EARNING INTEREST

ON FEDERAL GRANT FUNDS

National Program Inspection

Analysis and Inspections

9ffice of 
General

Office of Inspector 
Department of  nd Human Services

Health 
AUGUST 1985
 ---
" . 
TABLE OF CONTENTS

Page 
MAJOR FINDINGS 
RECOMMENDATIONS 
0 . . 
BACKGROUND 
FEDERAL SHARE OF INTEREST AND SAMPLE PERIOD 
GENERAL FINDINGS 
PROJECTED FEDERAL SAVINGS

co .. .

INTEREST RATES AND SERVICE CHARGES 
ADDITIONAL FINDINGS 
METHODOLOGY AND SAMPLE
 MAJOR FINDINGS 
Of about 4, 000 nonprofit grantees of the Office of Human Development 
Public Health Service (PHS) who were studied in this 
Services (OHDS) and the 
program inspection, 80% do not earn interest on federal funds kept in banks 
16% earn interest but do not report or return any to the federal government 
and only 4% earn and return interest. 
Some 94% of all grantees elect to commingle their federal grant funds in bank 
nonfederal funds. The mean average daily balance in these 
accounts with 
accounts is $65,831 , of which the federal share is $20 129, or about 31%. 
federal funds lost by these nonprofit grantees who fail to 
The amount of 
collect or return interest is $4 250 000 per year. However, this amount may 
be significantly higher due to bank deregulation in 1986, when banks may 
competitively pay more than 5-1/4% interest. 
also losing an additional 
About 80% of these same nonprofit grantees are 
interest-bearing 
$8 million per yer in interest on nonfederal funds kept in non-
may be higher after bank deregulation. 
accounts. Again, this loss 
assumed (or later proven) that these findings are also representative of 
tIfh ei t9 i s0 00 to 10 000 other grantees of OHDS and PHS who are required to 
hospitals 
return interest but were not sampled in this study (including private 
the 
and colleges, school districts , local governments and other grantees), then 
totals over $13 million per year in federal funds, plus about 
lost interest 
funds. 
$25 million per year in nonfederal 
Grantees who are funded via letter-of-credit keep a somewhat lower 
their grant dollars in the bank than do grantees funded via 
percentage of 
Treasury check disbursements. Even so, large daily balances remain in the 
grantees. 
bank accounts of both groups of 
Most grantees can easily obtain bank accounts paying at least 5-1/4% interest 
and can avoid paying fees on such accounts. Virtually all can hold any fees 
to a level of 2% to 7% of the interest earned. To forego interest for " 
fee" banking is a very poor exchange for most grantees. 
There are weaknesses in the Department'  handling of grantee  cash 
management reports and in the control of interest via the audit process.  RECOMMENDA nONS

The Department of Health and Human Services should amend 45 CFR 74 to 
require that all grantees not statutorily exempt should maintain federal funds 
in bank accounts which pay interest. 

The Department of Health and Human Services should recommelld again that 
the Office of Management and Budget revise Circular A-110 to mandate that 
the government use similar interest-bearing 
all nonexempt grantees of 
accounts. 
Grants management and other federal program officials should enforce existing 
policies requiring grantees to report and return interest earned on federal 
funds and should actively encourage and monitor grantee use of interest-
bearing accounts. 
Contract auditors should be explicitly instructed to identify interest earned 
by grantees and the federal share thereof and to assure return of the federal 
existing policy instructions. 
share to the government per  BACKGROUND 
The Department of Health and Human Services (HHS), Office of Inspector General 
(OIG), is already on record in support of strengthening requirements on the
accrual and return of interest earned on federal grant funds. 
In September 1982, Inspector General Richard P. Kusserow recommended to the 
HHS Assistant Secretary for Management and Budget 
(ASMB) and to the Office of 
Management and Budget (OMB) that OMB Circular A-II0 and HHS regulations be 
changed to mandate maximum use of interest-
tees.  bearing accounts by  nonprofit gran
The OIG estimated that $2.4 millon would be saved annually by HHS 
grantees, basing this estimate solely on the 5-day float period between the time
grantees write checks and the time the funds exit their 
bank accounts 
On 
ComMmaritcthe e5 o, n1 9t8h3 e IBnsupdegcetot rt Gheante trahl eK uIsnsteerrgoowv eternsmtifeinetda lb  efore the House
Cooperation Act
(P. L. 90-577) should be changed to require  state and local governments to return 
to the federal government interest earned on grant funds, estimating that $25. 
millon annually could thereby be saved. 
On July 22  1983  the General Accounting Office (GAO) issued a report on 18 
federal programs (6 in HHS), recommending clearer federal policy on and better 
reporting of grant-related income.  As recently as February 10, 1984  GAO
reported that some HHS grantees are not reporting interest earned on grant funds 
and recommended improvements in disposition of grant-related income by HHS
grantees) 
On May 8, 1985, the HHS Assistant Secretary for Management and Budget 
sreeslpeocntdeedd  stot athtee sOI.G  Trehpeo rrt eAsCpNon 1s2e-5 a30g0r4e eosn  wcaisthh  mtahnaege ment of programs
Inspector General' 
recommendation that the Joint State/Federal Cash Management Reform Task
Force should initiate  make states accountable for interest 
legislation to  earned on 
excess federal funds. 
During two recent program inspections in the Head Start program, grantees 
complained to OIG staff that they' " were required" to keep grant funds 
in non-
interest-bearing accounts. In fact, 45 CFR 74 gives nonprofit grantees the
option to earn interest
, so long as they report it and return it to HHS. 
1 Memos dated 
9/20/82 to ASMB Sopper , OMB  Deputy  Associate  Director 
Kleinberg, OMB Deputy Director Wright. 
2 Improved Standards Needed for Managing and Reporting Income Generated Under

Federal Assistance Programs. GAO/66D-83-55. 
3 Depl: of HHS Should Improve Policies and Practices 
on Grant-Related Income. 
GAO/66D-84-20. 
4 Memo dated 
 5/8/'l5  ASMB O' Shaughnessy to IG Kusserow.  As of August 1984, when this study was initiated , no change in either OMB 
Circular A-110 or 45 CFR 74 was planned with respect to interest earned 
nonprofit grantees. HHS grants management staff 
estimated that perhaps 90% of
such grantees were not earning interest and that there were no available data 
the actual amount of federal funds being carried in bank accounts by grantees. 
HHS generally has taken the approach that encouraging grantees to draw down 
funds only as needed, rather than prematurely (in accordance with OMB Circular 
), is the best 
lID , Attachment F, Item 2.  way to assure appropriate use of
federal funds. In fact, some grants management staff believe that encouragement
for grantees to earn (and return) interest might undercut efforts to make 
drawdowns timely. As a result 
, grantees are not encouraged to collect interest 
on federal grant funds. 
Finally, although some grantees were reporting interest earned in their quarterly 
cash management reports , as required, and were returning interest to grants
management offices annually or more frequently, no collected information about
interest earned or returned was available in HHS. Some 22 Public Health Service 
(PHS) and Office of Human Development Services (OHDS) grants offices (2 per 
region and 2 in headquarters), as well as the Rockville Payment Management 
Center , are involved in the collection, management, reporting, and accounting for
interest earned by grantees. 
This study was initiated, therefore, to obtain valid information about the actual 
amount of federal grant funds kept in bank accounts (regardless of the drawdown 
frequency), the portion earning interest , and the interest reported and returned. 
Unless otherwise exempt, all PHS and OHDS grantees are obligated under OMB 
Circular A-110 , 45 CFR 74 and departmental grants administration manuals to 
report nonexempt interest earned. This study addresses only the nonprofit portion
of the universe of grantees in PHS and OHDS. State entities were excluded 
return interest to the 
because they are not required to  federal government. 
, school districts  local and 
Local governments private colleges, hospitals and
Indian tribes were excluded from the sample because, even though usually 
. required to return interest, their banking and accounting systems are often too 
large or complex to be reviewed by the  survey approach used in this study. 
mail 
More than 5 000 nonprofit grants remained, representing about $1.6 billion. (See

Methodology and Sample, below, for further details on sample.)

FEDERAL SHARE OF INTEREST AND SAMPLE PERIOD 
Existing regulations and manuals do not specify how the federal share of interest 
should be computed by grantees who elect to commingle federal grant funds with 
other funds in the same bank account. At the outset of this study, no collected 
information was available in HHS to indicate how many grantees do, in fact 
commingle federal and other funds in bank accounts and how many maintain 
purely federal" accounts.

This study was not designed to audit any specific grantee s liabilities for interest 
due to the government, or to review the individual accounting systems or records 
by which grantees may document expenditures assigned to the federal grants. It 
is assumed that some grantees with commingled bank accounts do maintain records 
adequate to compute the federal share of 
interest in those accounts.  the federal grant funds in 
For  this study, we assumed that 
purposes of accounts were being expended at the same rate as the 
commingled bank 
nonfederal funds. Thus, by computing the average daily balance inI Iftehdee raaclc ogurnatn,t 
we had a base against which to compute a federal share, or a 
fund average daily balance. 
grant dollars in 
tWhee  caocmcopuutnetd a tnhdis/ osrh aderep obsaisteedd  utpoon  tthhee  attcoocto autlhn vteo  latutom teaa noly fo  ftfie mdeer adlu ring the period 
reviewed (llfederal volume ) compared  all dollars in and/or 
that period.

deposited to the account during 
Federal share =  Federal volume

Total volume

IIfederal volume management reports 
We obtained the  " information from the cash 
, in which the grantees

(Standard Form 272) submitted quarterly by the grantees
federal cash on hand as of the first day of the quarter, as

state the amount of  We obtained the

during the quarter. 
grant funds received 
well as the total of  bank statements forwarded by the

information directly from the 
total volume 
request.

grantees at our 
, we were generally able 
By requesting five consecutive months of bank statements 
statements with a 272 quarterly report (which 
to match thwraeey sm foonltlohsw  ocfa lbeanndka r quarters). In a few cases, however, it was 
does not a  months. 
projections from fewer than three full 
necessary to make quarterly 
provide an exact audit able reading on federal
This approiancdhi vwiadsu naol ta cdceoveulnotpse.d R taot h
er , the approach was designed to give a 
funds in 
cumulative  reading--for policy analysis purposes--of thed efteadielreadl  sftuunddsi ebse ionfg  thheelidr  
in bank accounts, without burdening grantees with 
accounts and books. 
GENERAL FINDINGS 
the  commingle" federal HHS 
. Ninety-four percent of  grantees have chosen to "
in  Out of 432 grantees with 585 
common bank accounts. 
funds with other funds  be "purely federal " i.  , in which the

grants , only 26 bank accounts appeared to 
studied.
funds disbursed for the period

amounts did not exceed the federal 

The grantees studied ranged from " large" to "small " from one receiving $19 
000/year. Fifty-
millon per year (in 11 grants) to several receiving under $5,
000 for the year. The 
, and 44 received under $50 
seven received over $1 millon year. 
received $585 000 for the 
average grantee sampled 
The grantees average daily bank balances ranged from $1.5 millon to $345. 
Three average  daily balances were greater than $1 million , and 57 were over
831. 
mean average daily bank balance was $65 
$100 000. The 
grantees (federal share x average daily 
The "federal average daily balance" of  Seven grantees had federal average 
bank balance) ranged from $459 000 to $0.  The mean federal average 
daily balances over $100 000 , Tanhdi s3 4 over $50 000.  % of the money
daily balance was $20 129  indicateiss  ftehdaet raabl ogurta n31t  money. (See pp. 3
grantee bank accounts on the average day 
 At an 
for explanation of federal share computations.  annual interest rate of 
1/4% , compounded monthly (yield = 5.54%) the "average grantee" sampled could
earn annual interest of $3,647, of which the federal portion would be $1 117. 
THE "TYPICAL" GRANTEE SAMPLED 
FY 
1984 Grant = $585,000 
Draws funds via letter-of-credit 
Commingles federal and nonfederal money in no-interest 
bank account

Has average daily bank balance of $65 831... 
Of which $20 129 is federal 
Pays no bank fees
Foregoes potential annual bank interest of $3 647... 
Of which $1 117 would be federal funds 
Reports/returns no interest to HHS 
Has no audit findings regarding interest 
Of the 432 grantees whose bank statements were examined, only 87 showed
receipt of any interest. 
In other words, 345 or 80% of the grantees apparently
retain  grant funds (and 
their federal  usually other funds as well in non-
interest-beqring accounts. These non-interest-bearing accounts handle 85% of the 
annual grant dollars let and have a combined average daily balance of over 
$20 millon , of which over $7 millon is the federal share. In short, these 345 
grantees are apparently foregoing (not earning) about $387 800 in yearly interest
on federal  , plus an 
grant funds in their accounts additional $1 108 000 per year 
interest on non federal funds held in these accounts. 
The 87 grantees earning interest do so at different rates, varying from 1 % 
12% of their average daily balance. The cumulative amount of interest actually
earned by these grantees was, not surprisingly, 5.4% of their combined average
daily balance. The federal 
share of the funds in these interest bearing accounts 
was only 20% (compared to the 31% share in all accounts). Even so, these 87
rantees earned 1984 interest on 
federal funds, by our computation, of about 
.590 000 , in addition to interest on nonfederal funds of $363 769.  earned 
statements showed interest reported interest 
Oinnl yth e9i rg qrauanrtteeers  lwyh ocsaes hb amnakn agement reports. Although the other 78 did not 
report any interest , their cash reports indicated the presence of federal funds 
their accounts. Another 9 grantees whose bank statements showed interest but 
some interest money to their 
whose cash report did not , nonetheless had returned 
grants management office during FY 1984; 5 of these 9 had apparently done so 
response to an audit. 
In summary, therefore, out of 432 grantees sampled, 345 or 80% were not 
receiving interest , another 69 or 16% were receiving interest but not reporting or 
had  returned interest 
returning any of it to HHS, and 18 or 4%  reported or 
during FY 1984. With 96% of the grantees sampled not returning interest , the 
HHS (at 5-1/4% compounded monthly) totals $462 47/+. 
annualized interest lost to 
GRANTEES RECEIVING AND/OR RETURNING INTEREST 
80%: Not Receiving Interest 
16%:  Not Returning 
Receiving 
Interest 
Returning 
4 %:  Receiving 
Interest 
5 Notea: Tt he FY 1984 audit closure was not due for every grantee rseapmpolretd i nitne rtehisst  
, more grantees who did not 
udy  report time. Therefore
quarterly may return interest directly or as a result of audit. 
bank statements showed interest being earned 
However , of the 87 grantees whose 
audit on file in the OIG  1981 to 
only 31 had any completed  during the period 
present. Of these 31 audits , only 14 audits even mentioned the word "interest 
audits 
and then usually in tables showing revenue sources of the grantee; only 5 
identified interest due for return to the federal government. 
, our findings give no reason 
Although not definitive because of the timeframe
interest earned on federal 
believe that the audit process is effectively policing 
gr ant funds.  PROJECTED FEDERAL SAVINGS 
that 
The Inspector General is already on record recommending  all grantees 
including state governments, should be required to return interest earned on HHS 
grant funds.  recommendation and provides a firmer basis 
This report repeats that 
fiscal impacts of this recommended policy change. 
for projecting the 
The specific universe from which the study sample was drawn was a group of 
970 nonprofit grantees during FY 1984. The value of 
377 grants received by 3 
637 million. 
these grants was $1 
Since 96% of these were found to be paying no interest on a mean federal 
average daily bank balance of $20 129, we calculate that the entire group of 
earn or return some 
nonprofit grantees represented by this sample are failing to 
250 000 per year to the federal government. 
In addition to the nonprofit grants actually sampled, another group of 13 645 
652 grantees should be yielding bank interest. However 
grants received by 8 
these grants, totaling $2 168 millon , are received by grantees whose banking 
for the  survey approach of this 
systems we judged too large or complex  mail 
study. If (1) it is assumed that their banking/interest patterns are similar to 
(2) subsequent study confirms this 
those of the nonprofit grantees sampled or if 
additional  918 000 per year is being lost in 
similarity, it is estimated that an 
unearned or unreturned interest on these federal grants. 
The total federal loss would be about $13 million per year for all OHDS and PHS 
grants excluding  interest lost on grants to states , state agencies, state 
univers, isttiile s, and state hospitals. In addition, grantees are losing some $25 millon 
per year interest on nonfederal funds in their accounts. 
INTEREST RATES AND SERVICE CHARGES 
The 87 sample grantees earning interest showed an average annualized interest 
rate of 5.4%. Individually, the annualized interest rates ranged from 1 % to 12%. 
In order to determine more precisely the interest rates available to grantees, we 
conducted a "mini-study" of 50 financial institutions in 35 states at which 50 
grantees currently are banking. While only 18% of the grantees in the mini-
offer at 
sample had their funds in interest-bearing accounts, 92% of the banks 
least one interest-bearing checking account option to nonprofit organizations. 
at  at 
Precision +/- 13%  the 90% confidence level or +/- 15%  the 95% 
This range is fairly wide for the sample size; however, the 
confidence level. 
wide variation in individual grantee interest accounts for the spread. To have 
attained a precision of +/- 5% at the 95% confidence level would have required a 
131 grantees. 
sample size of 2  Nearly every bank contacted offers what is commonly called a NOW account 
which pays a fixed rate of 5-1/4% interest (an effective yield of 5.48% to 5.67% 
depending upon how frequently the interest is compounded.) With few exceptions 
there are unlimited check-writing privileges and no service charges as long as 
maintained. 
certain minimum daily or monthly balances are  Interest continues to 
Half the banks in 
accrue regardless of whether minimum balances are maintained. 
yielding checking account, commonly called 
the sample also offer a second, higher-
Super-NOW accounts. 
An examination of 125 months of grantee bank statements (1 to 3 months per 
grantee) showed that most of the time grantees would have met the minimum 
NOW account at the institutions where they currently bank. 
requirements for a 
grantees not earning interest could have been 
This means that most of the 37 
Several of 
athccer ugirnagn itenteesr wesht oa td rao pmpiendi mbueml orwa tteh eoifr  5b-a1n/k4 % mwiintihm unmos  sweoruvilcde  sfteilels h. ave earned 
some interest because high balances during part of the month would have more 
than offset the assessed fees. Many of the grantees in the mini-sample also 
NOW accounts. 
would have qualified for the higher rates offered in Super-
financial institutions from offering 
Although federal regulations currently limit 
more than 5-1/4% on their fixed-rate NOW accounts, this limitation will be lifted 
toward deregulating the banking industry. Given the 
in 1986 as part of the move 
competition this action is likely to foster, interest rates for general purpose

higher in the future. 
checking accounts are expected to be 
We conclude, therefore, that all grantees should  be able to locate interest-
used), yielding at least 5.54% 
the same banks now 
bearing accounts (almost all at 
annualized interest (5-1/ 4 % compounded monthly).  After  deregulation in 1986 
even higher interest rates will be available 
that it is a "fair 
A common misperception among grantees and grants officers is 
interest from the bank in return for "no fee" service. 
exchange" to receive no 
no fee
Most grantees are, indeed, receiving " " service. 
Only 59 of 432 grantees , or 14%, paid any bank fees in the months sampled. 
received no interest but paid fees averaging about $168 per 
Thirty of these 59 
year , or $14 per month. The other 29 grantees paid fees and received interest. 
Their fees aver aged about $ 225 per year, or $19 per month;rnging from . 2% to 
of interest they earned in the same period. The cumulative 
44% of the amount 
fees paid by these grantees amounted to 6.7% of the interest they earned. 
who paid fees , the fees averaged $196 per year 
Considering all the 59 grantees 
or $16 per month. However, it must be remembered that 58 of the 87 grantees

earned  no fees.  The total fees paid by the 87 interest-earning
wghor antees amoinuternestte pdai dt o only 2.6% of the interest earned.  GRANTEES PAYING FEES AND/OR RECEIVING INTEREST 
Interest 
73% : No  Fees  - No 
Interest
7% :  Fees 
Interest 
7% :  Fees  - No 
Fees 
13% :  Interest  - No 
Coupled with the finding that grantees actually avoided going under the minimum 
balance requirements of their own 
banks most of the time, these findings suggest 
that most grantees can avoid paying fees altogether even while earning interest
and that virtually all who do incur fees can hold them to a level of 2% to 7% of 
the amount of interest earned. After paying such fees , the "average" grantee
would still "clear" over $1 000 per year in net interest on the federal funds. 
conclude that foregoing interest in return for "no fee" service is certainly not a
fair exchange for the average grantee. 
ADDITIONAL FINDINGS 
The following table illustrates the general similarity--and a few variations-
between the 227 OHDS grantees and the 205 PHS grantees in our final sample: 
OHDS  PHS 
% with federal-only accounts 
% on letter of credit  23%  100% 
A ver age gr ant size  $565 927  $606 508 
Mean average daily bank balance  $ 65 652  $ 66 029 
Mean "federal" average daily bank balance  $ 21 001  $ 19 162 
Federal share of bank balance  32%  29% 
% of grantees earning interest
16%  25% 
% of grantees reporting/returning  interest 
that 
So far as federal policy implications are concerned, we conclude  OHDS and 
PHS grantees are not substantially different with respect to their interest-earning
or reporting practices.  There is considerable belief in grants management circles that the letter-of-credit 
federal funds from lying 
disbursement system is more effective in preventing 
dormant in banks than the alternative Treasury check disbursement system. This 
study gives one reading on this issue. For our sample we asked "What portion of 
the annual, federal grant dollars were lying fallow in the grantee s bank on the 
average day (federal average daily balance/annual grant dollars)?" 
"Fallow Percent" - OHDS/PHS and 
Letter-of-Credit/Treasury Check 
OHDS  PHS  COMBINED 
Letter-of-Credit  11 %  16%  98% 
Treasury Check  09%  N/A  09% 
Combined  68%  16%  42% 
These findings are especially meaningful when compared to predicted or expected 
"fallow percent" figures. Assuming funds are spent regularly J.n the same amount 
each day of the week or month, one can calculate an expected average daily 
drawdown interval. 
balance anq "fallow percent" for each 
For example, a $100 grant disbursed  monthly  will put $100/12 or $8.33 per month 
this daily throughout the month leaves an average 
in the bank; spending 1/30 of 
daily balance in the bank of about half the drawdown, or $4. 16 (about 4% of the 
grant).  " for 
Calculating similar "fallow percents drawdowns occurring every 1, 2 
or 3 weeks gives the following table: 
Drawdown Frequency  Expected "Fallow Percent" 
Monthly 
Every 3 weeks

Every 2 weeks

E very week

By this measure, our sample shows OHDS Treasury-check grantees with bank 
accounts about as expected for monthly drawdowns, PHS letter-of-credit grants

about as expected for drawdowns every 3 weeks, and OHDS letter-of-credit 
grantees at about the two-week drawdown level. Overall, the letter-of-credit 
Treasury 
system appears to be shaving about a week's cash float off the monthly 
check disbursement pattern. 
Perhaps the more significant finding is that, despite drawdown practices yielding 
fair ly predictable bank balances , a large amount of interest is being lost to the 
federal government. We believe that additional drawdown improvement may be 
whole answer to this federal loss. 
possible, but is not the  METHODOLOGY AND SAMPLE 
This program inspection was designed during August and 
September 1984 
beginning with preliminary discussions with HHS grants management officials in
headquarters and several regions. States and their "instrumentalities
" are exempt 
under the Intergovernmental Cooperation Act, as are Indian tribes unqer the
Indian Self-Determination Act in the case of certain non-HHS funds. Assuming
that 
state colleges, universities, hospitals and other agencies are exempt, all 
other HHS grantees are required to report and return interest earned. This 
includes nonprofit organizations, large and small businesses, Indian tribes, local 
governments , school districts  , local or community colleges , private colleges and
universities , and local and private hospitals.  The following table summarizes
PHS and OHDS fiscal year 1984 grants: 
FY 1984 GRANTS 
OHDS  PHS  TOT AL 
States 
II  Grants  597  370  967 
$ Awarded  $112. 7 million  675. 2 million  787. 9 millon 
NonProfits 
II  Grants  828  549  377 
$ Awarded  $806. 8 millon  $830. 6 million  637. 4 millon 
Other Grantees 
II  Grants  711  934  645 
$ Awarded  $286. 9 million  881.4 million  168. 3 millon 
From rY 1984 lists of OHDS and PHS grants , we excluded all state or local
government agencies , school districts , colleges or universities and Indian tribes. 
Therefore, from the 
lists of 5 377 grants to nonprofits totaling $1 637 428  175 , we
randomly selected an initial 305 OHDS and 301 PHS grants which  after
. adjustments for nonactive status and other factors , yielded a final sample of 
585 
472. 
grants totaling $252 799  This sample comprises 1.7% of all FY 1984 OHDS 
and PHS grants and 3. 8% of all grant dollars awarded (excluding Title XX block 
grants). However, the sample comprises about 3% of those grants to entities 
which are required to return interest , and 7% of their award dollars. After 
drawing this random sample, we then requested verification of the grant amounts 
addresses and current status from the appropriate grants management offices in
HHS. 
7 The HHS Departmental Grants Appeals Board recently (8/31/83) decided against 
an appeal by the Los Angeles County Superintendent of Schools who argued that
the school district is a state "instrumentality
" and thereby exempt. 
8 HHS 
General Counsel opinion (June 1985) confirmed that these entities are
ordinarily not exempt; under certain 
circumstances of state law, however, it is
possible that some grantees may be "
state instrumentalities. 
9 Includes health block grants; excludes OHDS Title XX block grants.  During September 1984, pretest letters were sent to 10 OHDS and 10 PHS 
, all of 
grantees in the states of Washington and Pennsylvania whom responded 
promptly with the information requested. The request letter was then mailed 
between October 22 and November 8 to an additional 549 grantees. (The total 
number of grantees is smaller than 606 because 37 of the grants sampled 
represented a second or third grant to the same grantee.  all, 569 grantees 
In 
were contacted. 
Initial responses showed that some of the sampled grants were prior-year grants 
being carried on the "active  list for close-out purposes. Other grants were so 
new that actual funding or drawdown had not yet occ.u!rOred . A few grants were 
in payment or award embroglios affecting cash flow In other cases, the 
grantees turned out to be in categories intended to be excluded from the sample 
(e.g., local government agencies not originally recognized as such). In each case 
we sought to retain sampled grants representing active nonprofit FY 1984 grants
and to drop the others from the sample. In all, 95 grantees were dropped at this 
stage. 
In addition to contacts with the 95 "dropped" grantees , written responses were
received from 421 grantees in answer to the first 
request letter. A four-month 
hiatus in data gathering occurred as a result of an OMB reversal of the ASMB 
position on Paperwork Reduction Act clearance. After the OMB clearance was 
given , a follow-up request letter was sent, which resulted in responses from the 
remaining 53 grantees during March 1985. 
10  Example:  One grantee had been awarded a nurse anesthetist training grant 
in June 1984, to be used for scholarships during the school year beginning in
. September. When the funds did not arrive in the fall, an official from the 
organization made a number of telephone inquiries of the HHS Payment Center
before learning that a check had been issued , belatedly, on November 29. When 
several more weeks passed and the check didn t arrive, the official made 
additional telephone inquiries , and was finally advised on January 15 to make a 
formal notification of a lost check. The Payment Center said they would then 
begin tracing the check after a waiting period of eight weeks. This means that 
the school would have received the grant, at the very earliest, more than nine 
months after the grant award had been made.

OIG calls to the PHS grants management office revealed that they were unaware 
in February 1985 that their grantee had not received its money. When the 
grants management office became involved, as a result of the OIG inquiry, they 
were advised by the Payment  lost and 
Center that the check had been  would be 
reissued. Prior to our inquiry, the grants management office was under the 
impression that the grantee had made no efforts to obtain their funds. Had the 
problem not been resolved prior to June, the end of the grant year, the grantee
would have lost the grant money altogether. As it was, all the students who had 
been awarded scholarships under the grant lost their funds and some had left 
school.  Meanwhile, we gathered quarterly cash reports for each grantee for the same 
time period as the requested bank statements. To obtain these without burdening 
the grantees, we requested copies from the HHS regional and central grants 
management offices (for grantees paid via Treasury check), and manually pulled 
records at the HHS Payment Management System Center (PMS) in Rockvile 
Maryland (for the grantees paid via letter of credit))l Despite major efforts on 
PMS and agency grants officials, cash management reports from 
the part of OIG 
request letter could not be located 
42 of the grantees who responded to our 
time for this report.1  In all, some 175 cash management reports were located 
for Treasury-check grantees, and 257 reports for letter-of-credit grantees. 
In the case of letter-of-credit grantees who receive more than one grant  PMS 
reports do not break out cash flow on each individual grant. 
cash management 
This necessitated the expansion of the number of grants analyzed, so that cash 
flow was eventually computed on 585 individual grants going to 432 grantees. 
Since most grantees commingle all HHS funds in the same bank accounts, the 
effect of this sample expansion was to obtain a broader reading of the federal 
grant funds in these accounts. We judged this approach more accurate than any 
attempt to artificially pro-rate combined cash on hand reports to individual 
grants. 
SUMMAR Y OF SAMPLE

OHDS  PHS  TOT AL 
Grants Originally Sampled  305  301  606 
298  271  569 
Grantees Originally Sampled 
Pretest Grantees Contacted 
Other Grantees Contacted  288  261  549 
Total Grantees Contacted  298  271  569 
Dropped After Contact  ( 57)  ( 38)  ( 95)

Responding to First Request  219  202  421 
Responding to Second Request

Total Grantees Responding  241  233  474 
Unlocated Cash Reports  ( 14)  ( 28)  ( 42)

Final Sample (Grantee + Cash Report)  227  205  432 
Final Sample (Grants + Cash Report)  254  331  585 
11 
Although PMS is a largely automated system, information on federal cash on 
hand at the beginning of each quarter , as reported by each grantee, is not 
system. We were told that there are plans to 
entered into the automated data 
resources. 
upgrade this system, pending adequate 
12 
In some instances, it appears that grantees may not have been required to 
file SF-272s. In other instances where grants are administered by regional 
offices but payments are issued from the Rockville Payment Center , the regional 
grants management officers told us the SF-272s were in the Payment Center and 
the Payment Center indicated these documents were the responsibility of the
regions. In a number of instances there was no explanation as to why the 
SF-272s were not available.  Three additional "mini-samples" were analyzed during the study. For each of the 
grantees in which either the bank statements or the cash reports indicated 
receipt of bank interest  we reviewed completed audit reports, when available 
, (a) 
on file in the OIG Office of Audit and (b) we queried each grants office as to 
whether that grantee had returned any interest to the government during 
FY 1984. Finally, (c) we called 50 grantees' banks (selected randomly) and 
obtained information about the bank interest available to nonprofit organizations 
on checking accounts, bank fees, and minimum balance requirements. 
ascertain the amount of federal grant 
Since the primary goal of the study was to 
funds which were earning or might have been earning bank interest , it was 
necessary to calculate an avietr age daily bank balance for each grantee and 
determine what portion of  constituted federal funds. We developed a 
to 
microcomputer program in BASIC  assist in calculating average daily balances 
did not provide this calculation. 
for grantees, most of whose bank statements 
employed a microcomputer software package called PC-File II to organize study 
data and an OIG-approved microcomputer program, known as "  f\RIAB" for 
analysis of statistical precision. All computer work was done within OIG using 
an IBM-PC(XT).