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Vol 16 May 19, 2004

**[Financial Assistance And The Bona Fide Need Rule:]{.underline}**

**[Severability No Longer An Issue]{.underline}**

**By Michelle McClelland**

In a decision that could have significant impact on grants
administration, the General Accounting Office (GAO) was presented with
the issue of whether the Department of Education could use
appropriations available for only one fiscal year to fully fund grant
awards of multiple years in the case of two Education programs. See U.S.
Department of Education\'s Use of Fiscal Year Appropriations to Award
Multiple Year Grants (B-289801, December 30, 2002). The GAO held that
Education could fully fund such grant awards, relieving agencies funding
grants with annual appropriations or other time-limited funds from going
through an often convoluted [bona]{.underline} [fide]{.underline} need
analysis to determine whether the activities under a grant are severable
or nonseverable. (Note: The [bona]{.underline} [fide]{.underline} need
rule does not apply to no-year funds. 43 Comp. Gen. 657 (1964).) This
relief is provided regardless of whether the grant at issue is to be a
multi-year award or multiple year award. Unlike multiple year awards,
which are fully funded for a period of more that one year, multi-year
awards, by definition, are financial assistance awards for a period of
more that one year, which are partially funded when the award is made,
and then are subsequently funded in increments. See Department of
Commerce Grants and Cooperative Agreements Interim Manual, Chapter 3,
A.29. Thus, while the distinction between a multiple year award and a
multi-year award may remain for grants administration and definitional
purposes, there is no difference between the two types of awards based
on the fiscal law principles of the [bona]{.underline}
[fide]{.underline} need rule and severability. Under either, a
severability determination is now irrelevant to a [bona]{.underline}
[fide]{.underline} need analysis.

[Bona Fide Need Rule]{.underline}

The [bona]{.underline} [fide]{.underline} need rule establishes that an
appropriation is available for obligation only to fulfill a genuine or
[bona]{.underline} [fide]{.underline} need of the period of availability
for which it was made. The GAO held that the rule applies to all federal
government activities carried out with appropriated funds, including
contract, grant, and cooperative agreement transactions. An agency\'s
compliance with the [bona]{.underline} [fide]{.underline} need rule is
measured at the time the agency incurs an obligation. In the grant
context, the obligation occurs at the time of award.

[Bona Fide Need Rule and the Principle of Severability]{.underline}

In its discussion in the case, the GAO stated that, in a number of
contexts, most notably government contracts for services, it had
addressed whether the [bona]{.underline} [fide]{.underline} need rule is
violated when an agency uses current fiscal year funds to pay for
contractual services rendered subsequent to the end of that fiscal year.
When services are severable, the [bona]{.underline} [fide]{.underline}
need rule serves to limit the amount of a service contract charged to an
available fiscal year appropriation. In 64 Comp. Gen. 359 (1985),
relying on case law applying the [bona]{.underline} [fide]{.underline}
need rule in the context of service contracts, the GAO held that NIH
research project grants could not be funded for three fiscal years with
fiscal year 1985 appropriations because the [bona]{.underline}
[fide]{.underline} need rule would be violated. Since it could not be
said that there was a need for an end product in any particular year or
that the grants envisioned an end product, the GAO concluded that the
[bona]{.underline} [fide]{.underline} need rule was violated when funds
were obligated for more that one year for the grants, i.e., the grants
were for severable services.

Three years later, however, in B-229873, November 29, 1988, the GAO
noted that it significantly undercut the analysis used in the NIH
decision. In this later decision, the GAO held that the SBA did not
violate the [bona]{.underline} [fide]{.underline} need rule when it used
its fiscal year appropriation on September 30, the last day of the
fiscal year, to award cooperative agreements to operate Small Business
Development Centers even though the Centers would use the money in the
next fiscal year. In essence, the GAO had concluded that the concept of
severability was not relevant to the cooperative agreements at issue. In
other words, the award constitutes the obligation, and upon award, the
agency\'s need\--to financially assist the awardee\--is complete. In
this latest Education case, the GAO reiterated that the application of
the [bona]{.underline} [fide]{.underline} need rule found in the SBA
case is the correct approach. It expressly recognized the fundamental
difference between a contract and a grant or cooperative agreement and
the significance this difference has on a [bona]{.underline}
[fide]{.underline} need analysis. Contracts and grants are transactions
that fulfill significantly different needs of an agency, the former to
acquire goods and services and the latter to provide financial
assistance.

[Conclusion of Education Case]{.underline}

Thus, the GAO concluded: 1) for grants, the principle of severability is
irrelevant to a [bona]{.underline} [fide]{.underline} need
determination, and 2) a [bona]{.underline} [fide]{.underline} need
analysis in the grant context focuses on whether the grants are made
during the period of availability of the appropriation charged and
further the authorized purposes of program legislation. Consequently,
the duration of the grant award itself is irrelevant to a
[bona]{.underline} [fide]{.underline} need determination. In other
words, whether the activities under a grant are characterized as
severable or nonseverable no longer legally mandate that an award be
funded for only one year or funded in its entirety.

With regard to the specific two Education programs at issue, program
authorizations for the GEAR UP Program and the Early Childhood Educator
Program for FY 2001 did not provide explicit authority to award multiple
year grants. In fact, prior to FY 2001, Education had funded the GEAR UP
awards one year at a time. Nevertheless, the GAO found that Education's
award of 5-year, fully funded grants for the GEAR UP Program and 2-year,
fully funded grants for the Early Childhood Educator Program was in
accordance with the program legislation and fulfilled a
[bona]{.underline} [fide]{.underline} need of the period for which the
funds used were available. Absent from GAO's opinion was any analysis of
the severability of the activities to be carried out under the awards.

[Caveat]{.underline}

The Education case contains a cautionary [\"but]{.underline}
[see\"]{.underline} cite to 73 Comp. Gen. 77 (1994), in which this case
was described as follows: [\"bona]{.underline} [fide]{.underline} need
determination in the context of a cooperative agreement properly
required assessing severability of research activities where agreement
under which research was conducted more closely resembled a contract
than a grant of financial assistance.\" In this 1994 case, the GAO held
that the Fish and Wildlife Service could not incrementally fund
\"research work orders\" of multiple year duration that were
nonseverable. The Fish and Wildlife Service issued research work orders
that were project-specific extensions of unit cooperative agreements.
Thus, according to the GAO, the underlying character of the transaction
must still be analyzed to determine whether it is in the nature of an
acquisition of goods or services, or the provision of financial
assistance. If it is the former, then an assessment of severability may
still be required.