federal funds and determining if grant program
                            goals are met. Two issues that we have previously identified as important
Agencies’ Ability to        for effectively reporting on grant performance are having appropriate,
Effectively Measure Grant   high-quality performance measures and accurate performance data. 10
Program Performance
                            Lack of Appropriate Performance Measures. While the principles of
                            good governance indicate that agencies should establish performance
                            measures to demonstrate how they intend to achieve their program goals
                            and measure the extent to which they have done so, selecting the
                            measures by which a grant program’s performance is assessed can be
                            challenging. 11 We have previously reported on the general attributes of
                            appropriate grant performance measures, noting that measures should be
                            linked to agency goals and missions; be clearly stated; include


                            10
                              GAO, Grants Management: Enhancing Performance Accountability Provisions Could
                            Lead to Better Results, GAO-06-1046 (Washington, D.C.: Sept. 29, 2006).
                            11
                               GAO, Agencies’ Annual Performance Plans under the Results Act: An Assessment
                            Guide to Facilitate Congressional Decisionmaking, GAO/GGD/AIMD-10.1.18
                            (Washington, D.C.: February 1998); and The Results Act: An Evaluator’s Guide to
                            Assessing Agency Annual Performance Plans, GAO/GGD-10.1.20 (Washington, D.C.:
                            April 1998).




                            Page 15                            GAO-12-1016 Grants to State and Local Governments
measurable targets; and be objective, reliable, and balanced. However,
we have found that while agencies may implement measures with some
of these attributes, other key attributes may not be incorporated. For
example, the Department of Justice (Justice) developed and implemented
86 new performance measures for the Edward Byrne Memorial Justice
Assistance Grant (JAG) funds to state and local governments for criminal
justice activities in 2009. While Justice continued to make efforts to
improve these measures in 2009, we reported that 19 of the JAG
performance measures we reviewed generally lacked, in varying degrees,
several key attributes of successful performance measurement systems,
including clarity, linkages with strategic or programmatic goals, objectivity,
reliability, and the measurability of targets. 12 Specifically, we found that 14
of the 19 measures were not clearly defined; 14 of the 19 measures were
not linked to Justice’s strategic or programmatic goals; 13 of the 19
measures were not reliable; and 17 of the 19 measures did not have
measurable targets. Our report noted that by more fully incorporating
such attributes of effective performance measures into its performance
measurement and reporting system, Justice could facilitate accountability,
be better positioned to monitor and assess results, and subsequently
improve its grants management. We recommended that Justice should, in
revising its performance measures, consider incorporating key attributes
of successful performance measurement systems, such as clarity,
reliability, linkage, objectivity, and measurable targets. Justice concurred
with the recommendations in our report and they have actions underway
that address the recommendations.

In another example of an agency’s publishing measures that do not
necessarily contribute to its ability to assess grant program effectiveness,
Department of Homeland Security (DHS) implemented some
performance measures for the State Homeland Security Program (SHSP)
and Urban Areas Security Initiative (UASI) in the fiscal year 2011 grant
guidance. However, the type of measures DHS published in the SHSP
and UASI guidance did not contribute to DHS’s ability to assess the
effectiveness of these grant programs, but instead provided DHS with
information to help it measure completion of tasks or activities. We
recommended, among other things, that DHS revise its plan to ensure the
timely implementation of performance measures to assess the



12
  GAO, Recovery Act: Department of Justice Could Better Assess Justice Assistance
Grant Program Impact, GAO-11-87 (Washington, D.C.: Oct. 15, 2010).




Page 16                             GAO-12-1016 Grants to State and Local Governments
effectiveness of these grants. According to DHS, it has efforts under way
to develop additional measures to help it assess grant program
effectiveness; however, until these measures are implemented, it will be
difficult for DHS to determine the effectiveness of these grant-funded
projects, which totaled $20.3 billion from fiscal years 2002 through
2011. 13 As we have previously reported, performance measures that
evaluate program results can help Congress make more informed policy
decisions regarding program achievements and performance. Agencies
could facilitate accountability, be better positioned to monitor and assess
results, and subsequently improve their grants management by including
key attributes of successful performance measurement systems in their
performance measure revisions.

Data Collection and Validation Challenges. Grant programs often rely
on recipients’ administrative systems to provide performance information.
Our prior work has shown that agencies relying on third parties for
performance data can have difficulty collecting the data as well as
ascertaining its accuracy and quality. In past work, we have also found
that the availability and credibility of performance data has been a long-
standing weakness. An example of this can be seen in our November
2011 report on federal “green building” initiatives that foster—in part
through the use of grant funds—construction and maintenance practices
designed to make efficient use of resources, reduce environmental
problems, and provide long-term financial and health benefits in the
nonfederal sector. Eleven agencies implemented 94 federal initiatives, 47
of which were funded by grants. Agency officials reported that they may
not have had information on the results of green building initiatives for the
nonfederal sector, in part because they faced several challenges in
gathering appropriate and reliable performance data, such as utility usage
data for multifamily properties. These difficulties included obtaining the
resources necessary to develop systems for accurate data collection, a
lack of industry standards for performance data collection, third party
utility companies’ diverse policies governing data sharing, as well as the
utility companies’ wide-ranging capacities to collect data. In particular,
HUD officials told us the quality of utility data can vary by utility company,




13
   GAO, Homeland Security: DHS Needs Better Project Information and Coordination
among Four Overlapping Grant Programs, GAO-12-303 (Washington, D.C.: Feb. 28,
2012).




Page 17                             GAO-12-1016 Grants to State and Local Governments
especially for water consumption data—which can be incomplete and
inaccurate and is often not available in electronic form. 14

In other instances, actual performance data may not be available until
after the completion of the grant project. For example, Department of
Energy (DOE) officials said that for the Energy Efficiency and
Conservation Block Grant program (EECBG) actual energy savings data
are generally available only after a project is completed; therefore, to
comply with the program’s reporting requirements, most recipients
reported estimates calculated using the Environmental Protection
Agency’s Portfolio Manager tool. While DOE officials said they had
anecdotal examples of program successes, DOE had experienced
challenges in assessing the reasonableness of the energy-savings
estimates provided by recipients because DOE did not require recipients
to use the most up-to-date estimating tool when calculating and reporting
energy-savings estimates. Consequently, DOE could not identify
instances where recipients’ estimates may need to be more carefully
reviewed. 15 We recommended, among other things, that DOE should
solicit information on recipients’ methods for estimating energy savings
and verify that recipients use the most recent version of the estimating
tool. To address our recommendation, DOE issued guidance effective
June 23, 2011, that eliminates the requirement for grant recipients to
calculate and report estimated energy savings. DOE officials said the
calculation of estimated impact metrics will now be performed centrally by
DOE by applying known national standards to existing grantee-reported
performance metrics. Based on DOE’s action, we concluded that DOE
has addressed the intent of this recommendation. Even in federal grants
with designs that favor performance accountability, challenges related to
collecting and reporting performance data can affect the extent to which
performance accountability can be achieved.




14
   GAO, Green Building: Federal Initiatives for the Nonfederal Sector Could Benefit from
More Interagency Collaboration, GAO-12-79 (Washington, D.C.: Nov. 2, 2011).
15
     GAO-11-379.




Page 18                               GAO-12-1016 Grants to State and Local Governments
Numerous Federal Grant     In our 2012 Annual Report: Opportunities to Reduce Duplication, Overlap
Programs, Created over     and Fragmentation, Achieve Savings, and Enhance Revenue, we
Time without Coordinated   reported on examples of how multiple federal grant programs, created
                           without coordinated purposes and scopes, can result in structural grants
Purposes and Scopes, Can   management challenges. 16 One example involved four DHS grant
Result in Grants           programs—the State Homeland Security Program, the Urban Areas
Management Challenges      Security Initiative, the Port Security Grant Program, and the Transit
                           Security Grant Program. DHS’s Federal Emergency Management Agency
                           (FEMA) allocated about $20.3 billion to recipients through the four
                           programs from fiscal years 2002 through 2011. These four grant
                           programs have similar goals and fund similar activities in overlapping
                           jurisdictions. For instance, many jurisdictions within designated Urban
                           Areas Security Initiative regions also apply for and receive State
                           Homeland Security Program funding. Similarly, port stakeholders in urban
                           areas could receive funding for equipment such as patrol boats through
                           both the Port Security Grant Program and the Urban Areas Security
                           Initiative, and a transit agency could purchase surveillance equipment
                           with Transit Security Grant Program or Urban Areas Security Initiative
                           funding. We, as well as DHS’s IG, concluded that FEMA should use more
                           specific project-level data in making grant award decisions in order to
                           identify and mitigate potential duplication. Our work, and the work of the
                           DHS IG, concluded that coordinating the review of grant projects
                           internally would give FEMA more complete information about applications
                           across the four grant programs that could help FEMA identify and mitigate
                           the risk of unnecessary duplication across grant applications. 17 We
                           recommended in February 2012, among other things, that FEMA take
                           steps to ensure that it collects project information with the level of detail
                           needed to better position the agency to identify any potential unnecessary
                           duplication within and across the four grant programs. DHS concurred
                           with our recommendation in this area.

                           In another example of this challenge, we found instances where Justice
                           could improve how it targets nearly $3.9 billion to reduce the risk of
                           potentially unnecessary duplication across more than 11,000 grant
                           awards it makes annually. Justice’s grant-making agencies had awarded



                           16
                             GAO, 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and
                           Fragmentation, Achieve Savings, and Enhance Revenue, GAO-12-342SP (Washington,
                           D.C.: Feb. 28, 2012).
                           17
                                GAO-12-342SP.




                           Page 19                           GAO-12-1016 Grants to State and Local Governments
funds from different grant programs to the same applicants whose
applications described similar—and in some cases, the same—purposes
for using the grant funds. While we acknowledged that there may be
times when Justice’s decision to fund recipients in this manner is
warranted, our work found that Justice made grant award decisions
without visibility over whether the funds supported similar or the same
purposes, thus potentially resulting in unintended, and unnecessary,
duplication. We found that Justice had not assessed its grant programs to
determine the extent to which they may overlap with one another and
determine if consolidation of grant programs may be appropriate. Further,
Justice’s grant-making agencies had not established consistent policies
and procedures for sharing grant application information that could help
them identify and mitigate unnecessary duplication in how recipients
intend to use their grant awards. 18 We recommended that Justice should
conduct an assessment to better understand the extent to which the
department’s grant programs overlap with one another and determine if
grant programs may be consolidated to mitigate the risk of unnecessary
duplication. To the extent that Justice identifies any statutory obstacles to
consolidating its grant programs, it should work with Congress to address
them, as needed. Justice concurred with our recommendations in this
area. Addressing structural challenges such as these may achieve cost
savings, enhance revenue, and could result in greater efficiencies in grant
programs.




18
   GAO, Justice Grant Programs: DOJ Should Do More to Reduce the Risk of
Unnecessary Duplication and Enhance Program Assessment, GAO-12-517 (Washington,
D.C.: July 12, 2012).




Page 20                           GAO-12-1016 Grants to State and Local Governments
Because of Its Complexity,   The process of distributing federal assistance through grants is
Grants Management            complicated and involves many different parties—both public and
Benefits from Effective      private—with different organizational structures, sizes, and missions. In
                             previous work, we have identified lack of collaboration among and
Collaboration among          between federal agencies, state and local governments, and
Intergovernmental and        nongovernmental grant participants as a challenge to effective grant
Nongovernmental              implementation. 19 Because grants management can be complex,
Participants                 collaboration among the grant participants, particularly with regard to
                             information sharing, is important. With this in mind, we have identified key
                             practices to enhance and sustain collaboration among federal agencies. 20
                             We have also recommended these same key practices to strengthen
                             partnerships between government and nongovernmental entities, such as
                             nonprofit organizations. 21 In that same report, we describe an example
                             related to hurricane recovery that involves difficulties in collaboration
                             between federal agencies and state and local case management
                             providers. Disaster case management is a process that assists people in
                             identifying their service needs, locating and arranging services, and
                             coordinating the services of multiple providers to help people recover
                             from a disaster. State and local agencies providing federally funded
                             disaster case management services faced challenges in, among other
                             things, obtaining timely and accurate information from the federal
                             agencies overseeing the disaster case management programs. While
                             FEMA had a lead role in coordinating other types of disaster assistance
                             after Hurricanes Katrina and Rita, its role for coordinating disaster case
                             management was not explicit. Initial coordination activities among federal
                             agencies and case management providers were minimal following the



                             19
                                For the purpose of this report we use the term “collaboration” broadly to include
                             interagency activities that others have variously defined as “coordination,” “cooperation,”
                             “integration,” or “networking.” We have done so since there are no commonly accepted
                             definitions for these terms and we are unable to make definitive distinctions between
                             these different types of interagency activities. See GAO, Results Oriented Government:
                             Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies,
                             GAO-06-15 (Washington, D.C.: Oct. 21, 2005). Here, we use this definition to describe
                             collaboration among intergovernmental participants as well as between nongovernmental
                             grant stakeholders.
                             20
                                Examples of key practices for collaboration include establishing mutually reinforcing or
                             joint strategies, and establishing compatible policies, procedures, and other means of
                             operating across agency boundaries. For additional details, see GAO-06-15.
                             21
                                GAO, Disaster Assistance: Greater Coordination and an Evaluation of Programs’
                             Outcomes Could Improve Disaster Case Management, GAO-09-561, (Washington, D.C.:
                             July 8, 2009).




                             Page 21                                GAO-12-1016 Grants to State and Local Governments
hurricanes. As a result, we found that some victims may not have
received case management services while others may have received
services from multiple providers. 22 We recommended, among other
things, that FEMA establish a time line for developing a disaster case
management program that includes practices to enhance coordination
among stakeholders involved in this program. FEMA agreed with our
recommendations in this area and reported that it would take steps to
coordinate with stakeholders. Among other actions, FEMA has since held
a disaster case management summit, and participants made
recommendations for improving coordination among federal and
nonfederal stakeholders that will be included in the disaster case
management program guidance.

In another example of collaboration challenges, 80 federal grant
programs are authorized to provide funding for transportation for
disadvantaged populations and involve several federal agencies,
including the Departments of Agriculture, Education, HHS, HUD, Interior,
Labor, Transportation, and Veterans Affairs. 23 These grantors may
provide funds to state and local agencies that can be used for
transportation expenses to help individuals access federal programs,
including education, employment, medical care, or other human
services. 24 To improve the efficiency and effectiveness of human services
transportation by coordinating related programs at the federal level and
promoting the maximum feasible coordination at the state and local
levels, the federal grant-making agencies collaborate through an
Interagency Transportation Coordinating Council on Access and Mobility
(Coordinating Council). In our past work we have reported that while
some collaboration efforts have shown promising results, obstacles
continued to impede other attempts at collaboration between grant
participants. 25 In 2011, we reported that while some federal agencies



22
 GAO-09-561.
23
  GAO, Transportation-Disadvantaged Populations: Federal Coordination Efforts Could
Be Further Strengthened, GAO-12-647, (Washington, D.C.: June 20, 2012).
24
   Some federal programs, such as those administered by Veterans Affairs, may provide
direct transportation services to beneficiaries, as opposed to funds to state and local
agencies to provide these services.
25
   GAO, Transportation-Disadvantaged Populations: Some Coordination Efforts Among
Programs Providing Transportation Services, but Obstacles Persist, GAO-03-697
(Washington, D.C.: June 30, 2003).




Page 22                               GAO-12-1016 Grants to State and Local Governments
                             were developing guidance and technical assistance for transportation
                             coordination, other federal departments still had more work to do in
                             identifying and assessing their transportation programs, working with
                             other federal departments to identify opportunities for additional
                             collaboration, and developing and disseminating policies and recipient
                             guidance for coordinating transportation services. 26 In June 2012, we
                             reported that several state and local officials told us that there was not
                             sufficient federal leadership and guidance on how to coordinate
                             transportation services for the disadvantaged and that varying federal
                             program requirements may hinder coordination of transportation services,
                             acting as barriers to collaboration. In that report, we recommended that in
                             order to promote and enhance federal, state, and local coordination
                             activities, the Secretary of Transportation as the chair of the Coordinating
                             Council, as well as the member agencies of the Coordinating Council,
                             should complete and publish a strategic plan and report on their progress
                             in implementing their recommendations. Education and Veterans Affairs
                             generally agreed with our report, while HHS, HUD, and the Department of
                             Transportation neither agreed nor disagreed.


Internal Control             When awarding and managing federal grants, effective oversight and
Weaknesses in Grants         internal control is important to provide reasonable assurance to federal
Management and               managers and taxpayers that grants are awarded properly, recipients are
                             eligible, and federal grant funds are used as intended and in accordance
Oversight Processes Affect   with applicable laws and regulations. Internal control comprises the plans,
Federal Agencies’ Ability    methods, and procedures agencies use to be reasonably assured that
to Ensure Grant Funds Are    their missions, goals, and objectives can be met. In numerous reviews
Spent Effectively            over the years, we and agency IGs have identified weaknesses in
                             agencies’ internal controls for managing and overseeing grants. When
                             such controls are weak, federal grant-making agencies face challenges in
                             achieving grant program goals and assuring the proper and effective use
                             of federal funds which can help avoid improper payments.

                             Control Weaknesses in Monitoring and Overseeing Grant Programs.
                             Agencies are responsible for overseeing and monitoring implementation
                             of their grant programs to help ensure that recipients are meeting
                             program and accountability requirements. Oversight procedures for



                             26
                               GAO, Opportunities to Reduce Potential Duplication in Government Programs, Save
                             Tax Dollars, and Enhance Revenue, GAO-11-318SP (Washington, D.C.: Mar. 1, 2011)




                             Page 23                             GAO-12-1016 Grants to State and Local Governments
monitoring the recipients’ use of awarded funds, including site visits and
review of recipient reports, can help agencies determine whether
recipients are operating efficiently and effectively and whether program
funds are being spent appropriately. Risk-based monitoring programs can
help identify those areas in need of oversight resources. When agencies
do not consider certain risk factors when selecting recipients for site
visits, they may not know where to focus their monitoring resources. For
example, in February 2011, the IG at the National Archives and Records
Administration (NARA) reported that NARA, among other things, had not
developed a risk-based process for monitoring and determining which
grants to review. 27 The IG found that NARA did not consider relevant
factors, such as a program’s age or size, or the experience of the
recipient. The IG concluded that without a more structured process for
determining and assessing risk, NARA could not provide adequate
assurance that risks associated with its grant programs are properly
addressed and mitigated. According to the IG, NARA subsequently took
corrective actions, including developing selection criteria for grantee site
visits and desk audits and determining their frequency.

Federal agencies award grant funds to recipients, often states and local
governments, and then those grant recipients may award, or pass
through, subgrants to subrecipients. 28 It is important that grant recipients
identify, prioritize, and manage potential at-risk subrecipients to ensure
that grant goals are reached and funds are used properly. In April 2011,
we reported on DOE’s use of Recovery Act funds for the EECBG
program. 29 We found that EECBG recipients used various methods to
monitor sub-recipients, with some recipients providing more rigorous
monitoring than others. DOE officials acknowledged that many recipients
are resource constrained, limiting their ability to monitor subrecipients and
ensure compliance with applicable federal requirements. DOE gathered
specific information on recipient monitoring practices during on-site visits.



27
  NARA/OIG Audit Report No. 11-03, Audit of NARA’s Oversight of Selected Grantees’
Use of Grant Funds, Feb. 16, 2011.
28
  A subrecipient is an entity that receives a grant award from the prime recipient of an
award and is accountable to the prime recipient for the use of the federal funds provided
by the subaward.
29
   GAO, Recovery Act: Energy Efficiency and Conservation Block Grant Recipients Face
Challenges Meeting Legislative and Program Goals and Requirements, GAO-11-379
(Washington, D.C.: Apr. 7, 2011).




Page 24                                GAO-12-1016 Grants to State and Local Governments
However, because not all recipients were to receive site visits, DOE did
not have specific information on monitoring for many recipients, and
therefore, did not know whether those monitoring activities were
sufficiently rigorous to ensure compliance with federal requirements. We
recommended that DOE explore a means to capture information on the
monitoring processes of all recipients to make certain that recipients have
effective monitoring practices. DOE has taken some actions to increase
their monitoring efforts; however, the actions may not result in capturing
information on the monitoring practices of all recipients.

Medicaid, the largest federal grant program, has also been the subject of
numerous reviews. The challenges faced by HHS’s Centers for Medicare
& Medicaid Services (CMS) in overseeing fiscal management of the
Medicaid program have been well-documented in our past work. 30
Because of concerns about the program’s fiscal management, size,
growth, and diversity, Medicaid has been on our list of high-risk programs.
Areas of concern in the Medicaid program include improper payments
and inconsistent reviews of managed care rate setting by CMS.

Government-wide Issues. Our work has identified weaknesses in grant
oversight and accountability issues that span the government, including
challenges in oversight of undisbursed grant award balances and
significant levels of improper payments in grant programs.

We have found issues and raised concerns about timely grant closeouts,
including undisbursed funds remaining in grant accounts, across the
federal government. For grant programs with a defined end date, closeout
procedures help ensure that grant recipients have met all financial
requirements, provided final reports, and returned any unused funds. We
have reported that some agencies lack adequate systems or policies to
properly monitor grant closeouts or did not deobligate funds from grants
eligible for closeout in a timely manner. 31 When agencies do not conduct
closeout procedures in a timely manner, unused funds can be prevented
from being used to help address the purpose of the grant. Further, failure
to close out a grant and deobligate any unspent balances can allow



30
  GAO, Medicaid: Federal Oversight of Payments and Program Integrity Needs
Improvement, GAO-12-674T (Washington, D.C.: Apr. 25, 2012).
31
  GAO, Grants Management: Action Needed to Improve the Timeliness of Grant
Closeouts by Federal Agencies, GAO-12-360 (Washington, D.C.: Apr. 16, 2012).




Page 25                             GAO-12-1016 Grants to State and Local Governments
recipients to continue to draw down federal funds even after the grant’s
period of availability to the recipient has ended, making these funds more
susceptible to waste, fraud, or mismanagement. In April 2012, we
reported that, as of September 30, 2011, more than $794 million
remained in expired grant accounts in the Payment Management System,
the largest civilian federal payment system which made 68 percent of all
federal grant disbursements in fiscal year 2010. 32 These accounts were
more than 3 months past the grant end date and had no activity for 9
months or more, with some balances remaining in grant accounts several
years past their expiration date. Subsequently, OMB issued guidance
instructing federal agencies to take appropriate action to close out grants
in a timely manner.

Federal agencies reported an estimated $115.3 billion in improper
payments in fiscal year 2011. Many of the programs reporting improper
payments were federal grant programs, including Medicaid and the
National School Lunch program. Strong preventive controls are important
as they serve as the front-line defense against improper payments, and
effective monitoring and reporting are important to help detect emerging
improper payment issues. In March 2012, we reported that many
agencies and programs are in the process of implementing preventive
controls that involve activities such as training, which can be a key
element in any effort to prevent improper payments from occurring. 33 For
example, CMS’s Medicaid Integrity Group trains state-level staff and
sponsors education programs for beneficiaries and providers. Along with
strong preventive controls, effective detection techniques, such as data
mining and recovery auditing to quickly identify and recover improper
payments, are important for reducing improper payments.

In addition to weaknesses and issues found in our and IG reviews of
agencies’ grants-related controls and individual grant programs, we
identified grants management as a significant deficiency in internal control
in our fiscal year 2011 audit of the consolidated financial statements for




32
     GAO-12-360.
33
  GAO, Improper Payments: Remaining Challenges and Strategies for Government-wide
Reduction Efforts, GAO-12-573T (Washington, D.C.: Mar. 28, 2012).




Page 26                            GAO-12-1016 Grants to State and Local Governments
                              the U.S. Government. 34 A deficiency in internal control exists when the
                              design or operation of a control does not allow management or
                              employees, in the normal course of performing their assigned functions,
                              to prevent or detect and correct misstatements on a timely basis. 35 We
                              reported that these internal control deficiencies could adversely affect the
                              federal government’s ability to ensure that grant funds are being spent in
                              accordance with applicable program laws and regulations. We based our
                              finding on audits of agencies’ fiscal year 2011 financial statements, where
                              auditors at several federal agencies found grants management internal
                              control deficiencies, primarily regarding inadequate monitoring and
                              oversight of grant programs. For example, the auditor at HUD reported
                              issues regarding timely action and follow-up with noncompliant recipients,
                              as well as inadequate procedures to identify noncompliant recipients. We
                              reported that these internal control deficiencies could adversely affect the
                              federal government’s ability to ensure that grant funds are being spent in
                              accordance with applicable program laws and regulations.


A Lack of Organizational,     The capacity of grant-making agencies and recipients is a key issue in
Financial, or Human           grants management which can impact program success. Capacity
Capital Capacity Impacts      involves both the maintenance of appropriate resources and the ability to
                              effectively manage those resources. Building sufficient capacity is a
the Ability of Grant-making   challenge that may involve significant costs or tradeoffs. Three relevant
Agencies and Recipients to    types of capacity are organizational, human capital, and financial.
Effectively Manage Grant
Programs                      Organizational capacity captures the degree to which the grant-making
                              agency or recipient is institutionally prepared for grants management and
                              implementation. This may include having appropriate leadership,
                              management structure, and size to efficiently and effectively implement
                              the program and adapt as needed. For example, we recently reported
                              that capacity was a concern for states, school districts, and schools in the


                              34
                                 The 2011 Financial Report of the United States Government includes our report and
                              was issued by the Department of the Treasury on December 23, 2011, and is available
                              through GAO’s website at http://www.gao.gov/financial.html and Treasury’s website at
                              http://www.fms.treas.gov/fr/index.html.
                              35
                                 A deficiency is categorized as a material weakness or a significant deficiency. A
                              material weakness is a deficiency, or combination of deficiencies, in internal control over
                              financial reporting such that there is a reasonable possibility that a material misstatement
                              of the entity’s financial statements will not be prevented or detected and corrected on a
                              timely basis. A significant deficiency is less severe than a material weakness, yet
                              important enough to merit attention by those charged with governance.




                              Page 27                                 GAO-12-1016 Grants to State and Local Governments
School Improvement Grant program. 36 States and districts both struggled
to develop the necessary staff capacity to successfully support and
oversee the program implementation because of resource constraints.
Officials from Education and several states told us that the grant required
states to support local reform efforts to a much greater extent than they
had in the past, and staff in some states had not yet developed the
knowledge base to fulfill these responsibilities. Some states noted that
such capacity limitations meant that time staff could devote to
administering the program and monitoring district implementation was
significantly limited.

Human capital capacity measures the extent to which an organization has
sufficient staff, knowledge, and technical skills to effectively meet its
program goals. Human capital needs shift over time as programs change
and face new challenges. Human capital needs also shift as new
technology is implemented and the organization finds new ways to
leverage expertise. Human capital challenges at the federal, state, and
local level can underlie the operational difficulties faced during program
implementation. For example, we have previously reported that during the
initial phases of Gulf Coast rebuilding following the hurricanes in 2005,
officials at both the federal and state level initially lacked the human
capital capacity to administer the public assistance grant program. 37 In
addition, local applicants initially lacked the staff to fully participate as
partners in the program. Shortages of staff with the right skills and
abilities, as well as the lack of continuity among rotating FEMA staff,
contributed to delays in developing public assistance projects in Louisiana
and Mississippi.

Insufficient financial resources at the grant-making agency or recipient to
administer or implement the grant can also limit the effectiveness of a
grant in a number of ways. Financial capacity constraints may lead some
recipients, such as nonprofits, to reduce the population served, the scope
of services offered, and possibly forgo or delay physical infrastructure and
technology improvements and staffing needs. We have previously



36
   GAO, School Improvement Grants: Education Should Take Additional Steps to
Enhance Accountability for Schools and Contractors, GAO-12-373 (Washington, D.C.:
Apr.11, 2012).
37
  GAO, Disaster Recovery: FEMA’s Public Assistance Grant Program Experienced
Challenges with Gulf Coast Rebuilding, GAO-09-129 (Washington, D.C.: Dec. 18, 2008).




Page 28                             GAO-12-1016 Grants to State and Local Governments
reported that because many nonprofits view cuts in clients served or
services offered as unpalatable, they have reported that they often
compromise vital “back-office” functions, which over time can affect their
ability to meet their missions. 38 Further, nonprofits’ strained resources
limit their ability to build a financial safety net, which can create a
precarious financial situation for them. Absent a sufficient safety net,
nonprofits that experience delays in receiving their federal funding may be
inhibited in their ability to bridge funding gaps. When funding is delayed,
some nonprofits have reported that they either borrow funds on a line of
credit or use cash reserves to provide services and pay bills until their
grant awards are received. Collectively, these issues place stress on the
nonprofit sector, diminishing its ability to continue to effectively partner
with the federal government to provide services to vulnerable populations.




38
   GAO, Nonprofit Sector: Treatment and Reimbursement of Indirect Costs Vary among
Grants, and Depend Significantly on Federal, State, and Local Government Practices,
GAO-10-477 (Washington, D.C.: May 18, 2010).




Page 29                             GAO-12-1016 Grants to State and Local Governments
Since this report does not contain any new audit work that evaluates the
policies or operations of any federal agency in this report, we did not seek
agency comments. However, because of the role of OMB and GSA in
producing or managing data on grant outlays and the number of grant
programs, we shared drafts of relevant excerpts of this report with
cognizant officials at these agencies and we made technical clarifications
where appropriate.

We are sending copies of this report to other interested congressional
committees, the Acting Director of OMB, and the Acting Administrator of
GSA. This report is available at no charge on the GAO website at
http://www.gao.gov. If you have any questions about this report, please
contact Stanley J. Czerwinski at (202) 512-6806 or czerwinskis@gao.gov,
or Beryl H. Davis at (202) 512-2623 or davisbh@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. Key contributors to this report are
listed in appendix IV.




Stanley J. Czerwinski
Director, Strategic Issues




Beryl H. Davis
Director, Financial Management and Assurance




Page 30                         GAO-12-1016 Grants to State and Local Governments
List of Congressional Requesters

The Honorable Tom Carper
Chairman
The Honorable Scott Brown
Ranking Member
Subcommittee on Federal Financial Management, Government
 Information, Federal Services, and International Security
Committee on Homeland Security and Governmental Affairs
United States Senate

The Honorable Tom Coburn, M.D.
Ranking Member
Permanent Subcommittee on Investigations
Committee on Homeland Security and Governmental Affairs
United States Senate




Page 31                       GAO-12-1016 Grants to State and Local Governments
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              Our objectives were to describe (1) the amount of grant funding to state
              and local governments for fiscal year 2011, how grant funding to state
              and local governments has changed over the last three decades, and
              difficulties related to identifying the number of such grant programs; and
              (2) selected grant challenges involving federal grants to state and local
              governments that have been identified in our previous work and that of
              federal inspectors general (IG) over the last several years. In scoping the
              research objectives for this work we decided to limit our review to federal
              grants involving state and local governments because reliable historical
              data exist for this group of grants and, according to the Office of
              Management and Budget (OMB), such grants represent roughly 80
              percent of all federal grant funding. We could not identify a similarly-
              reliable data source for the wider universe of all federal grants. To do this
              work we took the actions described below and we discussed various
              issues related to federal grants and data on grants funding and programs
              with officials at the OMB and the General Services Administration (GSA),
              as these agencies have government-wide responsibilities related to
              grants, grants management, and grants data.

              To determine key information regarding grant funding for fiscal year 2011,
              the growth in grant funding over the last three decades, and shifts in the
              focus of grant funding during that time, we used OMB data, specifically,
              OMB’s Historical Table 12.3, Total Outlays for Grants to State and Local
              Governments, by Function, Agency, and Program: 1940 – 2013 and
              Table 12.2, Total Outlays for Grants to State and Local Governments, by
              Function and Fund Group: 1940 – 2017. We extracted the data for fiscal
              years 1980 through 2011 and converted each fiscal year’s outlay amount
              to 2011 constant dollars which reflect adjustments for inflation. We sorted
              the data by agency and budget function (i.e., purpose of the spending) to
              identify the top five grant-making agencies and the top five functions for
              which grants were awarded. To determine grant outlays as a percentage
              of total outlays, we also used OMB’s Historical Table 6.1, Composition of
              Outlays: 1940-2017. As these are budget data that has undergone
              rigorous review by OMB, they are generally considered sufficiently
              reliable for most of our purposes. Therefore, we determined the data were
              sufficiently reliable for the purposes of this report.

              To describe issues related to identifying the number of grant programs,
              we reviewed our prior work and the work of others on federal grants and
              the Catalog of Federal Domestic Assistance (CFDA), the single
              authoritative, government-wide compendium and source for descriptions
              of federal programs that provide assistance or benefits to the American
              public. We reviewed research regarding methodologies used to count


              Page 32                              GAO-12-1016 Grants to State and Local Governments
Appendix I: Objectives, Scope, and
Methodology




grant programs published by the Congressional Research Service (CRS).
We discussed issues related to CFDA numbers and their relationship to
the number of grant programs with GSA, the agency responsible for
maintaining CFDA. We also inquired into issues regarding counting the
number of grant programs with OMB. The on-line version,
www.CFDA.gov, allows one to search for assistance programs using a
number of search options, including the federal agency providing the
assistance, program name, and assistance type. 1

In addition to the OMB data described above, we identified other sources
of data for information on the amounts of federal grants funding, including
USASpending.gov and Census Bureau data. We analyzed and compared
the different sources and describe how the data elements in each source
differ. We discussed issues relating to USASpending.gov, including the
reliability of the data, with GSA, the agency responsible for maintaining it.
See appendix II for details about the data sources we identified and how
they differ.

To identify key issues and challenges related to the structure and
operation of grants management, we reviewed previous relevant reports
and audits by us, federal inspectors general (IG), and others. We
searched GAO’s online database for grants management-related reports
from 1995 to the present, and reviewed selected relevant reports. To
identify more recent issues and challenges for the examples in this report,
we reviewed selected GAO reports from 2006 to 2012. For IG reports, we
searched websites for IGs of large and small grant-making agencies for
reports related to grants management and financial statement audit
reports where internal control weaknesses are identified. We determined
whether the issues and challenges we identified still existed by reviewing
our recommendation follow up work. For reports by others, we
researched follow up work by the applicable IGs. We also searched
various federal, public policy, and research organizations’ websites,
including those for the CRS and OMB, to identify relevant reports and
other literature regarding federal grant programs and how they are
structured and managed.




1
  The CFDA can be downloaded in a printable version. We used the online version
(CFDA.gov) so we could conduct various searches more easily.




Page 33                              GAO-12-1016 Grants to State and Local Governments
Appendix I: Objectives, Scope, and
Methodology




We shared drafts of the relevant sections of this report with cognizant
officials at OMB and GSA. They generally agreed with the contents of this
report and we incorporated their technical clarifications where
appropriate.




Page 34                              GAO-12-1016 Grants to State and Local Governments
Appendix II: Sources of Information on
              Appendix II: Sources of Information on Grants




Grants

              Various sources exist for data on the amount the federal government
              spends on grants, including Office of Management and Budget (OMB)
              budget data, USASpending.gov, and Census Bureau surveys of state and
              local governments. Each source was established and is used for slightly
              different purposes and contains different data elements. The various
              differences in each data source can create challenges for those
              examining federal grants management issues when trying to identify the
              scope of federal spending on grants. This appendix explains the purposes
              for and the differences in data contained in each source.

              OMB Budget Data. OMB collects data from federal agencies each year
              to prepare the President’s budget. OMB uses this data for a number of
              purposes related to the budget, including producing Historical Tables and
              Analytical Perspectives. One series of Historical Tables contains
              information on federal outlays for grants to state and local governments.
              According to OMB, the purpose of this series of Historical Tables is to
              identify federal government outlays that constitute income to state and
              local governments to help finance their services. Analytical Perspectives,
              according to OMB, is designed to highlight specific subject areas or
              provide other presentations of budget data that put the budget in context.

              USASpending.gov. In response to the Federal Funding Accountability
              and Transparency Act (FFATA), OMB established USASpending.gov in
              December 2007 to enhance the transparency of government
              expenditures. 1 FFATA required that OMB establish a publicly available
              online database that would allow users to search for detailed information
              about entities that are awarded federal grants, loans, contracts, and other
              forms of financial assistance. The Congressional Research Service
              (CRS) reported that the premise of the law was that by making details of
              federal spending available to the public, government officials would be
              less likely to fund projects that might be perceived as wasteful. In
              addition, the new database required by the law would also help citizens
              better understand how the government distributes funds. 2 For grant
              awards, federal agencies report the amount of obligations they incur and
              information on the recipients of those awards, starting in fiscal year 2007,




              1
                  The General Services Administration now oversees and administers USASpending.gov.
              2
               CRS, The Federal Funding Accountability and Transparency Act: Background,
              Overview, and Implementation Issues. RL33680 (Washington, D.C.: Jan. 31, 2008).




              Page 35                                GAO-12-1016 Grants to State and Local Governments
Appendix II: Sources of Information on Grants




in accordance with OMB guidance for agency data submissions. 3 Over
490,000 grant-related transactions were reported by federal agencies for
fiscal year 2011.

Census Bureau Surveys. The Census Bureau collects data from state
and local governments, including data on grants provided by the federal
government. This census of governments is one component of the
nation’s economic census required by law, 4 and provides, among other
things, periodic and comprehensive statistics about governments and
their financial activities.

Consolidated Federal Funds Report. Prior to fiscal year 2011, the
annual Consolidated Federal Funds Report (CFFR) was prepared by the
Census Bureau from data submitted by federal agencies to the Federal
Assistance Awards Data System (FAADS) and other selected agency
data. With the enactment of FFATA, which required agencies to report
data elements in addition to those that were captured by FAADS, and due
to funding issues, the Census Bureau stopped publishing the CFFR after
the fiscal year 2010 report. The information is now available for the public
to review on USASpending.gov.

Table 2 summarizes data elements included and not included in these
data sources and provides more information about them.




3
  OMB Memorandum M-09-19, Guidance on Data Submission under the Federal Funding
Accountability and Transparency Act (FFATA) (Washington, D.C.: June 1, 2009).
4
    13 U.S.C. § 161.




Page 36                                GAO-12-1016 Grants to State and Local Governments
                                           Appendix II: Sources of Information on Grants




Table 2: Information about the Sources for Data on Federal Spending on Grants

Data source                     Data elements included                        Data elements not included              Time period covered
                                       a
OMB budget data:                Outlays for grants to state and local         Outlays for grants to some              1940 through the
Historical Tables               governments                                   nonprofit organizations, for            current budget
(specifically, Table 12.3 and   “Grants” includes cooperative                 profit institutions, and                period
other series 12 tables)         agreementsb                                   individuals
                                                                              Outlays for some basic
                                                                              research awarded by
                                                                              competitive grants
                                                                              (Note: Data for those grants
                                                                              are included in other tables or
                                                                              categories of OMB data, but
                                                                              they are combined with
                                                                              nongrant outlays, so just the
                                                                              grants portion cannot be
                                                                              isolated)
                                                                              Detailed information on
                                                                              recipients
                                                                              Information on the number of
                                                                              individual grant programs
USASpending.gov                 Obligationsc incurred by federal              Some grant     awards less than         Fiscal year 2000
                                agencies for grant awards and other           $25,000d                                through present
                                types of financial assistance (e.g.,          Grants awarded by the Legal
                                loans, cooperative agreements)                Services Corporation and the
                                (Note: Data for grants can be                 Corporation for Public
                                separated from that for other                 Broadcasting
                                assistance types)
                                Each obligation transaction has
                                associated information including the
                                name of the federal agency making
                                the award, information about the
                                recipient, and CFDA number
                                Recipient information includes type
                                (government, nonprofit or for profit
                                organization, individual); name; and
                                address
Census Bureau Surveys           Intergovernmental revenue to state            Grants to nongovernmental               1951 through
                                and local governments which                   recipients                              present
                                includes grants, taxes, and loans
                                (Note: Data for grants cannot be
                                separated out of the revenue
                                amounts)
                                           Source: GAO analysis.
                                           a
                                            Outlay means a payment to liquidate an obligation (other than the repayment of debt principal or
                                           other disbursements that are “means of financing” transactions). Outlays generally are equal to cash
                                           disbursements, but also are recorded for cash-equivalent transactions, such as the issuance of
                                           debentures to pay insurance claims, and in a few cases are recorded on an accrual basis such as
                                           interest on public issues of the public debt. Outlays are the measure of government spending.




                                           Page 37                                    GAO-12-1016 Grants to State and Local Governments
Appendix II: Sources of Information on Grants




b
 Cooperative agreements are another form of financial assistance similar to grants, but where the
federal agency is more involved with the recipient in implementing the program.
c
  An obligation is a definite commitment that creates a legal liability of the government for payment of
goods and services ordered or received. An agency incurs an obligation, for example, when it awards
a grant.
d
 OMB’s guidance for submitting data to USASpending.gov states that, under the Recovery Act,
agencies are required to report all transactions, but can aggregate amounts under $25,000, and that
agencies should begin to include aggregate information for all funding types. GSA officials told us
agencies are not required by FFATA to include awards under $25,000 related to non-Recovery Act
spending.




Page 38                                     GAO-12-1016 Grants to State and Local Governments
Appendix III: Cross-cutting Grants
                                         Appendix III: Cross-cutting Grants Legislation
                                         and OMB Circulars/Agency Grants Regulations



Legislation and OMB Circulars/Agency
Grants Regulations
                                         Federal grants are typically subject to a wide range of substantive and
                                         other requirements under the particular program statutes as well as
                                         implementing agency regulations and other guidance that applies to
                                         them. They are also governed by many additional cross-cutting
                                         requirements that are common to most federal assistance programs. 1
                                         Figure 6 shows the relevant grant-related public laws that are discussed
                                         below.

Figure 6: Selected Federal Grants-Related Legislation Timeline




                                         The Office of Management and Budget (OMB) has long been involved in
                                         grants management in the executive branch since its reorganization
                                         within the Executive Office of the President in 1970. 2 In 1971, OMB
                                         published standards for establishing consistency and uniformity in the
                                         administration of grants and other types of financial assistance to state



                                         1
                                          We focus this discussion on the history and current status of government-wide grants
                                         management. While we focus exclusively on grants, many of the legal requirements and
                                         guidance discussed also apply to other forms of federal assistance.
                                         2
                                          OMB was previously the Bureau of the Budget, which was established within the
                                         Department of the Treasury in 1921 but transferred to the Executive Office of the
                                         President in 1939.




                                         Page 39                                GAO-12-1016 Grants to State and Local Governments
Appendix III: Cross-cutting Grants Legislation
and OMB Circulars/Agency Grants Regulations




and local governments and certain Indian tribunals. 3 However, even with
the publication of OMB’s circular for grant administration, the Commission
on Government Procurement studying federal spending practices in the
early 1970s found that “federal grant-type activities are a vast and
complex collection of assistance programs, functioning with little central
guidance in a variety of ways that are often inconsistent even for similar
programs and projects.” 4 The Commission also found that because there
were no statutory guidelines for executive agencies to distinguish
between assistance relationships, such as grants and procurement
relationships with nonfederal entities, agencies were inappropriately using
grants to avoid competition and certain requirements that apply to the
procurement system. 5 Thereafter, Congress enacted the Federal Grant
and Cooperative Agreement Act of 1977 6 to establish standards for
executive agencies in selecting the most appropriate funding vehicle. The
act directed OMB to provide guidance to executive agencies to promote
consistent and efficient use of funding vehicles, and in 1978, OMB issued
supplementary interpretive guidelines to help agencies distinguish
between assistance programs and procurement relationships. 7

In 1984, the Administration created the President’s Council on
Management Improvement, assigning the Deputy Director of OMB as
Chairman of the Council. 8 While the Council’s role was to review overall


3
 The first Circular was A-102, “Uniform Administrative Requirements for Grants-In-Aid to
State and Local Governments.” In 1976, OMB published Circular No. A-110, “Grants and
Agreements with Institutions of Higher Education, Hospitals and Other Nonprofit
Organizations.” 41 Fed. Reg. 32,016 (July 30, 1976).
4
 See S. Rep. No. 95-449 (Sept. 27, 1977), citing The Report of the Commission on
Government Procurement, Vol. I, pp. VII-VIII, December 1972.
5
    S. Rep. No. 95-449.
6
  Pub. L. No. 95-224, 92 Stat. 3 (Feb. 3, 1978), codified, as amended, at 31 U.S.C. §§
6301-6308. The act directs executive agencies to use grant agreements or cooperative
agreements when the principal purpose of the relationship between the Federal
government and the nonfederal entity is to transfer a thing of value to the nonfederal entity
to carry out a public purpose of support or stimulation. The law further states that
“substantial involvement is not expected between the executive agency and the [grantee]
when carrying out the activity contemplated in the agreement.” Substantial involvement
refers to performance of the funded activity rather than oversight of the grant use.
7
    43 Fed. Reg. 36,860 (Aug. 18, 1978).
8
 Executive Order 12479, Management Reform in the Federal Government, 49 Fed. Reg.
22,243 (May 29, 1984).




Page 40                                 GAO-12-1016 Grants to State and Local Governments
Appendix III: Cross-cutting Grants Legislation
and OMB Circulars/Agency Grants Regulations




management of government programs, several interagency task forces
were created under the Council to review various aspects of grants
management. Based on recommendations of one task force, the
President issued Executive Order No. 12549 in 1986 requiring agencies
to participate in a government-wide nonprocurement debarment and
suspension system. Thereafter, OMB issued guidelines prescribing the
program coverage, government-wide criteria, minimum due process
procedures, and other guidance for the system. 9 Another interagency task
force explored streamlining the existing guidance for managing federal
aid programs, and based on that review, in 1987, the President directed
OMB to revise Circular No. A-102, “Grants and Cooperative Agreements
with State and Local Governments” to specify uniform, government-wide
terms and conditions for grants to state and local governments. 10 The
President further directed executive agencies to propose and issue
common regulations adopting the terms and conditions set out by OMB
verbatim, modified where necessary to reflect inconsistent statutory
requirements. 11

OMB circulars on grants provide policies to be followed by the grant-
making agencies, not the grantees. Therefore, prior to the publication of
the first grants management common rule in 1988, executive agencies
themselves issued regulations to govern their own grant requirements for
grantees. Subsequently, each grant-making agency issued four common
rules for grants: two are modeled after OMB’s grants management
circulars covering cost principles, administrative requirements, and audit;
a third common rule deals with the prohibition on using grant funds to
lobby; and a fourth common rule covers suspension and debarment 12 and
drug-free workplace requirements. The federal grant-making agencies’




9
  52 Fed. Reg. 20,360 (May 29, 1987). Executive Order No. 12689, (54 Fed. Reg. 34,131
(Aug. 18, 1989)) and section 2455 of the Federal Acquisition Streamlining Act of 1994,
(Pub. L. No. 103-355), established government-wide effect for debarment, suspension, or
other exclusions for participants in both procurement and nonprocurement activities.
10
     See 53 Fed. Reg. 8028 (Mar. 11, 1988) (OMB final revisions to Circular No. A-102).
11
   Memorandum on Grants to State and Local Governments, President Ronald Reagan
(March 12, 1987).
12
   In Executive Order No. 12549 (51 Fed. Reg. 6370 (Feb. 21, 1986)), the President
directed the establishment of a common system for debarment and suspension for
assistance programs.




Page 41                                 GAO-12-1016 Grants to State and Local Governments
Appendix III: Cross-cutting Grants Legislation
and OMB Circulars/Agency Grants Regulations




common rules are largely identical regulations that are binding on their
grantees.

There were several grant-related laws enacted during the 1980s that
focused on promoting accountability and transparency, and preventing
abuse, within federal assistance programs. The Single Audit Act, as
amended, 13 provides uniform requirements for annual audits of
nonfederal entities that expend more than $500,000 in federal awards
annually. Prior to this act’s enactment, there were no uniform audit
requirements for state and local government grantees, and these
grantees were often subject to overlapping and conflicting audit
requirements associated with each of the assistance programs in which
they participated. Congress enacted other federal statutory provisions
applicable to all recipients of federal funds, including the prohibition
against lobbying with grant funds under the “Byrd Amendment” 14 and the
requirement to maintain a drug-free workplace as a precondition of
receiving grant funding. 15 Subsequent to the enactment of each of these
acts, OMB issued guidance for agencies to implement the requirements
of the acts. 16

One of the key efforts to make government operations more efficient and
effective and to prevent waste, fraud, abuse, and financial
mismanagement came with the passage of the Chief Financial Officers
Act of 1990. 17 The act builds off other legislative initiatives, such as the
Single Audit Act, to improve financial management practices in the federal
government. 18 The Chief Financial Officers Act created within OMB the
Office of Federal Financial Management with specific statutory



13
   31 U.S.C. §§ 7501-7507. The Single Audit Act was enacted in 1982, and substantially
amended in 1996. OMB’s implementing guidance is contained in Circular No. A-133,
Audits of States, Local Governments, and Non-Profit Organizations.
14
     31 U.S.C § 1352.
15
   Drug-Free Workplace Act of 1988, Pub. L. No. 100-690, Title V, Subtitle D, § 5153, 102
Stat. 4181 (Nov. 18,1988), codified at 41 U.S.C. § 8103.
16
   Both the Single Audit Act of 1984 (Pub. L. No. 98-502) and the Byrd Amendment
(Section 319 of Pub. L. No. 101-121), included a requirement OMB to issue guidance for
the agency implementation of, and compliance with, the requirements of the act.
17
     Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).
18
     See H.R. Rep. No. 101-818(I) (Oct. 6, 1990).




Page 42                                 GAO-12-1016 Grants to State and Local Governments
Appendix III: Cross-cutting Grants Legislation
and OMB Circulars/Agency Grants Regulations




responsibility for financial management policy, including grants
management, for the federal government. 19 While OMB had long taken
the lead role in financial management, no entity had been statutorily
vested with the responsibility to coordinate financial management
practices in the federal government.

Along with the executive branch’s efforts to streamline and simplify grants
management in the 1980s and 1990s, Congress enacted the Federal
Financial Assistance Management Improvement Act of 1999, commonly
known as “Public Law 106-107,” which required each federal grant-
making agency to develop and implement a plan that simplifies the
application, administration, and reporting procedures for financial
assistance programs. 20 OMB was directed to coordinate this effort by
coming up with a common application and reporting system. Following
Public Law 106-107 and the President’s announcement of the E-
government initiative in his 2002 Fiscal Year Management Agenda, OMB
established Grants.gov as a central storehouse for information on
thousands of grant. To further improve transparency and provide the
public with information on federal spending, Congress enacted the
Federal Funding Accountability and Transparency Act of 2006. 21 The Act
directed OMB to ensure the existence and operation of a single
searchable website to be used by the public that shows the name of the
entity receiving a federal award, the amount of the award, information on
the award, and other information. 22 OMB launched USAspending.gov in
2007 to fulfill the Act’s requirements.

The executive branch’s recent efforts focus on streamlining administrative
requirements and improving the effectiveness of single audits. In
furtherance of Public Law 106-107’s requirements (discussed above),


19
     31 U.S.C. § 504.
20
     Pub. L. No. 106-107, 113 Stat. 1486 (Nov. 20, 1999).
21
     Pub. L. No. 109-282, 120 Stat. 1186 (Sept. 26, 2006).
22
   Currently pending before Congress is a bill that would expand the scope of spending
transparency currently required under the Federal Funding Accountability and
Transparency Act of 2006. Among other things, the Digital Accountability and
Transparency Act of 2012 (DATA Act), H.R. 2146, 112th Cong. (2012) would establish a
new Federal Accountability and Spending Transparency Board charged with collecting
spending information and publishing that information in formats that make it easy to
search, sort, and download, thus removing OMB’s responsibility over spending
transparency.




Page 43                                 GAO-12-1016 Grants to State and Local Governments
Appendix III: Cross-cutting Grants Legislation
and OMB Circulars/Agency Grants Regulations




OMB consolidated its grants-related circulars 23 as well as the agency
common rules into Title 2 of the Code of Federal Regulations. Currently,
OMB is in the process of re-issuing guidance for each of the common
rules under Title 2, allowing federal grant-making agencies to simply
adopt the regulations and thereby create a central point for all grantees to
locate all grant government-wide requirements. Concurrent to the
streamlining effort, OMB is also working with other stakeholders to
evaluate potential reforms in federal grant policies. 24 In an effort to reduce
improper payments, OMB created the Single Audit Workgroup with
federal and state members who studied a variety of options for improving
the effectiveness of single audits. In February 2012, OMB published an
advanced notice of proposed guidance detailing a series of reform ideas
that would standardize information collection across agencies, adopt a
risk-based model for single audits, and provide new administrative
approaches for determining and monitoring the allocation of federal
funds. 25 The comment period closed at the end of March 2012; OMB has
not yet issued proposed guidance based on comments received.

Until the fall of 2011, OMB coordinated grants management policy
through two federal boards: the Grants Policy Committee, which was
established in 1999, and the Grants Executive Board, which was
established in 2004. The Grants Executive Board oversaw the
implementation work groups and the Grants.gov initiative while the Grants
Policy Committee was composed of grants policy experts from across the
federal government whose mission it was to simplify and streamline grant
administration policies. In October 2011, OMB announced the creation of
the Council on Financial Assistance Reform (COFAR) which replaced
these two federal grant bodies. The COFAR is charged with identifying


23
   There are currently a total of six OMB circulars on grants, but only three apply to any
one type of grantee. Grantees are grouped by (1) states, local governments, and Indian
tribes, (2) educational institutions, and (3) nonprofit organizations. OMB published three
different circulars on cost principles for each group, published two circulars on
administrative requirements (one for states, local governments, and Indian tribes and
another for educational institutions and nonprofit organizations combined), and one
circular on audit requirements covering all three groups. Circular No. A-133, covering audit
requirements, has not been codified into Title 2.
24
   See Exec. Order No. 13520, Reducing Improper Payments and Eliminating Waste in
Federal Programs, 74 Fed. Reg. 62,201 (Nov. 25, 2009).
25
   Reform of Federal Policies Relating to Grants and Cooperative Agreements: Cost
Principles and Administrative Requirements (including Single Audit Act), Advance Notice
of Proposed Guidance, 77 Fed. Reg. 11,778 (Feb. 28, 2012).




Page 44                                GAO-12-1016 Grants to State and Local Governments
Appendix III: Cross-cutting Grants Legislation
and OMB Circulars/Agency Grants Regulations




emerging issues, challenges, and opportunities in grants management
and policy and providing recommendations to OMB on policies and
actions to improve grants administration. According to OMB officials, the
COFAR is also expected to serve as a clearinghouse of information on
innovations and best practices in grants management. In contrast to the
Grants Policy Committee and the Grants Executive Board, which together
included members from 26 agencies, the COFAR is made up of the OMB
Controller, representatives from the largest eight grant-making agencies,
and a representative from one of the smaller federal grant-making
agencies. The latter serves a rotating two-year term. Also unlike the
Grants Policy Committee, which largely consisted of program level grants
staff, the membership of the COFAR is at a higher level, being made up
of the Chief Financial Officers of participating agencies. OMB officials told
us that the COFAR is now working toward identifying priorities in grants
management that may include various initiatives that were started by the
defunct Grants Policy Committee and Grants Executive Board. Details on
these have yet to be decided.




Page 45                                GAO-12-1016 Grants to State and Local Governments
Appendix IV: GAO Contact and Staff
                  Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Stanley J. Czerwinski, (202) 512-6806 or czerwinskis@gao.gov
GAO Contacts
                  Beryl H. Davis, (202) 512-2623 or davisbh@gao.gov


                  In addition to the individuals named above, Peter Del Toro, Assistant
Staff             Director, Kimberly A. McGatlin, Assistant Director, Laura M. Bednar,
Acknowledgments   Maria C. Belaval, Anthony M. Bova, Amy R. Bowser, Melissa L. King, and
                  Diane N. Morris were the major contributors to this report. Additionally,
                  Virginia A. Chanley, Jason Kelly, and Robert Robinson also made key
                  contributions.




                  Page 46                              GAO-12-1016 Grants to State and Local Governments
Selected GAO Products on Grants
                    Selected GAO Products on Grants
                    Management Issues



Management Issues

Energy Efficiency   Green Building: Federal Initiatives for the Nonfederal Sector Could
                    Benefit from More Interagency Collaboration. GAO-12-79. Washington,
                    D.C.: November 2, 2011.

                    Recovery Act: Energy Efficiency and Conservation Block Grant
                    Recipients Face Challenges Meeting Legislative and Program Goals and
                    Requirements. GAO-11-379. Washington, D.C.: April 7, 2011.


Education           School Improvement Grants: Education Should Take Additional Steps to
                    Enhance Accountability for Schools and Contractors. GAO-12-373.
                    Washington, D.C.: April 11, 2012.

                    School Improvement Grants: Early Implementation Under Way, but
                    Reforms Affected by Short Time Frames. GAO-11-741. Washington,
                    D.C.: July 25, 2011.

                    Recovery Act: Head Start Grantees Expand Services, but More
                    Consistent Communication Could Improve Accountability and Decisions
                    about Spending. GAO-11-166. Washington, D.C.: December 15, 2010.

                    District of Columbia Public Education: Agencies Have Enhanced Internal
                    Controls Over Federal Payments for School Improvement, But More
                    Consistent Monitoring Needed. GAO-11-16. Washington, D.C.: November
                    18, 2010.

                    University Research: Policies for the Reimbursement of Indirect Costs
                    Need to Be Updated. GAO-10-937. Washington, D.C.: September 8,
                    2010.

                    Grant Monitoring: Department of Education Could Improve Its Processes
                    with Greater Focus on Assessing Risks, Acquiring Financial Skills, and
                    Sharing Information. GAO-10-57. Washington, D.C.: November 19, 2009.

                    Discretionary Grants: Further Tightening of Education’s Procedures for
                    Making Awards Could Improve Transparency and Accountability.
                    GAO-06-268. Washington, D.C.: February 21, 2006.


Healthcare          Medicaid: Federal Oversight of Payments and Program Integrity Needs
                    Improvement. GAO-12-674T. Washington, D.C.: April 25, 2012.




                    Page 47                           GAO-12-1016 Grants to State and Local Governments
                             Selected GAO Products on Grants
                             Management Issues




                             National Institutes of Health: Awarding Process, Awarding Criteria, and
                             Characteristics of Extramural Grants Made with Recovery Act Funding.
                             GAO-10-848. Washington, D.C.: August 6, 2010.

                             National Institutes of Health: Completion of Comprehensive Risk
                             Management Program Essential to Effective Oversight. GAO-09-687.
                             Washington, D.C.: September 11, 2009.


Homeland Security,           Justice Grant Programs: DOJ Should Do More to Reduce the Risk of
Disaster Preparedness, and   Unnecessary Duplication and Enhance Program Assessment.
Justice                      GAO-12-517. Washington, D.C.: July 12, 2012.

                             Managing Preparedness Grants and Assessing National Capabilities:
                             Continuing Challenges Impede FEMA’s Progress. GAO-12-526T.
                             Washington, D.C.: March 20, 2012.

                             Homeland Security: DHS Needs Better Project Information and
                             Coordination among Four Overlapping Grant Programs. GAO-12-303.
                             Washington, D.C.: February 28, 2012.

                             Recovery Act: Department of Justice Could Better Assess Justice
                             Assistance Grant Program Impact. GAO-11-87. Washington, D.C.:
                             October 15, 2010.

                             Hurricane Recovery: Federal Government Provided a Range of
                             Assistance to Nonprofits following Hurricanes Katrina and Rita.
                             GAO-10-800. Washington, D.C.: July 30, 2010.

                             Disaster Recovery: FEMA’s Long-term Assistance Was Helpful to State
                             and Local Governments but Had Some Limitations. GAO-10-404.
                             Washington, D.C.: March 30, 2010.

                             Disaster Assistance: Greater Coordination and an Evaluation of
                             Programs’ Outcomes Could Improve Disaster Case Management.
                             GAO-09-561. Washington, D.C.: July 8, 2009.

                             Disaster Recovery: FEMA’s Public Assistance Grant Program
                             Experienced Challenges with Gulf Coast Rebuilding. GAO-09-129.
                             Washington, D.C.: December 18, 2008.




                             Page 48                           GAO-12-1016 Grants to State and Local Governments
                         Selected GAO Products on Grants
                         Management Issues




Transportation           Transportation-Disadvantaged Populations: Federal Coordination Efforts
                         Could Be Further Strengthened. GAO-12-647. Washington, D.C.: June
                         20, 2012.

                         Surface Transportation: Competitive Grant Programs Could Benefit from
                         Increased Performance Focus and Better Documentation of Key
                         Decisions. GAO-11-234. Washington, D.C.: March 30, 2011.

                         Intercity Passenger Rail: Recording Clearer Reasons for Awards
                         Decisions Would Improve Otherwise Good Grant-making Practices.
                         GAO-11-283. Washington, D.C.: March 10, 2011.

                         Metropolitan Planning Organizations: Options Exist to Enhance
                         Transportation Planning Capacity and Federal Oversight. GAO-09-868.
                         Washington, D.C.: September 9, 2009.

                         Transportation-Disadvantaged Populations: Some Coordination Efforts
                         Among Programs Providing Transportation Services, but Obstacles
                         Persist. GAO-03-697. Washington, D.C.: June 30, 2003.


Government-wide Grants   Grants Management: Action Needed to Improve the Timeliness of Grant
and Other Grants         Closeouts by Federal Agencies. GAO-12-360. Washington, D.C.: April 16,
Management Issues        2012.

                         Improper Payments: Remaining Challenges and Strategies for
                         Government-wide Reduction Efforts. GAO-12-573T. Washington, D.C.:
                         March 28, 2012.

                         2012 Annual Report: Opportunities to Reduce Duplication, Overlap and
                         Fragmentation, Achieve Savings, and Enhance Revenue.
                         GAO-12-342SP. Washington, D.C.: February 28, 2012.

                         Federal Grants: Improvements Needed in Oversight and Accountability
                         Processes. GAO-11-773T. Washington, D.C.: June 23, 2011.

                         Grants.gov: Additional Action Needed to Address Persistent Governance
                         and Funding Challenges. GAO-11-478. Washington, D.C.: May 6, 2011.

                         Government Performance: GPRA Modernization Act Provides
                         Opportunities to Help Address Fiscal, Performance, and Management
                         Challenges. GAO-11-466T. Washington, D.C.: March 16, 2011.



                         Page 49                           GAO-12-1016 Grants to State and Local Governments
Selected GAO Products on Grants
Management Issues




Opportunities to Reduce Potential Duplication in Government Programs,
Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington,
D.C.: March 1, 2011.

Recovery Act: Opportunities to Improve Management and Strengthen
Accountability over States’ and Localities’ Uses of Funds. GAO-10-999.
Washington, D.C.: September 20, 2010.

Recovery Act: Further Opportunities Exist to Strengthen Oversight of
Broadband Stimulus Programs. GAO-10-823. Washington, D.C.: August
4, 2010.

State and Local Governments: Fiscal Pressures Could Have Implications
for Future Delivery of Intergovernmental Programs. GAO-10-899.
Washington, D.C.: July 30, 2010.

Legal Services Corporation: Improvements Needed in Controls over
Grant Awards and Grantee Effectiveness. GAO-10-540. Washington,
D.C.: June 11, 2010.

Nonprofit Sector: Treatment and Reimbursement of Indirect Costs Vary
among Grants, and Depend Significantly on Federal, State, and Local
Government Practices. GAO-10-477. Washington, D.C.: May 18, 2010.

Streamlining Government: Opportunities Exist to Strengthen OMB’s
Approach to Improving Efficiency. GAO-10-394. Washington, D.C.: May
7, 2010.

Electronic Government: Implementation of the Federal Funding
Accountability and Transparency Act of 2006. GAO-10-365. Washington,
D.C.: March 12, 2010.

Recovery Act: Status of States’ and Localities’ Use of Funds and Efforts
to Ensure Accountability. GAO-10-231. Washington, D.C.: December 10,
2009.

Grants Management: Grants.gov Has Systemic Weaknesses That
Require Attention. GAO-09-589. Washington, D.C.: July 15, 2009.

Recovery Act: Consistent Policies Needed to Ensure Equal Consideration
of Grant Applications. GAO-09-590R. Washington, D.C.: April 29, 2009.




Page 50                           GAO-12-1016 Grants to State and Local Governments
           Selected GAO Products on Grants
           Management Issues




           Single Audit: Opportunities Exist to Improve the Single Audit Process and
           Oversight. GAO-09-307R. Washington, D.C.: March 13, 2009.

           Nonprofit Sector: Significant Federal Funds Reach the Sector through
           Various Mechanisms, but More Complete and Reliable Funding Data Are
           Needed. GAO-09-193. Washington, D.C.: February 26, 2009.

           Grants Management: Attention Needed to Address Undisbursed
           Balances in Expired Grant Accounts. GAO-08-432. Washington, D.C.:
           August 29, 2008.

           Grants Management: Enhancing Performance Accountability Provisions
           Could Lead to Better Results. GAO-06-1046. Washington, D.C.:
           September 29, 2006.

           Grants Management: Grantees’ Concerns with Efforts to Streamline and
           Simplify Processes. GAO-06-566. Washington, D.C.: July 28, 2006.

           Principles of Federal Appropriations Law: Third Edition, Volume II.
           GAO-06-382SP. Washington, D.C.: February 2006.

           Grants Management: Additional Actions Needed to Streamline and
           Simplify Processes. GAO-05-335. Washington, D.C.: April 18, 2005.

           Federal Assistance: Grant System Continues to Be Highly Fragmented.
           GAO-03-718T. Washington, D.C.: April 29, 2003.

           Grant Programs: Design Features Shape Flexibility, Accountability, and
           Performance Information. GAO/GGD-98-137. Washington, D.C.: June 22,
           1998.

           Federal Grants: Design Improvement Could Help Federal Resources Go
           Further. GAO/AIMD-97-7. Washington, D.C.: December 18, 1996.

           Block Grants: Issues in Designing Accountability Provisions.
           GAO/AIMD-95-226. Washington, D.C.: September 1, 1995.

           Block Grants: Characteristics, Experience, and Lessons Learned.
           GAO/HEHS-95-74. Washington, D.C.: February 9, 1995.




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           Page 51                           GAO-12-1016 Grants to State and Local Governments
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