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Vol 3 April 19, 1995

**[OBLIGATION OF FEDERAL ASSISTANCE FUNDS]{.underline}**

by Joe Levine

At what point has funding for a grant or cooperative agreement been
obligated so that there is an underlying legal duty to disburse those
funds? Perhaps not surprisingly, the answer to this question depends on
the procedure utilized in executing the award.

The basic statutory provision which governs obligation of funds is 31
U.S.C. ¤ 1501, which provides:

\"(a) An amount shall be recorded as an obligation of the United States
Government only when supported by documentary evidence of\--

\*\*\*

\(5\) a grant or subsidy payable\--

\(A\) from appropriations made for payment of, or contributions to,
amounts required to be paid in specific amounts fixed by law or under
formulas prescribed by law;

\(B\) under an agreement authorized by law; or

\(C\) under plans approved consistent with and authorized by law.\"

In [Principles of Federal Appropriations Law, 2nd Ed.]{.underline} (the
Red Book), the GAO/OGC notes:

\"In order to properly obligate an appropriation for an assistance
program, some action creating a definite liability against the
appropriation must occur during the period of the obligational
availability of the appropriation. In the case of grants, the obligating
action will usually be the execution of a grant agreement. The
particular document will vary and may be in the form of an agency\'s
approval of a grant application or a letter of commitment.\" (Page 7-32)
(citations omitted)

The Red Book then quotes Title 2, Appendix I ¤G10.03 (1984), of GAO\'s
[Policy and Procedures Manual for Guidance of Federal
Agencies]{.underline} which states:

\"Accounting for a federal assistance award begins with the execution of
an agreement or the approval of an ap-plication or similar document in
which the amount and purposes of the grant, the performance periods, the
obligations of the parties to the award, and other terms are set out. [A
legal obligation to disburse the assistance funds, in ac-cordance with
the terms of the agre-ement, generally occurs with an executed agreement
or an approved application or similar document]{.underline}.\" (Page
7-33) (emphasis supplied)

Thus, when grant execution is com-pleted, a legal obligation to disburse
the funds is created, but when is execution completed?

GAO has also provided clear guidance as to what actions must be
accomplished to execute a valid grant. In general, in order for a grant
obligation to arise: (1) the United States must take action to establish
a firm commitment; (2) that commitment must be unconditional; (3)
documentary evidence of the com-mitment must exist; (4) the official
grantee must have the award terms communicated to it and, if there are
any prerequisites, it must comply with the prerequisites during the
period of availability of the appropriation. Red Book at 7-33.

Most Department programs require that the Grants Officer sign the award,
CD 450, and that the Recipient sign and return the award documents
within 15 days. Once this has occurred, an obligation is recorded and a
legally enforceable agreement exists. This holds true, even if there are
special award conditions, *e.g.*, submission of some additional
documentation, before funds may be drawn down. Compliance with special
award conditions generally are not a prerequisite to the creation of an
obligation. A recipient has accepted those conditions by signing and
returning the agreement.

The Economic Development Admin-istration (EDA), however, utilizes a
slightly different procedure. For EDA awards, the obligation occurs when
the **agency** signs the agreement with a requirement, under the terms
of the award, that recipient return a signed copy within a specific time
period. This procedure was approved by the General Accounting Office in
an unpublished decision of the Comptroller General (B-126652, August 30,
1977).

The contrast between the EDA procedure and that of the rest of the
Department may be instructive in understanding GAO\'s above cited four
requirements. Under the procedure approved in the 1977 Comp. Gen.
decision, EDA, in response to a proposal, sent an \"Offer of Grant\" to
the recipient which included the specific purpose, amount of funding and
all terms and conditions. EDA explained that "at the time of such 'grant
offer' the specific purpose, the amount of funding, [and all terms and
conditions for utilizing the funds are settled]{.underline} and that the
'Offer of Grant' is in no sense an invitation for future negotiation."
(emphasis supplied) The document provided \"This approval and award of
grant, subject to the Special Conditions, and the Standard Terms and
Conditions shall constitute an obligation to make such grant. Such
obligation may be terminated without further cause, however, if the
grantee shall fail to affirm its timely utilization of the grant by
signing and returning to the Economic Development Admin-istration within
30 days its affirmation of intent as set forth below.\"

GAO concluded that this document could be used as the basis for
recording an obligation under 31 U.S.C. ¤1501. Although it required
subsequent action by the recipient, the Comptroller General stated
\"\[t\]his document reflects the Administration\'s acceptance of a grant
application; specifies the project approved and the amount of funding;
and imposes a deadline for affirmation by the grantee.\" \[This last
proviso can create interesting complications when the award is made at
the end of the fiscal year and the funding availability expires at the
end of that year, but, as they say, that is the topic for another day.\]
In contrast, the Department\'s procedure imposes a condition antecedent
by expressly requiring the recipient to return a signed award **before**
the funds are obligated.

The key points to note are that under the EDA procedure the government
is **accepting** a grant application, and that there is no further room
for negotiation. The applicant is presented with a \"take it or leave
it\" situation. In contrast, under the Department\'s procedure the
govern-ment is making an **offer** which the ap-plicant can accept,
reject, or respond to with a counter offer.

Both procedures have their advantages. The EDA procedure allows for the
recording of obligations at an earlier time, which can be vital in end
of year rush situations when appropriations availability is expiring.
The Depart-ment\'s procedure eliminates any ambiguity about whether the
award will proceed during the time the recipient has not yet signed and
returned the award. There is no award until the signed copy is returned.

The Department's procedure could be changed to create an obligation upon
the signature of the Grants Officer so long as the application complies
with applicable statutes and regulations, adequately describes the
project, the amount of funding is specified, the terms and conditions
are settled, and the transmittal clearly indicates that it is an
"award". These requirements reinforce the importance of having the
applicant agree to all conditions of the award before processing is
completed.

As a final point, it should be noted that failure to comply with any
required conditions of valid award (*e.g.* comp-liance with special
award conditions, or, for EDA, failure to return a signed copy of the
award) does not void the award or affect the validity of the obligation,
rather it is a violation of the terms of the agreement that would
authorize the government to take remedial action, including the possible
institution of termination for default procedures. See *e.g.* Subpart C,
paragraphs \_\_.60 - \_\_.62 of OMB Circular A-110, \"Uniform
Administrative Requirements for Grants and Agreements With Institutions
of Higher Education, Hospitals and Other Non-Profit Organizations\".
Only after such procedures are completed would the funds be deobligated.
Even if an award is terminated for default the government may, under
certain circumstances, be required to pay for costs incurred by the
grantee prior to termination.