United States General Accounting Office

GAO OffIce of the General Counsel

December 1992

1

Principles of

Federal

Appropriations

Law

Second Edition

Volume II

GAO/OGC-92-13

Foreword

This is Volume 11 of Principles of Federal Appropriations Law, second

edition. Publication of this volume continues our process of revising

and updating the first (1982) edition of the “Red Book” and reissuing

it in what will ultimately be a 4-vohune looseleaf set. Volumes I and 11

supersede all of the completed chapters of the first edition except

Chapters 11 and 12, which will be renumbered and covered in Volume

III. The fourth and final volume will cover material not included in the

first edition.

As we noted in our first volume, our objective in Principles is to

present a basic reference work covering those areas of law in which

the Comptroller General renders decisions and which are not covered

in other GAO publications. We measure our success in this endeavor

by Principles’ day-to-day utility to its federal and nonfederal audience.

In this regard, we appreciate the many comments and suggestions we

have received to date, and hope that our publication will continue to

serve as a useful reference.

/

James F. Hinchman

General Counsel

December 1992

,.. .—_F---

,.,

For sale by tie U.S. Government Printing Office

Superintendent of Oacuments, Msil Stop: SSOP, Washington, DC 20402-9328

ISBN 0-16-041643-4

GAO/OGC-92-13 Appropriations Law-Vol. II
contents

“I was gratifhd to be able to answer promptly, and I did. I said I didn’t know.”

Mark Twain

Life on the Mississippi

Abbreviations

C.F.R.

EDA

FAR

FCRA

FFB

FY

GAO

GSA

HUD

OMB

REA

SBA

SBIC

TFM

U.s.c.

VA

Page ii

Code of Federal Regulations

Economic Development Administration

Federal Acquisition Regulation

Federal Credit Reform Act of 1990

Federal Financing Bank

FederaI Housing Administration

Fiscal Year

General Accounting Ofilce

General Services Administration

Department of Housing and Urban Development

Office of Management and Budget

Rural Electrification Administration

Small Business Administration

Small Business Investment Company

Treasury Financial Manual

United States Code

Department of Veterans Affairs

GAO/OGC-92-13 Appropriations Lsw-VOI. II
Detailed Table of Contents

Volume II

Chapters 6-11

Chapter 6

Availability of A. Introduction . . . . . . . . . . . . . . . . . . . . ., . . . . . , , . . . , , . .

Appropriations: B, Types of Appropriation Language and the Concept of

Amoun t

Earmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

C. The Antideficiency Act . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Introduction and Overview . . . . . . . . . . . . . . . . . . . . .

2. Obligation/Expenditure in Excess or Advance of

Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Exhaustion of an Appropriation . . . . . . . . . . . . . . .

(1) Making further payments . . . . . . . . . . . . . . . .

(2) Status of contracts . . . . . . . . . . . . . . . . . . . . .

b. Contracts or Other Obligations in Excess or

Advance of Appropriations . . . . . . . . . . . . . . . . . . .

(1) Recording obligations . . . . . . . . . . . . . . . . . . .

(2) Obligation inexcess of appropriation . . . . . .

(3) Variable quantity contracts . . . . . . . . . . . . . . .

(4) Multi-year or’’continuing’’ contracts . . . . . . .

c. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Prohibition against urdimited iiability . . . . . .

(2) When indemnification maybe authorized . . .

(3) Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

d. Specific Appropriation Limitations/Purpose

Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

e, Amount of Available Appropriation ori?und . . . . .

f. Intent/Factors Beyond Agency Control . . . . . . . . .

g. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Contract authority ... .,., , , . . . . . . . . . . . . .

(2) Other obligations “authorizedbylaw” . . . . . .

3. Voluntary Services Prohibition . . . . . . . . . . . . . . . . . .

a. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Appointment Without Compensation and Waiver

of Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(l) Therules–general discussion . . . . . . . . . . . .

(2) Student interns . . . . . . . . . . . . . . . . . . . . . . . .

(3) Program beneficiaries . . . . . . . . . . . . . . . . . . .

(4) AppIicabilityto legislative and judicial

branches . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Other VoluntaryServices . . . . . . . . . . . . . . . . . . . .

d. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Safety of human life . . . . . . . . . . . . . . . . . . . .

(2) Protection of property . . . . . . . ..,,..$. . . .

6-1

6-3

6-4

6-9

6-9

6-12

6-14

6-14

6-17

6-19

6-19

6-21

6-22

6-24

6-30

6-30

6-34

6-41

6-42

6-46

6-48

6-50

6-50

6-53

6-55

6-55

6-57

6-57

6-62

6-63

6-65

6-65

6-69

6-70

6-70

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Contents

e. Voluntary Creditors . . . . . . . . . . . . . . . . . . . . . . . . 6-71

4. Apportionment of Appropriations . . . . . . . . . . . . . . . 6-72

Statutory Requirement for Apportionment ... , . . 6-72

Establishing Reserves . . . . . . . . . . . . . . . . . . . . . . . 6-74

Method of Apportionment . . . . . . . . . . . . . . . . . . . 6-77

Control of Apportionments . . . . . . . . . . . . . . . . . . 6-77

Apportionments Requiring Deficiency Estimate . . 6-80

Exemptions From Apportionment Requirement . . 6-83

Administrative Division of Apportionments . . . . . . 6-85

Expenditures in Excess of Apportionment . . . . . . 6-88

5. Penalties and Reporting Requirements . . . . . . . . . . . .

a. Administrative and Penal Sanctions . . . . . . . . . . . .

b. Reporting Requirements . . . . . . . . . . . . . . . . . . . .

6. Funding Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D. Supplemental and Deficiency Appropriations . . . . . .

E. Augmentation of Appropriations . . . . . . . . . . . . . . . . . .

1. The Augmentation Concept . . . . . . . . . . . . . . . . . . . . .

2. Disposition of Moneys Received: Repayments and

Miscellaneous Receipts . . . . . . . . . . . . . . . . . . . . . . . .

a.

b.

c.

d.

e.

f.

g.

h.

i.

j.

k.

General Principles . . . . . . . . . . . . . . . . . . . . . . . . .

(1) The “miscellaneous receipts” statute . . . . . . .

(2) Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Timing of deposits . . . . . . . . . . . . . . . . . . . . . .

(4) Money not received “for the Government” . .

Contract Matters . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Excess reprocurement costs . . . . . . . . . . . . .

(2) Other contract situations . . . . . . . . . . . . . . . .

Darnage to Government Property and Other Tort

Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fees and Coremissions . . . . . . . . . . . . . . . . . . . . . .

Economy Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Revolving Fhnds . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Misceffaneous Cases: Money to Treasury . . . . . . .

Miscellaneous Cases: Money Retained by Agency .

Money Erroneously Deposited as Miscellaneous

6-90

6-90

6-91

6-92

6-99

6-103

6-103

6-105

6-105

6-105

6-108

6-112

6-113

6-115

6-115

6-119

6-123

6-126

6-129

6-129

6-130

6-131

6-134

6-135

Page iv

Receipts ... ... .~. ..~ . . . . . . . . . . . . . . . . . . . . . . 6-137

3. Gifts and Donations tothe Government . . . . . . . . . . . 6-140

a. Donations tothe Government . . . . . . . . . . . . . . . . 6-140

b. Donations to Individual Employees . . . . . . . . . . . . 6-148

GAO/OGC-92-13 Appropriations Lsw -Vol. II

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Contents

(l) Contributions tosalaryorexpenses . . . . . . . . 6-148

(2) Promotional and other travel-related items . . 6-151

4. Other Augmentation Principles and Cases . . . . . . . . . 6-155

F. Lump-Sum Appropriations . . . . . . . . . . . . . . . . . . . . . . . 6-158

1. The Rule-General Discussion . . . . . . . . . . . . . . . . . . 6-158

2. Specific Applications . . . . . . . . . . . . . . . . . . . . . . . . . . 6-161

a. Effect of Budget Estimates . . . . . . . . . . . . . . . . . . . 6-161

b. Restrictions in Legislative History . . . . . . . . . . . . . 6-163

c. “Zero Funding” Under a Lump-Sum Appropriation 6-167

Chapter 7 7-1

Obligation of A. Introduction: Nature of an Obligation . . . . . . . . . . . . . . 7-2

Appropriations B. Criteria for Recording Obligations (31 U. S.C. s 1501) 7-5

1. Subsection (a)(l): Contracts . . . . . . . . . . . . . . . . . . . 7-8

a.

b.

c.

d.

e.

f.

g.

h.

i.

Binding &eement . . . . . . . . . . . . . . . . . . . . . . . . . 7-8

Contract “inWriting” . . . . . . . . . . . . . . . . . . . . . . . 7-12

Requirement of SpecFlcity . . . . . . . . . . . . . . . . . . . 7-14

Invalid AwarcVUnauthorized Commitment . . . . . . . 7“14

Variations in Quantityto Be Furnished . . . . . . . . . 7-16

Amount to Be Recorded . . . . . . . . . . . . . . . . . . . . . 7-19

Administrative Approval of Payment . . . . . . . . . . . 7-20

Miscellaneous Contractual Obligations . . . . . . . . . 7-20

[ntera~ency Transactions . . . . . . . . . . . . . . . . . . . . 7-22

(1) E;on;my Actvs. other authority . . . . . . . . . . 7-22

(2) Orders from stock . . . . . . . . . . . . . . . . . . . . . . 7-26

(3) Project orders . . . . . . . . . . . . . . . . . . . . . . . . . 7-27

2. Subsection (a)(2): Loans . . . . . . . . . . . . . . . . . . . . . . . 7-28

3. Subsection (a)(3): Interagency Orders Required by

Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-30

4. Subsection (a)(4): Orders W~thout Advertising . . . . . 7-32

5. Subsection(a)(5): Grants and Subsidies . . . . . . . . . . 7-32

a. Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-32

b. Subsidies . . . . . . . . . . . . . . . . . . . . i . . . . . . . . . . . . 7-35

6. Subsection (a)(6): Pending Litigation . . . . . . . . . . . . 7-36

7. Subsection (a)(7) -..:Employment . and Travel . . . . . . . . 7-38

a. Wages, Salaries, Annual Leave . . . . . . . . . . . . . . . . 7-38

b.

c.

d.

;:

Compensation Plans in Foreign Countries . . . . . . 7-40

Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-41

Uniform Allowance . . . . . . . . . . . . . . . . . . . . . . . . . 7-42

Travel Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-42

State Department: Travel Outside Continental

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-44

GAOK)GC-92-13 Appl’0@4tiOM hw-%’ol. ~
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g. Employee Transfer/Relocation Costs ... , ... , . . . 7-44

8. Subsection (a)(8): PubIic Utilities . . . . . . . . . . . . . . . 7-46

9. Subsection (a)(9): Other Legal Liabilities . . . . . . . . . 7-47

C. Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-48

D. Reporting Requirements . . 1. . . . . . . . . . . . . . . . . . . . . . 7-50

E. Deobligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-51

Chapter 8

Continuing A. Introduction . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . .

Resolutions 1. Definition and General Description . . . . . . . . . . . . . .

2. UseofAppropriation Warrants . . . . . . . . . . . . . . . . . .

B. Rate for Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Current Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Rate Not Exceeding Current Rate . . . . . . . . . . . . . . . .

3. Spending Pattern Under Continuing Resolution . . . .

a. Pattern of Obligations . . . . . . . . . . . . . . . . . . . . . . .

b. Apportionment ., ., . . . . . . . . . . . . . . . . . . . . . . . .

4. Liquidation of Contract Authority . . . . . . . . . . . . . . . .

5. Rate for Operations Exceeds Final Appropriation . . .

C. Projects or Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D. Relationship to Other Legislation . . . . . . . . . . . . . . . . .

1. Not Otherwise Provided For . . . . . . . . . . . . . . . . . . . .

2. Status of Biller Budget Estimate Used as Reference .

3. More Restrictive Authority . . . . . . . . . . . . . . . . . . . . .

4. Lack of Authorizing Legislation . . . . . . . . . . . . . . . . .

E. Duration . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Duration of Continuing Resolution . . . . . . . . . . . . . . .

2. Duration of Appropriations . . . . . . . . . . . . . . . . . . . . .

3. Impoundment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8-1

8-2

8-2

8-6

8-8

8-8

8-10

8-12

8-12

8-14

8-15

8-15

8-17

8-20

8-20

8-20

8-22

8-24

8-28

8-28

8-29

8-30

Pagevi GAO/OGC-92-13 Appropriation Law -Vol. II
Contenta

Chapter 9 9-1

Liability and Relief of A, In~odu~ion . ~. ~. . . . . . . . . . . . . . . . . . . . . +... . . . . 9-3

Accountable Officers ‘“‘~nerdpficiples o-” o-” o-”” o””

” -””””””””””””””” 9-4

2.

3.

4.

5.

6.

TheConceptsofLiabilityand Relief . . . . . . . . . . . . . . 9-4

a. Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-4

b. SuretyBonding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-6

c. Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-7

WhoIsanAccountableOfficer? . . . . . . . . . . . . . . . . . 9-8

a. CertifyingOfficers . . . . . . . . . . . . . . . . . . . . . . . . . 9-8

b. DisbursingOfficers . . . . . . . . . . . . . . . . . . . . . . . . . 9-9

c. Cashiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-1o

d. Collecting Officers . . . . . . . . . . . . . . . . . . . . . . . . . 9-11

e. OtherAgents and Custodians . . . . . . . . . . . . . . . . . 9-12

Funds toWhichAccountabilityAttaches . . . . . . . . . . 9-14

a. Appropriated Funds . . . . . . . . . . . . . . . . . . . . . . . . 9-14

(I) hnprestfunds . . . . . . . . . . . . . . . . . . . . . . . . . 9-15

(2) Flash rolls . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-17

(3) Traveladvances . . . . . . . . . . . . . . . . . . . . . . . . 9-19

b. Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-20

c. FundsHeldinTrust . . . . . . . . . . . . . . . . . . . . . . . . 9-20

d. ItemsWhichAretheEquivalent ofCash . . . . . . . . 9-21

WhatKindsofEventsProduce Liability? . . . . . . . . . . 9-22

AmountofLiability . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-25

Effect ofCriminal Prosecution . . . . . . . . . . . . . . . . . . 9-26

a. Acquittal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-26

b. OrderofRestitution . . . . . . . . . . . . . . . . . . . . . . . . 9-27

C, PhysicalLossorDeficiency . . . . . . . . . . . . . . . . . . . . . .

1. StatutoryProvisions . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Civilian Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Military DisbursingOff~cers . . . . . . . . . . . . . . . . . .

2. Who CanGrantRelief? . . . . . . . . . . . . . . . . . . . . . . . .

a. 31 U.S.C. $3527(a) . . . . . . . . . . . . . . . . . . . . . . . .

b. 31 US.C. $3527(b) . . . . . . . . . . . . . . . . . . . . . . . .

c. Role ofAdministrative Determinations . . . . . . . . .

‘ 3. StandardsforGrantingRelief . . . . . . . . . . . . . . . . . . .

a. StandardofNegligence . . . . . . . . . . . . . . . . . . . . .

b. PresumptionofNegligence/Burden ofproof . . . . .

c. Actual Negligence . . . . . . . . . . . . . . . . . . . . . . . . . .

d. Proximate Cause . . . . . . . . . . . . . . . . . . . . . . . . . . .

e. Unexplained LossorShortage . . . . . . . . . . . . . . . .

f ComplianceWithRegulations . . . . . . . . . . . . . . . .

9-28

9-28

9-28

9-30

9-32

9-32

9-34

9-34

9-36

9-36

9-36

9-39

9-41

9-44

9-46

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g. Losses in Shipment . . . . . . . . . . . . . . . . . . . . . . . . .

h. Fire, Natural Disaster ;. . . . . . . . . . . . . . . . . . . . . .

i. Loss by Theft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Burglary: forced entry . . . . . . . . . . . . . . . . . . .

(2) Armed robbery . . . . . . . . . . . . . . . . . . . . . . . .

(3) Rio~publicdisturbance . . . . . . . . . . . . . . . . .

(4) Evidencelessthancertain . . . . . . . . . . . . . . .

(5) Embezzlement . . . . . . . . . . . . . . . . . . . . . . . . .

j. AgencySecurity . . . . . . . . . . . . . . . . . . . . . . . . . . .

k. ExtenuatingCircumstances . . . . . . . . . . . . . . . . . .

D. IllegalorImproperPayment . . . . . . . . . . . . . . . . . . . . .

1. DisbursementandAccountability . . . . . . . . . . . . . . . .

a. Statutory Framework: Disbursement Under

Executive Order6166 . . . . . . . . . . . . . . . . . . . . . .

b. AutomatedPaymentSystems . . . . . . . . . . . . . . . . .

c. Statistical Sampling . . . . ,4 . . . . . . . . . . . . . . . . . .

d. ProvisionalVouchersand Related Matters . . . . . .

e. Facsimile Signatures and Electronic Certification

f. GAOAudit Exceptions . . . . . . . . . . . . . . . . . . . . . .

2. CertifyingOfficers . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Duties andLiability . . . . . . . . . . . . . . . . . . . . . . . . .

b. Applicabilityof31 U.S.C. $3528 . . . . . . . . . . . . . .

c. Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Disbursing Officers . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Standards ofLiability andRelief . . . . . . . . . . . . . .

b. Some SpecificApplications . . . . . . . . . . . . . . . . . .

(1) Fraudulenttravelclaims . . . . . . . . . . . . . . . . .

(2) Other cash payments fraudulently obtained .

(3) Milita~separationvouchers . . . . . . . . . . . . .

(4) Assignmentofcontractpayments ... ..... O

(5) Improperpurpose/paymentbeyond scopeof

legalauthority . . . . . . . . . . . . . . . . . . . . . . . . .

4. Check Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Check Cashing Operations . . . . . . . . . . . . . . . . . . .

b. Duplicate CheckLosses . . . . . . . . . . . . . . . . . . . . .

c. Errors inCheckIssuance Process . . . . . . . . . . . . .

5. StatuteofLimitations . . . . . . . . . . . . . . . . . . . . . . . . .

E. Other ReliefStatutes . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. StatutesRequiringAffirmativeAction . . . . . . . . . . . .

a. UnitedStatesClaims Court . . . . . . . . . . . . . . . . . .

b. LegislativeBranchAgencies . . . . . . . . . . . . . . . . . .

9-48

9-49

9-51

9-51

9-52

9-52

9-53

9-56

9-57

9-62

9-63

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9-68

9-70

9-72

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9-75

9-80

9-82

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Pageviii GAO/OGC-92-13 ApproprlationsLsw-Vol.11
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c. Savings Bond Redemption Losses . . . . . . . . . . . . .

2. Statutes Providing “Automatic” Relief . . . . . . . . . . . .

a. Waiver of Indebtedness . . . . . . . . . . . . . . . . . . . . .

b. Compromise of Indebtedness . . . . . . . . . . . . . . . . .

c. Foreign Exchange Transactions . . . . . . . . . . . . . .

d. Check Forgery Insurance Fund . . . . . . . . . . . . . . .

e. Secreta.ry of the Treasury . . . . . . . . . . . . . . . . . . . .

f. Other Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F. Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. ReportingofIrregularities . . . . . . . . . . . . . . . . . . . . .

2. ObtainingRelief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Payments of$100orLess . . . . . . . . . . . . . . . . . . . . . .

4. Reliefvs. GrievanceProcedures . . . . . . . . . . . . . . . . .

G. CollectionAction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. AgainstRecipient . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. AgainstAccoun@ble Officer . . . . . . . . . . . . . . . . . . . .

H. Restitution,Reimbursement, andRestoration . . . . . .

1. Restitution andReimbursement . . . . . . . . . . . . . . . . .

2. Restoration . . . . ; . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. A@stmentIncidenttoG rantingofRelief . . . . . . .

b. OtherSituations . . . . . . . . . . . . . . . . . . . . . . . . . . .

9-114

9-114

9-114

9-115

9-115

9-116

9-117

9-117

9-118

9-118

9-119

9-119

9-120

9-121

9-121

9-123

9-125

9-125

9-126

9-126

9-127

Chapter 10

Federal Assistance: A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Grants and B. Grants vs. Procurement Contracts . . . . . . . . . . . . . . . .

1. Nature ofa Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cooperative 2. The Federal Grant and Cooperative Agreement Act .

Agreements 3. Competition for Discretionary Grant Awards . . . . . . .

C. Some Basic Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a, Statutory Construction . . . . . . . . . . . . . . . . . s . . . .

b. The Grant as an Exercise of Congressional

Spending Power . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Availability of Appropriations . . . . . . . . . . . . . . . .

(1) Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

d. Agency Regulations . . . . . . . . . . . . . . . . . . . . . . . .

(l) Generalprinciples . . . . . . . . . . . . . . . . . . . . . .

(2) The”commonrules” . . . . . . . . . . . . . . . . . . . .

2. ContractingbyGrantees . . . . . . . . . . . . . . . . . . . . . . .

10-1

10-3

10-4

10-4

10-9

10-15

10-18

10-18

10-18

10-19

10-20

10-21

10-23

10-23

10-24

10-24

10-27

10-29

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3. Liability for Acts of Grantees . . . . . . . . . . . . . . . . . . . 10-31

a. Contractual Liability to Third Parties . . . . . . . . . . . 10-31

b. Tortious Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . 10-33

4. Types of Grants: Categorical vs. Block . . . . . . . . . . . . 10-35

5. The Single Audit Act . . . . . . . . . . . . . . . . . . . . . . . . . . 10-38

D. Funds in Hands of Grantee: Status and Application

of Appropriation Restrictions . . . . . . . . . . . . . . . . . . . . 10-41

E. Grant Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-47 —

1.

2.

3.

4.

5.

Advances of GranVAssistance Funds . . . . . . . . . . . . . 10-47

Cash Management Concerns and Requirements . . . . 10-48

Interest on Grant Advances . . . . . . . . . . . . . . . . . . . . . 10-50

a. In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-50

b. Grants to State Governments , . . . . . . . . . . . . . . . . 10-53

Program Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-56

Cost-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-58

a. Local or Matching Share . . . . . . . . . . . . . . . . . . . . .

(1) General principles ., . . . . . . . . . . . . . . . . . . . .

(2) Hardand softmatches . . . . . . . . . . . . . . . . . .

(3) Matching one grant with funds from another .

(4) Relocation allowances . . . . . . . . . . . . . . . . . . .

(5) Payments by other than grantor agency . . . . .

b. Maintenance of Effort . . . . . . . . . . . . . . . . . . . . . . .

F. Obligation of Appropriations for Grants . . . . . . . . . . .

1. Requirement for Obligation . . . . . . . . . . . . . . . . . . . .

2. Changes in Grants–Replacement Grant.svs. New

Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. The Replacement Grant Concept . . . . . . . . . . . . . .

b. Substitution of Grantee . . . . . . . . . . . . . . . . . . . . .

c. Other Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . .

G. Grant Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Allowable vs. Unallowable Costs . . . . . . . . . . . . . . . . .

a. The Concept of Allowable Costs . . . . . . . . . . . . . .

b. Grant Cost Cases . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Note on Accounting . . . . . . . . . . . . . . . . . . . . . . . .

2. Pre-Award Costs (Retroactive Funding) . . . . . . . . . . .

H. Recovery of Grantee Indebtedness . . . . . . . . . . . . . . . .

1. Government’s Dutyto Recover . . . . . . . . . . . . . . . . . .

2. Offset and Withholding of Claims Under Grants . . . .

10-59

10-59

10-61

10-62

10-64

10-64

10-67

10-70

10-70

10-71

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10-72

10-73

10-74

10-74

10-74

10-77

10-79

10-80

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contenta

Chapter 11

Federal Assistance: A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Guaranteed and 1. GeneralDescription . . . . . . . . . . . . . . . . . . . . . . . . . .

2. SourcesofGuaranteeAuthority . . . . . . . . . . . . . . . . . Insured Loans B. BudgetaryandObligational Treatment . . . . . . . . . . . .

1. ‘&iorto Federal CreditReformAct . . . . . . . . . . . . . . .

2. Federal CreditReforrnActof1990 . . . . . . . . . . . . . . .

a. Post-1991 Guarantee Commitments . . . . . . . . . . .

b. Pre-1992 Commitments . . . . . . . . . . . . . . . . . . . . .

c. EntitlementPrograms . . . . . . . . . . . . . . . . . . . . . .

d. CertainInsurancePrograms . . . . . . . . . . . . . . . . .

C. Extension ofGuarantees . . . . . . . . . . . . . . . . . . . . . . . . .

1. Coverage offenders (Initialand Subsequent) . . . . . .

a. E1igibiMyofLerider/Debt Instrument . . . . . . . . . .

b, Substitution ofLender . . . . . . . . . . . . . . . . . . . . . .

c. Existence ofValidGuarantee . . . . . . . . . . . . . . . . .

d. Small Business InvestmentCompanies . . . . . . . . .

e. The FederalFinancingBank . . . . . . . . . . . . . . . . .

2. Coverage ofBorrowers . . . . . . . . . . . . . . . . . . . . . . . .

a, EligibilityofBorrowers . . . . . . . . . . . . . . . . . . . . .

b. SubstitutionofBorrowers . . . . . . . . . . . . . . . . . . .

c. Loan Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

d. Change in Loan Purpose . . . . . . . . . . . . . . . . . . . . .

3. Terms and Conditions of Guarantees . . . . . . . . . . . . .

;:

c.

11-1

11-3

11-3

11-7

11-9

I 1-1o

11-12

11-13

11-18

11-19

11-20

11-20

11-20

11-20

11-22

11-23

11-26

11-28

11-32

11-32

11-33

11-34

11-36

11-37

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-37

Property Insurance Programs Under the National

Housing Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-38

(l) Maximum amount of loan . . . . . . . . . . . . . . . . 11-38

(2) Maximum loan maturity . . . . . . . . . . . . . . . . . 11-40

(3) Ovvner/lessee requirement . . . . . . . . . . . . . . . 11-42

(4) Execution of thenote . . . . . . . . . . . . . . . . . . . 11-44

(5) Reporting requirement . . . . . . . . . . . . . . . . . . 11-45

(6) Payment of premiums . . . . . . . . . . . . . . . . . . . 11-45

Small Business Administration Business Loan

Program . . . . . . . . . ! . . . . . . . . . . . . . . . . . . . . . . . 11-47

(l) Payment ofguaranteefee . . . . . . . . . . . . . . . . 11-47

(2) Notice of default . . . . . . . . . . . . . . . . . . . . . . . 11-50

D. Rights and Obligations of Government Upon Default 11-51

1. Nature of the Government’ sObligation . . . . . . . . . . . 11-51

2. Scope of the Government’ sGuarantee . . . . . . . . . . . . 11-53

3. Amount of Government’s Liability . . . . . . . . . . . . . . . 11-55

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Contenta

4. Liability of the Borrower . . . . . . . . . . . . . . . . . . . . . . . 11-57

a. Veterans’ Home Loan Guarantee Program . . . . . . 11-57

(1) Loans closed priorto 1990 . . . . . . . . . . . . . . . 11-58

(2) Loans closed after January 1, 1990 . . . . . . . . 11-63

b. Debt Collection Procedures . . . . . . . . . . . . . . . . . . 11-63

5. Collateral protection . . . . . . . . . . . . . . . . . . . . . . . . . . 11-65

GAWOGC-92-13 Appropriations Law-Vol. 11
Chapter 6

Availability of Appropriations: Amount

A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. ... .., s.,..”.” “0”000”.o..”””.”””

B. Types ofAppropriationLan@~e andtheConceptofE~ king . . . . . . . . . . . . . . . . . .

C. TheAntideflciencyAct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......”..””.s”s”””” ““”

1. Introduction andOvemiew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........”””””” ““.”-”

2. Obligation/ExpenditureinExcess orAdvanceofAppropriations . . . . . . . . . . . . . . . . . . . . .

a. ExhaustionofanAppropriation . . . . . . . . . . . . . . . . . . . . .. .. .. ... ... ””. ””.”s ““s”

(1) Making further payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .”. o” . Q “ “ c o I

(2) Status of contracts ......... ... ... ... ..s. ........ ... .. ”. ”” as”””””.” * .”

b. ContractsorOtherObligations in Excess orAdvanceofAppropfiations . . . . . . . . . . . .

(1) Recording obligations . . . . . . . . . . . . . . . . . . . . . . . . . .......00 Q . ~ “.”. ” “”” -” Q “

(2) Obligationinexcessofappropriation . . . . . . . . . . . . . . . . . . . . . .. ... ... .s.””””

(3) Variable quanti@ contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s “ c “ 00 “””

(4) Multi-yearor’’continuing’’contracts . . . . . . . . . . . . . . . . . . . . . . . . . .....””.””.”

c. Indemnification . . . . . . . . . . . . . . . . . . . .. .. .. ... ... ...s””. ...””o”””””-”0”.”””

d. SpecKlcAppropriationLimitations/Purpose Violations . . . . . . . . . . . . . . . . . . . . . . . . . .

e. Amount ofAvailableAppropriation orFund . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......”

f. Intent/FactorsBeyondAgency Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......

g, Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........”.................

(1) Contract authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q .0..

(2) Other obligations “authorizedbylaw” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. VoluntaryServicesProhibition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...,oQ”....”... .

a. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..,.,,.”....”..””.......

b. AppointmentWiihoutCompensation andWaiverofS~ary . . . . . . . . . . . . . . . . . . . . . . .

c. OtherVoluntary Services . . . . . . . . . . . . . . . . . . . . . ..., . . . . . . . . . . . . . . . . . . . . . ....

d. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Safety ofhurnanlife . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Protection of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0..

e. VoluntaryCreditors . . . . . . . . . . . . . . . . . . . .. .. .. ... ,.. .s..... ..............”.

4. ApportionmentofAppropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............

a. Statutory Requirement forApportionment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Establishing Reserves . . . . . . . . . . . . . . . . . . . . . . ...................... ....”.

c. Method ofApportionment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . “ ..”.”....

d. Control ofApportionments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”...”........

e. Apportionments Requiring Deficiency Estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

f. ExemptionsIWomApportionment Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

g. Administrative Division ofApportionmen~ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...

h. ExpendituresinExcessofApportionment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....

5. PenaltiesandReportingRequirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . “.......

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6-4

6-9

6-9

6-12

6-14

6-14

6-17

6-19

6-19

6-21

6-22

6-24

6-30

6-42

6-46

6-48

6-50

6-50

6-53

6-55

6-55

6-57

6-65

6-69

6-70

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6-72

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6-77

6-77

6-80

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Page6-1

;,f~;’ ,“

GAO/OGC.9Z-13 Appropr+ationahw-Vo~II
Chapter 6

Avallabllity of Approprht.iona: hOtUlt

a. Administrative and Penal Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-90

b. ReportingRequirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-91

6. FundingGaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-92

D. Supplementa.landDeficiencyAppropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-99

E. AugmentationofAppropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-103

1. TheAugmentationConcept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-103

2. DispositionofMoneysReceived: RepaymentsandMiscellaneous Receipts . . . . . . . . . . . . . 6-105

a.

b.

c.

d.

;“

&

h.

i.

j.

k.

GeneraJPrinciples . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....;.... . . . . . . . . . . . . . . . . . .

(1) The “miscellaneousr eceipts” statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Timingofdeposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) Moneynotreceived”fortheGovernment” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ContractMatters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Excessreprocurementcosts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Other contractsituations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Damage to GovernmentProperty and OtherTortLiability . . . . . . . . . . . . . . . . . . . . . . .

Feesand Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EconomyAct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Revolving Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TrustFunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Miscellaneous Cases: Money toTreasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MiscellaneousCases: Money RetainedbyAgency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Money Erroneously Deposited as MiscelkmeousReceipts . . . . . . . . . . . . . . . . . . . . . . . .

3. Gifts and DonationstotheGovernment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Donations totheGovernment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Donationsto IndividualEmployees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(l) Contributionstosalaryorexpenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Promotionalandothertravel-related items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. OtherAugmentation Principles andCases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F. Lump-Sum Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........,,”.’.....”....

1. The Rule-General Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. SpecificApplications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a, EffectofBudgetEstimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Restrictions in Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. “ZeroFunding’’U nderaLump-Sum Appropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6-105

6-105

6-108

6-112

6-113

6-115

6-115

6-119

6-123

6-126

6-129

6-129

6-130

6-131

6-134

6-135

6-137

6-140

6-140

6-148

6-148

6-151

6-155

6-158

6-158

6-161

6-161

6-163

6-167

Page6-2 GAO/OGC-92-M AppropriationsLaw-VoLII

“’w’ ,. ,,

,.. m,f .<?::;.
Chapter6

Availability of Appropriations: Amount

A. Introduction The two preceding chapters have discussed the purposes for which

appropriated funds may be used and the time limits within which they

may be obligated and expended. This chapter will discuss the third

mqjor element of the concept of the “legal availability” of

appropriations-restrictions relating to amount. It is not enough to

know what you can spend appropriated funds for and when you can

spend them. You must also know how much you have available for a

particular object.

In this respect, the legal restrictions on government expenditures are

different from those governing your spending as a private individual.

For example, as an individual, you can buy a house and finance it with

a mortgage that may run for 25 or 30 years. Of course you don’t have

enough money to cover your full legal obligation under the mortgage.

You sign the papers on the hope and assumption that you will

continue to have an income. If your income stops and you can’t make

the payments, you lose the house. The government cannot operate

this way. The main reason why is the Antideficiency Act, discussed in

Section C.

Under the “separation of powers” doctrine established by the

Constitution, Congress makes the laws and provides the money to

implement them; the executive branch carries out the laws with the

money Congress provides. Under this system, Congress must have the

“final word” as to how much money can be spent by a given agency or

on a given program. In exercising this power, Congress may give the

executive branch considerable discretion within broad limits, but it is

ultimately up to Congress to determine how much the executive

branch can spend. In applying this theory to the day-to-day operations

of the federal government, it should be readily apparent that

restrictions on purpose, time, and amount are very closely related.

Again, the Antideficiency Act is one of the primary “enforcement

devices.” Its importance is underscored by the fact that it is the only

one of the funding statutes to include both civil and criminal penalties

for yiolation.

If the Antideficiency Act’s prohibition against overobligating or

overspending an appropriation is to be at all meaningful, agencies

must be restricted to the appropriations Congress provides. The rule

prohibiting the unauthorized “augmentation” of appropriations,

covered in Section E, is thus a crucial complement to the

Antideficiency Act.

Page 6-3 GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 6

Avallabiliq of Appropr4ationa: Amoumt

While Congress retains, as it must, ultimate control over how much an

agency can spend, it does not attempt to control the disposition of

every dollar. We began our general discussion of admuust “ “ rative

discretion in Chapter 3 by quoting Justice Holmes’ statement that

“some play must be allowed to the joints if the machine is to work.”

This is fully applicable to the expenditure of appropriated funds. An

agency’s discretion under a lump-sum appropriation is discussed in

Section F.

B. -es of Congress has been making appropriations since the beginning of the

Appropriation Republic. Over the course of this time, certain forms of appropriation

language have become standard. This section will point out the more

Language and the commonly used language with respect to amount.

Concept of

Earmarking Congress may wish to specifkally designate, or “earmark,” part of amore general lump-sum appropriation for a particular object, as

either a maximum, a minimum, or both.] For simplicity of illustration,

let us assume that we have a lump-sum appropriation of $1,000 for

“smoking materials” and a particular object within that appropriation

is “Cuban cigars.”

If the appropriation specitles “not to exceed” $100 for Cuban cigars

or “not more than” $100 for Cuban cigars, then $100 is the maximum

available for Cubart cigars. 64 Comp. Gen. 263 (1985).Z A specifkally

earmarked maximum may not be augmented with funds from the

general appropriation.

Statutory transfer authority will permit the augmentation of a “not to

exceed” earmark in many, but not all, cases. In 12 Comp. Gen. 168

(1932), it was held that general transfer authority could be used to

increase maximum earmarks for personal services, subject to the

percentage limitations specified in the transfer statute. The decision

pointed out that if the personal services earmark had been a separate

lwe ”= the km “eam~g” here to mean a specific statutotY designation of a W~on of a

lump-sum appropriation or authorization. The term ia also used to refer to the statutory

designation of revenues for Darticuhr uses. For a brief but nevertheieas useful clismssion of

earn&king in this latter sen-se, see GAO report entitled Budget Issues: Earrnar “kmgin the

Federal Government, GAOAFMD-90-8FS (January 1990).

2A “not to exceed” e armark was held not tQ constitute a maximum in 19 Comp. Gen. 61 (1939),

where the earrnarkmg language was inconsistent with other language in the general

appropriation.

Page 6-4 GAO/OGC-92-13 Appropriation kW -~OL fl
Chapter 6

Av-dhMlity of Approprhtions: Amount

line-item appropriation, the transfer authority would clearly apply. Id.

at 170. Also, the transfer authority was remedial legislation designe~

to mitigate the. impact of reduced appropriations. Somewhat similarly,

in 36 Comp. Gen. 607 (1957), funds transferred to an operating

appropriation from a civil defense appropriation could be used to

exceed an administrative expense limitation in the former which had

been calculated without including the increased administrative

expenses the added civil defense functions would entail. However, in

33 Comp. Gen.214 (1953), the Comptroller General held that general

transfer authority could not be used to exceed a maximum earmark

on an emergency assistance program where it was clear that

Congress, aware of the emergency, intended that the program be

funded only from the earmark. See also 18Comp.Gen.211 (1938].

Under a “not to exceed” earmark, the agency is not required to spend

the entire amount on the object specified, See, ~, Brown v.

Ruckelshaus, 364 F. Supp. 258,266 (C.D. Cal. 1973) (“the phrase

‘not to exceed’ connotes limitation, not disbursement”). If, in our

hypothetical, the entire $100 is not used for Cuban cigars,

unobligated balances may–within the time limits for obligation-be

applied to other unrestricted objects of the appropriation. 31 Comp.

Gen. 578,579 (1952); 15 Comp. Dec. 660 (1909); B-4568, June 27,

1939.

If later in the fiscal year a supplemental appropriation is made for

“smoking materials, ” the funds provided in the supplemental may not

be used to increase the $100 maximurn for Cuban cigars unless the

supplemental appropriation act so specifies. See Section D of this

chapter.

Words like “not to exceed” are not the only way to establish a

maximum limitation. If the appropriation includes a specific amount

for a particular object (such as “For Cuban cigars, $100”), then the

appropriation is a maximum which may not be exceeded. 36 Comp.

Gem 526 (1957); 19 Comp. Gen. 892 (1940); 16 Comp. Gen. 282

(1936).

Another device Congress has used to designate earmarks as maximum

limitations is the following general provision:

Whenever in this Act, an amount is specified within an appropriation for particular

purposes or objects of expenditure, such amount, unless otherwise specitied, shall be

Psge 6-5 GAODGC-92-13 Appropriations Law-Vol. U
Chapter 6

AvailabiU@ of Appropriations: Amount

considered ae the maximum amount that maybe expended for said purpose or object

rather than an amount set apart exclusively therefor.”3

By virtue of the “unless otherwise speciiled” clause, the provision

does not apply to amounts within an appropriation which have their

own specifk earmarking “words of limitation” such as “exclusively.”

31 Comp. Gen. 578 (1952).

If a lump-sum appropriation includes several particular objects and

provides further that the appropriation “is to be accounted for as one

fund” or “shall constitute one fund,” then the individual amounts are

not limitations, the only limitation being that the total amount of the

lump-sum appropriation cannot be exceeded. However, individual

items within that lump-sum appropriation that include the “not to

exceed” language will still constitute maximum limitations. 22 Comp.

Dec. 461 (1916); 3 Comp. Dec. 604 (1897); A-79741, August 7,

1936. The “one fund” language is still occasionally encountered, but

has become uncommon.

If Congress wishes to speci& a minimum for the particular object but

not a maximum, the appropriation act may provide “Smoking

materials, $1,000, of which not less than $100 shall be available for

Cuban cigars.” B-137353, December 3, 1959. See also 64 Comp. Gen.

388 (1985); B-131935, March 17, 1986. If the phrase “not less than”

is used, in contrast with the “not to exceed” language, portions of the

$100 not obligated for Cuban cigars may not be applied to the other

objects of the appropriation. 64 Comp. Gen. at 394–95; B-128943,

September 27, 1956.

Another phrase Congress often uses to earmark a portion of a

lump-sum appropriation is “shall be available.” There are variations.

For example, our hypothetical $1,000 “smoking materials”

appropriation may provide that, out of the $1,000, $100 “shall be

available” or “shall be available only” or “shall be available

exclusively” for Cuban cigars. Still another variation is”$ 1,000,

including $100 for Cuban cigars.”

If the “shall be available” phrase is combined with the maximum or

minimum language noted above (“not to exceed,” “not less than,”

~Distnct of L’ohnbiaAppropriations Act, 1992, Wb. L. No. 102-111, ~ 103, 105 SW. 559,567

(1991).

Page 6-6 GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 6

AvsilabWy of Appropriations: Amount

etc.), then the above rules apply and the phrase “shall be available”

adds little. See, ~, B-137353, December 3, 1959. However, if the

earmarking phrase “shall be available” is used without the “not to

exceed” or “not less than” modifiers, the rules are not quite as fwrn.

Cases interpreting the “shall be available” and “shall be available

only” earmarks are somewhat less than consistent. The earlier

decisions proclaimed “shall be available” to constitute a maximum

but not a minimum (B-5526, September 14, 1939), although it could

be a minimum if Congress clearly expressed that intent (B-128943,

September 27, 1956). Later cases held the earmark to constitute both

a maximum and a minimum which could neither be augmented nor

diverted to other objects within the appropriation. B-137353,

December 3, 1959; B-137353 -O.M., October 14, 1958. Another early

decision held summarily that “shall be available only” results in a

maximum which cannot be augmented. 18 Comp. Gen. 1013 (1939).

More recent decisions, however, have expressed the view that the

effect of “shall be available only’’ —whether it is a maximum or a

minimum-depends on the underlying congressional intent. 53 Comp.

Gen. 695 (1974); B-142190, March 23, 1960. Applying this test, the

earmark in 53 Comp. Gen. 695 was found to be a maximum; similar

language was found to be a minimum which could be exceeded in

B-142190 and in B-70933, March 1, 1948.

Thus, if the phrase “shall be available” maybe said to contain an

element of ambiguity, addition of the word “only” does not produce a

plain meaning. The Claims Court, reviewing an authorization earmark

for a Navy project known as RACER, commented:

“[I]t is not apparent from the language of the authorization ($45 million ‘is available

only for’) that Congress necessarily mandated the Navy to spend all $45 million on

the RACER system. Rather, Congress may have merely intended to preclude the Navy

from spending that $45 million on any other activities, i.e., the money would be

forfeited if not spent on the RACER system.”

—

Sol&r Turbines, Inc. v. United States, 23 Cl. ct. 142,158 (1991).

Use of the word “exclusively” is somewhat more precise. The

earmark “shall be available exclusively” is both a maximum which

cannot be augmented from the general appropriation, and a minimum

which cannot be diverted to other objects within the appropriation.

B-102971, August 24, 1951. Once again, however, clearly expressed

congressional intent can produce a different result. B-113272-O. M.,

Page 6-7 GAO/OGC-92-13 Appropriations Lnw-Voi. 11
Chapter 6

Availability Of&pI’Op*tiOM: AIMNUIt

May 21, 1953; B-1 11392-O. M., October 17, 1952 (earmar k held to be

a minimum only in both cases).

Similarly, the term “including” has been held to establish both a

maximum and a minimum. A-99732, January 13, 1939. As such, it

cannot be augmented from a more general appropriation (19 Comp.

Gen, 892 (1940)), nor can it be diverted to other uses within the

appropriation (67 Comp. Gen. 401 (1988)).

To sum up, the most effective way to establish a maximum (but not

minimum) earmark is by the words “not to exceed” or “not more

than.” The words “not less than” most effectively establish a

minimum (but not maximum). These are all phrases with well-settled

plain meanings. The “shall be available” family of earmarking

language presumptively “fences in” the earmarked SUIII (bOth

maximum and minimum), but is more subject to variation based upon

underlying congressional intent.

Our discussion thus far has centered on the use of earmarking

language to prescribe the amount available for a particular object.

Earmarking language may also be used to vary the period of

availability for obligation. An illustrative case is B-23 1711, March 28,

1989 (appropriation provision earmarked portion of lump sum to

remain available for an additional fiscal year, but was neither

maximum nor minimum limitation on amount available for particular

object).

Firudly, earmarking language maybe found in authorization acts as

well as appropriation acts. The same meanings apply. Several of the

cases cited above involve authorization acts, ~, 64 Comp. Gen. 388

(1985) and B-131935, March 17,1986.

GAO/OGC-92-13 &prOpd@iOM kw-vol. ~
Chapter 6

Avallabiiltyof Approprhtlons: Amount

C. The Antideficiency

Act

1. Introduction and The so-called Antideficiency Act is one of the @or laws in the

C)verview statutory pattern by which Congress exercises its constitutional

control of the public purse. It has been termed “the cornerstone of

Congressiomd efforts to bind the Executive branch of government to

the limits on expenditure of appropriated funds.”4

As with the series of funding statutes as a whole, the Antideficiency

Act did not hatch fully grown but evolved over a period of time in

response to various abuses. As we noted in Chapter 1, as late as the

post-Civil War period, it w% not uncommon for agencies to incur

obligations in excess of or in advance of appropriations. Perhaps most

egregious of all, some agencies would spend their entire

appropriations during the fnt few months of the fiscal year, continue

to incur obligations, and then return to Congress for appropriations to

fund these “coercive deficiencies.”5 These were obligations to others

who had fulfilled their part of the bargain with the United States and

who now had at least a moral-and in some cases also a legal-right to

be paid. Congress felt it had no choice but to fulfii these

commitments, but the frequency of deficiency appropriations played

havoc with the United States budget.

The congressional response to abuses of this nature was the

Antideficiency Act. Its history is summarized in the following

paragraphs:O

‘Control in the execution of the Government’s budgetary and fiiancial programs is

based on the provisions of section 3679 of the Revised Statutes, as amended. . . .

commonly referred to as the Antidefleiency Act. Aa the name. . . implies, one of the

principaJ purposes of the legislation was to provide effective control over the use of

appropriations so as to prevent the incurring of obligations at a rate which will lead to

deficiency (or supplemental) appropriations and to f~ responsibility on those

,.’. ,.:

4~opk~~ & Nutt, ‘&? Anti-Deficiency Act (Revised Statutes 3679) and Punding Fedemi

Contracts: An Analysis, 80 Mil. L. Rev. 51,56 (1978).

?I~d. ~ 57–58; L.OUiS Fisher, Presidential ‘~nb — Power 232 (1975).

6%wce. senate commi~ on Government Opemtions, ~IMIIC~ement tn the Federal

Government, S. Dec. No. 11, 87th Cong., 1st Sess. 45-46 (1961). The statute is cited as “section

3679 of the Revised Statutes,” a designation that is now obsolete.

.,”, ,

.,.i. .,

M,

Page 6-9 GAO/OGC-9Z.13 Appropriations Law -Vol. II
Chapter 6

AvaUabUIty of Approprlatiom: Amount

officials of Government who incur deficiencies or obligate appropriations without

proper authorization or at an excessive rate.

“The original section 3679.. . was derived from legislation enacted in 1870 [16 Stat.

251 ] and was designed solely to prevent expenditures in excess of amounts

appropriated. In 1905 [33 Stat. 1257] and 1906 [34 Stat. 48], section 3679 . . . was

amended to provide specific prohibitions regarding the obligation of appropriations

and required that certain types of appropriations be so apportioned over a fwcsl year

as to ‘prevent expenditures in one portion of the year which may necessitate

deficiency or additional appropriations to complete the service of the f~cd year for

which aaid appropriations are made.’ Under the amended section, the authority to

make, waive, or modify apportionments was vested in the head of the department or

agency concerned. By Executive Order 6166 of June 10, 1933, this authority was

transferred to the Director of the [Office of Management and Budget]. . . .

“During and following World War II, with the expansion of Government functions and

the increase in size and complexities of budgetary and operational problems,

situations arose highlighting the need for more effective control and conservation of

funds. In order to effectively cope with these conditions it was necessary to seek

Legislation clarifying certain technicaf aspects of section 3679 of the Revised Statutes,

and strengthening the apportionment procedures, particularly as regards to agency

control systems. Section 1211 of the General Appropriation Act, 1951 [64 Stat. 765],

amended section 3679. . . to provide a basis for more effective control and

economical use of appropriations. Following a recommendation of the second Hoover

Commission that agency allotment systems should be simplitled, Congress passed

legislation in 1956 [70 Stat. 783] further amending section 3679 to provide that each

agency work toward the objective of financing each operating unit, at the highest

practical level, from not more than one administrative subdivision for each

appropriation or fund affecting such unit. In 1957 [71 Stat. 440] section 3679 was

further amended, adding a prohibition against the requesting of apportionments or

reapportionments which indicate the necessity for a deficiency or supplemental

estimate except on the determination of the agency head that such action is within the

exceptions expressly set out in the law. The revised Antideficiency Act serves as the

primary foundation for the Government’s administrative control of funds systems.”

In its current form, the law prohibits

1. Making or authorizing an expenditure from, or creating or

authorizing an obligation under, any appropriation or fund in excess

of the amount available in the appropriation or fund unless authorized

by law;

2. Involving the government in any contractor other obligation for the

payment of money for any purpose in advance of appropriations made

for such purpose, unless the contract or obligation is authorized by

law;

Page 6-10 GAO/OGC-92-13 Appropriations Law-Vol. II
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Avdkbility efApprvpriations: Amount

3. Accepting voluntary services for the United States, or employing

personal services in excess of that authorized by law, except in cases

of emergency involving the safety of human life or the protection of

property; and

4. Making obligations or expenditures in excess of art apportionment

or reapportionment, or in excess of the amount permitted by agency

regulations.7

Subsequent sections of this chapter will explore these concepts in

detail. However, the fiscal principles inherent in the AntideficiencyAct

are really quite simple. The idea is to “pay as you go.” Government

oftlcials are warned not to make payments-or to commit the United

States to make payments at some future time-for goods or services

unless there is enough money in the ‘bank” to cover the cost in full.

The “bank,” of course, is the available appropriation.

The combined effect of the Antideflciency Act, in conjunction with the

other funding statutes discussed throughout this publication, was

summarized in a 1962 decision. The summary has been quoted in

numerous later Antideficiency Act cases and bears repeating here:

“These statutes evidence a plain intent on the part of the Congress to prohibit

executive oftlcers, unless otherwise authorized by law, from making contracts

involving the Government in obligations for expenditures or liabilities beyond those

contemplated and authorized for the period of availability of and within the amount of

the appropriation under which they are made; to keep all the departments of the

Government, in the matter of incurring obligations for expenditures, within the limits

and purposes of appropriations annually provided for conducting their lawfid

functions, and to prohibit any oflicer or employee of the Government from involving

the Government in any contractor other obligation for the payment of money for any

purpose, in advance of appropriations made for such purpose; and to restrict the use

of annual appropriations to expenditures required for the service of the particular

f~cal year for which they are made.” 42 Comp. Gen. 272,275 (1962).

‘Id. at 48; B-131361, May 9, 1957. Further discussion from varying perspectiveswill be found in

ti%followin gsources: Efros, RoUee H., Statutory RestrictJonson Funding of Government

Contracts, 10 Public Contract Law Journaf 254 (Dec. 1978); Feaster, Herbert H., and CMstisn

Volz, The AntideficiencyAct: Constitutional Control Gone , 11 Public contract WW

Journal 155 (No. 1, Nov. 1979); Frazier, John ., COL, Use of Aanuai Funds with Conditional,

Option, or Indefinite Delivery Contracts, 8

Hopkins, Gary L., Mqjor, and Lt. Cd. Robert M. 

A.F. JAG L. 

Nutt, The 

I%%

Ati-DeflciencyAct @x4sed Statutes

3679) and Funding Federal Contracts: An Analyda, 80 MiL L. Rev. 51 (1978); SPri&@?, William

J., The Anti-Deficiency Act Comes to Life in U.S. Government Contracting, 10 Natiorud Contract

ManagemcntJourmd 33 (Writer 1976-77).

Page 6-11 GAON3GC-9Z-N3 ApproprlatSons LIIW-VOL II
ChaPter 6

Availability of Appro@ationa: Amount

To the extent it is possible tosummarize appropriations law in a

single paragraph, this is it. Viewed in the aggregate, the Antideficiency

Act and related funding statutes “[restrict] in every possible way the

expenditures and expenses and liabilities of the government, so far as

executive offices are concerned, to the spec~lc appropriations for

each fiscal year.” Wdder’s Case, 16 Ct. Cl. 528,543 (1880).

2, ob~o~xpen~~e The key provision of the Antideficiency Act is 31 U.S.C. $ 1341 (a)(l):a

in Excess or Atice of

Appropriations

“(a)(1) An officer or employee of the United States Government or of the District of

Columbia government may not–

“(A) make or authoriae an expenditure or obligation exceeding an amount available in

an appropriation or fund for the expenditure or obligation; or

“(B) involve either government in a contract or obligation for the payment of money

before an appropriation is made urdeaa authorized by law.”

Not only is section 1341(a)(l) the key provision of the Act, it was

originally the only provision, the others being added to ensure

enforcement of the basic prohibitions of section 1341.

The law is not limited to the executive branch, but applies to any

“officer or employee of the United States Government” and thus

extends to all branches. Examples of legislative branch applications

are B-107279, January 9, 1952 (Ofllce of Legislative Counsel, House

of Representatives); B-78217, July 21, 1948 (appropriations to

Senate for expenses of Office of Vice President); 27 Op. Att’y Gen.

584 (1909) (Government Printing Office). Within the judicial branch,

it applies to the Administrative OffIce of the United States Courts.

~, 50 Comp. Gen. 589 (1971). However, whether a federal judge is

an officer or employee for purposes of 31 U.S.C. S 1341(a)(l) appears

to remain an open question, at least in some contexts. See Arrester v.

United States District Court, 792 F.2d 1423, 1427 n.7 (9th Cir. 1986).

Some government corporations are also classified as agencies of the

United States Government, and their offlcids are therefore “officers

s~or ~ the 1982 reco~lcation of title 31 of the UNted States Code, the Antideficiency Act

consisted of 9 lettered subsections of what was then 31 U.S.C. 5665. The recdifkation

scattered the law among several new sections. To IM@r show the relationship of the material,

our organization in this chapter retains the sequence of the former subsections.

Page 6-12 GAO/OGC-92.13 &Ipl’OfWhtiOM Lsw-VO]. II
Chapter 6

Availability of Appropriat&on8: Amount

and employees of the United States.” To the extent they operate with

funds which are regarded as appropriated funds, they too are subject

to 31 U.S.C. $ 1341(a)(l). E.&, B-223857, February 27, 1987

(Commodity Credit Corporation); B-135075-O.M., February 14,1975

(Inter-American Foundation). It follows that section 1341(a)(l) does

not apply to a government corporation which is not an agency of the

United States Government. ~, B-175155, July 26,1976 (Amtrak).

These principles are, of course, subject to variation if and to the

extent provided in the relevant organic legislation.

There are two distinct prohibitions in section 1341(a)(l). Unless

otherwise authorized bylaw, no officer or employee of the United

States may make (or authorize the making of) an expenditure, or

create or involve (or authorize the creation or involvement of) the

United States in any contractor obligation to make future

expenditures, in the absence of suftlcient funds in the account to

cover the payment or the obligation at the time it is made or incurred.

Put another way, the two sets of prohibitions are concerned with

Q Making expenditures or incurring obligations in excess of available

appropriations; and

s Making expenditures or incurring obligations in advance of

appropriations.

The distinction between obligating in excess of an appropriation and

obligating in advance of an appropriation is clear in the mqjority of

cases, but can occasionally become blurred, For example, an agency

which tries to meet a current shortfall by “borrowing” from (i.e.,

obligating against) the unenacted appropriation for the next fiscal

year is clearly obligating in advance of an appropriation. E&,

B-236667, January 26, 1990. However, it is also obligating in excess

of the currently available appropriation. Since both are equally illegal,

determining precisely which subsection of 31 U.S.C. $ 1341(a) has

been violated is of secondary importance. In any event, the point to be

stressed here is that the law is violated not only if there are

insufficient funds in an account when a payment becomes due. The

very act of obligating the United States to make a payment when the

necessary funds are not already in the account is also a violation of 31

u.s.c. $ 1341(a).

Note that the statute refers to overspending the amount available in an

“appropriation or fund.” OMB Circular No. A-34 spectiles:

Psge 6.13 GAO/OGC-9Z-13 Appropr&tioIRs Law-VoI. H
Chapter 6

Availability of Appropriations: Amount

a. Exhaustion of an

Appropriation

●

●

●

“As used in this Circular, the phrase ‘appropriation or fund accounts’ refers to

generaI fund expenditwe accounM, special fund expenditure accounts, public

enterprise revolving funds, intragovernmental revolving funds, management funds,

trust fund expenditure accounts, and trust revolving fund accounts. . . .“e

Thus, for example, the Arttideficiency Act applies to Indian trust funds

managed by the Bureau of Indian Affairs. However, the investment of

these funds in certificates of deposit with federally insured banks

under authority of 25 U.S.C. $ 162a does not, in GAO’S opinion,

constitute an obligation or expenditure for purposes of 31 U.S.C.

$1341. Accordingly, overinvested trust funds do not violate the

Antideficiency Act unless the overinvested funds, or any attributable

interest income, are obligated or expended by the Bureau.

B-207047-0. M., June 17, 1983. GAO also views the Act as applicable

to presidential and vice-presidential %rwouchered expenditure”

accounts. B-239854, June 21, 1990 (internal memorandum),

When we talk about an appropriation being “exhausted,” we are

really alluding to any of several different but related situations:

Depletion of appropriation account (i.e., fully obligated antior

expended).

Similar depletion of a maximum amount specifically earmarked in a

more general lump-sum appropriation.

Depletion of an amount subject to a monetary ceiling imposed by

some other statute (usually, but not always, the relevant program

legislation).

(1) Making further payments

In simple terms, once an appropriation is exhausted, the making of

any further payments, apart from using unexpended balances to

liquidate valid obligations recorded against that appropriation,

violates 31 U,S.C. $1341. When the appropriation is fully expended,

no further payments maybe made in any case. If an agency finds itself

in this position, unless it has transfer authority or other clear statutory

basis for making further payments, it has little choice but to seek

deficiency or supplemental appropriations from Congress, and to

a~ust or curtaiI operations as may be necessary. E@, 61 Comp. Gen.

9(3MB cir~&No. A-34, ]Mtmctiom on Budget Execution, Pti II, 521.1 (Au@st 1985)

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Availability of Appropriatlom: Amount

661 (1982); 38 Comp. Gen. 501 (1959). If the appropriation account

has expired but has not yet been closed, the agency has the alternative

of asking Congress for authority to use current appropriations to

liquidate the obligations, an option which may enable more prompt

liquidation. B-123964, November 27, 1956.

In many ways, the prohibitions in the Adequacy of Appropriations Act,

41 U.S.C. $11, parallel those of 31 U.S.C. $ 1341(a). For example, a

contract in excess of the available appropriation violates both

statutes. ~, 9 Comp. Dec. 423 (1903). However, a contract in

compliance with 41 US.C. f+ 11 can still result in a violation of the

Antideficiency Act. Presumably, ifa contract is entered into and there

are sufficient funds available when the contract is signed, there is no

violation of 41 U.S.C. $11. The Antideficiency Act, however,

Wticipates a further development. Suppose there are sufficient funds

available when a particular contract is signed, but during the period

before payment becomes due, the agency makes a number of

payments to other contractors or incurs a number of other

obligations, all charged to the same appropriation account, and finds

it has nothing left to pay the contract in question. The Antideficiency

Act is violated when the contract payment becomes due even though

there was no violation when the contract was signed.

To restate the point, the fact that the incurring of an obligation passes

Antideficiency Act muster is no guarantee against future violations

with respect to that obligation. Assessment of Antideficiency Act

violations is not frozen at the point when the obligation is incurred.

Certainly the Act is violated if there are insufficient unobligated

balances to support the obligation at the time it is incurred. However,

even if the initial obligation was well within available funds, the Act

can still be violated if insufficient funds remain to liquidate the

obligation when actual payment is due or if upward ac@stments cause

the obligation to exceed available funds. E&, 55 Comp. Gen. 812,

826 (1976).

GAO/OGC-92-13 Appropriations Law-Vol. II
(lhapter 6

Availability of Appropriation: Amount

What one authority termed the “granddaddy of all violations”

occurred when the Navy overobligated and overspent nearly $110

million from its “Military Personnel, Navy” appropriation during the

years 1969-1972, initially discovered in an internal audit, GAO

summarized the violation in a letter report, B-177631, June 7, 1973.

While there may have been some concealment, GAO concluded that the

violation was not the result of some evil scheme; rather, the “basic

cause of the violation was the separation of the authority to create

obligations from the responsibility to control them.” The authority to

create obligations had been decentralized while control was

centralized in the Bureau of Naval Personnel,

Granddaddy was soon to lose his place of honor on the totem pole.

Around November of 1975, the Department of the Army discovered

that, for a variety of reasons, it had overobligated four procurement

appropriations in the aggregate amount of more than $160 million

and consequently had to halt payments to some 900 contractors. The

Army asked and received the Comptroller General’s advice on a

number of potential courses of action it was considering. The

resulting decision was 55 Comp. Gen. 768 (1976). The Army

acknowledged that there were adequate funds available when all the

contracts were signed and therefore the contractors generally had

valid, enforceable obligations. However, the Army also recognized its

duty to mitigate the Antideficiency Act violation. ‘1 It was clear that

without a deficiency appropriation, all the contractors could not be

paid. One option–to use current appropriations to pay the

deficiencies-had to be rejected because there is no authority to apply

current funds to pay off debts incurred in a previous year.]z An option

GAO sanctioned was to reduce the amount of the deficiencies by

terminating some of the contracts for convenience, although the

termination costs would still have to come from a deficiency

appropriation unless there was enough left in the appropriation

accounts to cover them.

]o~her, ~e~iden~ Spending Power z36 (1975).

IIwe ~heve it ~ Obtiow t~, once ~ Anti&fi&ncyAct violation h~ been di~overed, the

agency concerned must take alf reasonable steps to mitJgate the effects of the viofation insofar

as it remains executory.” 55 Comp. Gen. at 772.

Mm *@merit ~pp11e5 ~ appropr~tion accounm which have expired but have not Yet been

closed. 71 Comp. Gen.— (B-245856.7, August 11, 1992). Once an account has been closed,

typically 5 fwcaf years after expiration, obligations chargeable to that account must, within

certain Iimite, be charged to current appropriations. 31 U.S.C. $ 1553(b).

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(2) Status of contracts

If the Antideficiency Act prohibits any further payments when the

appropriation is exhausted, where does this leave the contractor? Is

the contractor expected to know how and at what rate the agency is

spending its money? There is a small body of judiciid case law which

discusses the effect of the exhaustion of appropriations on

government obligations. The fate of the contractor seems to depend

on the type of appropriation involved and the presence or absence of

notice, actual or constructive, to the contractor on the limitations of

the appropriation.

Where a contractor is but one party out of several to be paid from a

general appropriation, the contractor is under no obligation to know

the status or condition of the appropriation account on the

government’s books. If the appropriation becomes exhausted, the

Antideficiency Act may prevent the agency from making any further

payments, but valid obligations will remain enforceable in the courts.

For example, in Ferris v. United Statesj 27 Ct. Cl, 542 (1892), the

plaintiff had a contract with the government to dredge a channel in

the Delaware River. The Corps of Engineers made him stop work

halfway through the job because it had run out of money. In

discussing the contractor’s rights in a breach of contract suit, the

COUrt said:

‘A contractor who is one of several persons to be paid out of an appropriation is not

chargeable with knowledge of ita administration, nor can his legal righta be affected

or impaired by its maladministration or by its diversion, whether legal or illegal, to

other objects. An appropriation= merely imposes limitations upon the

Government’s own agents; it is a definite amount of money intruated to them for

distribution; but its insuftlciency does not pay the Government’s debts, nor cancel its

obligations, nor defeat the rights of other parties.” Q. at 546.

The rationale for this rule is that “a contractor cannot justly be

expected to keep track of appropriations where he is but one of

several being paid from the fund. ” Ross Construction Corp. v. United

States, 392 F.2d 984,987 (Ct. Cl. 1968). Other illustrative cases are

Dougherty ex rel. Slavens v. United States, 18 Ct. Cl. 496 (1883), and

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Joplin v. United States, 89 Ct. Cl. 345 (1939). The Antideficiency Act

may “apply to the official, but [does] not affect the rights in this court

of the citizen honestly contracting with the Government.” Dougherty,

18 Ct. Cl. at 503. Thus, it is settled that contractors paid from a

general appropriation are not barred from recovering for breach of

contract even though the appropriation is exhausted.

However, under a specific line-item appropriation, the answer is

different. The contractor in this situation is deemed to have notice of

the limits on the spending power of the government official with

whom he contracts. A contract under these circumstances is valid only

up to the amount of the available appropriation. Exhaustion of the

appropriation will generally bar any further recovery beyond that

limit. ~, Sutton v. United States, 256 U.S. 575 (1921); Hooe v.

United States, 218 U.S. 322 (1910); Shipman v. United States, 18 Ct.

Cl. 138 (1883); Dougherty, 18 Ct. Cl. at 503.

The distinction between the Ferris and Sutton lines of cases follows

logically from the old maxim that ignorance of the law is no excuse. If

——

Congress appropriates a specific dollar amount for a particular

contract, that amount is specified in the appropriation act and the

contractor is deemed to know it. It is certainly not difficult to locate.

If, on the other hand, a contract is but one activity under a larger

appropriation, it is not reasonable to expect the contractor to know

how much of that appropriation remains available for it at any given

time. A requirement to obtain this information would place an

unreasonable burden on the contractor, not to mention a nuisance for

the government as well.

In two cases in the 1960s, the Court of Claims permitted recove~ on

contractor claims in excess of a specific monetary ceiling. See

Anthony P. Miller, Inc. v. United States, 348 F.2d-475 (C~. Cl. 1965)

(claim by Capehart Housing Act contractor), and Ross Construction

Corp. v. United States, 392 F.2d 984 (Ct. CL 1968) (claim by

contractor for “off-site” construction ancillary to Capehart Act

housing). The court distinguished between matters not the fault or

responsibility of the contractor (for example, defective plans or

specifications or changed conditions under the “changed conditions”

clause), in which case above-ceiling claims are allowable, and excess

costs resulting from what it termed “simple extras,” in which case

they are not. Without attempting to detail the fairly complex Capehart

legislation here, we note merely that Ross is more closely analogous

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AvailabUl@ of Appropriations: Amount

to the Ferris situation (392 F.2d at 986), while Anthony P. Miller is

more closely analogous to the Sutton situation (392 F.2d at 987). The

extent to which the approach reflected in these cases will be applied

to the more traditional form of exhaustion of appropriations remains

to be developed, although the Ross court intimated that it saw no real

distinction for these purposes=~een a specific appropriation and a

specific monetary ceiling imposed by other legislation (@.).

b. Contracts or Other It is easy enough to say that the Antideficiency Act prohibits you from

Obligations in Excess or

Advance of Appropriations

obligating a million dollars when you have only half a million left in

the account, or that it prohibits you from entering into a contract in

September purporting to obligate funds for the next f~cal year that

have not yet been appropriated. Many of the situations that actually

arise from day to day, however, are not quite that simple. A useful

starting point is the relationship of the Antideficiency Act to the

recording of obligations under 31 U.S,C. $1501.

(1) Recording obligations

Proper recording practices are essential to sound fund control.

However, it should be apparent that, if the Antideficiency Act is to

mean anything, the actual recording of obligations cannot by itself

provide a suftlcient basis on which to assess potential violations.

Reliance solely on the recording of obligations can produce error in

two directions. It can suggest violations which in fact do not exist, and

it can overlook violations which do exist.

If it appears that the total amount of recorded obligations exceeds the

available appropriation, there may be several reasons for this other

than an Antideficiency Act violation. Excessively high estimates may

have been recorded, through either error or an excess of caution,

which subsequent liquidation reveals can be reduced. Items may have

been incorrectly posted or improperly recorded as obligations. Or,

acc,ounts receivable that should be credited to the appropriation may

not have been properly identitled and taken into consideration.

For these reasons, an amount of recorded obligations in excess of the

available appropriation isprima facie evidence of a violation of the

Antideficiency Act, but is not conclusive. B-134474-O.M., December

18, 1957. Simiiarly, GAO has cautioned that an Antideficiency Act

violation should not be determined solely on the basis of year-end

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AvaUability of Approprhtions: Amount

reports prior to reconciliation and a~ustment. B-1 14841 .2-O. M.,

January 23, 1986.

If an examination of recorded obligations can be misleading in the

sense of indicating violations which in fact do not exist, the converse

is aiso true. Violations may exist which recorded obligations alone will

not disclose. Again, there are several reasons. One important principle

is stated in the following passage:

“[T]he recording of obligations under 31 U.S.C. $ [1501 ] is not the sole consideration

in determining violations of 31 U.S.C. $ [1341] . . . . We believe that the words ‘anY

contract or other obligation’ as used in [the predecessor of 31 U.S.C. S 1341]

encompass not merely recorded obligations but other actions which give rise to

Government liability and will ultimately require the expenditure of appropriated

funds.”

55 Comp. Gen. 812,824 (1976). See also 42 Comp, Gen. 272,277

(1962) (Act forbids not only the incurring of obligations beyond the

period of availability but also “any other obligation or liability which

may arise thereunder and ultimately require the expenditure of

funds”); B-163058, March 17, 1975; B-133170, January 29, 1975. An

example of action of this type might be conduct by an agency which,

under a clear line of administrative or judicial precedent, would result

in government liability to a contractor through claims proceedings. 55

Comp. Gen. at 824; B-163058, March 17, 1975.

Also, in many situations, the amount of the government’s liability is

not definitely freed at the time the obligation is incurred. An example

is a contract with price escalation provisions. In other situations, such

as certain contingent liability cases, the government is not required to

record any obligation unless and until the contingency materializes.

Thus, while examining the actual recording of obligations is a

necessa~ first step, it is also essential to look at what happens as the

contract is performed.

Finally, the possibility exists that there are valid obligations which the

agency has failed or neglected to record. The incurring of an

obligation in excess or advance of appropriations violates the Act, and

this is not affected by the agency’s failure to record the obligation.

~, 65 Comp. Gen. 4,9 (1985); 62 Comp. Gen. 692,700 (1983); 55

Comp. Gen. 812,824 (1976).

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In sum, for purposes of assessing violations of the Antideficiency Act,

you must start by looking at the actual recording of obligations, but

you cannot end there.

(2) Obligation in excess of appropriation

Incurring an obligation in excess of the available appropriation

violates 31 U.S.C. S 1341 (a)(l) .13 As the Comptroller of the Treasury

advised an agency head many years ago, “your authority in the matter

was strictly limited by the amount of the appropriation. . .; otherwise

there would be no limit to your power to incur expenses for the

service of a particular fiscal year. . . .“ 9 Comp. Dec. 423, 425

(1903). If you want higher authority, the Supreme Court has stated

that, absent statutory authorization, “it is clear that the head of the

department cannot involve the government in an obligation to pay any

thing in excess of the appropriation.” Bradley v. United States, 98

U.S. 104, 114 (1878).

To take a fairly simple illustration, the statute was violated by an

agency’s acceptance of an offer to install automatic telephone

equipment for $40,000 when the unobligated balance in the relevant

appropriation was only $20,000.35 Comp. Gen. 356 (1955).

In a 1969 case, the Air Force wanted to purchase computer

equipment but did not have sufficient funds available. It attempted an

arrangement whereby it made an initial down payment, with the

balance of the purchase price to be paid in installments over a period

of years, the contract to continue unless the government took

affmative action to terminate. This was nothing more than a sale on

credit, and since the contract constituted an obligation in excess of

available funds, it violated the Antideficiency Act. 48 Comp. Gen. 494

(1969).

13De~_ the amount of available budgetary resources against which obligations maybe

incurred is covered later in this chapter under the heading ‘Amount of Available Appropriation

or Fund. ”

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(3) Variable quantity contracts

A leading case discussing the Antideficiency Act ramiilcations of

“variable quantity” contracts (requirements contracts, indeftite

quantity contracts, and similar arrangements)14 is 42 Comp. Gen. 272

(1962). That decision considered a three-year contract the Air Force

had awarded to a firm to provide any service or maintenance work

necessary for government aircraft landing on Wake Island. GAO

questioned the legality of entering into the contract for more than one

year, since the Air Force had only a one-year appropriation available.

The Air Force argued that it was a “requirements” contract. No

obligation would arise unless or until some maintenance work was

ordered. The only obligation was a negative one–not to buy service

from anyone else but the contractor should the services be needed.

GAO disagreed. The services covered were “automatic incidents of the

use of the air field.” There was no place for a true administrative

determination that the services were or were not needed. There was

no true “contingency” as the services would almost certainly be

needed if the base were to remain operational. Accordingly, the

contract was not a true requirements contract but amounted to a firm

obligation for the needs of future years, and was therefore an

unauthorized multi-year contract. As such, it violated the

Antideficiency Act. GAO recognized that the rules in this area could

create difficult problems, especially in remote spots like Wake Island,

but felt that the only solution was to ask Congress for multi-year

procurement authority. ’5

The Wake Island decision noted that the contract contained no

provision permitting the Air Force to reduce or eliminate

requirements short of a termination for convenience. Id. at 277. If the

contract had included such a provision-and in the un~ely event that,

given the nature of the contract, such a provision could have been

meaningful-a somewhat different analysis might have resulted.

Compare, for example, the situation in 55 Comp. Gen. 812 (1976).

The exercise of a contract option required the Navy to furnish various

items of government-furnished property (GFP), but another contract

clause authorized the Navy to unilaterally delete items of GFP. If the

entire quantity of GFP had to be treated as a firm obligation at the

“We cover the obligational treatment of contracts of this type in Chapter 7, Section B.1 .e, which

should be read in co~unction with this section.

‘%he authority was subsequently sought and granted, and is found at 10 U.S.C. f+ 2306(g).

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AvaUabtlIty of Appmprhtions: Amount

tke the option was exercised, the obligation would have exceeded

available appropriations, resulting in an Antideficiency Act violation.

However, since the Navy was not absolutely obligated to furnish all

the GFP items at the time the option was exercised, it was

inappropriate to use the full value of all GFP items under the contract

to assess a violation of 31 U.S.C. $1341 at that time, The Navy could

avert a violation if it were able to delete enough GFP to stay within the

available appropriation; if it found that it could not do so, the violation

would then exist.]G See also B-134474-O. M., December 18, 1957,

In 47 Comp, Gen. 155 (1967), GAO considered an Air Force contract

for mobile generator sets which specified minimum and maximum

quantities to be purchased over a 12-month period. Since the contract

committed the Air Force to purchase only the minimum quantity, it

was necessary to obligate only sufficient funds to cover that minimum.

Subsequent orders for additional quantities up to the maximum were

not legally objectionable as long as the Air Force had sufilcient funds

to cover the cost when it placed those orders. See also 19 Comp. Gen.

980 (1940). The fact that the Air Force did not, at the time it entered

into the contract, have sufficient funds available to cover the

maximum quantity was, for Antideficiency Act purposes, irrelevant.

The decision distinguished the Wake Island case on the basis that

nothing in the mobile generator contract purported to commit the Air

Force to obtain any requirements over and above the specified

minimum from the contractor.

In a more recent case, GAO found no Antideficiency Act problems with

a General Services Administration ‘Multiple Award Schedule”

contract under which no minimum purchases were guaranteed and no

binding obligation would arise unless and until a using agency made

an administrative determination that it had a requirement for a

scheduled item. 63 Comp, Gen. 129 (1983).

l~e ~tio~e worked in that c= beca~ the Navy coufd stay within the aPProPria~on by

deleting a relatively small percentage of GFP. If the numbers had been different, such that the

amount of GFP to be deleted were so large as to effectively preclude contractor performance,

the analysis might well have been different. In a 1964 report, for example, GAO found the

Antideficiency Act violated where the Air Force, to keep within a “minor military construction”

ceiling, deleted needed plumbing, heating, and lighting from a buihiing alteration contract,

resulting in an incomplete facility, and subsequently charged the deleted items to Operation and

Maintenance appropriations. Continuing Inadequate Control Over Programing sic and[ ]

Financ’mg of Construction, B-133316, July 23, 1964, at 12-15.

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Regardless of whether we are dealing with a requirements contract,

indefinite quantity contract, or some variation, two points apply as far

as the Antideficiency Act is concerned:

● Whether or not there is avioIation at the time the contracts entered

into depends on exactly what the government is obligated to do under

the contract.

● Even if there is no violation at the time the contract is entered into, a

violation may occur later if the government subsequently incurs an

obligation under the contract in excess of available funds, for

example, by electing to order a maximum quantity without sufllcient

funds to cover the quantity ordered.

A conceptually related situation is a contract which gives the

government the option of two performances at different prices. The

government can enter into such a contract without violating the

Antideficiency Act as long as it has stilcient appropriations available

at the time the contract is entered into to pay the lesser amount. For

example, the Defense Production Act of 1950 authorizes the President

to contract for synthetic fuels, but the contract must give the

President the option to refuse delivery and instead pay the contractor

the amount by which the contract price exceeds the prevalent market

price at the time the delivery is made. Such a contract would not

violate the Antideficiency Act at the time it is entered into as long as

sufllcient appropriations are available to pay any anticipated

difference between the contract price and the estimated market price

at the time of performance. 60 Comp. Gen. 86 (1980). Of course, the

government could not choose to accept delivery unless there were

suftlcient appropriations available at that time to cover the full cost of

the fuel under the contract.

(4) Multi-year or “continuing” contracts

A multi-year contract is a contract covering the needs or requirements

of more than one fiscal year. Our discussion here presupposes a

general familiarity with relevant portions of Chapter 5, primarily the

nature of a f~ed-term appropriation and the bona fide needs rule as it

relates to multi-year contracts.

We start with some very basic propositions:

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Availability of Appropriations: Amount

● A f~ed-term appropriation (fiscal year or multiple-year) maybe

obligated only during its period of availability.

● A freed-term appropriation maybe validly obligated only for the bona

fide needs of that freed term.

● The Antideficiency Act prohibits the making ofcontracts which

exceed currently available appropriations or which purport to

obligate appropriations not yet made.

As we have seen in Chapter 5, performance may extend into a

subsequent fiscal year in certain situations. Also, as long as a contract

is properly obligated against funds for the year in which it was made,

actual payment can extend into subsequent years. Apart from these

situations, and unless the agency either has specific multi-year

contracting authority (e&, 62 Comp. Gen. 569 (1983)) or is

operating under a no-year appropriation (~, 43 Comp. Gen. 657

(1964)), the Antideficiency Act, together with the bona fide needs

rule, prohibits contracts purporting to bind the government beyond

the obligational duration of the appropriation.17 This is because the

current appropriation is not available for future needs, and

appropriations for those future needs have not yet been made.

Citations to support this proposition are numerous.18 The rule applies

to any attempt to obligate the government beyond the end of the fiscal

year, even where the contract covers a period of only a few months.

24 Comp. Gem 195 (1944).

The guiding principle still followed today stems from a 1925 decision

of the United States Supreme Court. An agency had entered into a

long-term lease for office space with one-year money, but its contract

specitlcally provided that payment for periods after the fmt year was

subject to the availability of future appropriations. In Leiter v. United

States, 271 U.S. 204 (1925), the Supreme Court specifically rejected

that theory. The Court held that the lease was binding on the

government only for one fiscal year, and it ceased to exist at the end

of the fiscal year in which the obligation was incurred. It takes

17Jjvew~olation ~fthe ~na fide needg rule does not necessarily ~o~~ the Antideficien~A~

as weU. Determinations must be made on a case-by-case basis. B-235086.2, January 22, 1992

(non-decision letter).

‘a=, 67 Comp. Gen. 190 (1988); 66 Comp. Gen. 556 (1987); 61 Comp. Gent 184,187

(1981); 48 Comp. Gen. 471,475 (1969); 42 Comp. Gen. 272 (1962); 37 Comp. Gen. 60 (1957);

36 Comp. Gen. 683 (1957); 33 Comp. Gen. 90 (1953); 29 Comp. Gen. 91 (1949); 27 Op. Att’y

Gen. 584 (1909).

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affmative action to bring the obligation back to life. The Court stated

its position as follows:

“It is not aIleged or claimed that these leases were made under any specilic authority

of law. And since at the time they were made there was no appropriation available for

the payment of rent after the first f~cal year, it is clear that in so far as their terms

extended beyond that year they were in violation of the express provisions of the

[Antideficiency Act]; and, being to that extent executed without authority of law, they

created no binding obligation against the United States after the first year. [Citations

omitted. ] A lease to the Government for a term of years, when entered into under an

appropriation available for but one fiscal year, is binding on the Government only for

that year. [Citations omitted. ] And it is plain that, to make it binding for any

subsequent year, it is necesaa~, not only that an appropriation be made available for

the payment of the rent, but that the Government, by its duly authorized officers,

affmatively continue the lease for such subsequent year; thereby, in effect, by the

adoption of the original lease, making a new lease under the authority of such

appropriation for the subsequent year.” ~. at 206–07.

GAO has relied heavily on Leiter in subsequent decisions. For

example, GAO refused to approve an automatic, annual renewal of a

contract for repair and storage of automotive equipment, even though

the contract provided that the government had a right to terminate.

The reservation of a right to termirtate does not save the contract from

the prohibition against binding the government in advance of

appropriations. 28 Comp. Gen. 553 (1949).

The Post Office wanted to enter into a contract for services and

storage of government-owned highway vehicles for periods up to four

years because it could obtain a more favorable flat rate per miIe of

operations instead of an item by item charge required if the contract

was for one year only. GAO held that any contract for continuous

maintenance and storage of the vehicles would be prohibited by 31

U.S.C. $1341 because it would obligate the government beyond the

extent of the existing appropriation. However, there would be no legal

objection to including a provision which gave the government art

affirmative option to renew the contract from year to year, not to

exceed four years. 29 Comp. Gen. 451 (1950).19

Where a contract gives the government a renewal option, it may not

be exercised until appropriations for the subsequent f~cal year

l~~me ~djtio~ _ we 67 COIIIP. (km. 190 (1988); 66 Comp. Gen. 556 (1987); 42 ComP.

Gen. 272,276 (1962); 37 Comp. Gen. 155,160 (1957); 37 Comp. Gen. 60,62 (1957); 36

Comp. Gen. 683 (1957); 9 Comp. Gen. 6 (1929); B-1 16427, 8eptember 27, 1955. 8ee also

B-97718, October 9,1950 (similar point but Leiter not cited).

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actually become available. 61 Comp. Gen. 184, 187 (1981). Under a

one-year contract with renewal options, the fact that funds become

available in subsequent years does not place the government under an

obligation to exercise the renewal option. Government Systems

Advisors, Inc. v. United States, 13 Cl. Ct. 470 (1987), afTd, 847 F.2d

811 (Fed. Cir. 1988).20

Note that, in Leiter, the inclusion of a contract provision conditioning

the government’s obligation on the subsequent availability of funds

was to no avail. In this connection, see ako 67 Comp. Gen. 190, 194

(1988); 42 Comp. Gen. 272,276 (1962); 36 Comp. Gen. 683 (1957).

If a “subject to availability” clause were sufficient to permit multi-year

contracting, the effect would be automatic continuation from year to

year unless the government terminated. If funds were not available

and the government nevertheless permitted or acquiesced in the

continuation of performance, the contractor would obviously be

performing in the expectation of being paid.zi Apart from questions of

legal liability, the failure by Congress to appropriate the money would

be a serious breach of faith. Congress would, as a practical, if not a

legal matter, have little real choice. This is another example of a we

of “coercive deficiency” the Antideficiency Act was intended to

prohibit. Thus, it is not enough for the government to retain the

option to terminate at any time if sufficient funds are not available.

Under Leiter and its progeny, the contract “dies” at the end of the

fiscal year, and may be revived only by affirmative action by the

government. This “new” contract is then chargeable to appropriations

for the subsequent year.

This is not to say that “subject to availability” clauses are not

important. They are, and are in fact required by the Federal

Acquisition Regulation in several situations: (1) contract actions

initiated prior to the availability of funds;zz (2) certain requirements

~O~e cl~ co~ bWd i~ Conclmion in part on Leiter and the Antideflciency Act; the

Federal Circuit relied on the language of the contract.

~l~e Fede~Acq@ition Reg~tiion states that encouraging a contractor to continue

performance in the absence of funds violates the AntideficiencyAct. 48 C.F.R. $ 32.704(c).

Z~A~b@ of ~ds, 48 C.F.R. $52.232-18.

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and indefinite-quantity contracts;z3 (3) fully funded

cost-reimbursement contracts;z4 (4) facilities acquisition and use;z5

and (5) incrementally funded cost-reimbursement contracts.zs FAR, 48

C.F.R, Subpart 32.7. While the prescribed contract clauses vary in

complexity, they all have one thing in common-each requires the

contracting officer to specifically notify the contractor of the

availability of funds and to confirm the notification in writing. The

objective of these clauses is compliance with the Antideficiency Act

and other funding smtutes. See ITI’ Federal Laboratories, ASBCA No.

12987, 69-2 BCA 117,849 (~69). What is not suftlcient is a simple

“subject to availability” clause which would permit automatic

continuation subject to the government’s right to terminate.

It maybe useful at this point to reiterate the basic principle that

compliance with the Antideficiency Act is determined on the basis of

when an obligation occurs, not when actual payment is scheduled to

be made. In the renewal option situation, for example, as long as

sufficient funds are available to cover the first year’s obligations, there

is no violation at the time the contract is made, and this is not affected

by the fact that payment may not be made until the foliowing year or

later. Of course, a violation would occur when payment becomes due

if the appropriation has become exhausted by that time.

Termination charges under renewal option contracts may also present

Antideficiency Act complications. As a general proposition, the

government has the right to terminate a contract “for the convenience

of the government” if that action is determined to be in the

government’s best interests. The Federal Acquisition Regulation

?.~Av~abifity of finds for the Next l%ctd Year, 48 C.F.R. $ 5~.~3~-19

!24Limition of Cost, 48 C.F.R. $52.232-20.

Z5LitiWon ~fco~t (Facilities), 48 C.F,R. $52.232-21.

zs~miwtion of ~ds, 48 C.F.R. !$ 52.232-22.

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prescribes the required contract clauses. 48 C.F.R. Subpart 49.5

(1991).’7 Under a termination for convenience, the contractor is

entitled to be compensated, including a reasonable profit, for the

performed portion of the contract, but may not recover anticipatory

profits on the terminated portion. ~, 48 C.F.R. $$49.201,49.202.

Total recovexy may not exceed the contract price. Id. s 49.207. In a

renewal option situation, the government may also=tiply decline to

exercise the option.

In the typical fiscal-year contract, termination does not pose a

problem because the basic contract obligation will be sufficient to

cover potential termination costs. Under a renewal option contract,

however, the situation may differ. A contractor who must incur

substantial capital costs at the outset has a legitimate concern over

recovering these costs if the government does not renew. A device

used to address this problem is a clause requiring the government to

pay termination charges or “separate charges” upon early

termination. As discussed in Chapter 5, separate charges have been

found to violate the bona fide needs rule to the extent they do not

reasonably relate to the value of current fiscal year requirements.

~, 36 Comp. Gen. 683 (1957), affd, 37 Comp. Gen. 155 (1957).

As such, whether we regard them as obligations against funds not yet

appropriated or obligations against current funds for the needs of

future years, they also violate the Antideficiency Act.

The leading case in this area is 56 Comp. Gen. 142 (1976), affd, 56

Comp. Gen. 505 (1977). The Burroughs Corporation protested the

award of a contract to the Honeywell Corporation to provide

automatic data processing Q4DP) equipment to the Mine Enforcement

and Safety Administration. If all renewal options were exercised, the

contract would run for 60 months after equipment installation. The

contract included a “separate charges” provision under which, if the

government failed to exercise any renewal option or otherwise

terminated prior to the end of the 60-month systems life, the

government would pay a percentage of all future years’ rentals based

on Honeywell’s “list prices” at the time of discontinuance or

termination. This provision violated the Antideficiency Act for two

reasons. Firstj it would amount to an obligation of fiscal-year funds

for the requirements of future years. And second, it would commit the

aTWhere a Tefinatjon for convenience clause is required by regulation, it wifl be read ~to the

contract whether expressly included or not. G.L. Christian and Associates v. United States, 312

F.2d 418 and 320 F.2d 345 (Ct. CL 1963), cert. denied, 375 U.S. 954.

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c. Indemnifkation

government to indeterminate liability because the contractor could

raise its list or catalog prices at any time, The government had no way

of knowing the amount of its commitment. Similar cases involving

separate charges are 56 Comp. Gen. 167 (1976), B-216718.2,

November 14, 1984, and B-190659, October 23, 1978.

The Burroughs decision also offers guidance on when separate

charges may be acceptable. One instance is where it is the only way

the government can obtain its needs. Cited in this regard was 8 Comp.

Gen. 654 (1929), a case invoking the installation of equipment and

the procurement of a water supply from a town. There, however, the

town was the only source of a water supply, a situation clearly

inapplicable to a competitive industry like ADP. 56 Comp. Gen. at

157. In addition, separate charges are permissible if they, together

with payments already made, reasonably represent the value of

requirements actually performed, Thus, where the contractor has

discounted its price based on the government’s stated intent to

exercise all renewal options, separate charges may be based on the

“reasonable value (e.g., ADP schedule price) of the actually

performed work at termination based upon the shortened term.” Id. at

158. However, termination charges may not be inconsistent with~he

Termination for Convenience clause remedy; for example, they may

not exceed the value of the contractor include costs not cognizable

under a “T for C.” Id. at 157. —

Where termination charges are otherwise proper, the Antideficiency

Act also requires that the agency have sufficient funds available to pay

them if and when the contingency materializes. ~, 62 Comp. Gen.

143 (1983). See also 8 Comp. Gen. 654,657 (1929) (same point but

Antideficiency Act not cited). This requirement is sometimes specified

in multi-year contracting legislation. An example is 40 U.S.C.

$ 757(c)(l), the Information Technology Fund. Congress may also,

of course, provide exceptions. ~,B-174839, March 20, 1984.

(1) Prohibition against unlimited liability

Under an indemnification agreement, one party promises, in effect, to

cover another party’s losses. It is no surprise that the government is

often asked to enter into indemnification agreements. The rule is that,

absent express statutory authority, the government may not enter into

an agreement to indemnifi where the amount of the government’s

liability is indefinite, indeterminate, or potentially unlimited. Such an

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agreement would violate both the Antideficiency Act, 31 U.S.C. s 1341,

and the Adequacy of Appropriations Act, 41 U.S.C. $11, since it can

never be said that sufficient funds have been appropriated to cover

the contingency. In plain English, you cannot purport to bind the

government to unlimited liability. The rule is not some arcane GAO

concoction. The Court of Claims stated in California-Pacflc Utilities

Co. v. United States, 194 Ct. Cl. 703,715 (1971):

“The United States Supreme Court, the Court of Claims, and the Comptroller General

have consistently held that absent an express provision in an appropriation for

reimbursement adequate to make such payment, [the Antideficiency Act] proscribes

indemnifkation on the grounds that it would constitute the obligation of funda not yet

appropriated. [Citations omitted, ]“

For example, in an early case, the Interior Department, as licensee,

entered into an agreement with the Southern Pacific Company under

which the Department was to lay telephone and telegraph wires on

property owned by the Iicensor in New Mexico. The agreement

included a provision that the Dep@ment was to inde- the

Company against any liabiti~ restdtirtg from the operation. Upon

reviewing the indemnity provision, the Comptroller General found

that it purported to impose indeterminate contingent liability on the

government. By including the indemnity provision, the contracting

officer had exceeded his authority, and the provision was held void.

16 Comp. Gen. 803 (1937).

Similarly, an indefinite and unlimited indenmitlcation provision in a

lease entered into by the General Services Administration without

statuto~ authority was held to impose no legal liability on the

government. 35 Comp. Gen. 85 (1955).

More recently, in 59 Comp. Gen. 369 (1980), the National Oceanic

and Atmospheric Administration desired to undertake a series of

hurricane seeding experiments off the coast of Australia in

cooperation with its Australian counterpart. The State Department, as

negotiator, sought GAO’S opinion on an Australian proposal under

which the United States would agree to indemn@ Australia against all

damages arising from the activities. State recognized that an unlimited

agreement would violate the Antideficiency Act and asked whether the

proposal would be acceptable if it specified that the government’s

liability would be subject to the appropriation of funds by Congress

for that purpose. GAO conceded that an agreement expressly

providing that the United States would not be obligated unless

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Congress chooses to appropriate the funds would not violate the letter

of the law. However, it would violate the spirit of the law because,

even though it would impose no legal obligation, it would impose a

moral obligation on the United States to make good on its promise.

This is still another example of the so-called “coercive deficiency.”

There was a way out, however, GAO concluded that the government’s

policy of self-insurance did not apply here. IW3AA could therefore

purchase private insurance, with the premiums hopefully to be shared

by the government of Australia. NOAA’s share of the insurance

premium would simply be a necessary expense of the project.

Another decision applying the general rule held that the Federal

Emergency Management Agency could not agree to provide

indeterminate indemnification to agents and brokers under the

National Flood Insurance Act, B-201394, April 23,1981. If FEMA

considered indemnification necessary to the success of its program, it

could either insert a provision limiting the government’s liability to

available appropriations or seek broader authority from Congress.

In B-201O72, May 3, 1982, the Department of Health and Human

Services questioned the use of a contract clause entitled

“Insurance–Liability to Third Persons,” found in the Federal

Procurement Regulations (predecessor to the Federal Acquisition

Regulation). The clause purported to permit federal agencies to agree

to reimburse contractors, without limit, for liabilities to third persons

for death, personal inju~, or property damage, arising out of

performance of the contract and not compensated by insurance,

whether or not caused by the contractor’s negligence. Since the clause

purported to commit the government to an indefinite liability which

could exceed available appropriations, the Comptroller GeneraI found

it in violation of the Antideficiency Act and the Adequacy of

Appropriations Act. This decision was affirmed upon reconsideration

in 62 Comp. Gen. 361 (1983), one of GAO’S more comprehensive

discussions of the indemnification problem.

For other cases applying or discussing the general rule, see 20 Comp.

Gen. 95, 100 (1940); 7 Comp. Gen. 507 (1928); 15 Comp. Dec. 405

(1909); B-1 17057, December 27, 1957; A-95749, October 14, 1938;

2 Op. Off. Legal Counsel 219, 223–24 (1978). A brief letter report

making the same point is Agreements Describing Liability in

Undercover Operations Should Limit the Government’s LiabiIity,

GGD-83-53 (March 15, 1983).

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,..; ,,,

,. .}.},

., ..,..

Some court cases are Frank v. United States, 797 F.2d 724,727 (9th

Cir. 1986); Lopez v. Johns Manville, 649 F. Supp. 149 (W.D. Wash.

1986), aff’d on other grounds, 858 F.2d 712 (Fed. Cir. 1988); In re

All Asbestos Cases, 603 F. Supp. 599 (D. Hawaii 1984); Wm. T.

Thompson Co. v. United States, 26 Cl. Ct. 17,29 (1992); Hercules

Inc. v, United States, 25 Cl. Ct. 616 (1992); Johns-Manville Corp. v.

United States, 12 Cl. Ct. 1 (1987). (Several of these are asbestos cases

in which the courts rejected claims of an implied agreement to

indemni&.) In Johns-Manville Corp. v. United States, the court stated:

“Contractual agreemenfi that create contingent liabilities for the Government serve

to create obligations of funds just as much as do agreements creating deftite or

certain liabilities. The contingent nature of the liability created by an indemnity

agreement does not so lessen its effect on appropriations as to make it immune to the

limitations of [the Antideficiency Act].” 12 CL Ct. at 25.

The Federal Labor Relations Authority has also applied the

anti-indemnity rule. National Federation of Federal Employees and

U.S. Department of the Interior, 35 F. L.R.A. 1034 (No. 113, 1990)

(proposal to indemnify union against judgments and litigation

expenses resulting from drug testing program held contrary to law

and therefore nonnegotiable); American Federation of State, County

and Municipal Employees and U.S. Department of Justice, 42 F. L.R.A.

412, 515–17 (No. 33, 1991) (same).

In some of the earlier cases-for example, 7 Comp. Gen. 507 (1928)

and 16 Comp. Gen. 803 (l937)–GA0 noted as further support for the

prohibition the then-existing principle that the United States was not

liable for the tortious conduct of its employees. Of course, since the

enactment of the Federal Tort Claims Act in 1946, this is no longer

true. Thus, the reader should disregard any discussion of the

government’s lack of tort liability appearing in the earlier cases. The

thrust of those cases, namely, the prohibition against open-ended

liability, remains valid.

A limited exception to the rule was recognized in 59 Comp. Gen. 705

(1980). Ln that case, the Comptroller General held that the General

Services Administration could agree to certain indemnity provisions in

procuring public utility services for government agencies under the

Federal Property and Administrative Services Act.

The extent of the exception carved out by 59 Comp. Gen. 705 was

discussed in a later decision, B-197583, January 19, 1981. There, GAO

+%

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once again applied the general rule and held that the Architect of the

Capitol could not agree to indemnify the Potomac Electric Power

Company for loss or damages resulting from PEPCO’S performance of

tests on equipment installed in government buildings or from certain

other equipment owned by PEPCO which could be installed in

government buildings to monitor electricity use for conservation

purposes. GAO pointed to two distinguishing factors that justfled-and

limited-the exception in 59 Comp. Gen. 705. First, in 59 Comp. Gen.

705, there was no other source from which the government could

obtain the needed utility services. Here, the testing and monitoring

could be performed by government employees. The second factor is

summarized in the following excerpt from B-197583:

“An even more important distinction, though, is that unlike the situation in the GSA

case [59 Comp. Gen. 705], the Architect has not previously been accepting the

testing services or using the impulse device from PEPCO and has therefore not

previously agreed to the liability represented by the proposed indemnity agreements.

In the GSA case, GSA merely sought to enter a contract accepting the same service

and attendant liability, previously secured under a non-negotiable tariff, at a rate

more advantageous to the Government. Here, however, the Government has other

meana available to provide the testing and monitoring desired.”

Thus, the case did not fall within the “narrow exception created by the

GSA decision,” and the proposed indemnity agreement was improper.

Citing 59 Comp. Gen. 369 (the hurricane seeding case previously

discussed), however, GAO suggested that the Architect consider the

possibility of obtaining private insurance.

The prohibition against incurring indefinite contingent liabilities is not

limited to indemnification agreements. It applies as well to other types

of contingent liabilities such as contract termination charges. The

cases are included in our preceding discussion of multi-year

contracting.

(2) When indemnification may be authorized

Indeti~lcation agreements maybe proper if they are limited to

available appropriations and are otherwise authorized. Before ever

getting to the question of amount, for an indemnity agreement to be

permissible in the first place, it must be authorized either expressly or

under a necessary expense theory. For example, in 1958, the National

Gallery of Art asked if it could enter into an agreement to indemni& a

corporation which was providing air conditioning equipment

maintenance training to members of the Gallery’s engineering staff.

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Under the proposal, the Gallery would indemni& the corporation for

losses resulting from death or @“ury to Gallery employees caused by

the negligence of the corporation or its employees. In reviewing the

proposal, GAO did not find it necessary to address the definite vs.

indefinite issue. There was simply no authority for the Gallery to use

appropriated funds to pay claims of this ~, nor could they be

considered authorized training expenses under the Government

Employees Training Act. B-137976, December 4, 1958. See also 63

Comp. Gen. 145, 150 (1984); 59 Comp. Gen. 369 (1980); B-201394,

Apti 23, 1981.

Once you cross the purpose hurdle-that is, once you determine that

the indemnification proposal you are considering is a legitimate object

on which to spend your appropriations-you are ready to grapple with

the unlimited liability issue.

One way to deal with this issue is, of course, to specifically iirnit the

amount of the liability assumed to available appropriations. Such a

limitation of an indemnity agreement may come about in either of two

ways: it may follow necessarily from the nature of the agreement

itself, coupled with an appropriate obligation or administrative

reservation of funds, or it may be expressly written into the

agreement. The latter alternative is the only acceptable one where the

government’s liability would otherwise be potentially unlimited.

For example, where the government rented buses to transport

Selective Service registrants for physical examination or induction,

there was no objection to the inclusion of an indemnity provision

which was a standard provision in the applicable motor carrier charter

coach tariff. 48 Comp. Gen. 361 (1968). Potential liability was not

indeftite since it was necessarily limited to the value of the motor

carrier’s equipment.

Similarly, under a contract for the lease of aircraft, the Federal

Ayiation Administration could agree to indemni& the owner for loss

or damage to the aircraft in order to eliminate the need to reimburse

the owner for the cost of “hull insurance” and thereby secure a lower

rental rate. The liability could properly be viewed as a necessary

expense incident to hiring the aircraft, FAA had no-year

appropriations available to pay for any such liability, and, as in the

Selective Service case, the agreement was not indefinite because

maximum liability was measurable by the fair market value of the

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aircraft. 42 Comp. Gen. 708 (1963), See aIso 22 Comp. Gen. 892

(1943) (Maritime Commission could amend contract to agree to

indemnify contractor against liabili~ to third parties, in lieu of

reimbursing contractor for cost of liability insurance premiums, to the

extent of available appropriations and provided liability was limited to

coverage of existing insurance policies).xs

In B-114860, December 19, 1979, the Farmers Home Administration

asked whether it could purchase surety bonds or enter into an

indemnity agreement in order to obtain the release of deeds of trust

for borrowers in Colorado where the original promissory notes had

been lost while in FmHA’s custody. Colorado law required one or the

other where the canceled original note could not be delivered to the

Colorado public trustee. GAO concluded that the indemnity agreement

was permissible as long as it was limited to an amount not to exceed

the original principal amount of the trust deed, The decision further

advised that FmHA should administratively reserve stilcient funds to

cover its potential liability. This aspect of the decision was

reconsidered in B-198161, November 25, 1980, Reviewing the

particular circumstances involved, GAO was unable to foresee

situations in which the government might be required to indenmifi

the public trustee, and accordingly advised FmHA that the

administrative reservation of funds would not be necessary.

In 63 Comp. Gen. 145 (1984), certain indemnification provisions in a

ship-chartering agreement were found not to impose indefinite or

potentially unlimited contingent liability because liability could be

avoided by certain separate actions solely under the government’s

control.

In cases like the Selective Service bus case (48 Comp. Gen. 361) and

the FAA aircratl case (42 Comp. Gen, 708), even though the

government’s potential liability is limited and determinable, this fact

alone does not guarantee that the agency will have stilcient funds

available should the contingency ripen into an obligation. This

concern is met in one of two ways. The fmt is the obligation or

administrative reservation of sufficient funds to cover the potential

liabili~. Ln particular cases, reservation maybe determined

2822 ~mp. Gen. 892 jS &ued in 62 Comp, Gen. 361,362-63 (1983), dJohwM~viue

Cwp. v. UNted States, 12 Cl. Ct. 1,23 (1987). The Claims Court noted the “significant

deficiency” of 22 Comp. Gen. 892 in that it nowhere mentions the Antideficiency Act.

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unnecessary, as in B-198161, above. Also, naturally, a specific

directive from Congress will render reservation of funds unnecessary.

See B-159141, August 18, 1967. The second way is for the agreement

to expressly limit the government’s liability to appropriations

available at the time of the loss with no implication that Congress will

appropriate funds to makeup any deficiency.

This second device-the express limitation of the government’s

liability to available appropriations-is sufficient to cure an otherwise

fatally defective (i.e., unlimited) indemnity proposal. GAO has

considered this type of provision in several contexts.

For example, the government may in limited circumstances assume

the risk of loss to contractor-owned property. While the maximum

potential liability would be determinable, it could be very large and

the “administrative reservation” of funds is not feasible. Thus,

without some form of limitation, such an agreement could result in

obligations in excess of available appropriations. The rules

concerning the government’s assumption of risk on property owned

by contractors and used in the performance of their contracts are set

forth in 54 Comp. Gen. 824 (1975), modifying B-168106, July 3,

1974. The rules are summarized below:z~

● If administratively determined to be in the best interest of the

government, the government may assume the risk for

contractor-owned property which is used solely in the performance of

government contracts.

“ The government may not assume the risk for contractor-owned

property which is used solely for nongovemment work. If the

property is used for both government and nongovernment work and

the nongovernment portion is separable, the government may not

assume the risk relating to the nongovernment work.

● Where the amount of a contractor’s commercial work is so

insignificant when compared to the amount of the contractor’s

government work that the government is effectively bearing the entire

risk of loss by in essence paying the full insurance premiums, the

government may assume the risk if administratively determined to be

in the best interest of the government.

Z~54 Comp, Gen. gz4 ~vefi~ a ~fiion of 42 Comp. Gen. 708, d~- ~ the ~fi~ m ‘e

extsnt it held that there was no need to either obligate or reserve funds. Thus, ina situation like

42 Comp. Gen. 708, the agency woufd presumably have to either obligate or wMnMmdw“ ely

reserve funds or include a provision like the one described in 54 Comp, Gen. 824.

Page 6-37 GAOfOGC-92-13 Appropr&tiorIs Law-VoL II
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● Any agreement for the assumption of risk by the government under

the above rules must clearly provide that, in the event the government

has to pay for losses, payments may not exceed appropriations

available at the time of the losses, and that nothing in the contract

may be considered as implying that Congress wiIl at a later date

appropriate funds sufficient to meetdeficiencies.

A somewhat different situation was discussed in 60 Comp. Gen. 584

(1981), involving an “installment purchase plan” for automatic data

processing equipment. Under the plan, the General Services

Administration would make monthly payments until the entire

purchase price was paid, at which time GSA would acquire

unencumbered ownership of the equipment. GSA’S obligation was

conditioned on its exercising an option at the end of each fiscal year

to continue payments for the next year. The contract contained a risk

of loss provision under which GSA would be required to pay the full

price for any equipment lost or damaged during the term. GAO

concluded that the equipment should be treated as contractor-owned

property for purposes of the risk of loss provision, and that the

provision would be improper unless one of the following conditions

were met:

1. The contract must include the provisions specified in 54 Comp.

Gen. 824 limiting GSA’S liability to appropriations available at the time

of the loss and expressly precluding any inference that Congress

would appropriate sufficient funds to meet any deficiency; or

2. If the contract does not include these provisions, then GSA must

obligate sufficient funds to cover its possible liability under the risk of

loss provision.

If neither of these conditions are met, the assumption of risk clause

could potentially violate the Antideficiency Act by creating an

obligation in excess of available appropriations if the contingency

occurs.

In a 1982 case, the Defense Department and the state of New York

entered into a contract for New York to provide certain support

functions for the 1980 Winter Olympic Games at Lake Placid,

New York. The contract provided for federal reimbursement of any

disability benefits which New York might be required to pay in case of

death or i@ry of persons participating in the operation. The contract

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speciiled that the government’s liability could not exceed

appropriations for assistance to the Games available at the time of a

disabling event, and that the contract did not imply that Congress

would appropriate funds stilcient to meet any deficiencies, Since

these provisions satisfied the test of 54 Comp. Gen. 824, the

indemnity agreement was not legally objectionable. B-2025 18,

January 8, 1982. Under this type of arrangement, the time to record

an obligation would be when the agency is notiiled that a disabling

event has occurred. The initial recording of course would have to be

based on an estimate.

Also, the decision in the National Flood Insurance Act case mentioned

above (B-201394, April 23, 1981) noted that the defect could have

been cured by inserting a clause along the Iines of 54 Comp. Gen.

824. The same point was made in B-201O72, May 3, 1982, also

discussed earlier. See dso National Railroad Passenger Corp. v.

United States, 3 Cl. Ct. 516,521 (1983) (indemnflcation agreement

between Federal Railroad Administration and Amtrak did not violate

AntideficiencyAct where liability was limited to amount of

appropriation).

When we frost stated the anti-indemnity rule at the outset of this

discussion, we noted that the rule applies in the absence of express

statutory authority to the contrary. Naturally, an indemnifkation

agreement, however open-ended it maybe, will be ‘legal” if it is

authorized by some express provision of law.

One statutory exception to the indemnification rules exists for certain

defense-related contracts by virtue of 50 U.S.C. $1431, often referred

to by its Public Law designation, PubIic Law 85-804. The statute

evolved from a temporary wartime measure, section 201 of the First

War Powers Act, 1941,55 Stat. 838,839. The implementing details

on indemnification are found in Executive Order No. 10789, as

amended.30

Another statutory exception is 42 U.S.C. $2210, the Price-Anderson

Act, which authorizes indemnification agreements with Nuclear

SOA de&lon ~ppro~g ~ ~demni~ ~eement under authority Of the ~W~ powem Act k

B-33801, April 19, 1943. A later related decision is B-33801, October 27, 1943. Both of theae

decisions involved the famed “Manhattan Project,” although that fact ia welf-concealed. The

decisiona had been clae.sfled, but we~ declassified in 1986.

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Regulatory Commission licensees and Department of Energy

contractors to pay claims resulting from nuclear accidents.

Some of the more recent cases have expressed the view that

indemnity agreements, even with limiting language, should not be

entered into without congressional approval in view of their

potentially disruptive fiscal consequences to the agency.a’ 63 Comp.

Gen. 145,147 (1984); 62 Comp. Gen. 361,368 (1983); B-242146,

August 16, 1991. Precisely what form this approval should take in

cases where the contractual language is sufficient to minimally Satisfi

the Antideficiency Act is not entirely clear.

In 1986, the Chairman of the Subcommittee on Nuclear Regulation,

Senate Committee on Environment and Public Works, in connection

with proposed Price-Anderson amendments the committee was

considering, asked GAO to identify possible funding options for a

statutory indemnifkation provision. GAO’S response, B-197742,

August 1, 1986, lists several options and notes the benefits and

drawbacks of each from the perspective of congressional flexibility.

The options range from creating a statutory entitlement with a

permanent indefinite appropriation for payment (indemnity

guaranteed but no congressional flexibility), to making payment fully

dependent on the appropriations process (full congressional

flexibility but no guarantee of payment). In between are various other

devices such as contract authority, use of contract provisions such as

those in 54 Comp. Gen. 824, and various forms of limited funding

authority.

The discussion in B-197742 highlights the essence of the

indemnifkation funding problem:

“An indemnity statute should generally include two featurea-the imierrud.tlcation

provisions and a funding mechanism. Inderrmi!lcation provisions can range from a

legally binding guarantee to a mere authorization. Funding mechanisms can similarly

vary in terms of the degree of congressional control and flexibility retained. It is

impossible to maximize both the assurance of payment and congressional flexibility.

Either objective is enhanced only at the expense of the other. . . .

. . . .

31T0 ~W~ Me ~~nti~ f~~ consequences, an authorized indemnity StWement entered

into in 1950 produced liability of over $64 million plus interest more than four decades later.

See E.L Du Pent De Nemours & Co. v. United States, 24 Cl. Ct. 635 (1991).

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“If payment is to be assured, Congress must yield control over funding, either in

whole or up to specified ceilings. . . . Conversely, if Congress is to retain funding

control, payment cannot be assured in any legally binding form and the

indemnitlcation becomes less than an entitlement.”

GAO’S bottom line: Whatever funding approach Congress may deem

desirable in a particular situation should be spelled out in the

legislation. Funding should never occur by default.

(3) Summary

Absent specific statutory authority, the government may generally not

enter into an indemnification agreement which would impose an

indefinite or potentially unlimited liability on the government. Since

the obligation or administrative resemation of funds is not a feasible

option in the indefinite liability situation, the only cure is for the

agreement to expressly limit the government’s liability to available

appropriations with no implication that Congress will appropriate the

money to meet any deficiencies. If the government’s potential liability

is limited and determinable, an agreement to indemnify will be

acceptable if it is otherwise authorized and if appropriate safeguards

are taken to protect against violation of the Antideficiency Act. These

safeguards may be either the obligation or administrative reservation

of sufficient funds to cover the potential liability, or the inclusion in

the agreement of a clause expressly limiting the government’s liability

to available appropriations.

While the preceding discussion reflects the relevant case law as of the

date of this publication, GAO is aware that the guidance provided does

not solve all problems. For example, limiting an indemnification

agreement to appropriations available at the time of the loss, as in

B-202518 (the New York Winter Olympics case), may remove the

“unlimited liability” objection, but it remains entirely possible that

liabilities incurred under such an agreement could exhaust the

agency’s appropriation and produce further Antideficiency Act

complications. Also, from the standpoint of the contractor or other

“beneficiary,” indemnification under these circumstances can prove

largely illusory, as it will obviously make a big difference whether the

incident giving rise to the claim occurs at the beginning or the end of

a fiscal year.

The indemnification area is concealedly a troublesome one. While

there are devices that may be employed to structure indemnification

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agreements in such a way as to make them legally acceptable, they are

no substitute for clear legislative authority. If an agency thinks that

indemnification agreements in a particular context are sufficiently in

the government’s interests, the preferable approach is for the agency

to go to Congress and seek specific statutory authori~.

d. Specif3c Appropriation In Chapter 4 we covered in some detail 31 US.C. $ 1301(a), which

Limitations/Purpose Violations prohibi~ the use of appropriations for purposes other than those for

which they were appropriated. As seen in that chapter, violations of

purpose availability can arise in a wide variety of contexts-charging

an obligation or expenditure to the wrong appropriation, making an

obligation or expenditure for an unauthorized purpose, violating a

statutory prohibition or restriction, etc. The question we explore in

this section is the relationship of purpose availability to the

Antideficiency Act. In other words, when and to what extent does a

purpose violation also violate the Antideficiency Act?

Why does it matter whether you have violated one statute or two

statutes? To our knowledge, nobody is keeping score. The reason here

is that, if the second statute is the Antideficiency Act, there are

reporting requirements and potential penaities to consider.

A useful starting point is the following excerpt from 63 Comp, Gen.

422,424 (1984):

“Not every violation of 31 U.S.C. $ 1301(a) also constitutes a violation of the

Antideficiency Act. . . . Even though an expenditure may have been charged to an

improper source, the Antideficiency Act’s prohibition against incurring obligations in

excess or in advance of available appropriations is not also violated unless no other

funds were available for that expenditure. Where, however, no other funds were

authorized to be used for the purpose in question (or where those authorized were

already obligated), both 31 U.S.C. $ 1301(a) and $ 1341(a) have been violated. In

addition, we would consider an Antideficiency Act violation to have occurred where

an expenditure was improperly charged and the appropriate fund source, although

available at the time, was subsequently obligated, making rear(justment of accounts

impossible.”

First, suppose an agency charges an obligation or expenditure to the

wrong appropriation account. This can involve either charging the

wrong appropriation for the same time period, or charging the wrong

fiscal year. The answer is found in the above passage from 63 Comp.

Gen. 422. If the appropriation that should have been charged in the

first place has s~lcient available funds to enable the a~ustment of

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AvaiJabiiity of Appmpriatiomx Amount

●

accounts, there is no Antideficiency Act violation. A violation exists if

the proper account does not have enough money to permit the

adjustment, and this includes cases where sufficient funds existed at

the time of the error but have since been obligated or expended. See

also 70 Comp. Gen. 592 (1991); B-222048, February 10, 1987;

B-95136, August 8, 1979.

Other cases illustrating or applying this principle are 57 Comp. Gen.

459 (1978) (grant funds charged to wrong fiscal year); B224702,

August 5, 1987 (contract modifications charged to expired accounts

rather than current appropriations); B-208697, September 28, 1983

(items charged to General Services Administration Working Capital

Fund which should have been charged to other operating

appropriations). Actually, the concept of “curing” a violation by

making an appropriate amustment of accounts is not new. See, e@,

16 Comp. Dec. 750 (1910); 4 Comp. Dec. 314,317 (1897). The

Armed Sewices Board of Contract Appeals has also followed this

principle. New England Tank Industries of New Hampshire, Inc.,

ASBCA No. 26474, 88-1 BCA 120,395 (1987).32

The next situation to consider is an obligation or expenditure in

excess of a statutory ceiling. This maybe an earmarked maximum in a

more general appropriation or a monetary ceiling imposed by some

other legislation. An obligation or expenditure in excess of the ceiling

violates 31 u.s.c. $ 1341(a). See, for example, the following:

Monetary ceilings on minor military construction (10 U.S.C. $ 2805):

63 Comp. Gen. 422 (1984); Continuing Inadequate Control Over

Programing [sic] and Financing of Construction, B-133316, July 23,

1964; Review of Programing [sic] and Financing of Selected

Facilities Constructed at Army, Navy, and Air Force Installations,

B-133316, January 24, 1961. (The latter two items are audit

reports.)~3

~~~though the ~~d’s decision was vacated and remanded on other grourKfs by tie ~urt of

Appeals for the Federal Circuit, New Engiand Tank Industries of New Hampaidre v. UniWd

States, 861 F.2d 685 (Fed. Cir. 1988), the court noted ita agreement with the Board’s

=ficiency Act conclusions. ~. at 692 n.15.

~~~other re~rt in this ~ries, making simijar fiidings Undera different S@hJtOrY a-,~

illegal Use of Operation and Maintenance Funds for Rehabilitation and Construction of Fat@

Housing and Construction of a Related i%ciii~. B-133102, August 30, 1963.

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● Monetary ceiling on lease payments for family housing units in foreign

countries (10 u.S.C. $ 2828(e)): report entitled Leased Military

Housing Costs in Europe Can Be Reduced by Improving Acquisition

Practices and Using Purchase Contracts, GAO/NSLMN85-l 13 (July 24,

1985), at 7-8; 66 Comp. Gen. 176 (1986); B-227527/B-227325,

October 21, 1987 (non-decision) letter.

● Ceiling in supplemental appropriation: B-204270, October 13, 1981

(dollar limit on Standard Level User Charge payable by agency to

General Services Administration).

● Ceiling in authorizing legislation: 64 Comp. Gen. 282 (1985) (dollar

limit on two Small Business Administration direct loan programs).

In a statutory ceiling case, the account aaustment concept described

above may or may not come into play. If the ceiling represents a limit

on the amount available for a particular object, then there generally

will be no other funds available for that object and hence no “correct”

funding source from which to reimburse the account charged. If,

however, the ceiling represents only a Iimit on the amount available

from a particular appropriation and not an absolute limit on

expenditures for the object, as in the minor military construction

cases, for example, then it maybe possible to cure violations by an

appropriate a@tstment. 63 Comp. Gen, at 424.

The final situation–and from this point on, the law gets a bit

murky-is an obligation or expenditure for an object which is

prohibited or simply unauthorized. In 60 Comp. Gen. 440 (1981), a

proviso in the Customs Service’s 1980 appropriation expressly

prohibited the use of the appropriation for administrative expenses to

pay any employee overtime pay in an amount in excess of $20,000. By

allowing employees to earn overtime pay in excess of that amount, the

Customs Service violated 31 U.S.C. $1341. The Comptroller GeneraI

expiained the violation as follows:

“When an appropriation act speciiles that an agency’s appropriation is not available

for a designated purpose, and the agency has no other funds for that purpose, any

oftlcer of the agency who authorizes an obligation or expenditure of agency funds for

that purpose violates the Antideflciency Act. Since the Congrees has not appropriated

funds for the designated purpose, the obligation may be viewed either as being in

excess of the amount (zero) available for that purpose or as in advance of

?qTM~ c- ~So Nus@ates that the Antideficiency Act applies to interagency tmnsactions the

same as any other obligations or expenditures.

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AvaUabUJty of Approprk@&ons: Amount

appropriationa made for that purpose. In either case the Antideficiency Act is

violated.” !g. at 441.

In B-201260, September 11, 1984, the Comptroller General advised

that expenditures in contravention of the Boland Amendment would

violate the Antideficiency Act (although none were found in that case).

The Boland Amendment, an appropriation rider, provided that

“[n~one of the funds provided in this Act may be used” for certain

activities in Central America. In B-229732, December 22, 1988, GAO

found the Antideficiency Act violated when the Department of

Housing and Urban Development used its funds for commercial trade

promotion activities in the Soviet Union, an activity beyond its

statutory authority. Similarly, a nonreimbursable interagency detail of

an employee, contrary to a specific statutory prohibition, produced a

violation in B-247348, June 22, 1992 (letter to Public Printer). All

three cases also involved purpose violations and are consistent with

60 Comp. Gen. 440, the rationale being that expenditures would be in

excess of available appropriations, which were zero.sS

However, one court has reached a result which may interpret the

Antideficiency Act somewhat differently. In Southern Packaging and

Storage Co. v. United States, 588 F. Supp. 532 (D.S.C. 1984), the

court found that the Defense Department had purchased certain

combat meal products (“MRE”) in violation of a “Buy American”

appropriation rider, which provided that “[n]o part of any

appropriation contained in this Act. . . shall be available” to procure

items not grown or produced in the United States. The court rqjected

the contention that the violation also contravened the Antideficiency

Act, stating:

“There is no evidence in this case to show that [the Defense Personnel Supply Center]

authorized expenditures beyond the amount appropriated by Congress for the

procurement of the MRE rations and the component foods thereof.” ~. at 550.

Given the sparse discussion in the decision and the fact that Congress

does not make specific appropriations for MRE rations, it is diftlcult

to discern precisely how the Southern Packagin g court would apply

the Antideficiency Act. While it is possible to reconcile Southern

35’rher~ we ~a few older cssss IMfing violations of both statutes, but they We of ~t~e help in

attempting to formulate a reasoned approach. Examples are 39 Comp. Gen. 388 (1959), which

does not discuss the relationship, and 22 Comp. Gen. 772 (1943), which includes a rationale,

now obsolete, based on the then-existing fack of authority to include interest stipulations in

contracts.

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e. Amount of Available

Appropriation or Fund

Packaging with the GAO cases, it is also possible to find an element of

inconsistency. In the opinion of the editors, this area requires further

careful thought. On the one hand, every expenditure for an

unauthorized purpose should not also violate the Antideficiency Act. It

does not seem to have been the intent of Congress that every

unauthorized entertainment expenditure or every payment for an

unauthorized long-distance telephone call be reported to Congress

and the President as an Antideficiency Act violation, a result that

could be reached by a broad application of the language of 60 Comp.

Gen. 440. Yet on the other hand, where Congress has expressly

prohibited the use of appropriated funds for some particular

expenditure, it seems clear that the “available appropriation” for that

item is zero. Further refinement in this area appears necessary.

Questions occasionally arise over precisely what assets an agency may

count for purposes of determining the amount of available resources

against which it may incur obligations.

The starting point, of course, is the unobligated balance of the

relevant appropriation. In Section F of this chapter, we discuss the

rule that subdivisions of a lump-sum appropriation appearing in

legislative history are not legally binding on the agency. They are

binding only if carried into the appropriation act itself, or are made

binding by some other statute. Thus, the entire unobligated balance of

an unrestricted lump-sum appropriation is theoretically available for

Antideficiency Act purposes. 55 Comp. Gen. 812 (1976).SG

Where an agency is authorized to retain certain receipts or collections

for credit to an appropriation or fund under that agency’s control,

those receipts are treated the same as direct appropriations for

purposes of obligation and the Antideficiency Act, subject to any

applicable statutory restrictions. q, 71 Comp. Gen. 224 (1992)

(National Technical Information Service may use subscription

pa~ents to defray its operating expenses but, under governing

legislation, may use customer advances only for costs directly related

to firm orders).

3~e WY ~~eoretic~y av~able” because matching an obligation ag~t the entire ~obM*d

balance will in many cases do little more than postpone the violation until later in the fiscal year.

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In addition, certain other assets maybe “counted,” that is, obligated

against, For example, OMB Circular No. A-34 includes certain

accounts receivable (also referred to as a form of “offsetting

collection”) as a “budgetary resource.”37 See also B-134474 -O. M.,

December 18, 1957. This does not mean anticipated receipts from

transactions that have not yet occurred or orders that have not yet

been placed. Obligations cannot be charged against anticipated

proceeds from art anticipated sale of prope~. 35 Comp. Gen. 356

(1955) (sale of old telephone equipment to be replaced with new

equipment); B-209758 -OAL, September 29, 1983 (saJe of assets

seized from embezzler). Thus, the Customs Service violated the

Antideficiency Act by obligating against anticipated receipts from

future sales of seized property unless it had stilcient funds available

from other sources to cover the obligation. B-237135, December 21,

1989. Similarly, the Comptroller General found that the Air Force

violated the Antideficiency Act by overobligating its Industrial Fund

based on estimated or anticipated customer orders. See report

entitled The Air Force Has Incurred Numerous Overobligations in its

Industrial Fund, AFMD-81-53 (August 14, 1981); 62 Comp. Gen. 143,

147 (1983). Even where receivables are properly included as

budgetary resources, an agency may not incur obligations against

receipts expected to be received after the end of the current fiscal

year without specific statutory authority. 51 Comp. Gen. 598,605

(1972).

GAO considered another aspect of the question in 60 Comp. Gen. 520

(1981). The General Services Administration buys furniture and other

equipment for other agencies through the General Supply Fund, a

revolving fund established by statute. Agencies pay GSA either in

advance or by reimbursement. For reasons of economy, GSA normally

makes consolidated and bulk purchases of commonly used items.

Concern over the application of the Antideficiency Act arose when, for

several reasons, the Fund began experiencing cash flow problems.

GSA wanted to obligate against the value of inventory in the Fund. In

other words, GSA wartted to consider the amount of the available

appropriation as the cash assets, including advances, in the Fund,

plus inventory.

37Bu@~ ~~wu~cI== ~chlde (a) OrdeRj frOIU Other gOVeINOent accounk ‘epr=nt ‘d

obligations of the ordering account, and (b) orders from the pubfic, including state and Iocaf

governments, but only to the extent accompanied by an advance. OMB Cucuk No. A-34, $31.4.

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The Comptroller General held that inventory in the General Supply

Fund did not constitute a “budgetary resource” against which

obligations could be incurred. The items in the inventory had already

been purchased with appropriated funds and could not be counted

again as a new budgetary resource. This was in accord with OMB

Circular No. A-34, which does not include inventory as a “budgetary

resource” for budget execution purposes. Thus, a violation of the

Antideficiency Act would occur at the moment GSA incurs obligations

in excess of available “budgetaty resources.”

Supplemental appropriations, requested but not yet enacted, may not

be counted as a budgetary resource. B-2301 17-0. M., February 8,

1989. See also OMB Circular No. A-34, $31.4.

f. Intent/Factors Beyond

Agency Control

A violation of the Antideficiency Act does not depend on intent or lack

of good faith on the part of contracting or other officials who obligate

or pay in advance or in excess of appropriations. Although these

factors may influence the applicable penalty, they do not affect the

basic determination of whether a violation has occurred. 64 Comp.

Gen. 282, 289 (1985). The Comptroller General once expressed the

principle in the following passage which, although stated in a slightly

different context, is equally applicable here:

Where a payment is prohibited by law, the utmost good faith on the part of the

officer, either in ignorance of the facts or in disregard of the facts, in purporting to

authorize the incurring of an obligation the payment of which is so prohibited, cannot

take the case out of the statute, otherwise the purported good faith of an officer could

be used to nullify the law.” A-86742, June 17, 1937.

To illustrate, a contracting officer at the United States Mission to the

North Atlantic Treaty Organization accepted an offer for installation of

automatic telephone equipment at twice the amount of the

unobligated balance remaining in the applicable account. The

Department of State explained that the contracting officer had

misinterpreted General Accounting Office regulations and

implementing State Department procedures. But for this

misinterpretation, additional funds could have been placed in the

account. State therefore felt that the transaction should not be

considered in violation of the Act. GAO did not agree and held that the

overobligation must be immediately reported as required by 31 U.S.C.

?j 1517(b). The official’s state of mind was not relevant in deciding

whether a violation had occurred. 35 Comp. Gen. 356 (1955).

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An overobligation may result from external factors beyond the

agency’s control. Whether this will produce an Antideficiency Act

violation depends on the particular circumstances.

In 58 Comp. Gen. 46 (1978), the Army asked whether it could make

payments to a contractor under a contract requiring payment in local

(foreign) currency where the original dollar obligation was well within

applicable funding limitations but, due to subsequent exchange rate

fluctuations, payment would exceed those limitations. The Army

argued that a payment under these circumstances should not be

considered a violation of the Act because currency fluctuations are

totally beyond the control of the contracting of%cer or any other

agency official. GAO disagreed. The fact that the contracting ofllcer

was a victim of circumstances does not make a payment in excess of

available appropriations any less illegal. (It is, of course, as with state

of mind, relevant in assessing penalties for the violation.) See also 38

Comp, Gen. 501 (1959) (severe adverse weather conditions or

prolonged employee strikes generally not sufficient to justify

overobligation by former Post Office Department, but facts in

particular case could justi& deficiency apportionment).

In apparent contrast, the Comptroller General stated in 62 Comp.

Gen. 692, 700 (1983) that an overobligation resulting from a judicial

award of attorney’s fees under 28 U.S.C. $ 2412(d), the Equal Access

to Justice Act, would not violate the Antideficiency Act. See also 63

Comp. Gen. 308,312 (1984) (judgments or board of contract appeals

awards under Contract Disputes Act, same answer);

B-227527/B-227325, October 21, 1987 (non-decision letter)

(amounts awarded by court judgment need not be counted in

determining whether statutory ceiling on lease payments has been

exceeded and Antideficiency Act thereby violated); A-37316, July 11,

1931 (land condemnation under Declaration of Taking Act which

results in deficiency judgment would not violate Antideficiency Act).3s

The, distinction appears to be based on the extent to which the agency

can act to avoid the overobligation even though it is imposed by some

external force beyond its control. Thus, the currency fluctuation

decision stated:

Wrn apparent ~ontra~ction to A-37316 is 54 Comp. Gen. 799 (1975).

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g. Exceptions

“[W]hen a contractm“ g officer fmdsthatthe dollars requiredto continue orrnake fti

payment on a contract will exceed a statutory limitation he may terminate the

contract, provided the terminatI“on costs will not exceed the statutory limitations.

Alternatively, the contracting officer may issue a stop work order and the agency may

ask Congress for a deficiency appropriation citing the currency fluctuation as the

reason for it9 reque9t.”

58 Comp. Gen. at 48. Similarly, the Postmaster General could curtail

operations if necewary. 38 Comp. Gen. at 504. See also 66 Comp.

Gen. 176 (1986) (Antideficiency Act would not preclude Air Force

from entering into lease for overseas family housing without provision

limiting annual payments to statutory ceiling, even though certain

costs couId conceivably escalate above ceiling, where good faith cost

estimates were well below ceiling and lease included termination for

convenience clause). Where the agency could have acted to avert the

overobligation but did not, the violation will not be excused. In

contrast, in the case of a payment ordered by a court, comparable

options (apart from seeking a deficiency appropriation) are not

available. (Curtailing activities after the overobligation has occurred

to avoid compounding the violation is a separate question.)

An exception to the Antideficiency Act is built right into 31 U.S.C.

$ 1341(a). The statute prohibits contracts or other obligations in

advance or excess of available appropriations, “unless authorized by

law.” This is nothing more than the recognition that Congress can

authorize exceptions to the statutes it enacts.

(1) Contract authority

At the outset, it is necessary to distinguish between “contract

authority” and the “authority to enter into contracts.” A contract is

simply a legal device employed by two or more parties to create

binding and legally enforceable obligations in furtherance of some

objective. The federal government uses contracts every day to procure

a wide variety of goods and services. An agency does not need specflc

statutory authority to enter into contracts. It has long been

established that a government agency has the inherent authority to

enter into binding contracts in the execution of its duties. Van

Brocklin v. Tennessee, 117 U.S. 151, 154 (1886); United States v.

Maurice, 26 F. Cas. 1211, 1216-17 (C.C.D. Va. 1823) (No. 15,747). It

should be apparent that these contracts, “authorized by law” though

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they may be, cannot be suffkient to constitute exceptions to the

Antideficiency Act, else the Act would be meaningless.

For purposes of the Antideficiency Act exception, a “contract

authorized bylaw” requires not only authority to enter into a contract,

but authority to do so without regard to the availability of

appropriations. While the former may be inherent, the latter must be

conferred by statute. The most common example of this is “contract

authority” as that term is defined and described in Chapter

2–statutory authority which speciilcally authorizes an agency to enter

into a contract in excess of, or prior to enactment of, the applicable

appropriation.

In some cases, the “exception” language wiJl be unmistakably

explicit. An example is the Price-Anderson Act, which provides

authority to “make contracts in advance of appropriations and incur

obligations without regard to” the Antideficiency Act. 42 U.S.C.

S 2210(j). Other examples of clear authority, although perhaps not as

explicit as the Price-Anderson Act, maybe found in 27 Comp. Gen.

452 (1948) (long-term operating-differential subsidy agreements

under the Merchant Marine Act); B-21 1190, April 5, 1983 (contracts

with states under the Federal Boat Safety Act); B-164497(3), June 6,

1979 (certain provisions of the Federal-Aid Highway Act of 1973);

B-168313, November 21, 1969 (interest subsidy agreements with

educational institutions under the Housing Act of 1950).

In an earlier case involving contract authority, GAO insisted that the

Corps of Engineers had to include a “no liability unless funds are later

made available” clause for any work done in excess of available funds.

2 Comp. Gen. 477 (1923). The Corps had trouble with this clause

because a Court of Claims decision, C.H. Leaven and Co. v. United

States, 530 F.2d 878 (Ct. Cl. 1976), allowed the contractor an

equitable a@stment for suspension of work due to a delay in

enacting an appropriation to pay him, notwithstanding the

“availability of funds” clause. In 56 Comp. Gen. 437 (1977), GAO

overruled 2 Comp. Gen. 477, deciding that section 10 of the River and

Harbor Act of 1922, by expressly authorizing the Corps to enter into

large multi-year civil works projects without seeking a full

appropriation in the first year, constituted the necessary exception to

the Antideficiency Act and a “funds available” clause was not

necessary. This applies as well to contracts financed from the Corps’

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Civil Works Revolving Fund. B-242974.6, November 26, 1991

(interred memorandum).

The rationale of 56 Comp. Gen. 437 has also been applied to

long-term fuel storage facilities contracts authorized by 10 U.S.C.

s 2388. New England Tank Industries of New Hampshire, Inc.,

ASBCA No, 26474,88-1 BCA 1120,395 (1987), vacated on other

grounds, New England Tank Industries of New Hampshire v. United

States, 861 F.2d 685 (Fed. Cir. 1988).

In 28 Comp. Gen. 163 (1948), the Commissioner of Reclamation was

authorized in an appropriation act to enter into certain contracts in

advance of appropriations but subject to a monetary ceiling. Since the

contract authority was explicit, with no language making it contingent

on appropriations being made at some later date, the statute

authorized the Commissioner to enter into a fm and binding

contract.

Contract authority may be ‘transferred” from one agency to another

in certain circumstances. The Bureau of Mines was authorized to enter

into a contract (in advance of the appropriation) to construct and

equip an anthracite research laboratory. The Bureau asked the

General Services Administration to enter into the contract on its

behalf pursuant to section 103 of the Federal Property and

Administrative Services Act of 1949, which provided that “funds

appropriated to . . . other FederaI agencies for the foregoing purposes

[execution of contracts and supervision of construction] shall be

available for transfer to and expenditure by the [General Services

Administration].” GAO held that the transfer language merely

authorized the transfer of funds appropriated to the various agencies

to GSA. It did not, however, preclude GSA from entering into contracts

before the funds were appropriated, in this instance, because GSA was

acting for the Bureau of Mines which clearly did have the necessary

authority, 29 Comp. Gen, 504 (1950).30

,

A somewhat different kind of contract authority is found in 41 U.S.C.

$11, the so-called Adequacy of Appropriations Act. An exception to

the requirement to have adequate appropriations-or any

appropriation at all-is made for procurements by the military

s~he ~ro~ion~ of the 1949 le~s~ion MUWij in 29 Comp. Gen. 504 have been suw=ded

by the Public Buildings Act of 1959. The case is inctuded here merely to illustrate the concept.

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departments for “clothing, subsistence, forage, fuel, quarters,

transportation, or medical and hospital supplies, which, however,

shall not exceed the necessities of the current year.” By

administrative interpretation, the Defense Department has limited this

authority to emergency circumstances where immediate action is

necessary. Department of Defense Directive No. 7220.8.

It should again be emphasized that to constitute an exception to 31

U.S.C. $ 1341(a), the “contract authority” must be specific authority to

incur the obligation in excess or advance of appropriations, not

merely the general authority any agency has to enter into contracts to

-out its fLUICtiOfiS.

Congress may grant authori~ to contract beyond the fiscal year in

terms which amount to considerably less than the type of “contract

authority” described above. An example is 43 US.C. S 388, which

authorizes the Secretary of the Interior to enter into certain contracts

relating to reclamation projects “which may cover such periods of

time as the Secret.my may consider necessary but in which the liability

of the United States shall be contingent upon appropriations being

made therefor.” While this provision has been referred to as an

exception to the Antideficiency Act (B-72020, January 9, 1948), it

authorizes only “contingent contracts” under which there is no legal

obligation to pay unless and until appropriations are provided. 28

Comp. Gen. 163 (1948). A similar example, discussed in B-239435,

August 24, 1990, is 38 U.S.C. $ 230(c) (Supp. II 1990), which

authorizes the Department of Veterans Affairs to enter into certain

leases for periods of up to 35 years but further provides that the

government’s obligation to make payments is “subject to the

availability of appropriations for that purpose.”

(2) Other obligations “authorized by law”

The “authorized by law” exception in 31 U.S.C, $ 1341(a) applies to

non-contractual obligations as well as to contracts. The basic

approach is the same. The authority must be more than just authority

to undertake the particular activity. In the broader sense, everything

government officials do should be authorized bylaw, otherwise they

shouldn’t be doing it. To constitute an Antideficiency Act exception,

the authority must be authority to incur the obligation in excess or

advance of appropriations.

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For example, statutory authority to acquire land and to pay for it from

a specfled fired is not an exception to the Antideficiency Act. It

merely authorizes acquisitions to the extent of funds available in the

specified source at the time of purchase. 27 Comp. Dec. 662 (1921).

Sirnihirly, the authority to conduct hearings does not, without more,

confer authority to do so without regard to available appropriations.

16 Comp. Dec. 75(I (1910). Provisions in the District of Columbia

Code requiring Saint Elizabeth’s Hospital to treat all patients who

meet admission eligibility requirements were held not to authorize the

Hospital to operate beyond the level of its appropriations. If

mandatory expenditures would cause a deficiency, the Hospital would

have to reduce nonmandatory expenditures. 61 Comp. Gen. 661

(1982).

Several cases have considered the effect of various statutory salary or

compensation increases. If a statutory increase is mandatory and does

not give anyone discretion to determine the amount, or if it gives

some administrative body discretion to determine the amount,

payment of which then becomes mandatory, the obligation is deemed

“authorized by law” for Antideficiency Act purposes. 39 Comp. Gen.

422 (1959) (salary increases for Wage Board employees); 22 Comp.

Gen. 570 (1942); 21 Comp. Gen. 335 (1941); B-168796, February 2,

1970 (mandatory statutory increase in retired pay for Tax Court

judges); B-107279, January 9, 1952 (mandatory increases for certain

legislative personnel). GAO has not treated the granting of increases

retroactively to correct past administrative errors as creating the

same type of exception. See 24 Comp. Gen. 676 (1945). Increases

which are discretionary do not permit the incurring of obligations in

excess or advance of appropriations. 31 Comp. Gen. 238 (1951)

(discretionary pension increases); 28 Comp. Gen. 300 (1948).40

Some other examples of obligations “authorized by law” for

Antideficiency Act purposes are:

c Marqiatorypilot program in Vermont under Farms for the Future Act

of 1990 (loan guarantees and interest assistance). B244093, July 19,

1991.

402fJ ~mp. Gen. 300 c~ncemed incre~ to Wage Board employeea under le@sltion which ~

now obsolete (see 39 Comp. Gen. 422, cited in the text). However, it is stilf useful for the basic

proposition, stated on page 302, that nonmandatay increases are not obligations “authorized by

law” as that term is used in 31 US.C. $ 1341(a).

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Mandatory entitlement programs administered by Department of

Veterans Affairs. B-226801, March 2, 1988.

Mandatory transfer from one appropriation account to artother where

“donor” account contained insufficient unobligated funds. 38 Comp.

Gen. 93 (1958).

Statute authorizing Interstate Commerce Commission to order a

substitute rail carrier to service shippers abandoned by their primary

carrier in emergency situations, and to reimburse certain costs of the

substitute carrier, B-196132, October 11, 1979.

Provision in Criminal Justice Act of 1964 imposing mandatmy

deadline on commencement of certain programs which would

necessarily involve creation of financial obligations. B-156932,

August 17, 1965.

What are perhaps the outer limits of the “authorized by law”

exception are illustrated in B-159141, August 18, 1967. The Federal

Aviation Administration had entered into long-term, incrementdy

funded contracts for the development of a civil supersonic aircraft

(SST). To ensure compliance with the AntideficiencyAct, the FM

each year budgeted for, and obligated, su.ftlcient fimds to cover

potentizd termination liability. The appropriations committees became

concerned that unnecessarily large amounts were being tied up this

way, especially in light of the highly remote possibility that the SST

contracts would be terminated. In considering the FAA’s 1968

appropriation, the House Appropriations Committee reduced the

FAA’s request by the amount of the termination reserve, and in its

report directed the FAA not to obligate for potential terminah‘on costs

The Comptroller General advised that if the Senate Appropriations

Committee did the same thing-a specflc reduction tied to the amount

requested for the reserve, coupled with clear direction in the

legislative history-then an overobligation resulting from a

termination would be regarded as “authorized bylaw” and not in

violation of the Antideficiency Act.

3. Voluntary Services

Prohibition

a. Introduction The next portion of the Antideficiency Act is 31 U.S.C. $ 1342:

“An officer or employee of the United States Government or of the District of

Columbia government may not accept volunt.my services for either government or

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employ personal services exceeding that authorized bylaw except for emergencies

involving the aafety of human life or the protection of property, . . .“

This provision fwst appeared, in almost identical form, in a deficiency

appropriation act enacted in 1884 (23 Stat. 17). Although the original

prohibition read “hereafter, no department or officer of the United

States shall accept. . . . “ it was included in an appropriation for the

(then) Indian OffIce of the Interior Department, and the Court of

Claims held that it was applicable only to the Indian OffIce. Glaveyv.

United States, 35 Ct. Cl. 242,256 (1900), reversed on other grounds,

182 U.S. 595 (1901). The Comptroller of the Treasury continued to

apply it across the board. See, ~, 9 Comp. Dec. 181 (1902). In any

event, the applicability of the 1884 statute soon became moot because

Congress reenacted it as part of the AntideficiencyAct in 1905 (33

Stat. 1257) and again in 1906 (34 Stat. 48).

Prior to the 1982 recodification of Title 31, section 1342 was

subsection (b) of the Antideficiency Act, while the basic prohibitions

of section 1341, previously discussed, constituted subsection (a). The

proximity of the two provisions in the Code reflects their relationship,

as section 1342 supplements and is a logical extension of section

1341. If an agency cannot directly obligate in excess or advance of its

appropriations, it should not be able to accomplish the same thing

indirectly by accepting ostensibly “voluntary” services and then

presenting Congress with the bill, in the hope that Congress will

recognize a “moral obligation” to pay for the benefits

conferred-another example of the so-called “coercive deficiency.” In

this connection, the chairman of the House committee responsible for

what became the 1906 reenactment of the voluntary services

prohibition stated:

“It is a hard matter to deal with. We give to Departments what we think is ample, but

they come back with a deficiency. Under the law they can [not] make these

deficiencies, and Congress can refuse to allow them; but after they are made it is very

hard to refuse to allow them. . . ,“41

In addition, as we have noted previously, the Antideficiency Act was

intended to keep an agency’s level of operations within the amounts

Congress appropriates for that purpose. The unrestricted ability to

use voluntary services would permit circumvention of that objective.

Thus, without section 1342, section 1341 could not be fhlly effective.

4139 COW. WC. 3687 (1906), quoti in 30 OP. Att’y Gen. 51,53-54 (1913).

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Note that 31 U.S.C. $1342 contains two distinct although closely

related prohibitions: It bans, f~st, the acceptance of any type of

voluntary services for the United States, and second, the employment

of personal services “exceeding that authorized by law.”

b. Appointment Without (1) The rules– general discussion

Compensation and Waiver of salary One of the evils which the “personal services” prohibition was

designed to correct was a practice which was controversial in 1884

but is much less so today. Lower-grade government employees were

being asked to “volunteer” their services for overtime periods in

excess of the periods allowed by law, thus enabling the agency to

economize at the employees’ expense but nevertheless generating

claims by the employees.42 Although this practice appears to have

receded, the applicability of 31 U.S.C. $1342 remains relevant in a

number of contexts involving senices by government employees or

services which would otherwise have to be performed by government

employees.

One of the earliest questions to arise under 31 U.S.C. $ 1342-and the

issue that seems to have generated the greatest number of cases-was

whether a government ofilcer or employee, or an individual about to

be appointed to a government position, could voluntarily work for

nothing or for a reduced salary. Initially, the Comptroller of the

Treasury ducked the question on the grounds that it did not involve a

payment from the Treasury, and suggested that the question was

appropriate to take to the Attorney GeneraL 19 Comp. Dec. 160, 163

(1912).

The very next year, the Attorney General tackled the question when

asked whether a retired Army officer could be employed as

superintendent of an Indian school without additional compensation.

In what has become the leading case construing 31 U.S.C. S 1342, the

Attorney General replied that the appointment would not violate the

voluntary services prohibition. 30 Op. Att’y Gen. 51 (1913). In

reaching this conclusion, the Attorney General drew a distinction

which the Comptroller of the Treasury thereafter adopted, and which

GAO and the Justice Department continue to follow to this day-the

distinction between “voluntary services” and “gratuitous services.”

4215 ~W. Rec. 3410-] I (1884), quoted in 30 OP. Att’Y Gen. 51,54-55 (1913).

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The key passages from the Attorney General’s opinion are set forth

below:

“[I]t seems plain that the words ‘voluntary service’ were not intended to be

synonymous with ‘gratuitous service’ and were not intended to cover services

rendered in an ofilcial capacity under regular appointment to an office otherwise

permitted bylaw to be nonsrdaried. in their ordinary and normal mcaning theae worda

refer to service intruded by a private person se a ‘volunteer’ and not rendered

pursuant to any prior contractor obligation. . . . It would be stretching the language a

good deal to extend it so far as to prohibit official services without compensation in

those instances in which Congress has not required even a minimum salary for the

office.

The context corroborates the view that the ordinruy meaning of ‘voluntary aeMces’

was intended. The very next words ‘or employ personal service in excess of that

authorized by law’ deal with contracturd services, thus making a balance between

‘acceptance’ of ‘voluntary service’ (i.e., the cases where there is no prior contract)

and ‘employment’ of ‘personal service’ (i.e., the cases where there is such prior

contract, though unauthorized bylaw).

. . . .

“Thus it is evident that the evil at which Congress was aiming was not appointment or

employment for authorized semices without compensation, but the acceptance of

unauthorized services not intended or agreed to be gratuitous and therefore likely to

~ford a basis for a future claim upon Congress. . . .“ ~. * 52–53, 55.

The Comptroller of the Treasury agreed with this interpretation:

“[The statute] was intended to guard against ciaims for compensation. A service

offered clearly and distinctly as gratuitous with a proper record made of that fact does

not violate this statute againat acceptance of voluntary service. An appointment to

serve without compensation which is accepted and properly recorded is not a

violation of [31 U.S.C. $ 1342], and is valid ifothenviee lawful.” 27 Comp, Dec. 131,

132–33 (1920).

Two main rules emerge from 30 Op. Att’y Gen. 51 and its progeny.

First, if compensation for a position is freed by law, art appointee may

not agree to serve without compensation or to waive that

compensation in whole or in part (these are two different ways of

saying the same thing). Id. — at 56. This portion of the opinion did not

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break any new ground. The courts had already held, based on public

policy, that compensation f~ed by law could not be waived.4s Second,

and this is really just a corollary to the rule just stated, if the level of

compensation is discretionary, or if the relevant statute prescribes

only a maximum (but not a minimum), the compensation can be set at

zero, and an appointment without compensation or a waiver, entire or

parthd, is permissible. ~.; 27 Comp. Dec. at 133.

Both GAO and the Justice Department have had frequent occasion to

address these issues, and there are numerous decisions illustrating

and applying the rules.44

In a 1988 opinion, the Justice Department’s Office of Legal Counsel

considered whether the Iran-Contra Independent Counsel could

appoint Professor Laurence Tribe as Special Counsel under an

agreement to serve without compensation. Applying the rules set

forth in 30 Op. Att’y Gen. 51, the OLC concluded that the

appointment would not contravene the Antideficiency Act since the

statute governing the appointment set a maximum salary but no

minimum. Independent Counsel’s Authority to Accept Voluntary

Services – Appointment of Laurence H. Tribe, Op. Off. Legal Counsel,

May 19, 1988.

Similarly, the Comptroller General held in 58 Comp. Gen. 383 (1979)

that members of the United States Metric Board could waive their

salaries since the relevant statute merely prescribed a maximum rate

of pay. In addition, since the Board had statutory authority to accept

gifts, a member who chose to do so could accept compensation and

then return it to the Board as a gift. Both cases make the point that

compensation is not “freed by law” for purposes of the “no waiver”

rule where the statute merely sets a maximum limit for the salary.

43~~vey”, u~~~ s-, 182 U.S. 595 (1901); hfikrV. Utim ‘u! 103” 413

(C.C.S.D.N.Y. 1900). Seealso9 Comp. Dec. 101 (1902). Later cawefollowing Glav are

MacMath v. United States, 248 U.S. 151 (1918), and United States v, Andrewa, 40 U.S. 90 !+

(1916). The policy rationale is that to permit agencies to disregard compensation prescribed by

statute could work to the disadvantage of those who cannot, or are notwillhgto, accept the

poeition forlessthan the prescribed sahry. See Miller, —— 103 F. at 415-16.

44%me c- ~ ~dtion t. th~~ ci~d h the text are 32 Comp. Gen. 236 (1952); 23 ~mP,

Gen. 109, 112 (1943); 14 Comp. Gen. 193 (1934); 34 Op. Att’y Gen. 490 (1925); 30 Op. Att’y

Gem 129 (1913); 3 OP. Off. Legal Counsel 78 (1979).

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A good illustration of the kind of situation 31 U.S.C. $1342 is designed

to prevent is 54 Comp. Gen. 393 (1974). Members of the Commission

on Marihuana and Drug Abuse had, apparently at the chairman’s

urging, agreed to waive their statutory entitlement to $100 per day

while involved on Commission business. The year after the

Commission ceased to exist, one of the former members changed his

mind and fded a claim for a portion of the compensation he would

have received but for the waiver. Since the $100 per day had been a

statutory entitlement, the purported waiver was invalid and the former

commissioner was entitled to be paid. Similar claims by any or all of

the other former members would also have to be allowed. If

insufficient funds remained in the Commission’s now-expired

appropriation, a deficiency appropriation would be necessary.

A few earlier cases deal with fact situations similar to that considered

in 30 Op. Att’y Gen. 51 –the acceptance by someone already on the

federal payroll of additional duties without additional compensation.

In 23 Comp. Gen. 272 (1943), for example, GAO concluded that a

retired Army officer could serve, without additional compensation, as

a courier for the State Department. The voluntary services

prohibition, said the decision, does not preclude “the assignment of

persons holding office under the Government to the performance of

additional duties or the duties of another position without additional

compensation.” Id. at 274. Another World War II decision held that

American Red Cr~ss Volunteer Nurses’ Aides who also happened to be

full-time federal employees could perform volunteer nursing services

at Veterans Administration hospitals. 23 Comp. Gen. 900 (1944).

One thing the various cases discussed above have in common is that

they involve the appointment of an individual to an official

government position, permanent or temporary. Services rendered

prior to appointment are considered purely voluntary and, by virtue of

31 U.S.C. $1342, cannot be compensated. Lee v. United States, 45 Ct.

Cl. 57,62 (1910); B-181934, October 7, 1974.45 It also follows that

post-retirement services, apart from appointment as a reemployed

annuitant, are not compensable. 65 Comp. Gen. 21 (1985). In that

case, an alleged agreement to the contrary by the individual’s

supervisor was held unauthorized and therefore invalid.

45B1819s4 ~m ~ver~ed by 55 Comp. Gen. 109 (19i’5) be@U+S additio~ fio~on

showed that the individual was a “de facto employee” performing under color of appointment

and with a claim of right to the position. A “voluntary” employee has no such ‘color of

appointment” or indicia of lawful employment.

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It has also been held that experts and consultants employed under

authority of 5 u.s.c. S 3109 may serve without compensation without

violating the Antideficiency Act as long as it is clearly understood and

agreed that no compensation is to be expected. 27 Comp. Gen. 194

(1947); 6 Op. Off. Legal Counsel 160 (1982). Cf. B-185952, August

18, 1976 (uncompensated participation in pre~id conference, on-site

inspection, and bid opening by contractor engineer who had prepared

specifkations regarded as “technical violation” of 31 U.S.C. $ 1342).

Several of the decisions note the requirement for a written record of

the agreement to serve without compensation. Proper documentation

is important for evidentimy purposes should a claim subsequently be

attempted. ~, 27 Comp. Gen. 194, 195 (1947); 26 Comp. Gen. 956,

958 (1947); 27 Comp. Dec. 131,132-33 (1920); 2 Op. Off. Legal

Counsel 322,323 (1977).

The rule that compensation freed by statute may not be waived does

not apply if the waiver or appointment without compensation is itself

authorized by statute. The Comptroller General stated the principle as

follows in 27 Comp. Gen. 194,195 (1947):

“[E]ven where the compensation for a particular position is freed by or pursuant to

law, the occupant of the position may waive his ordinary right to the compensation

fixed for the position and thereafter forever be estopped from claiming and receiving

the salary previously waived, if there be some applicable provision of law authorizing

the acceptance of services without compensation.” (Emphasis in original.)

In B-139261, June 26, 1959, GAO reiterated the above principle, and

gave several examples of statutes stilcient for this purpose. Another

example may be found in 2 Op. Off. Legal Counsel 322 (1977).

At this point a 1978 case, 57 Comp. Gen. 423, must be noted although

its effect is not entirely clear. The decision held that a statute

authorizing the Agency for International Development to accept gifts

of “services of any kind” did not meet the test of 27 Comp. Gem. 194,

and therefore did not permit waiver of salary by employees whose

compensation is fwed by statute. While 57 Comp. Gen. 423 did not

purport to overrule or modiij any prior cases, it seems to say that

statutory authority to accept gifts of personal service is no longer

adequate to permit waiver of compensation freed by statute. However,

in B-139261, June 26, 1959, not cited in 57 Comp. Gen. 423, one of

the examples given of statutes that would authorize waiver of

compensation fixed by law was a gift statute very similar to the AID

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statute involved in 57 Comp. Gen. 423. If 57 Comp. Gen, 423 is in fact

a modification of the prior case law, then an agency would need

explicit authority to employ persons without compensation. For an

example of such authority, see 32 Comp. Gen. 236 (1952).

The rules for waiver of salary or appointment without compensation

may be summarized as follows:

If compensation is not f~ed by statute, i.e., if it is f~ed

. . admwtmtively or if the statute merely prescribes a maximum but no

minimum, it maybe waived as long as the waiver qualifles as

“gratuitous.” There should bean advance written agreement waiving

all claims<

If compensation is freed by statute, it may not be waived, the

voluntary vs. gratuitous distinction notwithstanding, without speciilc

statutory authori~. Unfortunately, the decisions are not consistent as

to what form this authority must take, and the extent to which

authority to accept donations of services (as opposed to explicit

authority to employ persons without compensation) will suffice is not

entirely clear.

If the employing agency has statutory authority to accept gifts, the

employee can accept the compensation and return it to the agency as

a gift. Even if the agency has no such authority, the employee can still

accept the compensation and donate it to the United States Treasury.

(2) Student interns

In 26 Comp, Gen. 956 (1947), the (then) Civil Semice Commission

asked whether an agency could accept the uncompensated semices of

college students as part of a college’s internship program. The

students “would be assigned to productive work, i.e., to the regular

work of the agency in a position which would ordinarily fall in the

competitive civil service.” The answer was no. Since the students

would be used in positions the compensation for which was freed by

law, Md since compensation freed by law cannot be waived, the

proposal would require legislative authority.

TM.@ years later, the Justice Department’s CMi5ce of Legal Counsel

considered another internship program and provided similar advice.

Without statutory authority, uncompensated student semices that

furthered the agency’s mission, i.e., “productive work,” could not be

accepted. 2 Op. Off. Legal Counsel 185 (1978).

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In view of the long-standing rule, supported as we have seen by

decisions of the Supreme Court, prohibiting the waiver of

compensation for positions required bylaw to be salaried, GAO and

Justice had little choice but to respond as they did. Clearly, however,

this was not a very useful answer. It meant that uncompensated

student interns could be used only for essentially “make-work” tasks,

a result of benefit to neither the students nor the agencies.

The solution, apparent from both cases, was legislative authority,

which Congress provided later in 1978 by the enactment of 5 US.C.

~ 3111. The statute authorizes agencies, subject to regulations of the

Office of Personnel Management, to accept the uncompensated

services of high school and college students, “[notwithstanding

section 1342 of Title 31,” if the setices are part of an agency

program designed to provide educational experience for the student

and will not be used to displace any employee.

In a 1981 decision, GAO held that 5 U.S.C. $3111 does not authorize

the payment of travel or subsistence expenses for the students. 60

Comp. Gen. 456 (1981).

A paper entitled A Part-Time Clerkship Program in Federal Courts for

Law Students by the Honorable Jack B. Weinstein and Wtiiarn B.

Bonvillian, written in 1975 and printed at 68 F,R.D. 265. considered

the use of iaw students as part-time law clerks, without pay, to mostly

supplement the work of the regular law clerks in furtherance of the

ofilcial duties of the courts+ Based on the statute’s legislative history

and 30 Op. Att’y Gen. 51, previously discussed, Judge Weinstein

concluded that the program did not violate the Antideflciency Act.

Although this aspect of the issue is not explicitly discussed in the

paper, it appears that the compensation of regular law clerks is f~ed

administratively. See 28 U.S.C. $ 604(a)(5). In any event, the

Administrative Office of the United States Courts was given authority

in 1978 to “accept and utilize voluntary and uncompensated

(gratuitous) services.” 28 U.S.C. S 604(a) (17).

(3) Program beneficiaries

Programs are enacted from time to time to provide job training

assistance to various classes of individuals. The training is intended to

enable participants to enter the labor market at a higher level of skill

and thereby avoid the need for public assistance. Also, in more recent

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years, the concept of “workfare” (work as a requirement for the

receipt of public assistance) has begun to evolve. Questions have

arisen under programs of this nature as to the authority of federal

agencies to serve as employers.

A 1944 case, 24 Comp. Gen. 314, considered a vocational

rehabilitation program for disabled war veterans. GAO concluded that

31 U.S,C. S 1342 did not preclude federal agencies from providing

on-the-job training, without payment of salary, to program

participants. The decision is further discussed in 26 Comp. Gen. 956,

959 (1947).

In 51 Comp. Gen. 152 (1971), GAO concluded that 31 U.S.C. ~ 1342

precluded federal agencies from accepting work by persons hired by

local government-s for public service employment under the

Emergency Employment Act of 1971. Four years later, GAO modified

the 1971 decision, holding that a federal agency could provide work

without payment of compensation to (i.e., accept the free services o~

trainees sponsored and paid by nonfederal organizations from federal

grant funds under the Comprehensive Employment and Training Act

of 1973.54 Comp. Gen. 560 (1975). The decision stated:

“[Considering that the services in question will arise out of a program initiated by

the Federal Government, it would be anomalous to conclude that such setices are

proscribed as being voluntary within the meaning of 31 U,S.C. $ [1342]. That is to

say, it is our opinion that the utilization of enrollees or trainees by a Federal agency

under the circumstances here involved need not be considered the acceptance of

‘vohmtary services’ within the meaning of that phrase as used in 31 U.S.C.

$ [1342 ].” ~. at561.

Several issues under a workfare program (Community Work

Experience Program) are discussed in B-211079.2, January 2, 1987.

The relevant program legislation expressly authorizes program

participants to perform work for federal agencies “notwithstanding

section 1342 of title 31 .“ 42 U.S.C. $ 609(a)(4)(A). The decision seems

to say that the statutory authority was necessmy not because of the

Antideficiency Act but to avoid an impermissible augmentation of

appropriations. It is in any event consistent in result with 24 Comp.

Gen. 314 and 54 Comp. Gen. 560. The relationship between voluntary

service and the augmentation concept is expIored later in this chapter

in our discussion of augmentation of appropriations.

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(4) Applicability to legislative and judicial branches

The applicability of 31 U.S.C. $1342 to the legislative and judicial

branches of the federal government does not appear to have been

seriously questioned.

The salary of a Member of Congress is f~ed by statute and therefore

cannot be waived without specific statutoxy authority. B-159835,

Apti 22, 1975; B-123424, March 7, 1975; B-123424, April 15, 1955;

A-8427, March 19, 1925; B-206396.2, November 15,1988

(non-decision letter). However, as each of these cases points out,

nothing prevents a Senator or Representative from accepting the

salary and then, as several have done, donate part or all of it back to

the United States Treasury.

In 1977, GAO was asked by a congressional committee chairman

whether section 1342 applies to Members of Congress who use

volunteers to perform official office functions. GAO responded fmt

that section 1342 seems clearly to apply to the legislative branch. GAO

then summariz ed the rules for appointment without compensation and

advised that, to the extent that a particular employee’s sahuy could be

freed administratively by the Member in any amount he or she chooses

to set, that employee’s salary can be fued at zero. (This once again

was essentially an application of the rules set down decades earlier in

30 Op. Att’y Gen. 51 and 27 Comp. Dec. 131.) B-69907, February 11,

1977.

The salary of a federal judge is also ‘fwed by lawn-even more so

because of the constitutional prohibition against diminishing the

compensation of a federal judge while in office. A case applying the

standard “no waiver” rules to a federal judge is B-157469, July 24,

1974.

c. Other Voluntary Sewices Before entering the mainstream of the modern case law, two very

early decisions should be noted. In 12 Comp. Dec. 244 (1905), the

Comptroller of the Treasury held that an offer by a meat-packing firm

to pay the salaries of Department of Agricukure employees to conduct

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a pre-export pork inspection could not be accepted because of the

voluntary services prohibition.4d Similar cases have since come up, but

they have been decided under the augmentation theory without

reference to 31 U.S.C. s 1342. See 59 Comp. Gen. 294 (1980) and 2

Comp. Gen. 775 (1923), discussed later in Section E of this chapter.

To restate, apart from the 1905 decision, which has not been foliowed

since, the voluntary services prohibition has not been applied to

donations of money.

In another 1905 decision, a vendor asked permission to install an

appliance on Navy property for trial purposes at no expense to the

government. Presumably, if the Navy liked the appliance, it would

then buy it. The Comptroller pointed out an easily overlooked phrase

in the voluntary service prohibition–the seMces that are prohibited

are voluntary services “for the United States.” Here, tempcmuy

installation by the vendor for trial purposes amounted to service for

his own benefit and on his own behalf, “as an incident to or necessary

concomitant of a proper exhibition of his appliance for sale.”

Therefore, the Navy could grant permission without violating the

Antideficiency Act as long as the vendor agreed to remove the

appliance at his own expense if the Navy chose not to buy it. 11

Comp. Dec. 622 (1905). This case, although it has not been cited

since, would appear to be still valid.

For the most part, the cases have been resolved by applying the

“voluntary vs. gratuitous” distinction fwst enunciated by the Attorney

General in 30 Op. Att’y Gen. 51, discussed above. The underlying

philosophy is perhaps best conveyed in the following statement by the

Justice Department’s Office of Legal Counsel:

“Although the interpretation of $ [1342] has not been entirely consistent over the

years, the weight of authority doee support the view that the section was intended to

eliminate subsequent claims against the United Statea for compensation of the

‘volunteer,’ rather than to deprive the government of the benefit of truly gratuitous

.WMCeS.” 6 @ Off. Le@l counsel 160, 162 (1982).

In an early formulation that has often been quoted since, the

Comptroller General noted that:

461t would ~ contravene 18 U.S,C. 3209, which prohibits PSyment Of*O$ of government

employees from nongovermnent sources. This statute did not exist at the time of the 1905

decision.

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‘The voiuntary service referred to in [31 U.S.C. 5 1342] is not necawarily

synonymous with gratuitous service, but contemplates service furnished on the

initiative of the party rendering the same without request from, or agreement with,

the United States therefor. Services furrdshed pursuant to a formal contract are not

voluntary within the mesning of said section.” 7Comp.Gen.810,811 (1928).

In 7 Comp. Gen. 810, a contractor had agreed to prepare

stenographic transcripts of Federal Trade Commission public

proceedings and to furnish copies to the FTC without cost, in

exchange for the exclusive right to report the proceedings and to sell

transcripts to the public. The decision noted that consideration under

a contract does not have to be monetary consideration, and held that

the contract in question was supported by sufficient legal

consideration. While the case is thus arguably not a true “voluntary

services” case, it has often been cited since, not so much for the

actual holding but for the above-quoted statement of the rule.

For example, in B-13378, November 20, 1940, the Comptroller

General held that the Secretary of Commerce could accept gratuitous

services from a private agency, created by various social science

associations, which had offered to assist in the preparation of official

monographs analyzing census data. The setices were to be rendered

under a cooperative agreement which specf]ed that they would be

free of cost to the government. The Commerce Department agreed to

furnish space and equipment, but the monographs would not

otherwise have been prepared.

Applying the same approach, GAO found no violation of 31 U.S.C.

$1342 for the Commerce Department to accept services by the

Business Advisory Council, agreed in advance to be gratuitous.

B-125406, November 4, 1955. Likewise, the Commission on Federal

Paperwork could accept free services from the private sector as long

as they were agreed in advance to be gratuitous. B-182087-0. M.,

November 26, 1975.

In a,1 982 decision, the American Association of Retired Persons

wanted to volunteer services to assist in crime prevention activities

(distribute literature, give lectures, etc.) on Army installations. GAO

found no Antideficiency Act problem as long as the services were

agreed in advance, and so documented, as gratuitous. B-204326,

July 26, 1982.

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In B-177836, April 24, 1973, the Army had entered into a contract

with a landowner under which it acquired the right to remove trees

and other shrubs from portions of the landowner’s prope~ incident

to an easement. A subsequent purchaser of the property complained

that some tree stumps had not been removed, and the Army

proceeded to contract to have the work done. The landowner then

submitted a claim for certain costs he had incurred incident to some

preliminary work he had done prior to the Army’s contract. Since the

landowner’s actions had been purely voluntary and had been taken

without the knowledge or consent of the government, 31 U.S.C.

91342 prohibited payment.

In 7 Comp. Gem 167 (1927), a customs official had stored, in his own

private boathouse, a boat which had been seized for smuggling

whiskey. The customs ofiicial later fded a claim for storage charges.

Noting that “the United States did not expressly or impliedly request

the use of the premises and therefore did not by implication promise

to pay therefor,” GAO concluded that the storage had been purely a

voluntary service, payment for which would violate 31 U.S.C. $1342.

As if to prove the proverb that there is nothing new under the sun

(Ecclesiastes 1:9), GAO considered another storage case over 50 years

later, B-194294, July 12, 1979. There, an Agriculture Department

employee had an accident while driving a government-owned vehicle

assigned to him for his work, A Department official ordered the

damaged vehicle towed to the employee’s driveway, to be held there

until it could be sold. Since the government did have a role in the

employee’s assumption of responsibility for the wreck, GAO found no

violation of 31 U.S.C. $1342 and allowed the employee’s claim for

reasonable storage charges on a quantum meruit basis.

Section 1342 covers any type of service which has the effect of

creating a legal or moral obligation to pay the person rendering the

service. Naturally, this includes government contractors. The

prohibition includes arrangements in which government contracting

oftlcers solicitor permit-tacitly or otherwise-a contractor to

continue performance on a “temporarily unfunded” basis while the

agency, which has exhausted its appropriations and can’t pay the

contractor immediately, seeks additional appropriations. This was one

of the options considered in 55 Comp. Gen. 768 (1976), discussed

previously in connection with 31 U.S.C. $ 1341(a). The Army proposed

a contract modification which would explicitly recognize the

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d. Exceptions

government’s obligation to pay for any work performed under the

contract, possibly including reasonable interest, subject to subsequent

availability of funds. The government would use its best efforts to

obtain a deficiency appropriation, Certif@@s to this effect would be

issued to the contractor, including a statement that any additional

work performed would be done at the contractor’s own risk. In return,

the contractor would be asked to defer any action for breach of

contract.

GAO found this proposal “of dubious validity at best.” Although the

certifkate given to the contractor would say that continued

performan ce was at the contractor’s own risk, it was clear that both

parties expected the contract to continue. The government expected

to accept the benefits of the contractor’s performance and the

contractor expected to be paid–eventually-for it. This is certainly

not an example of a clear written understanding that work for the

government is to be performed gratuitously. Also, the proposal to pay

interest was improper as it would compound the Antideficiency Act

violation. Although 55 Comp. Gen. 768 does not specifkmlly discuss

31 U.S.C. $1342, the relationship should be apparent.

‘l%vo kinds of exceptions to 31 U.S.C. $1342 have already been

discussed-where acceptance of services without compensation is

specifically authorized bylaw, and where the government and the

volunteer have a written agreement that the services are to be

rendered gratuitously with no expectation of future payment.

There is a third exception, written into the statute itself: “emergencies

involving the safety of human life or the protection of proper@.” As

can be seen from the cases discussed, with very few exceptions, GACI

has not been called upon to construe the scope of the safety of human

life or protection of property exceptions in recent decades. However,

the Attorney General in 1981 considered the exceptions in the context

of funding gaps, and articulated a somewhat broader standard than

that applied in the early GAO decisions. The opinion, published at 5

Op. Off. Legal Counsel 1 (1981), and a 1990 amendment to 31 U.S.C.

$1342 designed to retrench somewhat from that broader view, are

discussed in more detail later under the Funding Gaps heading.

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(1) Safety of human life

The services provided to protect human life must have been rendered

in a true emergency situation. What constitutes an emergency is

discussed in several decisions.

In 12 Comp. Dec. 155 (1905), a municipal health ofllcer disinfected

seversl government buildings to prevent the further spread of

diphtheria. Several cases of diphtheria had already occurred at the

government compound, including four deaths. The Comptroller of the

Tressury found that the services had been rendered in an emergency

involving the loss of human life, and held accordingly that the doctor

could be reimbursed for the cost of materials used and the fair value

of his services.

In another case, the S.S. Rexmore, a British vessel, deviated from its

course to London to answer a call for help from an Army transport

ship carrying over 1,000 troops. The ship had sprung a leak and

appeared to be in danger of sinking. The Comptroller General aIlowed

a claim for the vessel’s actual operating costs plus lost profits

attributable to the services performed. The Rexmore had rendered a

tangible service to save the lives of the people aboard the Army

transport, as well ss the transport vessel itself. 2 Comp. Gen. 799

(1923).

On the other hand, GAO denied payment to a man who wss boating in

the Florida Keys and saw a Navy seaplane make a forced landing. He

offered to tow the aircraft over two miles to the nearest island, and did

so. His claim for expenses wss denied. The aircraft had landed intact

and the pilot was in no immediate danger. Rendering service to

overcome mere inconvenience or even a potential future emergency is

not enough to overcome the statutory prohibition. 10 Comp. Gen. 248

(1930).

(2) Protection of property

The main thing to remember here is that the property must be either

government-owned property or property for which the government

has some responsibility. The standard was established by the

Comptroller of the Treasury in 9 Comp. Dec. 182, 185 (1902) as

follows:

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e. VohN@Y Creditors

“I think it is clear that the statute does not contempk+te property in which the

Government has no immediat@ interest or concern; but I do not think it was intended

to apply exclusively to proper@ owned by the Government. The tmm ‘property’ is

used in the statute without any qusi@ing words, but it ie used in connection with the

rendition of services for the Government, The implication is, therefore, ciear that the

property in contemplation is properly in which the Government has an immediate

interest or in connection with which it has some duty to perform.”

In the cited decision, an individual had gathered up mail scattered in a

train wreck and delivered it to a nearby town. The government did not

“own” the mail but had a responsibility to deliver it. Therefore, the

services came within the statutory exception and the individual could

be paid for the value of his services.

Applying the approach of 9 Comp. Dec. 182, the Comptroller General

held in B-152554, February 24, 1975, that section 1342 did not

permit the Agency for International Development to make

expenditures in excess of available funds for disaster relief in foreign

countries.

A case clearly within the exception is 3 Comp. Gen. 979 (1924),

allowing reimbursement to a municipality which had rendered

fuefighting assistance to prevent the destruction of federal property

where the federal properly was not within the territory for which the

municipal f~e department was responsible.

An exception was also recognized in 53 Comp. Gen. 71 (1973), where

a government employee brotight in food for other government

employees in circumstances which would justi& a determination that

the expenditure was incidental to the protection of government

property in an extreme emergency.

A related line of decisions are the so-called “voluntary creditor”

cases. A voluntary creditor is an individual, government or

nongovernment, who pays what he or she perceives h be a

government obligation from personal funds. The rule is that the

voluntary creditor cannot be reimbursed, although there are

signif~cant exceptions. For the most part, the decisions have not

related the voluntary creditor prohibition to the Antideficiency Act,

with the exception of one very early case(17 Comp. Dec. 353 (1910])

and two more recent ones (53 Comp. Gen. 71 (1973) and 42 Comp.

Gen. 149 (1962)). The voluntary creditor cases are discussed in detail

in Chapter 12.

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4. Apportionment of

Appropriations

a. Statutory Requirement for As a general proposition, an agency does not have the full amount of

Apportionment its appropriations available to it at the beginning of the f~cal year.

This is because of what, prior to the 1982 recodiilcation of Title 31,

was subsection (c) of the Antideficiency Act and is now 31 U.S.C.

$1512. Subsection (a) of section 1512 establishes the basic

requirement:

“(a) Except as provided in this subchapter, an appropriation available for obligation

for a deftite period shall be apportioned to prevent obligation or expenditure at a

rate that would indicate a necessity for a deficiency or supplemental appropriation for

the period. An appropriation for an indeftite period and authority to make

obligations by contract before appropriations shall be apportioned to achieve the

most effective and economical use. An apportionment maybe reapportioned under

this section.”

Although apportionment was fwst required legislatively in 1905 (33

Stat. 1257), the current form of the statute derives from a revision

enacted in 1950 as section 1211 of the General Appropriation Act,

1951. The 1950 revision was part of an overall effort by Congress to

arnpl@ and enforce the basic restrictions against incurring

deficiencies in 31 U.S.C. $1341.

Section 1512(a) requires that all appropriations be administratively

apportioned so as to ensure their obligation and expenditure at a

controlled rate which will prevent deficiencies from arising before the

end of a f~cal year. Although section 1512 does not tell you who is to

make the apportionment, section 1513, discussed later, specifies the

President as the apportioning official for most executive branch

agencies. The function was delegated to the Director of the Bureau of

the Budget in 1933,47 and now reposes in the successor to that ofilce,

the Director, Office of Management and Budget (OMB).

The term “apportionment” may be defined as-

“A distribution made by the Office of Management and Budget of amounts available

for obligation. . . in an appropriation or fund account. Apportionments divide

amounts available for obligation by specific time periods (usuaUy quarters), activities,

4TExWutive Order No. 6166, $16 (Jme lo, 1933).

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projects, objects, or a combination thereof. The amounts so apportioned limit the

amount of obligations that maybe incurred.”48

Apportionment is required not only to prevent the need for deficiency

or supplemental appropriations, but also to insure that there is no

drastic curtailment of the activity for which the appropriation is made.

36 Comp. Gen. 699 (1957). See also 38 Comp. Gen. 501 (1959). In

other words, the apportionment requirement is designed to prevent an

agency from spending its entire appropriation before the end of the

f~cal year and then putting the Congress in a position in which it must

either grant an additional appropriation or allow the entire activity to

come to a halt.

In 36 Comp. Gen. 699 (1957), the Director of OMB reapportioned Post

Office funds in such a way that the fourth quarter funds were

substantially less than those for the third quarter. The Comptroller

General stated:

‘A drastic curtailment toward the close of a f~cal year of operations carried on under

a final year appropriation is aprima facie indication of a failure to so apportion an

appropriation ‘as to prevent obligation or expenditure thereof in a manner which

would indicate a necessity for deficiency or supplemental appropriations for such

period.’ In our view, this is the very situation the amendment of the law in 1950 was

intended to remedy.” 36 Comp. Gen. at 703.

Therefore, the very fact that a deficiency or supplemental

appropriation is necessary or that services in the last quarter must be

drastically cut suggests that the apportioning authority has violated

31 U.S.C. $ 1512(a).

A more recent case involved the Department of Agriculture’s Food

Stamp Program. The program was subject to certain spending ceilings

which, it seemed certain, the Department was going to exceed if it

continued its present rate of expenditures. The Department feared

that, if it was bound by a formula in a different section of its

authorizing act to pay the mandated amount to each eligible recipient,

it would have to stop the whole program when the funds were

exhausted. Based on both the Antideficiency Act and the program

legislation, GAO concluded that there had to be an immediate pro rata

reduction for all participants. Discontinuance of the program when

4SGA0, A Glossary of Terms Used in the Federal Budget Process, PAD-81-27, at 34 (1981). See

also OMB Circular No. A-34, ! 21.1; B167034, September 1, 1976.

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b. Establishing Reserves

the funds ran out would violate the purpose of the apportionment

requirement. A-51604, March 28, 1979.

This is not to say that every sub-activity or project must be carried out

for the full fiscal year, on a reduced basis, if necessary. Section

1512(a) applies to amounts made available in an appropriation or

fund. Where, for example, the Veterans Administration nursing home

program was funded from moneys made available in a general,

lump-sum VA medical care appropriation, the agency was free to

discontinue the nursing home program and reprogram the balance of

its funds to other programs ako funded under that heading.

B-167656, June 18, 1971. (It would be different if the nursing home

program had received a line-item appropriation.)

The requirement to apportion applies not only to “one year”

appropriations and other appropriations limited to a fwed period of

time, but also to “no-year” money and even to contract authority

(authority to contract in advance of appropriations). 31 U.S.C.

$$ 1511(a), 1512(a). In the case of indefinite appropriations and

contract authority, the requirement states only that the apportionment

is to be made in such a way as “to achieve the most effective and

economical use” of the budget authority. —Id, !$ 1512(a).

Prior to the 1982 recodification of Title 31, the apportionment

requirement applied explicitly to government corporations which are

instrumentalities of the United States.40 While the applicability of the

requirement has not changed, the recodification dropped the explicit

language, viewing it as covered by the broad definition of “executive

agency” in 31 U.S.C. $102.50 The authority of some government

corporations to determine the necessity of their expenditures and the

manner in which they shall be incurred is not sufficient to exempt a

corporation from the apportionment requirement. 43 Comp. Gen. 759

(1964).

Section 1512(c) of 31 U.S.C. provides as follows:

“(c)(1) In apportioning or reapportioning an appropriation, a reserve maybe

established only4931 ~.s.c. $ 665(d)(2) (19’6 ‘d”)”

~~e ~~~~c~on now follOWiIlg 31 U.S.C. 51511.

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that a reasonable reserve for contingencies was properly within the

agency’s discretion.

c. Method of Apportionment The remaining portions of 31 U.S.C. $1512 are subsections (b)

(d), set forth below:

“(b)(1) An appropriation subject to apportionment is apportioned by–

“(A) months, calendar quarters, operating seasons, or other time periods;

“(B) activities, functions, projects, or objects; or

and

“(C) a combination of the ways referred to in clauses (A) and (B) of this paragraph.”

“(d) An apportionment or reapportionment shall be reviewed at least 4 times a year

by the official designated in section 1513 of this title to make apportionments.”

These two provisions are largely technical, implementing the basic

apportionment requirement of 31 u.s.C. $ 1512(a).

Section 1512(b) makes it clear that apportionments need not be made

strictly on a monthly, quarterly, or other fwed time basis, nor must

they be for equal amounts in each time period. The apportioning

officer is free to take into account the “activities, functions, projects,

or objects” of the program being funded and the usual pattern of

spending for such programs in deciding how to apportion the funds.

Absent some statutory provision to the contrary, OMB’S determination

is controlling. Thus, for example, in Maryland Department of Human

Resources v. Department of Health and Human Services, 854 F.2d 40

(4th Cir. 1988), the court upheld OMB’S quarterly apportionment of

social services block grant funds, rejecting the state’s contention that

it should receive its entire annual allotment at the beginning of the

fiscal year.

Section 1512(d) requires a minimum of four reviews each year to

enable the apportioning officer to make reapportionments or other

a@stments as necessary.

d. Control of Apportionments The former subsection (d) of the Antideficiency Act, now 31 U.S.C.

$ 1513, deals with the mechanisms for making the apportionments or

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economic, fiscal, or policy considerations which are extraneous to the

individual appropriation or are in derogation of the appropriation’s

purpose. B-125187, September 11, 1973; B-130515, July 10, 1973.

See also State Highway Commission of Missouri v. Volpe, 479 F.2d

1099 (8th Cir. 1973), which held that the right to reserve funds in

order to “effect savings” or due to “subsequent events,” etc., must be

considered in the context of the applicable appropriation statute. Id.

at 1118. If the apportioning authority goes beyond the authority —

delegated, section 1512(c) is violated.

The Impoundment Control Act of 1974 amended section 1512(c) by

eliminating the “other developments” clause and by prohibiting the

establishment of appropriation reserves except as provided under the

Antideficiency Act for contingencies or savings, or as provided in

other specific statutory authority. The intent was to preclude reliance

on section 1512(c) as authority for “policy impoundments.” City of

New Haven v. United States, 809 F.2d 900,906 (D.C. Cir. 1987); 54

Comp. Gen. 453 (1974); B-148898, August 28, 1974.

Examples of permissible reserves were discussed in 51 Comp. Gen.

598 (1972) and 51 Comp. Gen. 251 (1971). The first case concerned

the provisions of a long-term charter of several tankers for the Navy.

The contract contained options to renew the charter for periods of 15

years. In the event that the Navy declined to renew the charter short of

a full 15-year period, the vessels were to be sold by a Board of

Trustees, acting for the owners and bondholders. Any shortfall in the

proceeds over the termination value was to be unconditionally

guaranteed by the Navy. GACI held that it would not violate the

Antideficiency Act to cover this contingent liability by setting up a

reserve. 51 Comp. Gen. 598 (1972). In 51 Comp. Gen. 251 (1971),

GAO said that it was permissible to provide in regulations for a clause

to be inserted in future contracts for payment of interest on delayed

payments of a contractor’s claim. Reserving suftlcient funds from the

appropriation used to support the contract to cover these potential

interest costs would protect against potentiai Antideficiency Act

violations.

In 1981, the Community Services Administration established a reserve

as a cushion against Antideficiency Act violations while the agency

was terminating its operations. Grantees argued that the reserve

improperly reduced amounts available for discretionary grants. In

Roge& v. United States,

Page 6-76

14 CL Ct. 39, 46–47 (1987), the court held

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“[T]he apportionment power may not lawfully be used as a form of executive control

or influence over agency functions. Rather, it may only be exercised by OhfB in the

manner and for the purposes prescribed in 31 US.C. $ [ 15121–i.e., to prevent

obligation or expenditure in a manner which would give rise to a need for deficiency

or supplemental appropriations, to achieve the most effective and economical use of

appropriationa and to establish reserves either to provide for contingencies or to

effect savings which are in ftiherance of or at least consistent with, the purposes of

an appropriation.

“As thus limited, the apportionment process serves a necessary purpose-the

promotion of economy and efficiency in the use of appropriationa. . . .

. . . .

“[S]ince a useful purpose is served by OMB’S proper exercise of the apportionment

power, we do not believe that the potential for abuse of the power ia suftlcient to

justify removing it from OMB.”

Thus, the appropriations of independent regulatory agencies like SEC

are subject to apportionment by OMB, but OMB may not lawfully use its

apportionment power to compromise the independence of those

agencies. To use the example given in B-163628, if OMB tried to use

apportionment to prevent the SEC from hiring personnel authorized

by Congress, that would be an abuse of its apportionment powers. But

this possibility does not justify denying OMB’S basic apportionment

authority altogether.

The Impoundment Control Act may permit OMB, in effect, to delay the

apportionment deadlines prescribed in 31 U.S.C. $ 1513(b). For

example, when the President sends a rescission message to Congress,

the budget authori~ proposed to be rescinded may be withheld for up

to 45 days pending congressional action on a rescission bill. 2 U.S.C.

$3 682(3), 683(b). In B-115398.33, August 12, 1976, GAO responded

to a congressional request to review a situation in which an

apportionment had been withheld for more than 30 days after

enactment of the appropriation act. The President had planned to

submit a rescission message for some of the funds but was late in

drafting and transmitting his message. If the full amount contained in

the rescission message could be withheld for the entire 45-day period,

and Congress ultimately disallowed the full rescission, release of the

funds for obligation would occur only a few days before the budget

authority expired. The Comptroller General suggested that, where

Congress has completed action on a rescission bill rescinding ordy a

part of the amount proposed, OMB should immediately apportion the

Psge 6-79 GAO/OGC-92-13 Appropriations L8w-VO1. ~
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reapportionments of appropriations which are required by section

1512.

Section 1513(a) applies to appropriations of the legislative and

judiciaI branches of the federal government, as well as appropriations

of the International Trade Commission and the District of Columbia

governrnent.5’ The authority to apportion is given to the “ofllcial

having administrative control” of the appropriation. Apportionment

must be made no later than 30 days before the start of the fiscal year

for which the appropriation is made, or within 30 days after the

enactment of the appropriation, whichever is later. The

apportionment must be in writing.

Section 1513(b) deals with apportionments for the executive branch.

The President is designated as the apportioning authority. As we have

seen, the function has been delegated to the Director, OMB. Time

limits are established, first for submission of information by the

various agency heads to OMB to enable it to make reasonable

apportionments. Although primary responsibility for a violation of

section 1512 lies with the Director of OMB, the head of the agency

concerned may also be found responsible if he or she fails to send the

Director accurate information on which to base an apportionment.

8econdly, the Director of OMB has up to 20 days before the start of the

fwcal year or 30 days after enactment of the appropriation act,

whichever is later, to make the actual apportionment and notify the

agency of the action taken. Again, the apportionments must be in

writing.

In B-163628, January 4, 1974, GAO responded to a question from the

chairman of a congressional committee about the power of OMB to

apportion the funds of independent regulato~ agencies, such as the

Securities and Exchange Commission. The Comptroller General

agreed with the chairman that independent agencies should generally

be free from executive control or interference. The response then

stated:

blA ~-ent ~ro~ion of Mw included h the 1988 District of Colubti appropriation @

states that appropriations for the D.C. government “shall not be subject to apportionment

except to the extent specifmally provided by statute.” Pub. L. No. 100-202,$135, 101 Stat.

1329, 1329-102 (1987). Thus, the applicability of 31 U.S.C. $ 1513(a) tQ the D.C. government

will be extremely limited.

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submit immediately a detailed report of the facts to Congress. The report shd bs

referred to in submitting a proposed deficiency or supplemental appropriation.”

Section 1515 provides certain exceptions to the requirement of

section 1512(a) that apportionments be made in such manner as to

assure that the funds will last throughout the f~cal year and there will

be no necessity for a deficiency appropriation. Under subsection

1515(a), deficiency apportionments are permissible if necessary to

pay salary increases granted pursuant to law to federal civilian and

military personnel. Under subsection 1515(b), apportionments can be

made in an unbalanced manner (e.g., an entire appropriation could be

obligated by the end of the second quarter) if the apportioning officer

determines that (1) a law enacted subsequent to the transmission of

budget estimates for the appropriation requires expenditures beyond

administrative control, or (2) there is an emergency involving safety

of human life, protection of property, or immediate welfare of

individuals in cases where an appropriation for mandatory payments

to those individuals is insufficient.

Prior to 1957, what is now subsection 1515(b) prohibited only the

m~in~ of ~ apportionment indicating the need for a deficiency or

supplemental appropriation, so the only person who could violate this

subsection was the Director of OMB. An amendment in 1957 made it

equally a violation for an agency to request such art apportionment.

See 38 Comp. Gen. 501 (1959).

The exception for expenditures “beyond admuus “ “ trative control”

required by a statute enacted after submission of the budget estimate

may be illustrated by statuto~ increases in compensation, although

many of the cases would now be covered by subsection (a). We noted

several of the cases in our consideration of when an obligation or

expenditure is ‘authorized by law” for purposes of 31 U.S.C. 51341,

Those cases established the rule that a mandatory increase is regarded

as “authorized by law” so as to permit overobligation, whereas a

discretionary increase is not. The same rule applies in determining

when an expenditure is “beyond administrative control” for purposes

of 31 U.S,C. $ 1515(b). Thus, statutory pay increases for Wage Board

employees granted pursuant to a wage survey meet the test. 39 Comp.

GAO/OGC-92.13 ApproPrM.ionsLa w-VoI. If
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Avatlabilky of Appropr&tions: Arnouat

amounts not included in the rescission bill without awaiting the

expiration of the 45-day period. See also B-115398.33, March 5,

1976.

e. Apportionments Requiring In our discussion of the basic requirement for apportionment, we

Deficiency Estimate quoted 31 U.S.C. $ 1512(a) to the effect that appropriations must be

apportioned “to prevent obligation or expenditure at a rate that would

indicate a necessity for a deficiency or supplemental appropriation.”

Thus, GAO has held that the Antideficiency Act requires that freed-term

appropriations be obligated and expended in such away as to avoid

situations in which Congress must either make a deficiency or

supplemental appropriation or face exhaustion of the appropriation

and the consequent drastic curtailment of the activity the

appropriation was intended to fund. 64 Comp. Gen. 728, 735 (1985);

36 Comp. Gen. 699,703 (1957). ‘

The requirement that appropriations be apportioned so as to avoid the

need for deficiency or supplemental appropriations is fleshed out in

31 U.S.C. $1515 (formerly subsection (e) of the Antideficiency Act):

“(a) An appropriation required to be apportioned under section 1512 of this title may

be apportioned on a basis that indicates the need for a deficiency or supplemental

appropriation to the extent necessary to permit payment of such pay increases as may

be granted pursuant to law to civilian officers and employees (including prevailing

rate employees whose pay is freed and a@usted under subchapter IV of chapter 53 of

title 5) and to retired and active mifitary personnel.

“(b)(1) Except as provided in subsection (a) of this section, an official may make,

and the head of an executive agency may request, an apportionment under section

1512 of this title that would indicate a necessity for a deficiency or supplemental

appropriation only when the officiaf or agency head decides that the action is required

because of–

“(A) a law enacted after submission to Congress of the estimates for an appropriation

that requires an expenditure beyond adnums “ “ trative control; or

“(B) an emergency involving the safety of human life, the protection of property, or

the immediate welfare of individuals when an appropriation that would allow the

United States Government to pay, or contribute to, amounts required to be paid to

individuals in specitlc amounts f~ed by law or under formulas prescribed by law, is

insuftlcient.

“(2) Ifan officiaI making an apportionment decides that an apportionment woufd

indicate a necessity for a deficiency or supplemental appropriation, the official shall

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medical and hospital suppiies.” It had been suggested that 41 U.S.C.

$11 was unnecessary in light of 31 u.s.c. $ 1515(b). The question was

whether, if 41 U.S.C. $11 were repealed, the military departments

would have essentially the same authority under section 1515(b).

The Defense Department expressed the view that section 1515(b)

would not bean adequate substitute for the 41 U.S.C. s 11 exception

which allows the incurring of obligations for limited purposes even

though the applicable appropriation is insufilcient to cover the

expenses at the time the commitment is made. Defense commented as

follows:

“The authority to apportion funds on a deficiency basis in [31 U.S.C. S 1515(b)] doea

not, as alleged, provide authority to incur a deficiency. It merely authorizes obligathg

funds at a deficiency rate under certain circumstances, e.g., a $2,000,000

appropriation can be obligated in its entirety at the end of the third quarter, but it

does not provide authority to obligate one dollar more than $2,000,000.” Letter from

the Deputy Secretary of Defense to the Chairman, House Armed seMCe.S timmittee,

April 2, 1976 (quoted in B-167034, September 1, 1976).

The Comptroller General agreed with the Deputy Secretary, stating:

“[Section 1515(b)] in no way authorizes an agency of the Government actwdly to

incur obligations in excess of the total amount of money appropriated for a period. It

only provides an exception to the general apportionment rule set out in [31 U.S.C.

5 1512(a) I that an appropriation be allocated so as to insure that it is not exhausted

prematurely. [Section 1515(b)] says nothing about increasing the total amount of the

appropriation itself or authorizing the incurring of obligations in excess of the total

amount appropriated. On the contrary, 55 noted above, apportionment only involves

the subdivision of appropriations already enacted by Congresa. It necesswily follows

that the sum of the parta, as apportioned, could not exceed the total amount of the

appropriations being apportioned.

“Any deficiency that an agency incurs where obligations exceed total amounts

appropriated, including a deficiency that arises in a situation where it was determined

that one of the exceptions set forth in [section 1515(b)] was applicable, would

constitute a violation of 31 US.C. ~ [1341(a)] . . . .“ B-167034, September 1, 1976.

f. Exemptions From A number of exemptions from the apportionment requirement,

Apportionment Requirement formerly found in subsection (f’) of the Antideficiency Act, are now

gathered in 31 U.S.C. $ 1516:

“An official designated in section 1513 of this title to make apportionment may

exempt from apportionment–

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Gen. 422 (1959); 38 Comp. Gen. 538,542 (1959). See also 45 Comp.

Gen. 584,587 (1966) (severance pay in fiscaI year 1966).bz

Discretionary increases, just as they are not “authorized by law” for

purposes of 31 U.S.C. $1341, are not “beyond administrative control”

for purposes of section 1515(b). 44 Comp. Gen, 89 (1964) (salary

increases to Central Intelligence Agency employees); 31 Comp. Gen.

238 (1951) (pension increases to retired District of Columbia police

and fmefighters).

The Wage Board exception was separately codified in 1957 and now

appears at 31 U.S.C. s 1515(a), quoted above, Subsection 1515(a)

reached its present form in 1987 when Congress expanded it to

include pay increases granted pursuant to law to non-Wage Board

civilian officers and employees and to retired and active military

personnel.ss

The exceptions in subsection 1515(b)(l)(B) do not appear to have

been discussed in any GAO decisions as of the date of this publication,

although a 1989 internal memorandum suggested that the exception

would apply to Forest Service appropriations for fighting forest fwes.

B-230117 -O.M., February 8, 1989. The exceptions for safety of

human life and protection of property appear to be patterned after the

identical exceptions under 31 U.S.C. $1342, so the case law under that

section should be equally relevant for construing the scope of the

exceptions under section 1515(b).

It is important to note that the exceptions in 31 U.S.C. S l!51b(b) are

exceptions only to the prohibition against making or requesting

apportionments requiring deficiency estimates; they are not

exceptions to the basic prohibitions in 31 U.S.C. S 1341 against

obligating or spending in excess or advance of appropriations. The

point was discussed at some length in B-167034, September 1, 1976.

Legislation had been proposed in the Senate to repeal 41 U.S.C. $11,

which prohibits the making of a contract, not otherwise authorized by

law, ,Wess there is an appropriation “adequate to its fulfillment,”

except in the case of contracts made by a military department for

“clothing, subsistence, forage, fuel, quarters, transportation, or

She ~w -w~ament Ofwvemce pay was enacted after the ~ of ~ 1966* ‘Mch h

why the expenditures in that caae would qwdifi under 31 IJ.S.C. 5 1515(b).

5S~b. L. No, ]0(3.202, $105, l(jl SW. 1329, 1329-433 (1987) (1988 cont~~ ‘lutiOn).

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g. Adrninistrative Division of Thus far, we have reviewed the provisions of the Antideficiency Act

Apportionments directed at the appropriation Ievei and the apportionment Ievel. The

law also addresses agency subdivisions.

The fti provision to note is 31 U.S.C. 3 1513(d):

“An appropriation apportioned under this subchapter may be divided and subdivided

admhistrativeiy within the limits of the apportionment.”

Thus, administrative subdivisions are expressly authorized. The

precise pattern of subdivisions will vary based on the nature and

scope of activities funded under the apportionment and, to some

extent, agency preference. The levels of subdivision below the

apportionment level are, in descending order, allotment,

suballotment, and allocation. OMB Circular No. A-34, $21.1.

Additional subdivisions may exist with varying designations such as

allowance, operating budget, etc. Id. 3 32.2(7). As we will see later in

our discussion of 31 U.S.C. $ 1517(=), there are definite Antideficiency

Act implications flowing from how an agency structures its fhnd

control system.

The next relevant statute is 31 I.J.S.C. J 1514:54

“(a) The offkiai having administrative control of an appropriation awdiable to the

legislative branch, the judiciai branch, the United States international Trade

Commiss ion, or the District of Columbia government, and, subject to the approvai of

the President, the head of each executive agency (except the Commisa ion) shaii

prescribe by regulation a system of administrative control not inconsistent with

accounting procedures prescribed under law. The system shaii be designed to–

“(1) restrict obligations or expenditures from each appropriation to the amount of

apportionments or reapportionments of the appropriation; and

“(2) enable the ofticiai or the head of the executive agency to fm responsibility for an

obligation or expenditure exceeding an apportionment or reapportionment.

“(b) To have a simpiiiled system for administrativeiy dividing appropriations, the

head of each executive agency (except the Commiss ion) shaii work toward the

objective of financing each operating unit, at the highest practicai level, from not

more than one adnurus “ “ trative division for each appropriation affecting the unit,”

MMor ~ me 1982 ~eco~lcation ofmfle 31, sections 1513(d) and 1514 ~been comb~ed~

subsection (g) of the Antideficiency Act.

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“(1) a trust fund or working fund if an expenditure from the fund has no signillcant

effect on the financial operations of the United Statea Government;

“(2) a woridng capital fund or a revohing fund established for intragovernmental

operations;

“(3) receipts from industrial and power operationa available under law; and

“(4) appropriations made specitlcaiiy for-

“(A) interest on, or retirement of, the public debt;

“(B) payment of claims, judgments, refunds, and drawbacks;

“(C) items the President decides are of a cordldentiai nature;

“(D) payment under a law requiring payment of the total amount of the appropriation

to a designated payee; and

“(E) grants to the States under the Sociai Security Act (42 U.S.C. 301 et eeq.).”

Section 1516 is largely self-explanatory and the various enumerated

exceptions appear to be readily understid. Note that the statute does

not make the exemptions mandatoiy. It merely authorizes them,

within the discretion of the apportioning authority (OMB). OMB’S

implementing instructions, OMB Circular No. A-34, $41.1, have not

adopted all of the exemptions permitted under the statute. In several

cases-for example, trust funds and intragovernmental revolving

ftmds-the funds are subject to apportionment unless OMB grants an

exemption for a particular account. Id. —

In addition, 10 U.S.C. $ 2201(a) authorizes the President to exempt

appropriations for military functions of the Defense Department from

apportionment upon determining “such action to be necessary in the

interest of national defense.”

Another exemption, this one mandatoiy, is contained in 31 U.S.C.

$151 l(b)(3), for “the Senate, the House of Representatives, a

committee of Congress, a member, officer, employee, or office of

either House of Congress, or the Office of the Architect of the Capitol

or an officer or employee of that mice.” Apart from this specific

exemption, the remainder of the legislative branch, and the judicial

branch, are subject to apportionment. 31 U.S.C. S 1513(a).

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prescribe precisely how this 1s to be done. Apart from subsection (b),

the substance of section 1514 derives from a 1950 amendment to the

Antideficiency Act (64 Stat. 765). In testimony on that legislation, the

Director of the (then) Bureau of the Budget stated:

“At the present time, theoretically, I presume the agency head is about the only one

that you could really hold responsible for exceeding [an] apportionment. The revised

section provides for going down the line to the person who creates the obligation

againat the fund and f~es the responsibility on the bureau head or the division head,

if he is the one who creates the obligation.”56

Thus, depending on the agency regulations and the level at which

administrative responsibility is freed, the violating individual could be

the person in charge of a major agency bureau or operating unit, or it

could be a contracting officer or finance officer.

Identifying the person responsible for a violation will be easy in

probably the majority of cases. However, where there are many

individuals involved in a complex transaction, and particularly where

the actions producing the violation occurred over a long period of

time, the pinpointing of responsibility can be much more diftlcult.

Hopkins and Nutt, in their study of the Antideficiency Act, present the

following as a sensible approach:

“Generally, [the individual to be held responsible] will be the highest ranking ofilcial

in the decision-making process who had knowledge, either actual or constmctive, of

(1) precisely what actions were taken and (2) the impropriety or at least

questionableness of such actions. There wili be officials who had knowledge of either

factor. But the person in the best and perhaps only position to prwent the uhimate

error-and thus the one who must be held accountable-is the highest one who is

aware of both.”57

Thus, Hopkins and Nutt conclude, where multiple individuals are

involved in a violation, the individual to be held responsible “must not

be too remote from the cause of the vioIation and must be in a

position to have prevented the violation from occurring.”ss

66He . armgs Refore 8ena@ Comm. on App ropriations on H.R. 7786, 81st Cong., 2d Ssss. 10

(1950), quoted in Hopldns & Nutt,l’he Anti-Deficiency Act (Revised Statutes 3679) and Ilm~

Federal Contracts: hfinalysis, 80 MU. L. Rev. 51,128 (1978).

67Memowdum for the Assistant 8eCrC!tary Of the ~Y -ckd M%ement]! 1976, quoti

in Hopkins& Nutt, supra note 56, at 130.

,,#:,

561d—.

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Section 1514 is designed to ensure that the agencies in each branch of

the government keep their obligations and expenditures within the

bounds of each apportionment or reapportionment. The oftlcial in

each agency who has administrative control of the apportioned funds

is required to set up, by regulation, a system of administrative

controls to implement this objective. The system must be consistent

with any accounting procedures prescribed by or pursuant to law, and

must be designed to (1) prevent obligations and expenditures in

excess of apportionments or reapportionments, and (2) fm

responsibility for any obligation or expenditure in excess of an

apportionment or reapportionment. Agency fund control regulations

in the executive branch must be approved by OMB. See OMB Circular

No. A-34, 8$31.3 and 31.5.

Subsection (b) of 31 U.SC. $1514 was added in 1956 (70 Stat. 783)

and was intended to simplify agency allotment systems. Prior to 1956,

it was not uncommon for agencies to divide and subdivide their

apportionments into numerous “pockets” of obligational authority

calied “allowances.” Obligating or spending more than the amount of

each allowance was a violation of the Antideficiency Act as it then

existed. The Second Hoover Commission (Commission on

Organization of the Executive Branch of the Government) had

recommended simplification in 1955. The Senate and House

Committees on Government Operations agreed. Both committees

reported as foIlows:

“The making of numerous allotments which are further divided and suballotted to

lower levels leads to much confusion and inflexibility in the financial control of

appropriations or funds as well as numerous minor violations of lthe Antideficiency

Act].”

S. Rep. No. 2265, 84th Cong., 2d Sess. 9 (1956), reprinted in 1956

U.S. Code Cong. & Admin. News 3794, 3802; H.R. Rep. No. 2734,

84th Cong., 2d Sess. 7 (1956). The result was what is now 31 U.S.C.

$ 1514(b).’5

As noted, one of the objectives of 31 U.S.C. 31514 is to enable the

agency head to fw responsibility for obligations or expenditures in

excess of apportionments The statute encourages agencies to fm

responsibility at the highest practical level, but does not otherwise

%’he historicalsummary in this psragrsph is taken largely from 37 Comp. Gen. 220 (1957).

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apportionment level. The agency thus, under the statute, has a

measure of discretion. If it chooses to elevate overobligations or

overexpenditures of lower-tier subdivisions to the level of

Antideficiency Act violations, it is free to do so in its fund control

regulations.

At this point, it is important to return to ohm Circular No. A-34. Since

agency fund control regulations must be approved by OMB, OMB has a

role in determining what levels of adnurus “ “ trative subdivision should

constitute Antideficiency Act violations. Under A-34, overobligation or

overexpenditure of an allotment or suballotment are always

violations. Overobligation or overexpenditure of other administrative

subdivisions are violations only if and to the extent specified in the

agency’s fund control regulations. OMB Circular No. A-W W+ 21.1 md

32.2.

In 37 Comp. Gen. 220 (1957), GAO considered proposed fund control

regulations of the Public Housing Administration. The regulations

provided for allotments as the first subdivision below the

apportionment level. They then authorized the further subdivision of

allotments into “allowances,” but retained responsibili~ at the

allotment level. The “allowances” were intended as a means of

meeting operational needs rather than an apportionment control

device. GAO advised that this proposed structure conformed to the

purposes of 31 U.S.C. $1514, particularly in light of the 1956 addition

of section 1514(b), and that expenditures in excess of an “allowance”

would not constitute Antideficiency Act violations.

For further illustration, see 35 Comp. Gen. 356 (1955)

(overobligation of allotment stemming from misinterpretation of

regulations); B-95136, August 8, 1979 (overobligation of regional

allotments would constitute reportable violation unless sufficient

unobligated balance existed at central account level to @just the

allotments); B-179849, December 31, 1974 (overobligation of

allotment held a violation of section 1517(a) where agency

regulations specified that allotment process was the “principal means

whereby responsibility is fwed for the conduct of program activities

within the funds available”); B-1 14841 .2-0. M., January 23, 1986 (no

violation in exceeding ailotment subdivisions termed “work plans”).

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h. Expenditures in Excess of The former subsection (h) of the Antideficiency Act, now 31 U.S.C.

Apportionment $ 1517(a), provides:

“(a) An officer or employee of the United States Government or of the District of

Columbia government may not make or authorize an expenditure or obligation

exceeding-

“(l) an apportionment; or

“(2] the amount permitted by regulations prescribed under section 1514(a) of this

title.”

Section 1517(a) must be read in conjunction with sections 1341,

1512, and 1514, previously discussed.

Subsection (a)(1) is self-explanatory-it prohibits obligations or

expenditures in excess of an apportionment. Thus, an agency must

observe the limits of its apportionments just as it must observe the

limits of it9 appropriations.

There is, however, one difference. It has been held that, under some

circumstances, an agency may have a legal duty to seek art additional

apportionment from OMB. Berends v. Butz, 357 F. Supp. 143, 155-56

(D. Minn. 1973); Blackhawk Heating & Plumbing Co. v. United States,

622 F.2d 539,552 n.9 (Ct. Cl. 1980). In Berends v. Butz, the

Secretary of Agriculture had terminated an emergency ~- loan

program, allegedly due to a shortage of funds. The court found the

termination improper and directed reinstatement of the program.

Since the shortage of funds related to the amount apportioned and not

the amount available under the appropriation, the court found that the

Secretary had a duty to request an additional apportionment in order

to continue implementing the program. The case does not address the

nature and extent of any duty OMB fight have in response to such a

request.

Subsection (a)(2) makes it a violation to obligate or expend in excess

of an administrative subdivision of an apportionment to the extent

provided in the agency’s fund control regulations. The import of 31

U.S.C. $1514 becomes much clearer when it is read in conjunction

with 31 US.C. $ 1517(a)(2). The statute does not prescribe the level of

fisczd responsibility for violations below the apportionment level. It

merely recommends that the agency set the level at the highest

practical point and suggests no more than one subdivision below the

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the provisions for fines and/or jail are intended to be resenwd for

particularly flagrant violations.

Finally, it should be emphasized that the administrative and penal

sanctions apply only to violations of the three provisions cited-31

U.S.C. $$ 1341(a), 1342, and 1517(a). They do not, for example, apply

to violations of 31 U.S.C. $1512.36 Comp. Gen. 699 (1957).

b. Reporting Requirements Once it is determined that there has been a violation of 31 U.S.C.

$ 1341(a), 1342, or 1517(a), the agency head “shall report

immediately to the President and Congress all relevant facts and a

statement of actions taken.” 31 U.S.C. $$1351, 1517(b). The report to

the President is to be forwarded through the Director of OMB. Further

instructions on preparing the reports maybe found in OMB Circular

No. A-34, S$ 32.2-32.4. The reports are to be signed by the agency

head. Id. $32.7. —

~ noted, the report is to include all pertinent facts and a statement of

all actions taken (any administrative discipline imposed, referral to

the Justice Department where appropriate, new safeguards imposed,

etc.), presumably including a request for additional appropriations

where necess~. It is also understood that the agency will do

everything it can lawfully do to mitigate the financial effects of the

violation. ~, 55 Comp. Gen. 768, 772 (1976); B-114841 .2-O. M.,

January 23, 1986. In view of the explicit provisions of 31 U.S.C.

$1351, it has been held that there is no private right of action for

declaratory, mandatory, or injunctive relief under the Antideficiency

Act. Thurstonv. United States, 696 F. Supp. 680 (D.D.C. 1988).

Factors such as mistake, inadvertence, lack of intent, or the minor

nature of a violation do not affect the du~ to report. Of course, if the

agency feels there are extenuating circumstances, it is entirely

appropriate to include them in the report. 35 Comp. Gen. 356 (1955).

What if GAO uncovers a violation in the course of its audit activities

but the agency thinks GAO is wrong? The agency should still make the

required reports, and should include an explanation of the

disagreement. OMB Circular No. A-34, $32.5. See also GAO report

entitled Anti-Deficiency Act: Agriculture’s Food and Nutrition Service

Violates the Anti-Deficiency Act, GAO/AFMD-87-20 (March 1987).
Chapter 6

Availsbllity of Appropriations: Amount

5. Penalties and Reporting

Requirements

a. Administrative and Penal Violations of the A.ntideficiency Act are subject to sanctions of two

Sanctions types, administrative and penal. The Antideficiency Act is the only one

of the Title 31 funding statutes to prescribe penalties of both types, a

fact which says something about congressional perception of the Act’s

importance.

An officer or empioyee who violates 31 U.S.C. $ 1341(a)

(obligate/expend in excess or advance of appropriation), $1342

(voluntary services prohibition), or 3 1517(a) (obligate/expend in

excess of an apportionment or administrative subdivision as specified

by regulation) “shall be subject to appropriate administrative

discipline including, when circumstances warrant, suspension from

duty without pay or removal from office.” 31 U.S.C. $3 1349(a), 1518.

For a case in which an officiai was reduced in grade and reassigned to

other duties, see Duggar v. Thomas, 550 F. Supp. 498 (D.D.C. 1982)

(upholding the agency’s action against a charge of discrimination).

In addition, an officer or employee who “knowingly and willfully”

violates any of the three provisions cited above “shall be fined not

more than $5,000, imprisoned for not more than 2 years, or both.” 31

U.S.C. 3$1350, 1519. As far as the editors are aware, it appears that no

officer or employee has ever been prosecuted, much less convicted,

for a violation of the Antideficiency Act as of this writing. The knowing

and willful failure to record an overobligation in order to conceal an

htideficiency Act violation is also a criminal offense. See 71 Comp.

Gem _(B-245856.7, August 11, 1992).

Earlier in this chapter, we pointed out that factors such as the absence

of bad faith or the lack of intent to commit a violation are irrelevant

for purposes of determining whether a violation has occurred.

However, intent is relevant in evaluating the assessment of penalties.

Note that the crifiinal penalties are linked to a determination that the

law was “knowingly and willfully” violated, but the administrative

sanction provisions do not contain similar language. Thus, intent or

state of mind may (and probably should) be taken into consideration

when evaluating potential administrative sanctions (whether to assess

them and, if so, what type), but must be taken into consideration in

determining applicability of the criminal sanctions. Understandably,

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are generally f~ed by law. Thus, permitting the employees to come to

work would result in an obligation to pay salary for the time worked,

an obligation in advance of appropriations in violation of section

1341(a). With respect to section 1342, no one was suggesting that the

employees were offering to work gratuitously, even assuming they

could lawfully do so, which for the most part they cannot. The fact

that employees were willing to take the risk that the necessary

appropriation would eventually be enacted did not avoid the violation.

Clearly, the employees still expected to be paid eventually. B-197841,

March 3, 1980. “During a period of expired appropriations,” the

Comptroller General stated, “the only way the head of an agency can

avoid violating the Antideficiency Act is to suspend the operations of

the agency and instruct employees not to report to work until an

appropriation is enacted.” Id. at 3. —

However, GAO, like all other agencies, had been groping for abetter

solution. Whatever might be the cause of a particular funding gap, it

seemed clear that it was not the intent of Congress that the federal

government simply shut down. At the beginning of w 1980, GAO

prepared an internal memorandum to address its own operations. The

memorandum said, in effect, that employees could continue to come

to work, but that operations would have to be severely restricted. No

new obligations could be incurred for contracts or small purchases of

any kind, and of course the employees could not actuaily be paid until

appropriations were enacted. The memorandum was printed in the

Congressional Record, and at least one Senator viewed the approach

as “commonsense guidelines.”w The memorandum was noted in

B-197841, discussed above, but it was conceded that those guidelines,

however sensible they might appear, would nevertheless “legally

produce widespread violations of the Antideficiency Act.” —Id. at 4.

Less than two months after B-197841 was issued, the Attorney

General issued a formal opinion to the President. The Attorney

General essentially agreed with GAO’S analysis that permitting

employees to work during a funding gap would violate the

Antideficiency Act, but concluded further that the approach outlined

in the GAO internal memorandum went beyond what the Act permitted.

43 Op. Att’y Gen. _ (No. 24), 4A Op. Off. Legal Counsel 16 (1980).

The opinion stated:

m125 cow. Rec. 26974 (Oct.Qber 1, 1979).

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6. Funding Gaps The term “funding gap” refers to a period of time between the

expiration or exhaustion of an appropriation and the enactment of a

new one. A funding gap is one of the most difficult f~cal problems a

federal agency may have to face. As our discussion here will

demonstrate, the case law reflects an attempt to forge a workable

solution to a bad situation.

Funding gaps occur most commonly at the end of a fiscal year when

new appropriations, or a continuing resolution, have not yet been

enacted. In this context, a gap may affect only a few agencies (if, for

example, only one appropriation act remains unenacted as of

October 1), or the entire federal government. A funding gap may also

occur if a particular appropriation becomes exhausted before the end

of the fiscai year, in which event it may affect only a single agency or a

single program, depending on the scope of the appropriation.

Funding gaps occur for a variety of reasons. For one thing, the

complexity of the budget and appropriations process makes it

difficult at best for Congress to get everything done on time. Add to

this the enormity of some programs and the need to address budget

deficits and the scope of the problem becomes more apparent. Also,

to some extent, funding gaps are perhaps an inevitable reflection of

the political process.

As GAO has pointed out, funding gaps, actual or threatened, are both

disruptive and costly.5’ They also produce extremely difficult legal

problems under the Antideficiency Act. The basic question, easy to

state but not quite as easy to try to answer, is what is an agency

permitted or required to do when faced with a funding gap? Can it

continue with “business as usual,” or must it lock up and go home, or

is there some acceptable middle ground?

In 1980, a congressional subcommittee asked whether agency heads

could legally permit employees to come to work when the applicable

appropriation for salaries had expired and Congress had not yet

enacted either a regular appropriation or a continuing resolution for

the next fiscal year. The Comptroller General replied that 31 U.S.C.

3$ 1341(a) and 1342 were both violated if employees reported for

work under those circumstances. The salaries of federal employees

b~GAO, fi~g Gaps Jeop~~e Federal Government Operations, PAD-81-31 (Mmch 3, 1981);

Governrnent Shutdown: Perman ent Funding Lapse Legislation Needed, GAO/GGD-91-76 (June

1991).

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entitlement program are funded from other than one-year

appropriations, e.g., a trust fund, but the salaries of personnel who

administer the program are funded by one-year money. As long as

money for the benefit payments remains available, administration of

the program is, by necessary implication, “authorized by law,” unless

the entitlement legislation or its legislative history provides otherwise

or Congress takes affwmative measures to suspend or terminate the

program.

(4) Obligations “necessarily incident to presidential initiatives

undertaken within his constitutional powers.” Example: the power to

grant pardons and reprieves.ez

The second broad category reflects the exceptions authorized under

31 U.S.C. $ 1342–emergencies involving the safety of human life or

the protection of prope~. The Attorney General suggested the

following rules for interpreting the scope of this exception:

“First, there must be some reasonable and articulable comection between the

function to be performed and the safety of human life or the protection of property.

Second, there must be some reasonable likelihood that the safety of human life or the

protection of property woufd be compromised, in some degree, by delay in the

performance of the function in question.”

5 Op. Off. Legal Counsel at 8. The Attorney General then cited the

identical exception language in the deficiency apportionment

prohibition of 31 U.S.C. $1515, and noted that OMB followed a similar

approach in granting deficiency apportionments over the years. Given

the wide variations in agency activities, it would not be feasible to

attempt an advance listing of functions or activities that might qualify

under this exception. Accordingly, the Attorney General made the

following recommendation:

“To erect the most solid foundation for the Executive Branch’s practice in this

regard, I would recommend that, in preparing contingency plans for periods of lapsed

appropriations, each government department or agency provide for the Director of

the Otllce of Management and Budget some written description, that coufd be

transmitted to Congress, of what the head of the agency, assisted by its general

counsel, considers to be the agency’s emergency functions.”

62me -e ~io~~e ~o~ld apply t. thfj legistive branch. B-24191 1, October Z3j 1990

(non-decision letter).

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“[T]here is nothing in the language of the Antideficiency Actor in its long history

from which any exception to its terms during a period of lapsed appropriationa may

be inferred. . . .

. . . .

“[F]irst of all. . . . on a lapse in appropriations, federal agencies may incur no

obligations that cannot lawfully be funded from prior appropriations unless such

obligations are otherwise authorized by law. There are no exceptions to this rule

under current law, even where obligations incurred earlier would avoid greater costs

to the agencies should appropriations later be enacted.

“Second, the Department of Justice will take actions to enforce the criminal

provisions of the Act in appropriate cases in the future when violations of the

Antideficiency Act are alleged. This does not mean that departments and agencies,

upon a lapse in appropriations, will be unable logistically to terminate functions in an

orderly way. . . . [Authority may be inferred from the Antideficiency Act itself for

federal oftlcers to incur those minimal obligations neces.%my to closing their

agencies.” 4A Op. Off. Legal Counsel at 19,20.

This opinion seemed to say that agencies had little choice but to lock

up and go home. A second formal opinion, 43 Op. Att’y Gen. _, 5

Op. Off. Legal Counsel 1 (1981), went into much more detail on

possible exceptions and should be read in conjunction with the 1980

opinion.

As set forth in the 1981 Attorney General opinion, the exceptions fall

into two broad categories. The first category is obligations

“authorized by law.” Within this catego~, there are four types of

exceptions:

(1) Activities under funds which do not expire at the end of the fiscal

year, i.e., multiple-year and no-year appropriations.~’

(2) Activities authorized by statutes which expressly permit

obligations in advance of appropriations.

(3) Activities “authorized by necessary implication from the specific

terms of duties that have been imposed on, or of authorities that have

been invested in, the agency.” To take the example given in the

opinion, there will be cases where benefit payments under an

GlThi5 would ~$o include cefin revolving fund operations, but not those whose use require$

affitive authorization in annuat appropriation acts. B-241730.2, February 14, 1991

(Government Printing Oflice revolving fund).

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This, then, is the basic framework. There area number of exceptions

to the Antideficiency Act which would permit certain activities to

continue during a funding gap. For activities not covered by any of the

exceptions, however, the agency must proceed with prompt and

orderly termination or violate the Act and risk invocation of the

criminal sanctions. Avery brief restatement may be found in 6 Op.

Off. Legal Counsel 555 (1982).

Within this framework, GAO and the Justice Department have

addressed a number of specific problems agencies have encountered

in coming to grips with funding gaps. For example, towards the end of

FY 1982, the President vetoed a supplemental appropriations bill. As a

resuh, the Defense Department did not have sufficient funds to meet

the military payroll. The total payroll obligation consisted of(1) the

take-home pay of the individuals, and (2) various items the employing

agency was required to withhold and transfer to someone else, such

as federal income tax and Social Security contributions. The Treasury

Department published a change to its regulations permitting a

temporary deferral of the due date for payment of the withheld items,

and the Defense Department, relying on the “safety of human life or

protection of property” exception, used the funds it had available to

pay military personnel their full take-home pay. The Attorney General

upheld the legality of this action. 43 Op. Att’y Gen. _.._, 6 Op. off.

Legal Counsel 27 (1982). The Comptroller General agreed, but

questioned the blanket assumption that all military personnel fit

within the exception. B-208985, Octobe=5, 1982; B-208951,

October 5, 1982. The extent to which this device might be available to

civilian agencies would depend on (1) Treasury’s willingness to grant

a similar deferral, and (2) the extent to which the agency could

legitimately invoke the emergency exception.

Additional cases dealing with funding gap problems are:

● Salaries of commissioners of Copyright Royalty Tribunal attach by

virtue of their status as officers without regard to availability of funds.

Salary obligation is therefore viewed as “authorized by law” for

purposes of Antideficiency Act, and commissioners could be

retroactively compensated for periods worked without pay during a

funding gap. 61 Comp. Gen. 586 (1982).

● Richmond district office of Internal Revenue Service shut down for

half a day in October 1986 due to a funding gap. Subsequent

legislation authorized retroactive compensation of employees

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5 Op. Off, Legal Counsel at 11. Lest this approach be taken too far,

Congress added the following sentence to 31 U.S.C. $ 1342:

“As used in this section, the term ‘emergencies involving the safety of human life or

the protection of property’ does not include ongoing, regular functions of

government the suspension of which would not imminently threaten the safety of

human fife or the protection of property.”

Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508,

$ 13213(b), 104 Stat. 1388, 1388-621 (1990). The conference report

on the 1990 legislation explains the intent:

“The conference report also makes conforming changes to title 31 of the United

States Code to make clear that. . . ongoing, regular operations of the Government

cannot be sustained in the absence of appropriations, except in limited

circumstances. These changes guard against what the conferees believe might bean

overly broad interpretation of an opinion of the Attorney General issued on

January 16, 1981, regarding the authority for the continuance of Government

functions during the temporary lapse of appropriations, and affwm that the

constitutional power of the purse resides with Congress.”

H.R. Conf. Rep. No. 964, IOlst Cong., 2d Sess. 1170 (1990).

The Ninth Circuit Court of Appeals added to the list of exceptions,

holding the suspension of the civil jury trial system for lack of funds

unconstitutional. Arrester v. United States District Court, 792 F.2d

1423 (9th Cir. 1986). Faced With the potential exhaustion of

appropriations for juror fees, the Administrative Oftlce of the United

States Courts, at the direction of the Judicial Conference of the United

States, had sent a memorandum to all district court judges advising

that civil jury trials would have to be suspended until more money was

available. Basing its holding on the Constitution and expressly

declining to rule on the Antideficiency Act, the court held that a

suspension for more than a “most minimal” time violated the seventh

amendment. Id. at 1430. See also Hobson v. Brennan, 637 F. Supp.

173 (D.D.C. ~86).

Since the appropriation was not yet actually exhausted, and since

there was still ample time for Congress to provide additional funds,

the court noted that its decision did not amount to ordering Congress

to appropriate money. The court noted, but did not address, the far

more difficult question of what would happen if the appropriation

became exhausted and Congress refused to appropriate additional

funds. Id. at 1430–31 and 1431 — n.14.

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had pointed out, and GAO agreed, that automatic funding legislation

could have the undesirable effects of(1) reducing pressure on

Congress to make timely funding decisions, and (2) permitting mqjor

portions of the government to operate for extended periods without

action by either House of Congress or the President. The ideal

solution, both agencies agreed, is the timely enactment of the regular

appropriation bills.

GAO continues to support the concept of an automatic continuing

resolution in a form that does not reduce the incentive to complete

action on the regular appropriation bills. Managin g the Cost of

Government: Proposals for Reforming Federal Budgeting Practices,

GAO/AFMD-90-l (October 1989) at 28-29. A 1991 report analyzed the

impact of a funding gap which occurred over the 1990 Columbus Day

weekend and again renewed the recommendation for permanent

legislation to, at a minimum, allow agencies to incur obligations to

compensate employees during temporary funding gaps but not pay

them until enactment of the appropriation. Government Shutdown:

Permanent Funding Lapse Legislation Needed, GAO/GGD-91-76

(June 1991). The report stated:

“In our opinion, shutting down the government during temporary funding gaps is an

inappropriate way to encourage compromise on the budget. Beyond being

counterproductive from a financial standpoint, a shutdown disrupts government

services. In addition, forcing agency managers to choose who will and will not be

furloughed during these temporaty funding lapses severely tests agency

management’s ability to treat its employees fairly.” ~. at 9.

D. Supplemental and

Deficiency

Appropriations

A supplemental appropriation may be defined as “an act

appropriating funds in addition to those in an annual appropriation

act. ”bs The purpose of a supplemental appropriation is to fund

projects and activities not included in the budget request for the

current annual appropriation and which cannot be postponed until the

next regular appropriation. Factors generating the need for

supplemental appropriations include the following:

.

●

9

●

Enactment of legislation adding new or increased functions

Unanticipated surge in workload

Inflation higher than that projected for the fiscal year

Emergency situations involving unforeseen expenditures

OSGAO, A G]O- of Term used in the Federal Budget Process, pAO-81-27, w 79.

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affected. GAO concluded that the le~lation applied to intermittent as

well as regular full-time employees, and held that the intermittent

employees could be compensated in the form of administrative leave

for time lost during the half-day furlough. B-233656, June 19, 1989.

Witness who had been ordered to appear in federal court was

stranded without money to return home when court did not convene

due to funding gap. Cash disbursement to permit witness to return

home or secure overnight lodging was held permissible since hardship

circumstances indicated reasonable likelihood that safety of witness

would be jeopardized. 5 Op. Off. LegaJ Counsel 429 (1981).

There are also a few cases addressing actions an agency has taken to

forestall the effects of a funding gap. In 62 Comp. Gen. 1 (1982), the

Merit Systems Protection Board, faced with a substantial cut in its

appropriation, placed most of its employees on half-time, half-pay

status in an attempt to stretch its appropriation through the end of the

f~cal year. A subsequent supplemental appropriation provided the

necesszuy operating funds. GAO advised that it was within the Board’s

discretion, assuming the availability of sufilcient funds, to grant

retroactive administrative leave to the employees who had been

affected by the partial shutdown.

GAO reviewed another furlough plan in 64 Comp. Gen. 728 (1985).

The Interstate Commerce Commission had determined that if it

continued its normal rate of operations, it would exhaust its

appropriation six weeks before the end of the fiscal year. To prevent

this from happening, it furloughed its employees for one day per

week. GAO found that the ICC’s actions were in compliance with the

Antideficiency Act. While the ICC was thus able to continue essential

services, the price was financial hardship for its employees, plus

“serious backlogs, missed deadlines and reduced efficiency.” ~. at

732.

GAO has issued several reports on funding gaps. The fwst was

Fu@ing Gaps Jeopardize Federal Government Operations, PAD-81-31

(March 3, 1981), In that report, GAO noted the costly and disruptive

effects of funding gaps, and recommended the enactment of

permanent legislation to permit federal agencies to incur obligations,

but not disburse funds, during a funding gap. In the second report,

Continuing Resolutions and an Assessment of Automatic Funding

Approaches, GAO/AFMD-86-l 6 (January 1986), GAO compared several

possible options but this time made no specific recommendation. OMB

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Unless otherwise provided, a restriction contained in an annual

appropriation act will apply to funds provided in a supplemental

appropriation act even though the restriction is not repeated in the

supplemental. For example, a restriction in a foreign assistance

appropriation act prohibiting the use of funds for assistance to certain

countries would apply equally to funds provided in a supplemental

appropriation for the same fiscal year. B-158575, February 24, 1966.

Similarly, a provision in an annual appropriation act that “no part of

any appropriation for the Bureau of Reclamation contained in this Act

shall be used for the salaries and expenses” of certain oftlcials who

were not qualifled engineers would apply as well to funds

appropriated in supplemental appropriation acts for the same fiscal

year. B-86056, May 11, 1949. The rule applies to supplemental

authorizations as well as supplemental appropriations. B-106323,

November 27, 1951. If a supplemental appropriation act includes a

new appropriation which is separate and distinct from the

appropriations being supplemented, restrictions contained in the

original appropriation act will not apply to the new appropriation

unless specitkally provided. ~. The fiscal year limitations of the

original appropriation, however, would still apply.

The rule that supplemental appropriations are subject to restrictions

contained in the regular appropriation act being supplemented

applies equally to specific dollar limitations. Thus, if a regular annual

appropriation act speciiles a maximum limitation for a particular

object, either by using the words “not to exceed” or otherwise, a

more general supplemental appropriation for the same fwcal year

does not authorize an increase in that limitation. 19 Comp. Gen. 324

(1939); 4 Comp. Gen. 642 (1925); B-71583, February 20, 1948;

B-66030, May 9, 1947. Naturally, this principle will not apply if the

supplemental appropriation specifically provides for the object in

question. 19 Comp. Gen. 832 (1940).

Restrictions appearing in a supplemental appropriation act mayor

may not reach back and apply to balances remaining in the original

annual appropriation, depending on the precise statutory language

used. Thus, without more, a restriction in a supplemental applicable

by its terms to “this appropriation” would apply only to the

supplemental funds. B-31546, January 12, 1943. See also 31 Comp.

Gen. 543 (1952).

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● Pay increases not previously budgeted

“ Items not included in regular appropriation for lack of timely

authorization

● Poor program planning

There is a technical distinction between supplemental appropriations

and deficiency appropriations.~ However, Congress stopped enacting

separate “deficiency appropriation acts” in the 1960s and now,

supplemental appropriations and deficiency appropriations are

combined in “supplemental appropriation acts.” The rules governing

the availability of supplemental and deficiency appropriations are

essentially the same, Thus, the term “supplemental appropriation” for

purposes of the following discussion should be construed as including

both types.

A supplemental appropriation “supplements the original

appropriation, partakes of its nature, and is subject to the same

limitations as to the expenses for which it can be used as attach by law

to the original appropriation” unless otherwise provided. 4 Comp.

Dec. 61 (1897). See also 27 Comp. Gen. 96 (1947); 25 Comp. Gen.

601 (1946); 20 Comp. Gen, 769 (1941). This means that a

supplemental appropriation is subject to the purpose and time

limitations, plus any other applicable restrictions, of the appropriation

being supplemented.

Thus, an appropriation made to supplement the regular annual

appropriation of a given fiscal year is available beyond the expiration

of that fiscal year only to liquidate obligations incurred within the

fiscal year. The unobligated balance of a supplemental appropriation

will expire at the end of the fiscal year in the same manner as the

regular annual appropriation. See 27 Comp. Gen. 96 (1947); 4 Comp.

Dec. 61 (1897); 3 Comp. Dec. 72 (1896). Of course, a supplemental

appropriation, just like any other appropriation, can be made

available until expended (no-year). ~, 36 Comp. Gen. 526 (1957);

B-72020, January 9, 1948.

IMA ~ficienw ~ppropnation i.q an appropriation made b WY Obbtiou b@Y cre*~ but ‘or

which sufllcient funds are not available in the appropriation origkdly made for that purpose. 27

Comp. Gen. 96 (1947); 25 Comp. Gen. 601,604 (1946); 4 Comp. Dec. 61,62 (1897). The need

for deficiency appropriations often results from violations of the Antideflciency Act, and they

cam be made in the same fisczd year as the overobligated appropriation or in a Iat@r year. Since

they serve essentially the same purpose as supplemental appropriations, the distinction had

become recognized by the late 1950s as a Wistinctionwtthout a difference.” See 103 Cong. Rec.

6420 (1957).

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E. Augmentation of

Appropriations

1. The Augmentation As a general proposition, an agency may not augment its

Concept appropriations from outside sources without specific statutofy

authority. The prohibition against augmentation is a corollary of the

separation of powers doctrine. When Congress makes an

appropriation, it is also establishing an authorized program level. In

other words, it is telling the agency that it cannot operate beyond the

level that it can finance under its appropriation. To permit an agency

to operate beyond this level with funds derived from some other

source without specflc congressional sanction would amount to a

usurpation of the congressional prerogative. Restated, the objective of

the rule against augmentation of appropriations is to prevent a

government agency from undercutting the congressional power of the

purse by circuitously exceedjng the amount Congress has

appropriated for that activity.

There is no statute which, in those precise terms, prohibits the

augmentation of appropriated funds. The concept does nevertheless

have an adequate statutory basis, although it must be derived from

several separate enactments. Specifkally:

c 31 U.S.C. $ 3302(b), the “miscellaneous receipts” statute.

● 31 U.S.C. $ 1301(a), restricting the use of appropriated funds to their

intended purposes. Early decisions often based the augmentation

prohibition on the combined effect of 31 U.S.C. gs 3302(b) and

1301(a). See, ~, 17 Comp. Dec. 712 (1911); 9 Comp. Dec. 174

(1902).

● 18 US.C. $209, which prohibits the payment of, contribution to, or

supplementation of the salary of a government officer or empioyee as

compensation for his or her offkial duties from any source other than

the,government of the United States.

The augmentation concept manifests itself in a wide variety of

contexts. One application is the prohibition against transfers between

appropriations without spectilc statutory authority. An unauthorized

transfer is an improper augmentation of the receiving appropriation.

~, 23 Comp. Gen. 694 (1944); B-206668, March 15,1982. In

B-206668, for example, a department received a General

Administration appropriation plus separate appropriations for the

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At onetime, supplemental appropriation acts specified that the funds

were for the same objects and subject to the same limitations as the

appropriations being supplemented. The (then) Bureau of the Budget

wanted to delete this language pursuant to its mandate to elimimte

unnecessary words in appropriations.m The Comptroller General

agreed that the appropriation language was unnecessary, pointing out

that these conditions would apply even without being explicitly stated

in the supplemental appropriation acts themselves. B-13900,

December 17, 1940.

In addition to supplementing prior appropriations, a supplemented

appropriation act may make entirely new appropriations which are

separate and distinct from those made by an earlier appropriation act.

Where a supplemental appropriation act contains new legislation,

whether permanent or temporary, the new legislation will take effect

on the date the supplemental is enacted absent a clear intent to make

it retroactive. 20 Comp. Gen. 769 (1941). In the cited decision, an

appropriation incIuded in a supplemental appropriation act enacted

late in fiscal year 1941 which for the fmt time permitted payment of

transportation expenses of certain military dependents was held

effective on the date of enactment of the supplemental act and not on

the frost day of n 1941.

A supplemental appropriation may also provide for a new object

within a lump-sum appropriation. If the original appropriation was not

available for that object, then the supplemental amounts to anew

appropriation. For example, a m 1957 supplemental appropriation

for the Maritime Administration provided $18 million for a

nuclear-powered merchant ship under the heading “ship

construction.” Funds for the nuclear-powered ship had been sought

under the regular “ship construction” lump-sum appropriation for A’

1957, but had been denied. Under the circumstances, the Comptroller

GeneraI found that the supplemental appropriation amounted to a

specifically earmarked maximum for the vessel, and that the agency

could not exceed the $18 million by using funds from the regular

appropriation. 36 Comp. Gen. 526 (1957).

ob~or ~ the 1982 rW~fiation of Title 31, the mandate was found in 31 U.s.c. 5623. me

recoilers thought thoee worda themselves were unnecessary, and the concept is now included

in the general mandate in 31 U.S.C. $ 1104(a) ta “uae oniform terma” in requesting

appropriations.

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have it washed, the result is the same-the car gets washed and your

own money is free to be used for something else. Be that as it may, the

m~ority of the cases support limiting the augmentation rule to the

receipt of money. In the final analysis, the distinction probably makes

little practical difference. In view of 31 U.S.C. $1342, limiting the

augmentation rule to the receipt of funds does not mean that the rule

can be negated by the unrestricted acceptance of seMces.

In a 1991 case, 70 Comp. Gen. 597, GAO concluded that the Interstate

Commerce Commission would not improperly augment its

appropriations by permitting private carriers to instali computer

equipment at the ICC headquarters, to facilitate access to

electronically ffled rate tariffs. Installation was viewed as a reasonable

exercise of the ICC’s statutory authority to prescribe the form and

manner of tariff f~g by those over whom the agency has regulatory

authority. Somewhat similar in concept to the workfare case,

however, the decision suggests that use of the equipment for other

purposes, such as word processing by ICC staff, would be an

improper augmentation, and advised the ICC to establish controls to

prevent this.

2. Disposition of Moneys

Received: Repayments and

Miscellaneous Receipts

a. General Principles (1) The “miscellaneous receipts” statute

Avery important statute in the overall scheme of government foperations is 31 U.S.C. $ 3302(b), known as the “miscellaneous

receipts” statute. Originally enacted in 1849 (9 Stat. 398), 31 U.S.C.

$ 3302(b) provides:

“Except as provided in section 3718(b) of this title, an official or agent of the

Government receiving money for the Government from any source shall deposit the

money in the Treasury as soon as practicable without deduction for any charge or

claim.”

Penalties for violating 31 U.S.C. $ 3302(b) are found in 31 U.S.C.

$ 3302(d), and include the possibility of removal from office. In

addition, if funds which should have been deposited in the Treasury

but were not are lost or stolen, there is the risk of personal liability.

~, 20 Op. Att’y Gen. 24 (1891) (liability would attach where funds,

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administration of its component bureaus. The unauthorized transfer

of fi.mds from the bureau appropriations to the General

Administration appropriation was held to be an improper

augmentation of the latter appropriation. As with the transfer

prohibition itself, however, the augmentation rule has no application

at the agency allotment level within the same appropriation account.

70 Comp. Gen. 601 (1991).

It should also be apparent that the augmentation rule is related to the

concept of purpose availability. For example, a very early case

pointed out that charging a general appropriation when a spec~lc

appropriation is exhausted not only violates 31 U.S,C. $ 1301(a) by

using the general appropriation for an unauthorized purpose, but also

improperly augments the specitic appropriation. [1] Bowler, First

Comp, Dec. 257,258 (1894). However, it is most closely related to

the subject of this chapter-availability as to amount-because it has

the effect of restricting executive spending to the amounts

appropriated by Congress. In this respect, it is a logical, perhaps

indispensable, complement to the Antideficiency Act.

For the most part, although the cases are not entirely consistent, GAO

has distinguished between receipts of money and receipts of services,

dealing with the former under the augmentation rule and the latter

under the voluntary services prohibition (31 U.S.C. $ 1342). For

example, in B-13378, November 20, 1940, a private organization was

willing to donate either funds or services. Since the agency lacked

statutory authority to accept gifts, acceptance of a cash donation

would improperly augment its appropriations. Acceptance of services

was distinguished, however, and addressed under 31 U.S.C. $1342.

GAO drew the same distinction in B-125406, November 4, 1955. More

recently, acceptance by the Federal Communications Commission of

free space at industry trade shows was found not to constitute an

augmentation of the Commission’s appropriation because there had

been no donation of funds. 63 Comp, Gen. 459 (1984).

In apparent conflict with these cases, however, is B-21 1079.2,

January 2, 1987, which stated that, without statutory authority, an

agency would improperly augment its appropriations by accepting the

uncompensated services of “workfare” participants to do work which

would normally be done by the agency with its own personnel and

funds. Logic would seem to support the formulation in B-21 1079.2.

Certainly, if I wash your car without charge or if I give you money to

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●

●

●

In addition to 31 U.S.C. $ 3302(b), several other statutes require that

moneys received in various spec~~c contexts be deposited as

miscellaneous receipts.67 Examples are:

7 U.S.C. $$2241,2242,2246,2247 (proceeds from sale of various

products by Secretary of Agriculture)

10 U.S.C. S 2667 (moneys received by the military departments from

authorized leases)

16 U.S.C. $499 (revenue from the national fores@ such as timber

sales, subject to the deductions specified in 16 U.S.C. $$500 and 501)

19 U.S.C. $527 (customs frees, penalties, and forfeitures)

40 U.S.C. $ 485(a) (proceeds from sale of surplus public property,

except as provided in other subsections of section 485)W

Although it is preferable, it is not necessary that the statute use the

words “miscelkmeous receipts” A statute requiring the deposit of

funds “into the Treasury of the United States” will be construed as

meaning the general fund of the Treasury. 27 Comp. Dec. 1003

(1921).

To understand the significance of 31 U.S.C. $ 3302(b) and related

statutes, it is necesswy to recall the provision in Article I, section 9 of

the Constitution directing that “No Money shall be drawn from the

Treasury but in Consequence of Appropriations made by Law.” Once

money is deposited into a “miscellaneous receipts” account, it takes

an appropriation to get it back out. ~, 3 Comp. Gen. 296 (1923); 2

Comp. Gen. 599,600 (1923); 13 Comp. Dec. 700,703 (1907). Thus,

the effect of 31 U.S.C. S 3302(b) is to ensure that the executive branch

remains dependent upon the congressional appropriation process.

Viewed from this perspective, 31 U.S.C. $ 3302(b) emerges as another

67~e~ SWci~c ~eferenca t. ~we~eoW receipte in the pre-1982 vemion of ~~e 31 ‘m

dele~d in the recoditkation because they were regarded sa covered by the general prescription

of the new section 3302. An example is the so-called User Charge Statute. me pre-recodlflcstlon

version, 31 U.S.C. .$ 483a, required fees to be deposited as mtaceUaneoUS receipts. The current

version, 31 U.S.C. $9701, omits the requirement because, aa the Revision Note points out, it is

covered by $3302. Other examples are 31 U.S.C. M 485 and 487 (1976 cd.).

es~~on 485 stem from the Federal Property and Admink+t@ive 80@cosA~ of 1949. ~or @

this law, proceeds from the arde of public property were required to be deposited as

miscellaneous receirX.s under the more general authority of what is now 31 U.S.C. 5 3302(b). See

Mammoth Oil Co. v~UNted States, 275~S. 13,34 (19~7); Pan American Petroleum snd

Trsnsport Co. v. United States, 273 U.S. 456,502 (1927). (These are the notorious ‘“M@

Dome“ cases.) Property sales not governed by 40 U.S.C. S 485, such as the situation in 2S

Comp. Gen. 38 (1948), for example, woufd remafn subject to 31 U.S.C. 53302.

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which disbursing agent had placed in bank which was not an

authorized depositary, were lost due to bank failure).

“It is dWlcult to see,” said an early decision, “how a legislative

prohibition could be more clearly expressed.” 10 Comp. Gen. 382,

384 (1931). Simply stated, any money an agency receives from a

source outside of the agency must be deposited into the Treasury.

This means deposited into the general fund (“miscellaneous

receipts”) of the Treasury, not into the agency’s own appropriations,

even though the agency’s appropriations may be technically still ‘in

the Treasury” until the agency actually spends them.aa The

Comptroller of the Treasury explained the distinction in the following

terms:

“It [31 U.S.C. S 3302(b)] could hardly be made more comprehensive as to the

moneys that are meant and these moneys are required to be paid ‘into the Treasury.’

This does not mean that the moneys are to be added to a fund that has been

appropriated from the Treasury and may be in the Treasury or outside. [Emphasis in

original. ] It seems to me that it can only mean that they shall go into the general fund

of the Treasury which is subject to any disposition which Congress might choose to

make of it. This has been the holding of the accounting officers for many years.

[Citations omitted.] If Congress intended that these moneys should be returned to the

appropriation from which a similar amount had once been expended it could have

been readily so stated, and it was not.”

22 Comp. Dec. 379,381 (1916). See also 5 Comp. Gen. 289 (1925).

The term “miscellaneous receipts” does not refer to any single

account in the Treasury. Rather, it refers to a number of receipt

accounts under the heading “General Fund.” These are all listed in the

Treasury Department’s “Federal Account Symbols and Titles”

publication.

WA ~generd ~ropo~ition, ~ ~enw’s appropriations do remain “in the T~mLuY” wti needed

for a valid purpose. Unless Congress expressly so provides, sn agency may not have its

appropriations paid over directly to it to be held pending disbursement. 21 Comp. Gen. 489

(1941).

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defines authorized repayments in terms of two general classes,

reimbursements and refunds, as follows:

“a. Reimbursements to appropriations which represent amounts collected from

outside sources for commodities or services furnished, or to be furnished, and which

bylaw may be credited directly to appropri~ons.

“b. Refunds to appropriations which represent amounts collected from outside

sources for payments made in error, overpayments, or a@.tstments for prevtous

amounts dkibursed, including returns of authorized advances.”

As used in the above definitions, the term “reimbursement” generally

refers to situations in which retention by the agency is authorized by

statute. The term “refund” embraces a category of mostly

nonstatutory exceptions in which the receipt is directly related to, and

is a direct reduction of, a previously recorded expenditure. Thus, the

recovery of an erroneous payment or overpayment which wss

erroneous at the time it was made qualifies as a refund to the

appropriation originally charged. ~, B-139348, May 12, 1959

(utility overcharge refund); B-138942 -O.M., August 26,1976

(collections resulting from disallowances by GAO under the “Fly

America Act”). Also, the return of an authorized advance, such as a

travel advance, is a “refund.”

At this point, an important distinction must be made. Moneys

collected to reimburse the government for expenditures previously

made are not automatically the same as “ac(justments for previous

amounts disbursed. ” Reimbursements must generally, absent

statutory authority to the contrary, be deposited as miscellaneous

receipts. The mere fact that the reimbursement is related to the prior

expenditure-although this is an indispensable element of an

authorized “refund”–is not in itself sufficient to remove the

transaction from the scope of 31 U.S.C. $ 3302(b). See, for example,

16 Comp. Gen. 195 (1936); 24 Comp. Dec. 694 (1918); 22 Comp.

Dec. 253 (1915); B-45198, October 27, 1944. The controlling

principles were stated as follows in two early decisions:

“The question as to whether moneys coflected to reimburse the Government for

expenditures previously made should be used to reimburse the appropriations from

which the expenditures were made or should be covered into the generat fund of the

Treasury has often been before the accounting officers of the Treasury and this office,

and it has been uniformly held that in the absence of an express provision in the

statute to the contrary, such funds should be covered in as miscefhmwoua receipts.” 5

Comp. Gen. 289,290 (1925),

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element in the statutory pattern by which Congress retains control of

the public purse under the separation of powers doctrine. 8ee 51

Comp. Gen. 506,507 (1972); 11 Comp. Gen. 281,283 (1932); 10

Comp. Gen. 382,383 (1931) (the intent is that ‘all the public moneys

shall go into the Treasury; appropriations then follow”).

Accordingly, for an agency to retain and credit to its own

appropriation moneys which it should have deposited into the general

fund of the Treasury is an improper augmentation of the agency’s

appropriation. This applies even though the appropriation is a no-year

appropriation. 46 Comp. Gen. 31 (1966). (No-year status relates to

duration, not amount.)

Receipts in the form of “monetary credits” are treated for deposit and

augmentation purposes the same as cash. 28 Comp. Gen. 38 (1948)

(use by government of monetary credits received as payment for sale

of excess electric power held unauthorized unless agency transfem

corresponding amount from its appropriated funds to miscellaneous

receipts). This will not apply, however, where it is clear that the

appropriation or other legislation involved contemplates a different

treatment. B-125127, February 14, 1956 (transfer to miscellaneous

receipts not required where settlement of accounts was to be made on

“net balance” basis). See also 62 Comp. Gen. 70, 74–75 (1982)

(credit procedure which would differ from treatment of cash receipts

recognized in legislative history).

(2) Exceptions

Exceptions to the “miscellaneous receipts” requirement fall into two

broad categories, statutory and nonstatutory:

1. An agency may retain moneys it receives if it has statutory authority

to do so. In other words, 31 U.S.C. $ 3302(b) will not apply if there is

specific statutory authority for the agency to retain the funds.

2. Receipts that qualify as “repayments” to an appropriation maybe

retained to the credit of that appropriation and are not required to be

deposited into the General Fund. 6 Comp. Gen. 337 (1926); 5 Comp.

Gen. 734,736 (1926); B-138942 -O. M., August 26, 1976.

These exceptions are embodied in Treasury Department-GAO Joint

Regulation No. 1, S 2, reprinted at 30 Comp. Gen. 595 (1950), which

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within the time and purpose limits of the appropriation. However, if

the appropriation has expired for obligational purposes (but has not

yet been closed), the repayment must be credited to the expired

account, not to current funds. See 23 Comp, Gen. 648 (1944); 6

Comp. Gen. 337 (1926); B-13=42-O. M., August 26, 1976. If the

repayment relates to an expired appropriation, crediting the

repayment to current funds is an improper augmentation of the

current appropriation unless authorized by statute. B-114088,

April 29, 1953. These same principles apply to a refund in the form of

a credit, such as a credit for utility overcharges. B-139348, May 12,

1959; B-209650-O. M., July 20, 1983.69 Once an appropriation

account has been closed in accordance with 31 U.S.C. $$ 1552(a) or

1555, repayments must be deposited as miscellaneous receipts

regardless of how they would have been treated prior to closing. 31

U.S.C. 3 1552(b), as amended by Pub. L. No. 101-510,$1405 (1990).

Where funds are authorized to be credited to an appropriation,

restrictions on the basic appropriation apply to the credits as well as

to the amount originally appropriated. A-95083, June 18, 1938.

The fact that some particular reimbursement is authorized or even

required by law is not, standing alone, sufficient to overcome 31 U.S.C.

$ 3302(b). ~, 67 Comp. Gen. 443 (1988); 22 Comp. Dec. 60

(1915); 1 Comp. Dec. 568 (1895). The accounting for that

reimbursement-whether it maybe retained by the agency and, if so,

how it is to be credited-will depend on the terms of the statute. Some

statutes, for example, permit reimbursements to be credited to

current appropriations regardless of which appropriation “earned”

the reimbursement. As a general proposition, however, this practice,

GAO has pointed out, diminishes congressional control. For further

discussion of these concepts in the context of statutes applicable to

the Defense Department, see GAO report entitled Reimbursements to

Appropriations: Legislative Suggestions for Improved Congressional

Control, FGMSD-75-52 (November 1, 1976).

As might be expected, there have been a great many decisions

involving the “miscellaneous receipts” requirement. It is virtually

impossible to draw further generalizations from the decisions other

Bolt ~h~~d not be au@matic* assumed that every form of “credit” accruing @tie government

undera contract wiU qurdifyas a “refund” to the appropriation. See, ~, A-51604, May 31,

1977.

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“On the other hand, if the collection involves a refund or repayment of moneya paid

from an appropriation in excess of what waa actually due such refund haa been held

to be properly for credit to the appropriation originally charged.. . .“5 Comp. Gen,

734,736 (1926).

The key language in the above passage is “in excess of what was

actually due.” Apart from the more obvious situations-refunds of

overpayments, erroneous payments, unused portions of authorized

advances-the type of situation contemplated by the “ac@stments for

previous amounts disbursed” portion of the deftition is illustrated by

23 Comp. Gen. 652 (1944), The Agriculture Department was

authorized to enter into cooperative agreements with states for soil

conservation projects. Some states were prohibited by state law from

making advances and were limited to making reimbursements after

the work was performed. In these cases, Agriculture initially put up

the state’s share and was later reimbursed. The Comptroller General

held that Agriculture could credit the reimbursements to the

appropriation charged for the project. The distinction between this

me of situation and the simpler “related to a previous expenditure”

situation in which the money must go to miscellaneous receipts lies in

the nature of the agency’s obligation. Here, Agriculture was not

required to contribute the state’s share; it could simply have foregone

the projects in those states which could not advance the funds. This is

different from a situation in which the agency is required to make a

given expenditure in any event, subject to later reimbursement. In 23

Comp. Gen. 652, the agency made payments larger than it was

required to make, knowing that the “excess” of what it paid over what

it had to pay would (or at least was required to) be returned. See also

64 Comp. Gen. 431 (1985); 61 Comp. Gen. 537 (1982); B-69813,

December 8, 1947; B-220911 .2-O. M., April 13,1988.

For other examples of refunds as that term is used in the Joint

Regulation, see 69 Comp. Gen. 260 (1990) (recoveries under False

Claims Act to the extent of reimbursing erroneous payments); 65

Comp. Gen. 600 (1986) (rebates from Travel Management Center

contractors); 62 Comp. Gen. 70 (1982) (partial repayment of

contribution to International Natural Rubber Organization occasioned

by addition of new members); B-139348, May 12, 1959 (refund of

overcharge by public utility); B-209650-0. M., July 20, 1983 (same).

A repayment is credited to the appropriation initially charged with the

related expenditure, whether current or expired. If the appropriation

is still current, then the funds remain available for further obligation

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ii ‘ ~ ‘ .- ~~i•

385 (1931). The deadline applies to all receipts, including those to be

credited to an appropriation account (which, of course, is “in the

Treasury”), not just those for deposit as miscellaneous receipts. ~,

10 Comp. Gen. 382 (1931).

(4) Money not received “for the Government”

As originally enacted, 31 U.S.C. $ 3302(b) required deposit in the

Treasury of moneys received “for the use of the United States” (9

Stat. 398). The 1982 recodification of Title 31 changed this language

to moneys received “for the Government.” The meaning, of course, is

the same. Although the Comptroller General has not attempted to

define this phrase in any detail, its scope, consistent with the statutory

purpose, is broad. There is no distinction between money received for

the use of the United States and money received for the use of a

particular agency; such a distinction would largely nullify the statute.

As will be seen from the following case summaries, situations in which

the “for the use of the United States” clause was the primary basis for

the decision do not fall into any particular pattern.

In B-205901, May 19, 1982, a railroad had furnished 15,000 gallons

of fuel to the Federal Bureau of Investigation for use in an undercover

investigation of thefts of diesel fuel from the railroad. The railroad and

FBI agreed that the fuel or the proceeds from its sale would be

returned upon completion of the investigation. In view of 31 U.S.C.

5 3302(b), the FBI then asked whether money generated from the sale

of the fuel had to be deposited in the Treasury as miscellaneous

receipts.

In one sense, it could be argued that the money was received “for the

use of the United States,” in that the FBI planned to use it as evidence.

However, the Comptroller General pointed out, this is not the kind of

receipt contemplated by 31 US.C. $ 3302(b). Citing 33 Op. Att’y Gen.

316,321 (1922), the decision concluded that “[f]unds are received

for the use of the United States only if they are to be used to bear the

expenses of the Government or to pay the obligations of the United

States.” Therefore, there was no legal barrier to returning the funds to

the railroad.

In another case, GAO held that misconduct frees levied on Job Corps

participants by the Labor Department need not be treated as money

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than to restate the basic rule: Art agency must deposit into the General

Fund of the Treasury arty funds it receives from sources outside of the

agency unless the receipt constitutes an authorized repayment or

unless the agency has statutory authority to retain the funds for credit

to its own appropriations.

(3) Timing of deposits

As to the timing of the deposit in the Treasury, 31 U.S.C. $ 3302(b)

says merely “as soon as practicable.” There is another statute,

however, now found at 31 U.S.C. $ 3302(c), which provides in relevant

part:

“(1) A person having custody or possession of public money, including a disbursing

ofilciid having public money not for current expenditure, shall deposit the money

without delay in the Treasury or with a depositary designated by the Secretmy of the

Treasury under law. Except as provided in paragraph (2), money required to be

depositsd pursuant to this subsection shall be deposited not later than the third day

after the custodian receives the money. . . .

“(2) The Secretary of the Treasury may by regulation prescribe that a person having

custody or possession of money required by this subsection to be deposited shall

deposit such money during a period of time that is greater or lesser than the period of

time specitled by the second sentence of paragraph (l).”

This statute, formerly designated as Revised Statutes $3621,

originated in 1857 (11 Stat. 249). It was amended in 1896 (29 Stat.

179) to specify a deadline of 30 days. The time limit was reduced to

three days by section 2652(b)(1) of the Deficit Reduction Act of 1984

(98 Stat. 494, 1152).

Treasury Department regulations provide:

“An agency will achieve same day deposit of monies. Where same day deposit is not

cost-effective or is impracticable, next day deposit of monies must be achieved.”

31C.F.R.5206.5(a)(l) (1991). However, receipts of less than $1,000

may be accumulated and deposited when the total reaches $1,000. Id.

$ 206.5(b)(l). Further procedural guidance is contained in I Treasfi

Financial Manual Chapter 5-4000.

As a general proposition, section 3302(c) and the Treasury

regulations place an outer limit on what is ‘practicable” under section

3302(b). 11 Comp. Gen. 281, 283–84 (1932); 10 Comp. Gen. 382,

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Finally, several of the trust fund cases noted later in this chapter have

employed the “not received for the use of the United States” rationale.

~, 60 Comp. Gen. 15,26-27 (1980); B-241744, May 31, 1991;

13-166059, July 10, 1969; B-43894, September 11, 1944;

B-241 17-O. M., Apti 21, 1942.

b. Contract Matters (1) Excess reprocurement costs

We use the term “excess reprocurement costs” hereto include two

factually different but conceptually related situations:

1. Originai contractor defaults. Agency still needs the work done and

contracts with someone else to complete the work, almost invariably

at a cost higher than the original contract price. Original contractor is

liable to the government for these “excess reprocurement costs.”

2. Agency incurs additional,expense to correct defective work by

original contractor. Contractor is liable for the amount of this

additional expense.

Disposition of amounts recovered in these situations has generated

numerous cases. As a general proposition, the answer depends on the

timing of the recovery in relation to the agency’s reprocurement or

corrective action and the status of the applicable appropriation. The

objective is to avoid the depletion of currently available

appropriations to get what the government was supposed to get under

the original obligation. The rules were most recently summarized, and

the case law reviewed, in 65 Comp, Gen. 838 (1986).

The rules are as fo~lows:

1. If, at the time of the recovery from the original contractor, the

agency has not yet incurred the additional expense, the agency may

re~in the amount recovered to the extent necessary to fund the

reprocurement or corrective measures. The collection is credited to

the appropriation obligated for the original contract, without regard

to the status of that appropriation.

2. If, at the time of recovery from the original contractor, the agency

has already incurred the additional reprocurement or corrective

expense, the agency may retain the recove~ for credit to the

applicable appropriation, to the extent necessary to reimburse itself,

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received for the use of the United States for purposes of 31 U,S.C.

5 3302(b). The governing legislation specifically authorized

“reductions of allowances” as a disciplinary measure. Labor felt that,

in some cases, immediate collection of a cash fme from the

individual’s pocket would be more effective. Finding a legislative

intent to confer broad discretion in matters of enrollee discipline, GAO

agreed that the cash frees could be regarded as a form of disciplinary

allowance reduction, and accordingly credited to Job Corps

appropriations. B-130515, August 18, 1970. GAO followed the same

approach in a similar question several years later in 65 Comp. Gen.

666,671 (1986).

In 64 Comp. Gen. 217 (1985), a food service concession contract

required the contractor to reserve a percentage of income to be used

for the replacement of government-owned equipment. The reserve

was found not to constitute money “for the Government” within the

meaning of 31 U.S.C. $ 3302(b). GAO distinguished an earlier decision,

35 Comp. Gen. 113 (1955), because the reserve here was merely a

bookkeeping entry whereas the proposal in the 1955 case would have

required the actual transfer of funds to a bank account. 64 Comp.

Gen. at 219.

Two cases deal with fees paid to contractors. In B-166506,

October 20, 1975, the Environmental Protection Agency had a

number of contracts with private firms for the processing, storage,

and retrieval of various kinds of recorded environmental information.

Much of this information was of value to private parties and available

under the Freedom of Information Act. Fees collected by an agency

under FOIA must be deposited as miscellaneous receipts. Here,

however, EPA proposed advising requesting parties to deal directly

with the contractors, who would charge and retain fees for providing

the data, although the requesters would retain the right to deal with

EPA. GAO approved the proposal, concluding that fees charged by the

contractors in these circumstances were not money received for the

use of the United States. The decision cautioned, however, that the

fees charged and retained by the contractors could not exceed the

fees which EPA could charge if it provided the services directly. Thus,

the fees could include the direct costs of document search and

duplication, but not costs associated with developing the information.

In 61 Comp. Gen. 285 (1982), GAO provided similar advice to the

Federal Election Commission in connection with requests from the

public for microfilm copies of its reports.

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chwged with the contract and expended for completion of the work.

The appropriation involved was a no-year appropriation.

● 44 Cornp. Gen. 623 (1965). Recovery for defective work could be

credited to an expired annual appropriation. Since the corrective

work had not yet been undertaken, the funds would remain available

for that corrective work under the “replacement contract” theory.

● 65 Comp. Gen. 838 (1986), Recovery for faulty design could be used

for necessary corrective work. The appropriation involved was a

multiple-year appropriation still available for obligation at the time of

the recovery.

In the default situation, the earliest decisions held that the agency

could retain excess reprocurement costs recovered from the

defauking contractor. Consistent with the defective work cases, the

early default cases involved situations in which the recovered funds

would still be available for obligation, either because the

appropriation used for the contract was still available or under the

replacement contract theory. 21 Comp. Dec. 107 (1914) (expired

annual appropriation, reprocurement not yet effected); 16 Comp.

Dec. 384 (1909) (no-year appropriation). However, the decisions

inexplicably changed course, starting apparently with 23 Comp. Dec.

352 (1916), and for several decades thereafter consistently held,

without attempting much further analysis, that excess reprocurement

costs recovered from defaulting contractors had to be deposited as

miscellaneous receipts.io

The two lines of cases met in a 1983 decision, 62 Comp. Gen. 678.

That decision recognized that there was no real reason to distinguish

between default and defective work for purposes of accounting for

recoveries. The rules should be the same in both situations.

Accordingly, 62 Comp. Gen. 678 modified the prior default cases and

held, in effect, that the rules previously applied in the defective work

cases should be applied in the future to all excess reprocurement cost

cases “without reference to the event that gave rise to the need for the

replacement contract–that is, whether occasioned by a default or by

defective workmanship.” Id. at 681. The decision went on to hold that

the Bureau of Prisons coti~ retain damages recovered from a

7’)~, 46 Comp. Gen. 554 (1966); 40 Comp. Gen. 590 (1961); 27 Comp. Gen. 117 (1947); 14

Comp. Gen. 729 (1935); 14 Comp. Gen. 106 (1934); 10 Comp. Gen. 510 (1931); 8 Comp. Gen.

284 (1928); 26 Comp. Dec. 877 (1920); A-26073, March 20, 1929, aff’d upon reconsideration,

A-26073, August 8, 1929; A-24614, June 20, 1929. The rule was applied regardless of whether

the funds were acturdly collected or merely withheld from contract payments due. 52 Comp.

Gen. 45 (1972).

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if that appropriation is still available for obligation, If the

appropriation is no longer available for obligation, the recovery

should go to miscellaneous receipts.

These rules apply eqwdly to default and defective work situations. To

restate them from the perspective of the type of appropriation

involved, if the appropriation used to fund the original contract is a

no-year appropriation, the recovery may be credited to that

appropriation regardless of whether the agency has or has not yet

actually incurred the additional costs. If the appropriation is an annual

or multiple-year appropriation and the agency has not yet incurred the

additional costs as of the time of recovery, the agency may credit the

collection to the appropriation regardless of whether it is still current

or expired. In the case of an annual or multiple-year appropriation

where the agency has already incurred the reprocurement or

corrective costs as of the time of recovery, the agency may retain the

recovery if the appropriation is still available for obligation, but not if

it has expired. (Where the excess costs have already been incurred

and the appropriation has expired at the time of recovery, depletion of

currently available funds is clearly not a concern.)

Prior to 1983, there were essentially two separate lines of cases, one

dealing with defective work and the other dealing with default. The

defective work cases, if one examines the facts and types of

appropriations involved, had always applied the principles stated

above, although not necessarily in those terms. Some illustrative cases

are summarized below:

● 8 Comp. Gen. 103 (1928). Supplies delivered by a contractor were

found upon inspection to be unsatisfactory for use, that is, not in

accordance with the terms of the contract. It was held that a refund by

the contractor could be credited to the appropriation originally

charged, on the theory that the payment was improperly made from

the appropriation in the first instance. The appropriation involved was

an annual appropriation, and the corrective costs had not been paid as

of the time of the recovery.

● 34 Comp. Gen. 577 (1955). An amount recovered from a contractor’s

surety because the work failed to meet specifications after the

contractor received final payment was regarded as in the nature of a

reduction in contract price representing the value of unfinished work,

and therefore amounted to the recovery of an unauthorized

overpayment. As such, it could be deposited in the appropriation

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appropriation status and the timing of agency action, the fact patterns

may be categorized as follows:

1. No-year appropriation; recovery made before agency incurs

additional costs.

2. No-year appropriation; additional costs incurred prior to recovew.

3. Annual or multiple-year appropriation; recovery made before

agency incurs additional costs; appropriation still current at time of

recovery.

4. Annual or multiple-year appropriation; additional costs incurred

prior to recovery; appropriation still current at time of recovery.

5. Annual or multiple-year appropriation; recovery made before

agency incurs additional costs; appropriation expired at time of

recove~.

6. Annual or multiple-year appropriation; additional costs incurred

prior to recovery; appropriation expired at time of recovery.

In the first five situations, the agency may retain amounts recovered

to the extent necessary to fund the reprocurement or corrective work,

or to reimburse itself for costs already incurred. In the sixth situation,

the recove~ goes to the Treasury as miscellaneous receipts.72

(2) Other contract situations

The traditional rule for liquidated damages is that they maybe

retained in the appropriation originally charged. 44 Comp. Gen. 623

(1965); 23 Comp. Gen. 365 (1943); 9 Comp. Gen. 398 (1930); 18

Comp. Dec. 430 (1911). See also B-237421, September 11,1991.

The rationale for retaining liquidated damages in the appropriation

account rather than depositing them in the Treasury as miscellaneous

receipts is that they effect an authorized reduction in the price of the

individual contract concerned, and also that this would make them

available for return to the contractor should the liability subsequently

7zIt k entirely pomible that mme of the defauft cases modified by 62 COmP. Gen. 678 ~vofved

this precise situation, in which event the result in those cases would still be correct. However,

since this cannot be known with certainty from the text of the decisions alone, it is besto

disregard them.

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contractor charged with defective work, for credit to the

appropriation which had been used to replace the defective work.

Although not noted in the decision, the appropriation to be credited

was a no-year appropriation. 65 Comp. Gen. 838,841 n.3 (1986).

The decision added another new element: The rules would apply even

where the recovery, by virtue of factors such as inflation or

underbidding, exceeds the amount paid to the original contractor. Of

course, the reason behind permitting retention of the funds is to

enable the agency to get what it originally bargained for, not for the

agency to make a “profit” on the transaction. Thus, any amounts

recovered over and above what is actually necessary to fund the

reprocurement or corrective work (or to reimburse the appropriation

charged with that work, if it is still currently available) must be

deposited in the Treasury as miscellaneous receipts, 62 Comp. Gen. at

683.

It follows logically from what has been said that the proceeds of a

forfeited performance bond should be available to the contracting

agency if and to the extent necessary to fund a replacement contract

to complete the work of the original contract, and this was the holding

in 64 Comp. Gen. 625 (1985). It had been held in an earlier case that,

under a contract for the exchange of government property for private

property, when the government delivers its property but the

contractor defaults, moneys received from a surety under a

performance bond, presumably representing the value of the

government property delivered, could be regarded as in recoupment

of the “advance payment” and used for a replacement purchase. 27

Comp. Gen. 117 (1947).71

In 65 Comp. Gen. 838 (1986), GAO reviewed the evolution of the case

law on excess reprocurement costs, restated the rules, and pointed

out that in no case had GAO approved agency retention of recovered

funds where the reprocurement or corrective costs “had already been

paid from art appropriation which, at the time of the recove~, was no

longer available for obligation.” ~. at 841 n.5.

Before leaving the subject, it maybe helpfuI to once again summarize

the rules in a slightly different manner. From the perspective of

71~7 camp, Gen. 117 went on to state that any moneys recovered from the cOntmCtOr over ad

above the amount of the performance bond had to go to rnisceflaneous receipts It was this

portion of the decision that was moditled by 62 Comp. Gen. 678.

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Somewhat similarly, it was held in 39 Comp. Gen. 647 (1960) that to

require amounts refunded to the United States for contract violations

under the Great Plains Conservation Program to be deposited as

miscellaneous receipts would deplete the appropriation to that extent

and would thereby defeat the statutory purpose. However, the

exception was permitted only for the refund of “unearned payments,”

that is, violations which amounted to a failure of consideration such

that the payments did not result in any benefit to the program,

Refunds of “earned payments,” that is, where the payments had

resulted in some benefit to the program, would have to go to

miscellaneous receipts since their retention would constitute an

improper augmentation. In recognizing the limited exception, the

Comptroller General noted that the terms of 31 U.S.C. $ 3302(b) “are

general in nature and should receive a reasonable construction with

respect to any particular form of income or receipt, ” Id. at 649. The

decision also noted that the “contracts” involved were—not

procurement contracts but were more in the nature of grants. Id.

.

Refunds received by the government under a price redetermination

clause may be credited to the appropriation from which the contract

was funded. 33 Comp. Gen. 176 (1953). However, if the refund is

entirely voluntary on the part of the contractor, the money goes to

miscellaneous receipts. 24 Comp. Gen. 847, 851 (1945).

Refunds received by the government under a warranty clause maybe

considered as an adjustment in the contract price and therefore

credited to the appropriation originally charged under the contract.

34 Comp. Gen. 145 (1954), The same result applies where the

warranty refund is in the form of a replacement purchase credit. 27

Comp. Gen. 384 (1948). (These cases are conceptually related to the

“defective work” cases discussed earlier, and the result follows

logically from the result in those cases.)

A different type of credit was discussed in 53 Comp. Gen. 872 (1974).

It was proposed to require prospective timber sale purchasers to

make certain property surveys, the cost of which would be credited

against the sale price. The surveys had previously been financed from

Forest Service appropriations. GAO viewed the proposal as an

unauthorized augmentation of those appropriations. Similarly, the

Department of Agriculture could not apply savings in the form of

credits accrued under a contract for the handling of food stamp sales

receipts to offset the cost of a separate data collection contract, even

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be relieved. However, where this rationale does not apply–for

example, in a case where the contractor did nothing and therefore

earned nothing and the Comptroller General had denied the remission

of liquidated damages under 41 U.S.C. $ 256a–the liquidated damages

should be deposited in the Treasury as miscellaneous receipts. 46

Comp. Gen. 554 (1966).

In some liquidated damage situations, the agency will not have

incurred any additional reprocurement or corrective costs. This might

happen in a case where an agency received liquidated damages for

delay in performance but the contractor’s performance, though late,

was otherwise satisfactory. In other cases, however, the agency will

incur additional costs. In the situation described in 46 Comp. Gen.

554, for example, the agency would presumably need to reprocure, in

which event it could retain the liquidated damages in accordance with

the rules for excess reprocurement costs just discussed. 64 Comp.

Gen. 625 (1985) (modifying 46 Comp. Gen. 554 to that extent).

Consistent with these rules, liquidated damages credited to an expired

appropriation may not be used for work which is not part of a

legitimate replacement contract. B-242274, August 27, 1991.

Compensation paid by an insurance company for damage to

government property caused by a contractor may not be used to

augment the agency’s appropriation used for the contract, absent

specific statutory authority, and the moneys, whether paid to the

government or to the contractor, are for deposit into the Treasury as

miscellaneous receipts. 67 Comp. Gen. 129 (1987); 48 Comp. Gen.

209 (1968). The retention of insurance proceeds was also involved in

B-93322, April 19, 1950, an apparent exception based on the

particular circumstances involved. In that case, the General Services

Administration had entered into a contract for renovation of the

Executive Mansion. The contract required the contractor to carry

adequate fire and hazard insurance. The renovation project had been

undertaken under a specific appropriation which was enough for the

initial, cost but would not have been sufficient for repairs in the event

of a fire or other hazard. Since the renovation was a “particular job of

temporary nature,” and since a contrary result would defeat the

purpose of the appropriation, the Comptroller General held that

insurance proceeds received in the event a covered risk occurred

could be retained and used for the cost of repairs.

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c. Damage to Government As a general proposition, amounts recovered by the government for

Property and Other Tort loss or damage to government property cannot be credited to the

Liability appropriation available to repair or replace the property, but must be

deposited in the Treasury as miscellaneous receipts. 64 Comp. Gen.

431 (1985) (damage to government motor vehicle); 26 Comp. Gen.

618 (1947] (recovery from insurance company for darnage to

government vehicle); 3 Comp. Gen. 808 (1924) (loss of Coast Guard

vessel resulting from collision) .7a While the recovery may well be

“related” to a prior expenditure for repair of the property, it is not an

“a~ustment” of a previous disbursement for purposes of

Treasury-GAO Joint Regulation No. 1.64 Comp. Gen. 431,433

(1985).

There are statutory exceptions. One involves property purchased and

maintained by the General Services Administration from the General

Supply Fund, a revolving fund established by 40 U.S.C. $756. By virtue

of 40 US.C. $ 756(c), recoveries for loss or damage to General Supply

Fund property are credited to the General Supply Fund. This includes

recoveries from other federal agencies for darnage to GSA motor pool

vehicles. 59 Comp. Gen. 515 (1980).

Another is 16 U.S.C. 5 579c, which authorizes the Forest Service to

retain the proceeds of bond forfeitures resulting from failure to

complete performance under a permit or timber sale contract, and

money received from a judgment, compromise, or settlement of a

government claim for present or potential darnage to lands or

improvements under the administration of the Forest Service. If the

receipt exceeds the amount necessary to complete the required work

or make the needed repairs, the excess must be transferred to

miscellaneous receipts. This provision is discussed in 67 Comp. Gen.

276 (1988), holding that the proceeds of a bond forfeiture could be

used to reimburse a general Forest Service appropriation which had

been charged with the cost of repairs.

In addition, where an agency has statutory authority to retain income

derived from the use or sale of certain property, and the governing

legislation shows an intent for the particular program or activity to be

selA.Waining, the agency may retain recoveries for loss or darnage to

that property. 24 Comp. Gen. 847 (1945); 22 Comp. Gen. 1133

‘%urther cases for this proposition are 35 Comp. Gen. 393 (1956); 28 Comp. Gen. 476 (1949);

15 Comp, Gen. 683 (1936); 5 Comp. Gen, 928 (1926); 20 Comp. Dec. 349 (1913); 14 Comp.

Dec. 87 (1907); 9 Comp. Dec. 174 (1902).

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though both contracts were necessary to the same program objective.

A-51604, May 31, 1977.

The rule that money received by the government under a contract is

governed by 31 U.S.C. 5 3302(b) unless one of the established

exceptions applies is underscored by the case of Reeve Aleutian

Airways, Inc. v. Rice, 789 F. Supp. 417 (D.D.C. 1992). The Air Force

had awarded a contract to a commercial air carrier to provide

passenger and cargo service to a remote base in the Aleutian Islands.

The carrier’s revenue would be derived almost entirely from fares

either purchased directly or reimbursed by the United States (military

personnel, their dependents, and government contractor employees).

The contract granted the carrier landing rights and ground support at

the base, and the contractor agreed to return a specified portion of its

receipts as a “concession fee,” to be deposited in the base morale,

welfare, and recreation fund. “[Innovation consistent with the law

should be encouraged,” said the court, “but this transaction so plainly

violates the express terms of 31 U.S.C. $ 3302(b) . . . that it should be

nipped in the bud.” ~. at 421. Since there was no authority to diveti

the funds from the Treasury to the welfare fund, and since the

diversion would actually increase the cost to the government, the

court found the contract award to be arbitrary and capricious, and

declared the contract “null, void and of no force and effect.” ~. at

423.

A similar GAO decision is 35 Comp. Gen. 113 (1955), holding that a

provision in a food services contract under which a portion of gross

receipts would be set aside in a reserve fund for the repair and

replacement of government-owned equipment was contrary to 31

U.S.C. $ 3302(b).

If a contract requires the government to pay a deposit on containers

and provides for a refund by the contractor of the deposit upon return

of the empty containers by the government, the refund maybe

credited to the appropriation from which the deposit was paid.

B-8121, January 30, 1940. However, if the contract establishes a time

limit for the government to return the empty containers and provides

further that thereafter title to the containers shall be deemed to pass

to the government, a refund received from the contractor after

expiration of the time limit is treated as a sale of surplus property and

must be deposited as miscellaneous receipts. 23 Comp. Gen. 462

(1943).

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damaged in transit. 46 Comp. Gen. 31 (1966). See also 28 Comp.

Gen. 666 (1949); 2 Comp. Gen. 599 (1923); 22 Comp. Dec. 703

(1916); 22 Comp. Dec. 379 (1916). There is a narrow exception in

cases where the freight bill on the shipment of the property lost or

damaged exceeds the amounts paid for repairs and both are payable

from the same appropriation, in which event the bill is reduced and

the amount deducted to cover the cost of repairs is allowed to remain

to the credit of the appropriation. 21 Comp. Dec. 632 (1915), as

amplified in 8 Comp. Gen. 615 (1929) and 28 Comp. Gen. 666

(1949). The rule and exception are discussed in 46 Comp. Gen. 31

and in B-4494, September 19, 1939. Also, as with receipts in general,

the miscellaneous receipts requirement does not apply if the

appropriation or fund involved is made reimbursable by statute. 46

Comp. Gen. at 33.

The requirement to deposit as miscellaneous receipts recoveries from

carriers for property lost or damaged in transit does not apply to

operating funds of the National Credit Union Administration since,

even though the funds are treated as appropriated funds for most

other purposes, they are technically not direct appropriations but fees

and assessments collected from member credit unions. 50 Comp.

Gen. 545 (1971).

While the preceding cases have all involved loss or damage to

property, the United States may also recover amounts resulting from

tortious ir@y to persons, for example, under the so-called Federal

Medical Care Recovery Act, 42 U.S.C. ~ 2651. See, ~, 57 Comp.

Gen. 781 (1978). Such recoveries must be deposited in the Treasury

as miscellaneous receipts. 52 Comp. Gen. 125 (1972).

A case involving the Milita~ Personnel and Civilian Employees Claims

Act of 1964, 31 U.S.C. $3721, provides a good illustration of an

adjustment to a prior disbursement, i.e., an authorized refund which

the agency may retain for credit to the disbursing appropriation. The

statute authorizes agencies to pay claims by their employees for

personal property lost or damaged incident to service. In cases where

there may be third-party liability (e.g., an insurer or carrier), the

agency has a choice. It may pay the entire amount of the employee’s

claim and be subrogated to the employee’s claim against the third

party, or it may require the “employee to pursue the third-party claim

first. If the agency chooses the former option, it may retain any

third-party recoveries for credit to the appropriation used to pay the

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(1943). While the two cited decisions involve recoveries from

insurers, the principle applies equally to recoveries directly from the

party responsible for the loss or damage. 27 Comp. Gen. 352 (1947).

There is also a nonstatutory exception. Where a private party

responsible for loss or damage to government property agrees to

replace it in kind or to have it repaired to the satisfaction of the

proper government officials and to make payment directly to the party

making the repairs, the arrangement is permissible and the agency is

not required to transfer an amount equal to the cost of the repair or

replacement to miscellaneous receipts.T4 The principle was first

recognized in 14 Comp. Dec. 310 (1907), and has been followed,

either explicitly or implicitly, ever since. ~, 67 Comp. Gen. 510

(1988); B-87636, August 4, 1949; B-128209-O. M., July 12,1956. The

exception applies even though the money would have to go to

miscellaneous receipts if the responsible party paid it directly to the

government. 67 Comp. Gen. at511; B-87636, August 4, 1949. For an

apparent “exception to the exception” based on the specific

legislation involved, see 28 Comp. Gen. 476 (1949).

If one regards 14 Comp. Dec. 310 from the standpoint of pure logic, it

appears difficult to support. It is, in fact, one of the extremely few

instances in which the decisions have sanctioned doing indirectly

something that cannot be done directly. Be that as it may, the

exceptjon has been followed since 1907 and appears to be firmly

entrenched. Thus, for example, in B-128209 -O. M., July 12, 1956, GAO

addressed the relationship between 14 Comp. Dec. 310 and 28 Comp.

Gen. 476, stating that “14 Comp. Dec. 310 has been followed for

almost 50 years and we have never expressed disagreement with the

conclusion reached therein.” The exception does not disturb the rule

itself; it is “nothing more than an exception that maybe advantageous

if the timing of repair and payment can be made to coincide.” 64

Comp. Gen. 431,433 (1985).

The rule that recoveries for loss or damage to government property

must ‘be deposited as miscellaneous receipts applies equally to

recoveries from common carriers for government property lost or

71A 1943 ~= ~ugges~d a different result, i.e., the agency might have to tr~fer the ‘iUe ‘f ‘he

repairs to miscellaneous receipts, if the agency had a specitlc appropriation for repair or

replacement of the property in question. 22 Comp. Gen. 1133, 1137 (1943). GAO indicated in

67 Comp. Gen. 510 (1988) that this would not be the case, although 67 Comp. Gen. 510 did not

deal with a specific repair appropriation, which would appear to be a rare case in any event.

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Service for service of civil process and judicial execution seizures and

sales, to the extent provided in advance in appropriation acts); 28

U.S.C. $1931 (specified portions of filing fees paid to the clerk of

court, to the extent provided in annual appropriation acts). The

relevant legislation will determine precisely what may be retained.

q, 34 Comp. Gen. 58 (1954).

Training fees illustrate both the general rule and statutory exceptions.

Under the Government Employees Training Act, an agency may

extend its training programs to employees of other federal agencies

on a reimbursable or nonreimbursable basis. 5 U.S.C. s 4104. The

agency may, unless it receives appropriations for interagency training,

retain the fees. B-241269, February 28, 1991 (non-decision letter),

Similarly, an agency may admit state and local government employees

to its training programs, and may charge a fee or waive it in whole or

in part. Fees received are credited to the appropriation to which the

training costs were charged. 42 U.S.C. 54742. The agency may also

admit other private persons to its training programs on a

space-available and fee basis, but unless it has statutory authority to

the contrary, must deposit the fees as miscellaneous receipts. 42

Comp. Gen. 673 (1963); B-241269, February 28, 1991; B-190244,

November 28, 1977.

Parking fees assessed by federal agencies under the authority of 40

U.S.C. $ 490(k) are to be credited to the appropriation or fund

originally charged for providing the service. However, any amounts

collected in excess of the actual cost of providing the service must be

deposited as miscellaneous receipts. 55 Comp. Gen. 897 (1976).

Parking fees may be authorized by statutes other than 40 U.S.C.

$ 490(k), in which event the terms of the particular statute must be

examined. For example, parking fees at Department of Veterans

Affairs medical facilities are addressed in 38 U.S,C. $5009. Originally,

the fees had to go to miscellaneous receipts under 31 U.S.C. $ 3302(b].

45 Comp. Gen. 27 (1965). However, 38 u.S.C. $5009 was later

amended and the fees now go into a revolving fund,

Income derived from the installation and operation of vending

machines on government-oyned or controlled property is generally

for deposit as miscellaneous receipts, 32 Comp, Gen. 124 (1952);

A-44022, August 14, 1944. However, there are two m@or exceptions.

First, if the contractual arrangement with the vendor is made by an

employee association with administrative approval, the employee

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claim. 61 Comp. Gen. 537 (1982). Art agency adopting the former

policy, the decision stated–

“will be making payments in some cases that are, strictly speaking, higher than are

required. In such cases, it is entirely legitimate to treat a third-party recove~ as a

reduction in the amount previously disbursed rather than as an augmentation of the

agency’s appropriation.” ~. at 540.

A comparison of 61 Comp. Gen. 537 with the Federal Medical Care

Recovery Act case, 52 Comp. Gen, 125, illustrates the distinction

previously discussed with respect to applying the definition of

“refund”– 61 Comp. Gem 537 is an example of an a@stment to an

amount previously disbursed; 52 C<omp. Gen. 125 ilhtstrates a

collection which must go to miscellaneous receipts even though it is

“related” to a prior expenditure. See 61 Comp. Gen. at 539–40; 64

Comp. Gen. 431, 432–33 (1985). In this respect, the situation in 61

Comp. Gen. 537 is very similar to the situation in 23 Comp. Gen. 652

(1944), described in our earlier discussion.

d. Fees and Corrtrnissions Fees and commissions paid either to the government itself or to a

government employee for activities relating to official duties must be

deposited in the Treasury as miscellaneous receipts absent statutory

authority to the contrary.

In the case of fees paid directly to the government, the result is a

simple application of31 U.S.C. $ 3302(b). Thus, the following items, it

has been held, must be deposited as miscellaneous receipts:

● Commissions from the use of pay telephones in government buildings.

59 Comp. Gen. 213 (1980); 44 Comp. Gen. 449 (1965); 23 Comp.

Gen. 873 (1944); 14 Comp. Gem 203 (1934); 5 Comp. Gen. 354

(1925); B-4906, October 11,1951.

● Fees and related reimbursable incidental expenses paid to the

Department of Agriculture in connection with the investigation of and

issuance of certifications of quality on certain farm products. 2 Comp.

Gen. 677 (1923).

● Fees collected under the Freedom of Information Act. 4B Op. Off.

Legal Counsel 684,687 (1980).

Of course, art agency may retain fees and use them to offset operating

costs if and to the extent expressly authorized by statute. Examples

are 28 U.S.C. $ 1921(c) (fees collected by the United States Marshals

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e. Economy Act

f. Setoff

service, even if otherwise proper, could not be implemented without

specific statutory authority because the payments could not be

retained by the erdistees but would have to be deposited in the

Treasury under 31 U.S.C. $ 3302(b). B-200013, April 15, 1981.

The Economy Act, 31 U.S.C. $31535 and 1536, authorizes the interand intra-departmental furnishing of materials or performance of

work or services on a reimbumable basis. It is a statutory exception to

31 U.S.C. $ 3302(b), authorizing a performing agency to credit

reimbursements to the appropriation or fund charged in executing its

performance. However, thi$ is not mandatory. The performing agency

may, at its discretion, deposit reimbursements for both direct and

indirect costs in the Treasury as miscellaneous receipts. 57 Comp.

Gen. 674,685 (1978), mod@ing 56 Comp. Gen. 275 (1977).

There is one area in which the agency has no discretion.

Reimbursements may not be credited to an appropriation against

which no charges have been made in executing the order. This would

constitute an improper augmentation. Such reimbursements must

therefore be deposited into the General Fund as miscellaneous

receipts. An example would be depreciation in some cases. 57 Comp.

Gen. at 685-86.

Collections by setoff may be factually distinguishable from direct

collections, but the effect on the appropriation is the same. If

crediting an agency appropriation with a direct collection in a

particular instance would result in an improper augmentation, then

retaining an amount collected by setoff would equally constitute an

improper augmentation. Thus, setoffs must be treated the same as

direct collections. If an agency could retain a direct collection in a

given situation, it can retain the setoff. However, if a direct collection

would have to go to miscellaneous receipts, the setoff also has to go

to miscellaneous receipts. In this latter situation, the agency must take

the amount of the setoff from its own appropriation and transfer it to

the General Fund of the Treasury. ~, 2 Comp. Gen. 599 (1923); 20

Comp. Dec. 349 (1913).

A hypothetical situation will illustrate. Suppose a contractor

negligently damages apiece of government equipment and becomes

liable to the government in the amount of $500. Suppose further that

an employee of the contracting agency, in a separate transaction,

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●

●

●

group may retain the income. 32 Cornp. Gen. 282 (1952); B-1 12840,

February 2, 1953. Second, under the Randolph-Sheppard Act, 20

US.C. $ 107d-3, vending machine income in certain cases must go to

blind licensee-operators or state agencies for the blind. See B-238937,

March 22, 1991 and B-199132, September 10, 1980 (non-decision

letters).

For purposes of determining the disposition of amounts collected,

there is a distinction between donations, which are voluntary, and fees

and assessments, which are not. Statutory authority to accept gifts

and donations does not include fees and assessments exacted

involuntarily. 25 Comp. Gen. 637,639 (1946); B-195492, March 18,

1980; B-225834 .2-0. M., April 11, 1988. This is more of a

presumption than a rule, however, and specific circumstances may

warrant different treatment. ~, B-232482, June 4, 1990 (not

improper for Commerce Department to treat certain registration fees

as “contributions” within scope of 22 U.S.C, $ 2455(f); interpretation

ratiiied first by appropriation, later by specific legislation).

Fees paid to individual employees require a two-step analysis. The

first step is the principle that the earnings of a government employee

in excess of the regular compensation gained in the course of or in

connection with his or her services belong to the government and not

to the individual employee. The second step is then the application of

31 U.S.C. S 3302(b). Using this analysis, GAO has held that fees were

required to be deposited as miscellaneous receipts in the following

instances:

An honorarium paid to an Army officer for delivering a lecture at a

university in his capacity as an officer of the United States. 37 Comp.

Gen, 29 (1957).

Fees collected from private individuals by government employees for

their services as notaries public. 16 Comp. Gen. 306 (1936).

Witness fees and any allowances for travel and subsistence, over and

above actual expenses, paid to federal employees for testifying in

ce- state court proceedings. 36 Comp. Gen. 591 (1957); 23

Comp. Gen. 628 (1944); 15 Comp. Gen. 196 (1935); B-160343,

November 23, 1966.

Applying the same analysis, a proposal under which a nonprofit

corporation funded entirely by private industry would pay monthly

“bonuses” to Army enlistees to encourage enlistment and satisfactory

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,. ,

●

●

h. Trust Funds

However, the existence of a revolving fund does not automatically

signal that 31 U.S.C. $ 3302(b) will never apply. In other words, it

should not be assumed that a revolving fund is incapable of being

improperly augmented. Thus, where the statute establishing the fired

does not authorize the crediting of receipts of a given type back into

the fund, those receipts must be deposited in the Treasury as

miscellaneous receipts. See 69 Comp. Gen. 260 (1990); 40 Comp.

Gen. 356 (1960); 23 Comp. Gen. 986 (1944); 20 Comp. Gen. 280

(1940).

Augmentation of a revolving fund may occur in other ways, depending

on the nature of the fund and the terms of the governing legislation.

Examples are:

Statute authorizes Bureau of Land Management to retain funds

collected as a result of coal trespasses on federal lands, to use those

funds to repair damage to the specific lands involved in the trespass,

and, within the Bureau’s discretion, to refund any excess. An excess

of collections over repair costs which the Bureau determines is

inappropriate to refund should not be retained in the revolving fund to

be used for other purposes, but must be deposited in the Treasury as

miscellaneous receipts. B-204874, July 28, 1982.

Corps of Engineers has a revolving fund used to provide supervision

and administration of certain construction work for other agencies on

a reimbursable basis, It charges a flat rate calculated to recover actual

costs over the long run. Recovery from a contractor for faulty design

may be reimbursed to the fund to the extent of the amount actually

charged, but any excess must go to the Treasuly. 65 Comp. Gen. 838

(1986). However, an “excess” representing costs which were not

calculated into the flat rate may be reimbursed to the fund, B-237421,

September 11, 1991.

Legislation which merely authorizes, or even requires, that certain

expenditures be reimbursed is not sufficient to create a revolving

@d. Reimbursements must be deposited as miscellaneous receipts

unless the statute specifically authorizes retention by the agency. 67

Comp. Gen. 443 (1988); 22 Comp. Dec. 60 (1915); 1 Comp. Dec. 568

(1895).

Moneys properly received by a federal agency in a trust capacity are

not subject to 31 U.S.C. $ 3302(b) and thus do not have to be

deposited in the Treasuqy as miscellaneous receipts. 60 Comp. Gen.

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negligently damages property of the contractor. The contractor files a

claim under the Federal Tort Claims Act and the agency settles the

claim for $600. Neither par@ disputes the validity or amount of either

claim. The agency sets the contract debt off against the tort claim and

makes a net payment to the contractor of $100, However, if the

agency stops here, it has augmented its appropriation to the tune of

$500. If the tort claim had never occurred and the agency collected

the $500 from the contractor, the $500 would have to go to

miscellaneous receipts (see “Contract Matters,” above). Conversely,

if the contract claim did not exist, the agency would end up paying

$600 on the tort claim. Now, combining both claims, if both were paid

without setoff, the net result would be that the agency is out $600.

The setoff cannot operate to put the agency’s appropriation in a better

position than it would have been in had the agency and contractor

simply exchanged checks. Thus, in addition to paying the contractor

$100, the agency must deposit $500 from its own appropriation into

the Treasury as miscellaneous receipts.

A different type of “setoff” occurs under the Back Pay Act, 5 U.S.C.

$5596. When an agency pays an employee back pay under the Back

Pay Act, it must deduct amounts the employee earned through other

employment during the time period in question. The agency simply

pays the net amount. There is no requirement to transfer the amount

of the deduction for outside earnings to miscellaneous receipts 31

Comp. Gen. 318(1952), The deduction for outside earnings is not

really a collection; it is merely part of the statutory formula for

determining the amount of the payment.

A mqjor exception to the requirements of 31 U.S.C. 5 3302(b) is the

revolving fund. Under the revolving fund concept, receipts are

credited directly to the fund and are available, without further

appropriation by Congress (unless the Legislation specifies

otherwise), for expenditures to carry out the purposes of the fund. An

agency must have statuto~ authority to establish a revolving fund.

The enabling statute will specify the receipts that may be credited to

the fund and the purposes for which they may be expended. An

example is the General Services Administration’s “General Supply

Fund,” noted above under “Damage to Government Property.”

Receipts that are properly for deposit to a revolving fund are,

obviously, exempt from the miscellaneous receipts requirement of

$ 3302(b). ~, 33 Op. Att’y Gen. 316 (1922).

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part by trust funds and in part by appropriated funds, although the

activities in question were supported mostly by appropriated funds,

The Justice Department’s Office of Legal Counsel has cautioned

against carrying this theory too far in the case of nonstatutory trusts

created by executive action. For example, the United States and the

Commonwealth of Virginia sued a transportation company for causing

art oil spill in the Chesapeake Bay. A settlement was proposed under

which the defendant would donate money to a private waterfowl

preservation organization. The OLC found that the proposal would

contravene 31 U.S,C. 5 3302(b), stating:

“In our view, the fact that no cash actually touches the palm of a federal oftlcial is

irrelevant for purposes of 4 [3302(b)], ifa federal agency could have accepted

possession and retains discretion to direct the use of the money. The doctrine of

constructive receipt will ignore the form of a transaction in order to get to its

substance. . . . Since we believe that money available to the United States and directed

to another recipient is constructively ‘received’ for purposes of S [3302(b)], we

conclude that the proposed settlement is barred by that statute.”

4B Op. Off. Legal Counsel 684,688 (1980). There was a solution in

that case, however. Since the United States had not suffered any

monetary loss, it was not required to seek damages. The proposed

contribution by the defendant could be attributed to the co-plaintiff,

Virginia, which of course is not subject to 31 U.S.C. 5 3302(b). Id. 75 —

GAO reached a similar conclusion in B-21021O, September 14, 1983,

holding that the Commodity Futures Trading Commission lacked

authority to enter into a settlement agreement under which a party

charged with violation of the Commodity Exchange Act would donate

funds to an educational institution with no relationship to the

violation. A more recent case concluded that, without statutory

authority, permitting a party who owes a penalty to contribute to a

research project in lieu of paying the penalty amounts to a

circumvention of 31 U.S.C. $ 3302(b) and improperly augments the

agency’s research appropriations. 70 Comp. Gen. 17 (1990). A case

saying essentially the same thing in the context of Clean Air Act

violations is B-247155, July 7, 1992.

T~e Opfion noted that the proposed settlement would be authorized under sub~uent

amendments to the goverming legislation.

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15,26 (1980); 27 Comp. Gen. 641 (1948). In the latter case, the

government of Persia had made a payment to the United States

government to reimburse expenses incurred in sending an American

vessel to Persia to return to the United States the body of an American

official killed by a mob in Tehran. The State Department suggested

that the money be used as a trust fund for the education of Persian

students. However, the Comptroller General found that the funds had

not been received under conditions which would constitute a “proper

and legal trust” and therefore were properly deposited as

miscellaneous receipts, the clear implication being that 31 U.S.C.

$ 3302(b) would not apply to money received in a valid trust capacity.

Other authorities supporting this general proposition are Emery v.

United States, 186 F.2d 900,902 (9th Cir. 1951) (money paid to

United States under court order as refund of overcharges by persons

who had violated rent control legislation was held in trust for tenants

and could be disbursed to them without need for appropriation);

Varneyv. Warehime, 147 F.2d 238,245 (6th Cir. 1945) (assessments

levied against milk handlers to defray certain wartime expenses were

trust funds and did not have to be covered into the Treasury); United

States v. Sinnott, 26 F. 84 (D. Ore. 1886) (proceeds from sale of

lumber made at Indian sawmill were to be applied for benefit of

Indians and were not subject to 31 U.S.C. S 3302(b)); 62 Comp. Gen.

245, 251–52 (1983) (proceeds from sale of certain excess stockpile

materials where federal agency was acting on behalf of foreign

government); B-223146, October 7, 1986 (moneys received by

Pension Benefit Guaranty Corporation when acting in its trustee

capacity); B-43894, September 11, 1944; B-23647, February 16,

1942 (taxes and fines collected in foreign territories occupied by

American armed forces); B-24117-O. M., April 21, 1942 (penalty on

defaulted bond received by United States as trustee for Indians).

In addition, receipts generated by activities financed with trust funds

are generally credited to the trust fund and not deposited as

miscellaneous receipts B-166059, July 10, 1969 (recovefy for

damage to property purchased with trust funds); B-4906, October 11,

1951 (receipts accruing from activities financed from Federal Old-Age

and SuMvors Insurance Trust Fund). See also 50 Comp. Gen. 545,

547 (1971) (summarizing the holding in B-4906). In 51 Comp. Gen.

506 (1972), GAO advised the Smithsonian Institution that receipts

generated by various activities at the National Zoo need not be

deposited as miscellaneous receipts. The Smithsonian is financed in

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B-235577 .2-O. M., November 9, 1989 (civil penalties under Food

Stamp Act). See also 39 Comp. Gen. 647,649-50 (1960).

● Interest earned on grant advances by grantees other than states. ~,

69 Comp, Gen. 660 (1990).

● Reimbursements received for child care services provided by federal

agencies for their employees under authority of 40 U.S.C. $ 490b. 67

Comp. Gen. 443, 448–49 (1988).

● Receipts generated by undercover operations by law enforcement

agencies. 67 Comp. Gen. 353 (1988); 4B Op. Off. Legal Counsel 684,

686 (1980). In GAO’S opinion, however, short-term operations (a card

game or dice game, for example) maybe treated as single

transactions. 67 Comp. Gen. 353, clarifying B-201751, February 17,

1981. Thus, 31 U.S.C. S 3302(b) need not be read as requiring an

undercover agent participating in a card game to leave the table to

make a miscellaneous receipts deposit after every winning hand. If,

however, the agent ends up with winnings at the end of the game, the

money cannot be used to offset expenses of the operation.70 Related

cases are 5 Comp. Gen. 289 (1925) and 3 Comp, Gen. 911 (1924)

(moneys used to purchase evidence for use in criminal prosecutions

and recovered when no longer needed for that purpose must be

deposited as miscellaneous receipts).

● Proceeds from silver and gold sold as excess property by the Interior

Department as successor to the American Revolutionary Bicentennial

Administration. (The silver and gold had been obtained by melting

down unsold commemorative medals which had been struck by the

Trea.wuy Department for sale by the ARBA.) B-200962, May 26, 1981.

● Income derived from oil and gas leases on “acquired lands” (as

distinguished from “public domain lands”) of the United States used

for military purposes. B-203504, JuIy 22,1981.

j. Miscellaneous Cases: Money Most cases in which an agency may credit receipts to its own

Retained by Agency appropriation or fund involve the areas previously discussed:

authorized repayments, Economy Act transactions, revolving funds,

76sm~g ~ ~ 1979, the Fede~ Bureau of Investigation, and ~ter Me DW Enforcement

Admirristration as wetl, received authority annually, ht. in authorization acts and later in

appropriation acts, to use proceeds from undercover operdons to offset reasonable and

necessary expenses of the operations. E.&, Pub. L. No. 102-140,5 102(b), 105 StX. 782,

791-93 (1991) (FT 1992 Justice Department appropriation act) As soon as the proceeds or the

balance thereof are no longer necessary for the conduct of the operation, they are to be

deposited as miscellaneous receipts. Id. $ 102(b)(2). The Internal Revenue Service, the subject

of 67 Comp. Gen. 353, received simil~ authority late in 1988 (Pub. L. No. 100-690, $ 7601(c),

102 Stat. 4181, 4504), but it appears to have expired as of December 31, 1991 (Pub. L. No.

101-647, $ 3301(a), 104 Stat. 4789, 4917).

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GAO considered simiiar issues in several cases involving consent

orders between the Departtnent of Energy and oii companies charged

with violation of federal oil price and ailocatian regulations. The

Department has iimited authori~ to use recovered overcharge funds

for restitutionary purposes, and in fact has a duty to attempt

restitution. However, to the extent this cannot reasonably be

accomplished or funds remain atler restitution efforts have been

exhausted, the funds may not be used for energy-related programs

with no restitutionary nexus but must be deposited in the Treasury

pursuant to 31 U.S.C. $ 3302(b). 62 Comp. Gen. 379 (1983); 60

Comp. Gen. 15 (1980). It is equally unauthorized to give the funds to

charity or to use them to augment appropriations for administering

the overcharge refund program. B-200170, April 1,1981.

In a 1991 case, an agency had discovered a $10,000 bank account

belonging to an employee morale club which had become defunct. No

documentation of the club’s creation or dissolution could be located.

Thus, if the club had ever provided for the disposition of its funds, it

could no longer be established. Clearly, the money was not received

for the use of the government for purposes of31 U.S.C. $ 3302(b). It

was equaliy clear that the money could not be credited to the agency’s

appropriations. GAO advised that the money could be turned over to a

successor employee moraie organization to be used for its intended

PWPWes. If no successor organization stepped forward, the funds

would have to be deposited in a Treasury trust account in accordance

with 31 U.S.C. $1322. B-241744, May 31, 1991.

i. Miscellaneous Cases: Money III addition to the categories discussed above, there have been

to Treasury numerous other decisions involving the disposition of receipts in

various contexts. Some cases in which the Comptroller Generai held

that receipts of a particular type must be deposited in the Treasury as

miscelia.neous receipts under 31 U.S.C. 3 3302(b) or related statutes

am set forth below.

● Costs awarded to the United States byacourt under 28 U.S.C. $2412.

47 Comp, Gen. 70 (1967).

● Moneys collected as a fine orpenal~. 70 Comp. Gen. 17 (1990) (civil

penalties assessed against Nuclear Regulatory Commission licensees);

69 Comp. Gen. 260 (1990) (penalties–as opposed to the recovery of

actual losses-under the False Claims Act); 47 Comp. Gen. 674

(1968) (dishonored checks); 23 Comp. Dec. 352 (1916);

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In the occasional case, the authority maybe less than specific. In

B-1 14860, March 20, 1975, for example, based on the broad authority

of the National Housing Act, GAO advised that the Department of

Housing and Urban Development couid require security deposits from

tenants in HuD-owned multifamily projects. consistent with practice in

the private sector, the deposit wouid be considered the property of

the tenant and held in an escrow account, to be either returned to the

tenant upon completion of the lease or forfeited to the government in

cases of breach.

A final case we will note is 24 Comp. Gen. 514 (1945), an exception

stemming from the particular funding arrangement involved rather

than a specific statute. The case dealt with certain government

corporations which did not receive reguiar appropriations but instead

received annual authorizations for expenditures from their capitai

funds for administrative expenses. An appropriation act had imposed

a limit on certain communication expenditures and provided that

savings resulting from the limit “shall not be diverted to other use but

shali be covered into the Treasuqy as miscellaneous receipts.” The

Comptroiier Generai construed this as meaning returned to the source

from which made available. In the case of the corporations in

question, this meant that the savings couid be returned to their capitai

funds.

k. Money Erroneously The various accounts that comprise the heading “miscellaneous

Deposited as Miscellaneous receipts” are just that—they are receipt accounts, not expenditure or

Receipts appropriation accounts. As noted eariier, by virtue of the Constitution,

once money is deposited into miscellaneous receipts, it takes an

appropriation to get it back out. What, therefore, can be done if an

agency deposits some money into miscellaneous receipts by mistake?

This question really involves two separate situations. In the first

situation, an agency receives funds which it is authorized, under the

principles discussed above, to credit to its own appropriation or fund,

but erroneously deposits them as miscellaneous receipts. The

decisions have always recognized that the agency can make an

appropriate a~ustment to correct the error. In an eariy case, the

Interior Department sold some property and deposited the proceeds

as miscellaneous receipts when in fact it was statutorily authorized to

credit the proceeds to its reclamation fund. The Interior Department

then requested a transfer of the funds back to the reclamation fund,

and the Secretary of the Treasury asked the Comptroller of the

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or the other specific situations noted. There is another group of cases,

not susceptible of further generalization, in which an agency simply

has speciiic statutory authority to retain certain receipts. Examples

are:

● Forest Service may retain moneys paid by permitters on national

forest lands representing their pro rata share under cooperative

agreements for the operation and maintenance of waste disposal

systems under the Granger-Thye Act. 55 Comp. Gen. 1142 (1976).

c Customs Service may, under 19 U.S.C. $1524, retain charges collected

from airlines for preclearance of passengers and baggage at airports

in Canada, for credit to the appropriation originally charged with

providing the service. 48 Comp. Gen. 24 (1968).

● overseas Private Investment Corporation may retain interest on loans

of excess foreign currencies made under the Foreign Assistance Act of

1961, as amended. 52 Comp. Gen. 54 (1972).

● Payroll deductions forgovernment-furnished quarters under 5 U.S.C.

$5911 are retained in the appropriation(s) or fund(s) from which the

employee’s salary is paid. 59 Comp. Gen. 235 (1980), as modified by

60 Comp. Gen. 659 (1981). However, if the employee pays directly

rather than by payroll deduction, the direct payments must go to

miscellaneous receipts unless the agency has specific statutory

authority to retain them. 59 Comp. Gen. at 236.T7

● Under the Mineral Lands Leasing Act of 1920, receipts from the sale

or lease of public lands are distributed in the manner specified in the

statute. This was held to include the proceeds of bid deposits forfeited

by successful mineral lease bidders who fail to execute the lease. 65

Comp. Gen. 570 (1986).

c By virtue of provisions in the Job Training Partnership Act and annual

appropriation acts, certain receipts generated by Job Corps Centers

may be retained for credit to the Labor Department appropriation

from which the Centers are funded. 65 Comp. Gen. 666 (1986).

● Legislation establishing the Commission on the Bicentennial of the

United States Constitution authorized the Commission to retain

revenues derived from its licensing activities but did not address sales

revenues. Sales revenues, therefore, had to be deposited as

miscellaneous receipts. B-228777, August 26, 1988.

TTFor ~encie~ fuded under the SIUIUOJ Interior Department ~d Relati At?encies

appropriation acts, the rentals, whether collected by payroll deduction or otherwise, go into a

“special fund” maintained by each agency to be used for maintenance and operatjon of the

quarters. 5 U.S.C. $5911 note.

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,,:f, . .

,. l:.

,..,

question); 63 Comp. Gen. 189 (1984) (Department of Energy

deposited overcharge recoveries from oil companies into general fund

instead of first attempting to use them to make restitutionary

refunds); B-217595, April 2, 1986 (interest collections subsequently

determined to have been erroneous).

One case, 53 Comp. Gen. 580 (1974), combined elements of both

situations. The Army Corps of Engineers had been authorized to issue

discharge permits under the Refuse Act Permit Program. The program

was statutorily transferred in 1972 to the Environmental Protection

Agency. Under the User Charge Statute, 31 U.S,C. $9701, both the

Corps and EPA had charged applicants a fee. In some cases, the fees

had been deposited as miscellaneous receipts before the applications

were processed. The legislation that transferred the program to EPA

also provided that EPA could authorize states to issue the permits.

However, there was no provision that authorized EPA to transfer to

the states any fees aIready paid. Thus, some applicants found that

they had paid a fee to the Corps or EPA, received nothing for it, and

were now being charged a second fee by the state for the same

application. EPA felt that the original fees should be refi.mded. So did

the applicants.

GAO noted that the User Charge Statute contemplates that the federal

agency will furnish something in exchange for the fee. Since this had

not been done, the fees could be viewed as having been erroneously

deposited in the general fund. However, the fees had not been

erroneously received–the Corps and EPA had been entirely correct in

charging the fees in the first place–so the appropriation madeby31

U.S.C. $ 1322(b)(2) could not be used, There was a way out, but the

refunds would require a two-step process. The Corps and EPA should

have deposited the fees in a trust account70 and kept them there until

the applications were processed, at which time depositing as

miscelkmeous receipts would have been proper. Thus, EPA could first

transfer the funds from the general fund to its suspense account as

the correction of an error, and then make the refunds directly from

the suspense account.

In cases where the “Moneys Erroneously Received and Covered”

appropriation is otherwise a-.~ailable, it is available without regard to

‘%% also B-3596/A-51615, November 30, 1939. Use of a deposit fund suspense account is

equally acceptable. B-158381, June 21, 1968.

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Treasury if it was authorized. Of course it was, replied the

Comptroller:

“This is not taking money out of the Treasury in violation of paragraph 7, section 9,

Article I of the Constitution. ., .

“The proceeds of the sale. . . have been appropriated by law. Taking it from the

Treasury and placing it to the credit in the Treasury of the appropriation to which it

belongs violates neither the Constitution nor any other law, but simply corrects an

error by which it was placed to the unappropriated surplus instead of to the

appropriation to which it belongs.” 12 Comp. Dec. 733, 735 (1906).

This concept has consistently been followed. See 45 Comp. Gen. 724

(1966); 3 Comp. Gen. 762 (1924); 2 Comp. Gen. 599 (1923).78

In the second situation, a private party pays money to a federal

agency, the agency deposits it as miscellaneous receipts, and it is

subsequently determined that the party is entitled to a refund. Here, in

contrast to the first situation, an appropriation is necessary to get the

money out. E.g., 3 Comp. Gen. 296 (1923).

There is a permanent indefinite appropriation for refunding

collections “erroneously received and covered” which are not

properly chargeable to any other appropriation. 31 U.S,C.

$ 1322(b)(2). The availability of this appropriation depends on

exactly where the receipts were deposited. If the amount subject to

refund was credited to some specific appropriation account, the

refund is chargeable to the same account. If, however, the receipt was

deposited in the general fund as miscellaneous receipts, then the

appropriation made by 31 U.S.C. ~ 1322(b)(2) is available for the

refund, provided that the amount in question was “erroneously

received and covered.” 61 Comp. Gen. 224 (1982); 55 Comp. Gen.

625 (1976); 17 Comp. Gen. 859 (1938).

Examples of cases in which use of the “Moneys Erroneously Received

and Covered” appropriation was found authorized are 71 Comp.

Gen. — (B-239769.2, July 24, 1992) (refund to investment company

of late fding fee upon issuance of order by Securities and Exchange

Commission exempting company from fting deadline for fiscal year in

%he reverse adjustment is made when funds which should have been deposited as

rnisceltaneous receipts are erroneously credited to an appropriation. The remerly is a transfer

from the appropriation to the appropriate miscellaneous receipta account. ~,B-48722,

APril 16, 1945.

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statutory authority is necessary. As the Supreme Court has said,

“[u]ninterrupted usage from the foundation of the Government has

sanctioned it.” United States v. Burnison, 339 U.S. 87, 90 (1950). The

gifts may be of real property or personal property, and they may betestamentary (made by will) or inter vivos (made by persons who are

not dead yet). Since monetary gifts to the United States go to the

general fund of the Treasury, there is no augmentation problem.

However, as the Supreme Court held in the Burnison case, a state may

prohibit testamentary gifts by its domiciliaries to the United States.

Also, a state may impose an inheritance tax on property bequeathed

to the United States. United Statesv. Perkins, 163 U.S. 625 (1896).

The tax is not regarded as a constitutionally impermissible tax on

federal property “since the tax is imposed upon the legacy before it

reaches the hands of the government. The legacy becomes the

property of the United States only after it has suffered a diminution to

the amount of the tax. . . .“ Id. at 630. —

While gifts to the United States do not require statutory authority,

gifts to an individual federal agency stand on a different footing. The

rule is that a government agency may not accept for its own use (i.e.,

for retention by the agency or credit to its own appropriations) gifts

of money or other property in the absence of specific statutory

authority. 16 Comp. Gen. 911 (1937). As the Comptroller General

said in that decision, “[w]hen the Congress has considered desirable

the receipt of donations. . . it has generally made speciilc provision

therefor. . . .“ Id. at 912. See also B-13378, November 20, 1940;

A-44015, Marc~17, 1937.

Thus, acceptance of a gift by an agency lacking statutory authority to

do so is an improper augmentation. If an agency does not have

statutory authority to accept donations, it must turn the money in to

the Treasury as miscellaneous receipts. ~, B-139992, August 31,

1959 (proceeds of life insurance policy designating federal agency as

beneficiary).

For purposes of this discussion, the term “gifts” maybe defined as

“gratuitous conveyances or transfers of ownership in property

without any consideration.” 25 Comp. Gen. 637,639 (1946);

B-217909, September 22, 1986. A receipt that does not meet this

definition does not become a gift merely because the agency

characterizes it as one. Forexample, a fee paid for the privilege of

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whether the original payment was made under protest. 55 Comp. Gen.

243 (1975). Payments under 31 U.S.C. S 1322(b)(2) are made by the

Treasury Department without the need for settlement action by GAO,

except in doubtful cases. B-142380, March 24, 1960 (circular letter).

The procedure is for the finance office of the agency making the

refund to submit a Standard Form 1166 to the Treasuqy Department,

citing account 20X1807 in the “appropriationsummary” block. See

B-217595, April 2, 1986; B-210638, July 5, 1984 (non-decision

letter).

The appropriation made by 31 U.S.C. $ 1322(b)(2) is available only to

refund amounts actually received and deposited. If a given refund

bears interest, for example, a refund claim approved by a contracting

officer under the Contract Disputes Act, the interest portion must be

charged to the contracting agency’s operating appropriations for the

fiscal year in which the award is made. B-217595, April 2, 1986.

If an agency collects money from someone to whom it owes a refund

from a prior transaction, it should not simply deposit the net amount.

The correct procedure is to deposit the new receipt into the general

fund (assuming that’s the proper receptacle), and then make the

refund using the “Moneys Erroneously Received and Covered”

appropriation. B-19882, October 28, 1941; A-96279, September 15,

1938. However, GAO has approved offsetting a refund against future

amounts due from the same party in cases where there is a continuing

relationship, but suggested that the party be given the choice.

B-217595, April 2, 1986, at 4.

Clearly, if the receipt cannot be regarded as erroneous, 31 U.S.C.

$ 1322(b)(2) is not available. 53 Comp. Gen. 580 (1974); B-1461 11,

July 6, 1961. Also, the “Moneys Erroneously Received and Covered”

appropriation is available only where the amount to be refunded was

deposited into the general fund. ~, 11 Comp. Dec. 300 (1904). If a

refund is due of moneys deposited somewhere other than the general

fund, some other basis must be sought.

3. Gifts and Donations to

the Government

a. Donations to the

Government

It has long been recognized that the United States (as opposed to a

particular agency) may receive and accept gifts. No particular

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limited-purpose authorities available to the military are found in 10

U.S.C S$ 2601–2607.

We may also note a statute tailor-made for the philanthropist desiring

to make a donation for the express purpose of reducing the national

debt. (Some people think they already do this in April of each year.)

The Secretary of the Treasury may accept gifts of money, obligations

of the United States, or other intangible personal prope~ made for

the express purpose of reducing the public debt. Gifts of other real or

personal property for the same purpose may be made to the

Administrator of the General Services Administration. 31 U.S.C.

$3113.

Assuming the existence of the requisite statutoxy authority, it is quite

easy to make a gift to the government. There are no particular forms

required. A simple letter to the appropriate agency head transmitting

the funds for the stated purpose will suftice. See B-157469, July 24,

1974 (non-decision letter).

A 1980 GAO study found that, during fiscal year 1979,41 government

agencies received a total of $21.6 million classified as gill revenue.

See report entitled Review of Federal Agencies’ Gift IN.mds,

FGMSD-80-77 (September 24, 1980). The report pointed out that the

use of gifi funds dilutes congressional oversight because the funds do

not go through the appropriation process. The report recommended

that agencies be required to more fully disclose gift fund operations in

their budget submissions.

The issue raised in most gift cases is the purpose for which gift funds

may be used. This ultimately depends on the scope of the agency’s

statutory authority and the terms of the gift. Gift funds are accounted

for as trust funds. They must be deposited in the Treasury as trust

funds under 31 U.S.C. $ 1321(b), to be disbursed in accordance with

the terms of the trust. In 16 Comp. Gen. 650,655 (1937), the

Comptroller General stated:

“Where the Congress authorizes Federal officers to accept private gifts or bequfor a specific purpose, often subject to certain prescribed conditions as to

administration, authority must of necessity be reposed in the custodians of the trust

fund to make expenditures for administration in such a manner as to carry out the

purposes of the trust and to comply with the prescribed conditions thereof without

reference to generrd regulatory and prohibitory statutes applicable to public funds.”

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filming a motion picture in a national park is not a gift and must be

deposited as miscellaneous receipts rather than in the agency’s trust

fund. 25 Comp. Gen. 637 (1946). See also B-61938, April 16, 1948.

Similarly, a reduction of accrued liability in fulfillment of a contractual

obligation is not a donation for purposes of a statute authorizing

appropriations to match “donations.” B-183442, October 21, 1975.

A number of departments and agencies have statutory authority to

accept gifts. A partial listing is contained in B-149711, August 20,

1963. The statutory authorizations contain varying degrees of

specificity as to precisely what may be accepted (money, property,

services, etc.). For example, the State Department’s gift statute, 22

U.S.C. $2697, authorizes the acceptance of gifts of money or property,

real or personal, and, in the Secretary’s discretion, conditional gifts. A

case discussing this statute is 67 Comp, Gen. 90 (1987) (United

States Information Agency may accept donations of radio programs

prepared by private syndicators for broadcast over Voice of America

facilities). Another is 70 Comp. Gen. 413 (1991) (United States

Information Agency may accept donations of foreign debt). Authority

to accept voluntary services does not include donations of cash.

A-86115, July 15, 1937; A-51627, March 15, 1937.

The authority of the Defense Department to accept gifts is found in

several statutes. First, the Defense Department may accept

contributions of money or real or personal property “for use by the

Department of Defense” from any person, foreign government, or

international organization. The money and proceeds from the sale of

property are credited to the Defense Cooperation Account in the

Treasury. The money is not automatically available to Defense, but is

available for obligation or expenditure only in the manner and to the

extent provided in appropriation acts. 10 U.S.C. $2608 (Supp. HI

1991). Second, the Department may accept services, supplies, real

property, or the use of real property under a mutual defense or similar

agreement or as reciprocal courtesies, from a foreign government for

the support of any element of United States armed forces in that

country. 10 U.S.C. S 2350g (Supp. III 1991). These authorities formed

the basis for the United States to accept contributions from foreign

governments and others to defray the costs of the 1991 military

operations in the Persian Gulf. See GAO report, Operations Desert

Shield/Storm: Foreign Government and Individual Contributions to

the Department of Defense, GAO/NSIAD-92-144 (May 1992). Other

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Under a statute authorizing the Federal Board for Vocational

Education to accept donations to be used “in connection with the

appropriations hereby made or hereafter to be made, to defray the

expenses of providing and maintaining courses of vocational

rehabilitation,” the funds could be used only to supplement the

Board’s regular appropriations and could not be used for any expense

not legally payable from the regular appropriation. The statute here

conferred no discretion. 27 Comp. Dec. 1068 (1921).

If an agency is authorized to accept conditional gifts (git7s made on

the condition that the funds be used for a specific authorized

purpose), the funds may be used to augment a “not to exceed”

earmark applicable to that purpose. B-52501, November 9, 1945.

(Although the statute involved in B-52501, the predecessor of

10 U.S.C. $2608 noted above, no longer exists, the point of the

decision is still valid.)

Once it is determined that the proposed use will not contravene the

terms of the agency’s authorizing statute, the agency will have some

discretion under the trust theory. The area in which this discretion has

most often manifested itself in the decisions is entertainment.

Although appropriated funds are generally not available for

entertainment, several decisions have established the proposition that

donated funds may be used for entertainment, This does not mean any

entertainment agency oftlcials may desire. Donated funds maybe

used for entertainment only if the entertainment will further a valid

function of the agency, if the function could not be accomplished as

effectively from the government’s standpoint without the expenditure,

and if the expenditure does not violate any restrictions imposed by the

donor on the use of the funds. 46 Comp. Gen. 379 (1966); B-170938,

October 30, 1972; B-142538, February 8, 1961. See also B-195492,

March 18, 1980; B-152331, November 19, 1975. (B-152331 involved

a trust fund which included both gift and non-gift funds.) It follows

that donated funds may not be used for entertainment which does not

bear a legitimate relationship to official agency purposes. 61 Comp.

Gen. 260 (1982), affirmed upon reconsideration, B-206173, August 3,

1982 (donated funds improperly used for breakfast for Cabinet wives

and Secretary’s Christmas party); B-198730, April 13, 1981

(non-decision letter).

The trust fund concept was also applied in 36 Comp. Gen. 771

(1957). The Alexander Hamilton Bicentennial Commission had been

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While this passage correctly states the trust theory, agencies have

sometimes misconstrued it to mean that they have free and

unrestricted use of donated funds. This is not the case. On the one

hand, donated funds are not subject to all of the restrictions

applicable to direct appropriations. Yet on the other hand, they are

still “public funds” in a very real sense. They can be used only in

furtherance of authorized agency purposes and incident to the terms

of the trust. See B-195492, March 18, 1980.

An interesting illustration of this point occurred in B-16406, May 17,

1941. A citizen had bequeathed money in her will to a hospital. When

the will was made, the hospital belonged to the state of Louisiana. By

the time the will was probated, however, it had been acquired by the

United States. Louisiana was concerned that the bequest might, if

deposited in the United States Treasury, be diverted from the

decedent’s intent. There was no need for concern, the Comptroller

General advised. The money would have to be deposited as trust funds

and would be available for expenditure only for the purposes specified

in the trust, i.e., for the hospital.

Since gift funds are accounted for as trust funds, they are presumably

subject to the Antideficiency Act. See OMB Circular No. A-34, $21.1

(1985), which includes trust fund expenditure accounts in the

definition of “appropriation or fund.”

In evaluating the propriety of a proposed use of gift funds, it is first

necessary to examine the precise terms of the statute authorizing the

agency to accept the gift. Limitations imposed by that statute must be

followed. Thus, under a statute which authorized the Forest Service to

accept donations “for the purpose of establishing or operating any

forest research facility,” the Forest Service could not turn over

unconditional gift funds to a private foundation under a cooperative

agreement, with the foundation to invest the funds and use the

proceeds for purposes other than establishing or operating forest

research facilities. 55 Comp. Gen. 1059 (1976). See also 40 Op. Att’y

Gen. 66 (1941) (Library of Congress could not, without statutory

authority, share income from donated property with Smithsonian

Institution); B-198730, December 10, 1986 (funds donated to Library

of Congress to further purposes of Library’s Center for the Book

could not be used for unrelated Library programs).

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Gifts which involve continuing expense present special problems.

Although there are no recent cases, indications are that the agency

needs specific statutory authority-not merely general authority to

accept gifts-since the agency’s appropriations would not otherwise

be available to make the continuing expenses. For example, an

individual made a testamentary gift to a United States naval hospital.

The will provided that the money was to be invested in the form of a

memorial fund, with the income to be used for specit3ed purposes.

The Comptroller General found this objectionable in that “the United

States would become, in effect, a trustee for charitable uses, would

never gain a legal title to the money, but would have the burden and

obligation of administering in perpetuity a trust fund. . . .“ Also,

absent spectilc authorization by Congress, appropriations would not

be available for the expenses of administering the trust. Therefore,

absent congressional authorization to accept the donation “as made,”

it could not be accepted either by the naval hospital, 11 Comp. Gen.

355 (1932), or by the Treasury Department, A-40707, December 15,

1936. See also Story v. Snyder, 184 F.2d 454,456 (D.C. Cir. 1950),

cert. denied, 340 U.S. 866 (“[g]ifts to the United States which involve

any duty, burden, or condition, or are made dependent upon some

future performance by the United States, are not accepted by the

Government unless by the express authority of Congress”); 10 Comp.

Gen. 395 (1931); 22 Comp. Dec. 465 (1916)80; 30 Op. Att’y Gen. 527

(1916). A few of the cases (~, 10 Comp, Gen. 395 and 30 Op. Att’y

Gen. 527) have tied the result in with the Antideficiency Act

prohibition against incurring obligations in advance of appropriations.

A question which appears to have received little attention is whether

an agency with statuto~ authority to accept gifts may use either

appropriated funds or donated funds to solicit the gifts. GAO found

that the Holocaust. Memorial Council may use either appropriated or

donated funds to hire a fund-raiser, but the cases have little precedent

value since the legislation involved included specific authority to

solicit as well as accept donations. See B-211149, December 12,

1985; B-211149, June 22, 1983.

An interesting, and hopefully unique, situation presented itself in

B-230727, August 1, 1988. Congress had enacted legislation to

establish a Commission on Improving the Effectiveness of the United

Wsome wag once said, j{)king]y we think, that if you looked hard enough You ~~d Probabb ‘md

a case dealing with the use of appropriated funds to buy dog food. 22 Comp. Dec. 465 is it.

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given statutory authority to accept gifts and wanted to use the

donations to award Alexander Hamilton Commemorative

Scholarships. The Cornmission was to have a brief existence and

would not have sufficient time to dmhiste r the scholarship awards.

The Comptroller General held that the Commission could, prior to the

date of its expiration, transfer the funds to a responsible private

organization for the purpose of enabling proper administration of the

scholarship awards. The distinction between this case and 55 Comp.

Gen. 1059, mentioned above, is that in 36 Comp. Gen. 771, the

objective of transferring the funds to a private organization was to

better carry out an authorized purpose. In 55 Comp. Gen. 1059, the

objective was to enable the funds to be used for unauthorized

purposes.

Another case illustrating permissible administrative discretion under

the trust theory is B-131278, September 9, 1957. A number of

persons had made donations to St. Elizabeth’s Hospital to enable it to

buy an organ for its chapel. The donors (organ donors?) had made the

giits on the condition that the Hospital purchase a high-quality

(expensive) organ. When the Hospital issued its invitation for bids on

the organ, the specifications were sufficiently restrictive so as to

preclude offers on lower quality organs. The decision found this to be

entirely within the Hospital’s discretion in using the gift funds in

accordance with their terms.

A noted above, however, the agency’s discretion in admhistering its

gift funds is not unlimited. Thus, for example, an agency may not use

gift funds for purely personal items such as greeting cards. 47 Comp.

Gen. 314 (1967); B-195492, March 18,1980.

The particular statutory scheme will determine the extent to which

donated funds are subject to other laws governing the expenditure of

public funds. In two cases, for example, where it was clear that a

designated activity was to be carried out solely or primarily with

donated funds, GAO found that the recipient agency could invest the

gift funds in non-Treasury interest-bearing accounts, and was not

required to comply with the Federal Property and Administrative

Services Act of 1949 or the Federal Acquisition Regulation. 68 Comp.

Gen. 237 (1989) (Christopher Columbus Quincentenary Jubilee

Commission); B-211149, December 12, 1985 (Holocaust Memorial

council).

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F. Supp. 87,90 (D. Minn. 1969). For purposesof18U.S.C.5209, the

proverb that it is better to give than to receive doesn’t work. Both the

giving and the receiving are criminal offenses under the statute. The

employee would presumably violate the law by receiving more than he

or she is entitled to receive under applicable statutes and regulations.

33 Op. Att’y Gen. 273 (1922).

Second, they are improper as unauthorized augmentations. To the

extent the private contribution replaces the employee’s government

salary, it is a direct augmentation of the employing agency’s

appropriations. To the extent the contribution supplements the

government salary, it is an augmentation in an indirect sense, the

theory being that when Congress appropriates money for an activity,

all expenses of that activity must be borne by that appropriation

unless Congress specifically provides otherwise.

An early case in point is 2 Comp. Gen. 775 (1923). The American

Jewelers’ Protective Association offered to pay the salary and

expenses of a customs agent for one year on the condition that the

agent be assigned exclusively for that year to investigate jewelry

smuggling. The Comptroller General found the arrangement

improper, for the two reasons noted above. Whether the payments

were to be made directly to the employee or to the agency byway of

reimbursement was immaterial.

Most questions in this area involve schemes for private entities to pay

official travel expenses. From the sheer number of cases GAO has

considered, one cannot help feeling that the bureaucrat must indeed

be a beloved creature. Prior to 1991, a long series of decisions

established the proposition that donations from private sources for

official travel to conduct government business constituted an unlawful

augmentation unless the employing agency had statuto~ authority to

accept gifts. If the agency had such authority, the donation could be

made to the agency, not the individual employee, and the agency

would then reimburse the employee in accordance with applicable

travel laws and regulations, with the allowances reduced as

appropriate in the case of contributions in kind.8*

~I%me ~=~ from ~~ series we 59 Comp. Gen. 415 (1980); 55 Comp. Gen. 1293 (1976); 49

Comp. Gen. 572 (1970); 46 Comp. Gen. 689 (1967); 36 Comp. Gen. 268 (1956); 26 Comp.

Dec. 43 (1919).

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Nations, to be funded solely from private contributions. The effective

date of the legislation was March 1, 1989. Unfortunately, the

legislation failed to provide a mechanism for anyone (Treasury

Department or General Services Administration, for example) to

accept and account for donations prior to the effective date, and the

Commission itself could not do so since it had no legid existence.

Thus, unless the statute were amended to authorize some other

agency to act on the Commission’s behalf, potential donors could not

make contributions prior to the effective date since there was no one

authorized to accept them.

Occasionally, someone makes a gift to the United States and later

wants the money back. Where the elements of an unconditional gift

have been satisfied (intent to make a gift, delivery, and acceptance),

claims for refund have been denied, A-94582, June 6, 1938;

B-151432-O. M., June 3, 1963.

Finally, if an agency is authorized to accept gifts, it may also accept a

loan of equipment by a private party without charge to be used in

connection with particular government work. The agency’s

appropriations for the work will be available for repairs to the

equipment, but only to the extent necessary for the continued use of

the equipment on the government work, and not after the

government’s use has terminated. 20 Comp. Gen. 617 (1941). In one

case, GAO approved the loan of private property to a federal agency by

one of its employees, without charge and apparently without statutory

authority, where the agency administratively determined that the

equipment was necessary to the discharge of agency functions and the

loan was in the interest of the United States. 22 Comp. Gen. 153

(1942). The decision stressed, however, that the practice should not

be encouraged. The decision seems to have been based in part on

wartime needs and its precedent value would therefore seem minimal.

See, ~, B-168717, February 12, 1970.

b. Donations to Individual (1) Contributions to salary or expenses

Employees

As a general proposition, unless authorized by statute, private

contributions to the salary or expenses of a federal employee are

improper. First, they may in some circumstances violate 18 U.S.C,

$209, which prohibits the supplementation of a government

employee’s salary from private sources. “The evils of such, were it

permitted, are obvious.” Exchange National Bank v. Abramson, 295

$!!’ i%

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1293 (1976). An employee who receives an authorized donation after

the government has already paid the travel expenses cannot keep

everything. The employee must refund to the government the amount

by which his or her allowances would have been reduced had the

donation been received before the allowances were paid. The agency

may then credit this refund to its travel appropriation as an authorized

repayment. —1d. at 1294-95.

The statute requires an “appropriate reduction” in travel payments in

order to preclude the agency from paying for something that has

already been reimbursed by an authorized private organization. An

employee being reimbursed on an “actual expense” basis should not

be claiming items which would duplicate private reimbursements.

Thus, the agency is not required to reduce the actual expense

entitlement by the value of provided meals. 64 Comp. Gen. 185

(1985). However, the value of subsistence items furnished in kind

must be deducted where the employee is being reimbursed on a per

diem basis.—Id. at 188; 49 Comp. Gen. 572,576 (1970).

The authority conferred by5U.S.C.$4111 is expressly limited to

organizations exempt from taxation under section 501 (c)(3) of the

Interm-d Revenue Code, 26 U.S.C. $ 501(c)(3) (religious, charitable,

scientilc, educational, etc.). It does not extend to organizations which

may be tax-exempt under other portions of $501. B-225986,

March 2, 1987. Also, it does not apply to an organization whose

application for exemption under $ 501(c)(3) has not yet been

approved; subsequent approval is not retroactive for purposes of 5

U.S.C. $4111. B-225264, November 24, 1987 (non-decision letter).

Donations made under the express condition that they be used for

some unauthorized purpose should be returned to the donor. 47

Comp. Gen. 319 (1967).

(2) Promotional and other travel-related items

In recent years, commercial airlines and others have devised a variety

of schemes, which change from time to time, to reward frequent

customers. Promotional materials awarded to customers may take

various forms–bonus trips, reduced-fare coupons, cash,

merchandise, credits toward future goods or services, etc.

Government employees traveling on government business are eligible

for these promotional items the same as anyone else. There is,

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One problem with this system was the lack of uniformity in treatment,

varying with the agency’s statuto~ authority. Congress addressed the

situation in the Ethics Reform Act of 1989, Pub. L. No. 101-194,

$302, 103 Stat. 1716, 1745, codified at 31 U.S.C. $1353. Subsection

(a) provides as follows:

“Notwithstanding any other provision of law, the Administrator of General Services,

in consultation with the Director of the OffIce of Government Ethics, shall prescribe

by regulation the conditions under which an agency in the executive branch

(including an independent agency) may accept payment, or authorize an employee of

such agency to accept payment on the agency’s behalf, from non-Federal sources for

travel, subsistence, and related expenses with respect to the attendance of the

employee (or the spouse of such employee) at any meeting or similar function

relating to the oftlciaf duties of the employee. Any cash payment so accepted shall be

credited to the appropriation applicable to such expenses. In the case of a payment in

kind so accepted, a pro rata reduction shafl be made in any entitlement of the

employee to payment from the Government for such expenses.”

GSA’S implementing regulations, published on March 8, 1991 (56 Fed.

Reg. 9878), are found at 41 C.F.R. Parts 304-1 and 304-2. Thus, as

long as acceptance complies with the statute and regulations, there is

no longer art augmentation problem. The existence or lack of separate

statutory authority to accept gifts is immaterial,

Another relevant statute, which seemingly overlaps 31 U.S.C. $1353 to

some extent but was left untouched by it, is 5 U.S.C. $4111, enacted as

part of the Government Employees Training Act. Under this provision,

an employee may accept (1) contributions and awards incident to

training in nongovernment facilities, and (2) payment of travel,

subsistence, and other expenses incident to attendance at meetings,

but only if the donor is a tax-exempt nonprofit orgartization.82 If an

employee receives a contribution in cash or in kind under this section,

travel and subsistence allowances are subject to an “appropriate

reduction.”

Section 4111 authorizes the employee to accept the donation. It does

not authorize the agency to accept the donation, credit it to its

appropriations, and then reimburse the employee. 55 Comp. Gen.

82~e ~e~ ~der 5 I-J.S, C $4111 are stated and applied in a number of source ~ ~~tion m

the cases cited in the text. 8ee, for example, B171751, February 11, 1971, and two GAO

reporta involving the Agency for International Development (1’ravel Practices: Private Funding

of AfD Employees’ Travel, GAO/NSlA.D-87-92, March 1987, and Travel Practices: Use of Airfine

Ronus Coupons and Privately Funded Travel by AID Employees, GAO/?WAD-86-26, November

1985).

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Items such as promotional coupons that provide for future free or

reduced-cost travel should be integrated into the agency’s travel

plans. FPMR, 41 C.F.R. $ 101-25.103-2(b). Merchandise items which

the receiving agency cannot use must be disposed of in accordance

with General Services Administration regulations. Id.

$5 101-25.103-2(d), 101-25.103-4.

—

Since the benefit is the property of the government from the moment

the employee receives it, an employee who uses it for personal travel

or other personal use becomes indebted to the government for the full

value of the benefit received. 63 Comp. Gen. 233 (1984); B-216822,

March 18, 1985.W

The typical bonus program is not automatic, but requires the traveler

to submit an application and, in some cases, pay a fee. An employee

who has paid such a fee maybe reimbursed, not to exceed the amount

of expected savings to the government. FI’R, 41 C.F.R. $ 301-1.6(f)(2);

63 Comp. Gen. 229,231.

The employee may retain two types of promotional “gift”:

● Merchandise items of nominal intrinsic value (pens, pencils, note

pads, calendars, etc.). 63 Comp. Gen. 229,233,

● Benefits which have no value to the government, such as free

upgrades to fwst class. 63 Comp. Gen. 229, 232; B-212559,

February 24, 1984. The free upgrade should be used only for official

travel. B-223387-O.M,, August 22, 1986.

In addition, the Federal Travel Regulations were amended in 1989 to

permit an employee, subject to agency approval, to obtain

premium-class accommodations through the redemption of frequent

traveler benefits.87

86A~ he tie ~~lf3~~~ ~~ hued, the indebkdna could not be waived. me w~ver -u@, 5

US.C. S 5584, haa since been amended to include debts arising from travel or transportation

allowances, so this portion of the decision 8hould be disregarded.

8741 C,F.R, ~ 301.3,3 (d)(3)(ii)(F),tiwd by 54 Fed. Reg. 47523,47524 (Novembr 15> 1989).

GAO supported the amendment. See 67 Comp. Gen. 79,83 (1987); R-235185, August 18, 1989

(non-decision letter), Prior to the amendment, such a redemption would not have been

authorized under the guidelines set forth in the decisions. 8ee GAO report, Frequent Fliers: Use

of Airline Ronus Awarda by AID Employees, GAOITWAD-86-217 (8eptember 1986).

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however, one important distinction. “Anyone else” may keep them;

the government employee, with certain exceptions, may not.

The fundamental principle underlying the decisions and regulations in

this area is that any benefit, cash payment or otherwise, received by a

government employee from private sources incident to or resulting

from the performance of ofllcial duty is regarded as having been

received on behalf of the government and is the property of the

govemment.83 It should also be noted that the promotional items are

not really “gifts”; they are more in the nature of benefits “earned” as

a result of the expenditure of federal funds, B-216052, January 29,

1985 (non-decision letter). While the cases are not “augmentation of

appropriations” cases, they are sufficiently related to the subject

matter of this section to warrant brief treatment here.

GAO’S “leading case” in this area is 63 Comp. Gen. 229 (1984), and

many of the points noted below will be found in that decision. In

addition, the basic rules are reflected in the Federal Property

Management Regulations (FPMR), 41 C.F.R. S 101-25.103, and

Federal Travel Re@ations (~R), 41 C,F.R. Parts 301-1 and 301-3.

The primary rule is that, except as noted below, promotional items or

benefits of any type received by a government employee resulting in

whole or in part from ofticial travel are the property of the

government and may not be retained by the employee for personal

use. 63 Comp. Gen. 229,s4 The fact that the individual obtains the

benefit through a combination of official and personal travel is

immaterial. 1d.66 An employee wishing to take advantage of

promotional_%enefits should maintain separate accounts for official

and personal travel. I?17R, 41 C.F.R. $ 301-1.6(f)(l). Whether the

benefit is transferable or nontransferable is also immaterial. 63 Comp.

Gen. 229, 232–33; B-215826, January 23, 1985.

s~em we ~omon.=w exceptiom to MS. For example, a 1977 Justice De-ent op~on~

summarized in B-199656, March 21, 1984 (non-decision letter), held that a government

employee may retain a public service award in the form of cash from a private organiaau“on even

though the service was performed as a government employee.

sq~ ~W 69 Comp. Gen, 643 (1990); 67 Comp. Gen. 79 (1987); 59 ComP. Gent 203~ 206

(1980); B-210717.2, February 24, 1984; B-199656, July 15, 1981; GAO report, Use of Airfine

Bonus Coupons and Privately Funded Travel by AID Employees, GAO/NSIAD-86-26

(November 1985).

85&e ~ B.215826, J~u~ 23, lg85; B-212559, February Z4, 1984; B-235185, AU8USt 18!

1989 (non-decision letter); B-218524, April 1, 1986 (non-decision letter).

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should be any different since the airline is entitled to be made whole in

either case.

4. Other Augmentation As pointed out earlier in our introductory comments, the

Principles and Cases augmentation theory is relevant in a wide variety of contexts. The

most common applications are the areas previously discussed-the

spectrum of situations involving the miscellaneous receipt9 statute

and the acceptance of gifts. This portion of the discussion will present

a sampling of cases to illustrate other applications of the t.heo~.

Another way of stating the augmentation rule is that when Congress

appropriates funds for an activity, the appropriation represents a

limitation Congress has f~ed for that activity, and all expenditures for

that activity must come from that appropriation absent express

authority to the contr~. Thus, a federal institution is normally not

eligible to receive grant funds from another federal institution. It is

not necessary for the grant statute to expressly exclude federal

institutions as eligible grantees; the rule will apply based on the

augmentation theory unless the grant statute expressly includes

federal institutions. 57 Comp. Gen. 662,664 (1978); 23 Comp. Gen.

694 (1944); B-1 14868, April 11, 1975.

The improper treatment of reimbursable transactions may result in an

augmentation. Thus, if a given reimbursement must be credited to the

appropriation that “earned” it, i.e., that financed the transac tion, and

that appropriation has expired, crediting the reimbursement to

current funds is an improper augmentation. An example of this type

of transaction is the Economy Act, 31 U.S.C. $1535.

An agency may have the option of crediting reimbursements either to

current funds or to the appropriation which financed the transaction.

An example here is the Arms Export Control Act (Foreign Military

Sales Act). Even here, however, crediting a reimbursement to an

account which bears no relationship to the transaction would be an

unauthorized augmentation. B-132900-O. M., November 1, 1977.

Several statutes applicable to the Defense Department provide similar

options. For a detailed discussion of these statutes, see

B-1 79708-O. M., December 1, 1975; B- 179708-O.M., July 21, 1975;

GAO report entitled Reimbursements to Appropriations: Legislative

Suggestions for Improved Congressional Control, FGMSD-75-52

(November 1, 1976).

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An employee may keep a prize won in a contest or lottery sponsored

by an air carrier if the contest was open to the general public and not

limited to ticket-holding passengers. B-199656, July 15,1981.

Also, there is no problem with the acceptance of life insurance

benefits offered to federal employees by travel management

contractors at no additional cost to the government where the

government would receive no financial benefit by declining.

B-222234, December 9, 1986.

Similarly, if an employee chooses to charge official travel expenses to

a personal credit card and subsequently receives a cash or credit

rebate on purchases made with that card, the employee may keep the

entire rebate since it is not directly related to ofiicial travel.

B-236219, May 4, 1990. As the decision suggests, the answer would

presumably be different if the rebate were based solely on use of the

card for official travel.

Denied boarding compensation (compensation paid by an air carrier

when a passenger is involuntarily “bumped”) is payable to the

government and not to the individual employee. 59 Comp. Gen. 95

(1979); B-227280, October 14, 1988; B-224590, November 10, 1986;

B-148879, July 20, 1970, affirmed upon reconsideration, B-148879,

August 28, 1970; Ff’R, 41 C.F.R. 5 301-3.5(b). Since this is not a gift,

but is more in the nature of damages, it must be deposited into

miscellaneous receipts. 41 Comp. Gen. 806 (1962); FTR, supra.

However, an employee who voluntarily vacates his or her seat and

takes a later flight may retain overbooking compensation received

from the airline, subject to offset for any additional travel expenses

caused by the employee’s voluntary action. 59 Comp. Gen. 203

(1980); B-196145, January 14,1980.

A strange result occurs if a federal agency makes a mandatory space

requisition that forces an airline to “bump” a passenger who turns out

to be another federal employee. The airline can charge the agency for

the overbooking compensation it is required to pay. 62 Comp. Gen.

519 (1983). The bumped employee turns the money into his or her

employing agency, which in turn deposits it in the Treasury. The net

result is the transfer of the amount of the overbooking compensation

from the requisitioning agency to the general fund of the Treasury.

While 62 Comp. Gen. 519 did not expressly address the case of a

bumped federal employee, there is no apparent reason why the result

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validation of unpatented mining claims, although it may charge for

other services in connection with the validation which it is not

required to furnish); B-211953, December 7, 1984 (General Services

Administration may not seek reimbursement for costs of staring

records which it is required by law to store and for which it receives

appropriations).

The Merit Systems Protection Board may not accept reimbursement

from other federal agencies for travel expenses of hearing offkers to

hearing sites away from the Board’s regular field offices. HoMing the

hearings is not a service to the other agency, but is a Board function

for which it receives appropriations. The inadequacy of the Board’s

appropriations to permit sufficient travel is legally irrelevant. 59

Comp. Gen. 415 (1980), affiied upon reconsideration, 61 Comp.

Gen. 419 (1982). Where an agency provides personnel to act as

hearing officers for another agency, it maybe reimbursed if it is not

required to provide the oftlcers (B-192875, January 15, 1980), but

may not be reimbursed if it is required to provide them (32 Comp.

Gen. 534 (1953)).

Similar issues can arise when an agency is trying to decide which of its

appropriations to use for a given object. In 68 Comp, Gen. 337

(1989), for example, the Railroad Retirement Board wanted to make

performance awards to personnel in its Office of Inspector General,

and was unsure whether to charge its appropriation for the IG’s office

or its general appropriation. A reasonable argument could be made to

support either choice. Thus, the Board could make an election as long

as it remained consistent thereafter. Since there was no indication that

the IG appropriation was intended to be the exclusive funding source

for the performance awards, using the general appropriation would

not result in an improper augmentation of the IG appropriation.

A somewhat analogous situation could arise if an agency agrees to

reduce or forgo receipts to which it is entitled, and the party owing

those receipts agrees in return to make some expenditure which

would otherwise have to be borne by a separate appropriation of the

same agency. GAO examined such a situation in B-77467, November 8,

1950, involving the leasing of lands under the BankheadJones Farm

Tenant Act at reduced rentals on condition that the lessees in return

perform certain improvements to the hind. There was no

augmentation in that case, however, since the statute expressly

authorized the leasing with or without consideration and on such

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Failure to recover all required costs in a reimbursable Economy Act

transaction improperly augment9 the appropriations of the ordering

agency. 57 Comp. Gen. 674,682 (1978).

Similarly, treating a transaction which should be reimbursed as

nonreimbursable may result in an improper augmentation. For

example, an agency receives appropriations to do its own work, not

that of another agency. Accordingly, as a general proposition,

interdepartmental loans of persomel on a nonreimbursable basis

improperly augment the appropriations of the receiving agency. 65

Comp, Gent 635 (1986); 64 Comp. Gen. 370 (1985).

Reimbursement by one agency to another in situations which are not

the proper subject of an Economy Act agreement or where

reimbursement is not otherwise statutorily authorized is improper for

several reasons: It is an unauthorized transfer of appropriations; it

violates 31 U.S.C. $ 1301(a) by using the reimbursing agency’s

appropriations for other than their intended purpose; and it is an

improper augmentation of the appropriations of the agency receiving

the reimbursement. (The cases do not always cite all of these theones;

they again illustrate the close interrelationship of the various concep~

discussed throughout this publication.) The situation arises, for

example, when agencies attempt to use the Economy Act for a

“service” which is a normal part of the providing agency’s mission

and for which it receives appropriations.

To illustrate, an agency acquiring land cannot reimburse the Justice

Department for the legal expenses incurred incident to the acquisition

because these are regular administrative expenses of the Justice

Department for which it receives appropriations. 16 Comp. Gen. 333

(1936). Similarly, an agency cannot reimburse the Treasury

Department for the administrative expenses incurred in making

disbursements on its account. 17 Comp. Gen. 728 (1938).

Federal agencies may not reimburse the Patent OffIce for services

performed in administering the patent and trademark laws since the

Patent Oftlce is required bylaw to furnish these semices and receives

appropriations for them. 33 Comp. Gen. 27 (1953). Nor may they

reimburse the Library of Congress for recording assignments of

copyrights to the United States. 31 Comp. Gen. 14 (1951). See also

40 Comp. Gen. 369 (1960) (Interior Department may not charge

other agencies for the cost of conducting hearings incident to the

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decades, however, as the federal budget has grown in both size and

complexity, a lump-sum approach has become a virtual necessity. For

example, an appropriation act for an establishment the size of the

Defense Department structured solely on a line-item basis would rival

the telephone directory in bulk.

The amount of a hunp-sum appropriation is not derived through

guesswork. It is the result of a lengthy budget and appropriation

process. The agency first submits its appropriation request to

Congress through the OffIce of Management and Budget, supported

by detailed budget justifications. Congress then reviews the request

and enacts an appropriation which maybe more, less, or the same as

the amount requested. Variations from the amount requested are

usually explained in the appropriation act’s legislative history, most

often in committee reports.

All of this leads logically to a question which can be phrased in various

ways: How much flexibility does an agency have in spending a

lump-sum appropriation? Is it legally bound by its original budget

estimate or by expressions of intent in legislative history? How is the

agency’s legitimate need for administrative flexibility balanced against

the constitutional role of the Congress as controller of the public

purse?

The answer to these questions is one of the most important principles

of appropriations law. The rule, simply stated, is this: Restrictions on

a lump-sum appropriation contained in the agency’s budget request or

in legislative history are not legally binding on the department or

agency unless they are carried into (spec~led in) the appropriation act

itself, or unless some other statute restricts the agency’s spending

flexibility. Of course, the agency cannot exceed the total amount of

the lump-sum appropriation, and its spending must not violate other

applicable statutory restrictions. The rule applies equally whether the

legislative history is mere acquiescence in the agency’s budget

request or an affirmative expression of intent.

The rule recognizes the agency’s need for flexibility to meet changing

or unforeseen circumstances, yet presenes congressional control in

several ways. First, the rule merely says that the restrictions are not

legally binding. The practical wisdom of making the expenditure is an

entirely separate question. An agency that disregards the wishes of its

oversight or appropriations committees will most likely be called

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terms as the Secretary of Agriculture determined would best

accomplish the purposes of the act.

The following cases illustrate other situations which GAO found would

result in unauthorized augmentations:

● The Customs Service may not charge the party-in-interest for travel

expenses of customs employees incurred incident to official duties

performed at night or on a Sunday or holiday. 43 Comp. Gen. 101

(1963); 3 Comp. Gen. 960 (1924). See also 22 Comp. Dec. 253

(1915).

● Department of Energy may not use overcharge refunds collected from

oil companies to pay the administrative expenses of its Office of

Hearings and Appeals. B-200170, April 1, 1981.

c Proposal for airlines to reimburse Treasury to permit Customs Service

to hire additional staff to reduce clearance delays at Miami airport was

unauthorized in that it would augment appropriations made by

Congress for that service. 59 Comp. Gen. 294 (1980).

F. Lump-Sum

Appropriations

1. The Rule-General A lump-sum appropriation is one that is made to cover a number of

Discussion specitlc programs, projects, or items. (The number maybe as small as

two.) In contrast, a line-item appropriation is available only for the

specific object described.

Lump-sum appropriations come in many forms. Many smaller

agencies receive only a single appropriation, usually termed “Salaries

and Expenses” or “Operating Expenses.” All of the agency’s

operations must be funded from this single appropriation.

Cabiqet-level departments and larger agencies receive several

appropriations, often based on broad object categories such as

“operations and maintenance” or “research and development.” For

purposes of this discussion, a lump-sum appropriation is simply one

that is available for more than one specific object.

In earlier times when the federal government was much smaller and

federal programs were (or at least seemed) much simpler, very

specitlc line-item appropriations were more common. In recent

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Two common examples of devices Congress uses when it wants to

restrict an agency’s spending flexibility are line-item appropriations

and earmarks. Another approach is illustrated by the followlng

provision, the most restrictive we have seen, from the 1988

continuing resolution:

“Amounts and authorities provided by this resolution shall be in s.ccordsnce with the

reports accompanying the bills as passed by or reported to the House and the Senate

and in the Joint Explanatory Statement of the Conference accompanying this Joint

Resolution.”oz

The 1983 appropriation act for the Department of Housing and Urban

Development contained this restriction:

“Where appropriations in titles I and 11 of this Act are expendable for travel experuies

and no spectiLc limitation has been placed thereon, the expenditures for such travel

expenses may not exceed the amounts set forth therefor in the budget estimates

submitted for the appropriations. . . .“03

A provision prohibiting the use of a construction appropriation to

start any new project for which an estimate was not included in the

budget is discussed in 34 Comp. Gen. 278 (1954).

Also, the availability of a lump-sum appropriation maybe restricted by

provisions appearing in statutes other than appropriation acts, such

as authorization acts. For example, if an agency receives a line-item

authorization and a lump-sum appropriation pursuant to the

authorization, the line-item restrictions and earmarks in the

authorization act will apply just as if they appeared in the

appropriation act itself. The topic is discussed in more detail, with

citations, in Chapter 2.

2. Specific Applications

a. Effect of Budget Estimates Perhaps the easiest case is the effect of the agency’s own budget

estimate. The rule here was stated in 17 Comp. Gen. 147, 150 (1937)

as follows:

~Z~ub, L, N(), ~()().~()~, s IC17, 101 Stat. 1329, 1329-434 (19871.

~~~ub. L No. 97.~7~, $401,96 Stat. 1160, 1178 (19821

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upon to answer for its digressions before those committees next year.

An agency that fails to “keep faith” with the Congress may fmd its

next appropriation reduced or limited by line-item restrictions. That

Congress is fully aware of this relationship is evidenced by the

following statement from a 1973 House Appropriations Committee

report:

“In a strictly legal sense, the Department of Defense could utilize the funds

appropriated for whatever programs were included under the individual

appropriation accounts, but the relationship with the Congress demands that the

detaiied justitlcationa which are presented in support of budget requests be followed.

To do otherwise would cause Congress to lose cotildence in the requests made and

probably result in reduced appropriations or line item appropriation bills.”w

Second, restrictions on an agency’s spending flexibility exist through

the operation of other laws. For example, a %.kwies and Expenses”

appropriation may be a large lump sum, but much of it is in fact

nondiscretionary because the salaries of agency employees are f~ed

by law.80 Third, reprogramming arrangements with the various

committees provide another safeguard against abuse. Finally,

Congress always holds the ultimate trump card. It has the power to

make any restriction legally binding simply by including it in the

appropriation act.w Thus, the treatment of lump-sum appropriations

may be regarded as yet another example of the efforts of our legal and

political systems to balance the conflicting objectives of executive

flexibility and congressional control.g]

8aReWfi of me HOW co~~~e on AppropristJons on the 1974 Defense Dep*ent

appropriation bill, H.R. Rep. No. 662, 93d Cong., 1st 8ess. 16 (1973).

.Wmher, Pr&lden@ spen~ng power 72 (1975).

WFor ~Wible l~tiom on this s~ment,see New York V. Uni~d S~tes, — U.S. —! 112 ‘.

Ct. 2408,2426 (1992); Nevadav. Skinner, 884 F.2d 445,447 (9th Cir. 1989).

~t~e effo~ hss not ~WW been free from controversy. One senator, concerned with wh~ he

felt was excessive flexibility in a 1935 appropriation, tried to make his point by suggesting the

fouowing:

“Section 1. Congress hereby appropriates $4,880,000,000 to the President of the UNted States

to use as he pleases.

“Sec. 2. Anybody who dues nol tike it is tined $l,COO.”

79 Cong. Rec. 2014 (1935) (remarks of 8en. Arthur Vandenberg), quoted in I%her,-m note

89, at 62–63.

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b. Restrictions in Legislative The issue raised in most of the decisions results from changes to or

History restrictions on a htmp-sum appropriation imposed during the

legislative process. The “leading case” in this area is 55 Comp. Gen.

307 (1975), the so-called “LTV case.” The Department of the Navy

had selected the McDonnell Douglas Corporation to develop a new

fighter aircraft. LTV Aerospace Corporation protested the selection,

arguing that the aircraft McDonnell Douglas proposed violated the

1975 Defense Department Appropriation Act. The appropriation in

question was a lump-sum appropriation of slightly over $3 billion

under the heading “Research, Development, Test, and Evaluation,

Navy.” This appropriation covered a large number of projects,

including the fighter aircraft in question. The conference report on the

appropriation act had stated that $20 million was being provided for a

Navy combat fighter, but that “[adaptation of the selected Air Force

Air Combat Fighter to be capable of carrier operations is the

prerequisite for use of the funds provided.” It was conceded that the

McDonnell Douglas aircraft was not a derivative of the Air Force

fighter and that the Navy’s selection was not in accord with the

instructions in the conferetice report. The issue, therefore, was

whether the conference report was legally binding on the Navy. In

other words, did Navy act illegally in choosing not to follow the

conference report?

The ensuing decision is GAO’S most comprehensive statement on the

legal availability of lump-sum appropriations. Pertinent excerpts are

set forth below:

“[Congress has recognized that in most instances it is desirable to maintain

executive flexibility to shift around funds within a particular lump-sum appropriation

account so that agencies can make necessary adjustments for ‘unforeseen

developments, changing requirements, . . . and legislation enacted subsequent to

appropriations.’ [Citation omitted. ] ‘Rds is not to say that Congress does not expect

that funds will be spent in accordance with budget estimates or in accordance with

restrictions detailed in Committee reports However, in order to preseme spending

flexibility, it may choose not to impose these particular restrictions as a matter of law,

but rather to leave it to the agencies to ‘keep faith’ with the Congress. . . .

“On the other hand, when Congress does not intend to permit agency flexibility, but

intends to impose a legally binding restriction on an agency’s use of funds, it does so

by means of explicit statutory language. . . .

“Accordingly, it is our view that when Congress merely appropriates lump-sum

amounts without statutorily restricting what carI be done with those funds, a clear

inference arises that it does not intend to impose legally binding restrictions, and

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“The amounts of individual items in the estimates presented to the Ccmgress on the

baais of which a lump sum appropriation is enacted are not binding on dmhMmtJ“ve

officers unless carried into the appropriation act itaelf.”

See also B-63539, June 6, 1947; B-55277, January 23, 1946;

B-35335, July, 17, 1943; B-48120-O. M., October 21, 1948.

It follows that the lack of a specific budget request will not preclude

an expenditure from a lump-sum appropriation which is otherwise

Iegally available for the item in question. To illustrate, the

Administrative OffIce of the U.S. Courts asked for a supplemental

appropriation of $11,000 in 1962 for necessary salaries and expenses

of the Judicial Conference in revising and improving the federal rules

of practice and procedure. The House of Representatives did not

allow the increase but the Senate included the full amount. The bill

went to conference but the conference was delayed and the agency

needed the money. The Administrative Oftlce then asked whether it

could take the $11,000 out of its regular 1962 appropriation even

though it had not specifically included this item in its 1962 budget

request. Citing 17 Comp. Gen. 147, and noting that the study of the

federal rules was a continuing statuto~ function of the Judicial

Conference, the Comptroller General concluded as follows:

“[I]n the absence of a specific limitation or prohibition in the appropriation under

consideration as to the amount which maybe expended for revising and improving

the Federal Rules of practice and procedure, you would not be IegaUy bound by your

budget estimates or absence thereof.

“If the Congress desires to restrict the availability of a particular appropriation to the

several items and amounts thereof submitted in the budget estimates, such control

may be effected by limiting such iterns in the appropriation act itself. Or, by a general

provision of law, the availability of appropriations could be limited to the items and

the amounts contained in the budget estimates. In the absence of such limitations an

agency’s lump-sum appropriation is legally available to carry out the functions of the

agency.”

This decision is B-149163, June 27, 1962. See also 20 Comp. Gen.

631 (1941); B-198234, March 25, 1981; B-69238, September 23,

1948. The same principle would apply where the budget request was

for an amount less than the amount appropriated, or for zero. 2

Comp. Gen. 517 (1923); B-126975, February 12, 1958.

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Chapter 6

AvalIabIUtyof Appropriations: Amount

for DLGN 42 . . . .“ The committee reports on the appropriation act

and the related authorization act indicated that, out of the $244

million appropriated, $152 million was for construction of the DLGN

41 and the remaining $92 million was for long lead time activity on

the DLGN 42. It was clear that, if the $152 million specified in the

committee reports for the DLGN 41 was legally binding, obligations

resulting from exercise of the contract option would exceed the

available appropriation.

The Comptroller General applied the “LTV principle” and held that

the $152 million was not a legally binding limit on obligations for the

DLGN 41. As a matter of law, the entire $244 million was legally

available for the DLGN 41 because the appropriation act did not

include any restriction. Therefore, in evaluating potential violations of

the Antideficiency Act, the relevant appropriation amount is the total

amount of the lump-sum appropriation minus sums already obligated,

not the lower figure derived from the legislative history.g4 As the

decision recognized, Congress could have imposed a legaliy binding

limit by the very simple device of appropriating a specific amount only

for the DLGN41, or by incorporating the committee reports in the

appropriation language,

This decision illustrates another important point: The terms

“lump-sum” and “line-item” are relative concepts. The $244 million

appropriation in the Newport News case could be viewed as a

line-item appropriation in relation to the broader “Shipbuilding and

Conversion” category, but it was also a lump-sum appropriation in

relation to the two specific vessels included. This factual distinction

does not affect the applicable legal principle. As the decision

explained:

“Contractor urges that LTV is inapplicab~e here since LTV involved a lump-sum

appropriation whereas the DLGN appropriation is a more specific ‘line item’

appropriation. While we recognize the factual distinction drawn by Contractor, we

nevertheless believe that the principles set forth in LTV are equally applicable and

con~rolling here. . . . II]mplicit in our holding in LTV and in the other authorities

cited is the view that dollar amounts in appropriation acts are to be interpreted

differently from statutory words in general. This view, in our opinion, pertains

whether the dollar amount is a lump-sum appropriation available for a large number

Wor ~ourw, ~1 ~u~ ~ewt Ww that there wo~d be 00 Antideficiency Act violat.h at the time the

option was exercised. The decision recognized that subsequent actions could still produce a

violation. 55 Comp. Gen. at 826.

Page 6-165 GAO/OGC-92-13 Appropriations Iaw-Vol. II
Ohapter6

Availability of Appropriations: Amount

indicia in committee reports and other legislative histo!y as to how the funds should

or are expected to be spent do not establish any legal requirements on Federal

agencies. . . .

. . . .

We further point out that Congress itself has often recognized the reprogramming

flexibility of executive agencies, and we think it is at least implicit in such

[recognition] that Congress is well aware that agencies are not legally bound to follow

what is expreased in Committee reports when those expressions are not explicitly

carried over into the statutory language. . . .

. . . .

We think it follows from the above discussion that, as a general proposition, there is

a distinction to be made between utilizing legislative history for the purpose of

illumin ating the intent underlying language used in a statute and resorting to that

history for the purpose of writing into the law that which is not there.

. . . .

“As observed above, this does not mean agencies are free to ignore clearly expressed

legislative history applicable to the use of appropriated funds. They ignore such

expressions of intent at the peril of strained relations with the Congress. The

Executive branch. . . has a practical duty to abide by such expressions. This duty,

however, must be understood to fall short of a statutory requirement giving rise to a

legal infraction where there is a failure to carry out that duty.”

55 Comp. Gen. at 318,319,321,325. Accordingly, GAO concluded

that Navy’s award did not vioIate the appropriation act and the

contract therefore was not illegal.

The same volume of the Comptroller General’s decisions contains

another often-cited case, 55 Comp. Gen. 812 (1976), the Newport

News case. This case also involved the Navy. This time, Navy wanted

to exercise a contract option for construction of a nuclear powered

guided missile frigate, designated DLGN 41. The contractor, Newport

News Shipbuilding and Dry Dock Company, argued that exercising

the contract option would violate the Antideficiency Act by obligating

more money than Navy had in its appropriation.

The appropriation in question, Navy’s “Shipbuilding and Conversion”

appropriation, provided “for the DLGN nuclear powered guided

missile frigate program, $244,300,000, which shall be available only

for construction of DLGN 41 and for advance procurement funding

Page 6-164 GAO/OGC-92-13 Appropriations Law-Vol. II
Chaptar6

AvaUabiUty of ApproprIationa: Amount

The treatment of lump-sum appropriations as described above has

been considered by the Department of Justice and the courts as well

as CAO, and all have reached the same result. For example, the Justice

Department’s Office of Legal Counsel concluded in one case that the

Department could, in the Attorney General’s discretion, reallocate

funds within the same lump-sum appropriation in order to avoid an

impending deficiency for the United States MarshaIs Service. 4B OP.

Off. Legal Counsel 701 (1980). Another case applying these

principles is 4B Op. Off. Legal Counsel 674 (1980).

The Urtited States Court of Appeals for the District of Columbia

Circuit has noted that lump-sum appropriations have a “well

understood meaning” and stated the rule as follows:

“A lump-sum appropriation leaves it to the recipient agency (as a matter of law, at

least) to distribute the funds among some or ali of the permissibie objects as it sees

fit.”

International Unionv. Donovan, 746 F.2d 855,861 (D.C. Cir. 1984),

cert. denied, 474 U.S. 825. The court in that case refused to impose a

“reasonable distribution” requirement on the exercise of the agency’s

discretion, and found that discretion unreviewable. Id. at 862–63.

See also McCarey v. McNamara, 390 F.2d 601 (3d C%. 1968);

Biackhawk Heating& Plumbing Co. v. United States, 622 F.2d 539,

547 n.6 (Ct. Cl. 1980).

One court, seemingly at odds with the weight of authority, has

concluded that an agency was required by 31 U.S.C. $ 130i(a)

(purpose statute) to spend money in accordance with an earmark

appearing only in legislative history. Blue Ocean Preservation Society

v. Watkinsj 767 F. Supp. 1518 (D. .Haw. 1991). An additional factor in

that case was that the agency had unsuccessfully sought

congressional approval to reprogram the funds in question.

c. “Zero Funding” Under a Does discretion under a lump-sum appropriation extend so far as to

Lump-Sum Appropriation permit an agency to “zero fund” a particular program? Although there

are few cases, the answer would appear, for the most part, to be yes,

as long as the program is not mandatory and the agency uses the

funds for other authorized purposes to avoid impoundment

complications. ~, B-209680, February 24, 1983 (agency could

properly decide not to fund a program where committee reports on

appropriation stated that no funds were being provided for that

Page 6-167 GAO/OGC-92-13 Appropriations Law-Vol. II
-ra

Avdlabilityof ApproprIatJorta: Amount

of items, as in LTV, or, as here, a more specf]c appropriation available for only two

items.” 55 (hmp. Gen. at 821–22.

A precursor of LTV and Newport News provides another interesting

illustration. In 1974, controversy and funding uncertainties

surrounded the Navy’s “Project Sanguine,” a communications system

for sending command and control messages to submerged

submarines from a single transmitting location in the United States.

The Navy had requested $16.6 million for Project Sanguine for FY

1974. The House deleted the request, the Senate restored it, the

conference committee compromised and approved $8.3 million. The

Sanguine funds were included in a $2.6 billion lump-sum Research

and Development appropriation. Navy spent more than $11 million

for Project Sanguine inn 1974. The question was whether Navy

violated the Antideficiency Act by spending more than the $8.3 million

provided in the conference report. GAO found that it did not, because

the conference committee’s action was not specified in the

appropriation act and was therefore not legally binding. Significantly,

the appropriation act did include a proviso prohibiting use of the

funds for “full scale development” of Project Sanguine (not involved

in the $11 million expenditure), illustrating that Congress knows

perfectly well how to impose a legally binding restriction when it

desires to do so. GAO report, Legality of the Navy’s Expenditures for

Project Sangum“ e During Fiscal Year 1974, LCD-75-315 (January 20,

1975); B-168482 -0. M., August 15, 1974.

Similarly, the Department of Health, Education, and Welfare received

a $12 billion lump-sum appropriation for public assistance in 1975.

Committee reports indicated that $9.2 million of this amount was

being provided for research and development activities of the Social

and Rehabilitation Service. Since this earmarking of the $9.2 million

was not carried into the appropriation act itself, it did not constitute a

statutory limit on the amount available for the program. B-164031(3),

April 16, 1975.

GAO has applied the rule of the LTV and Newport News decisions in a

number of additional cases and reports, several of which invoive

variations on the basic theme.g5

96= 64 Comp. Gen. 359 (19s5); 59 ~mp. Gen. 228 (1980); B-247853.2, J~Y 20~ 1992;

B-23171 1, March 28, 1989; B-222853, September 29, 1987; B-204449, November 18, 1981;

5204270, October 13, 1981; B-202992, May 15, 1981; B-157356, August 17, 1978; B-159993,

September 1, 1977; B-163922, October 3, 1975; Intemaf Controls: Funding of International

Defense Research and Development Projects, GAO/NSIAD-91-27 (October 1990).

Page 6-166 GAO/OGC-92-13 Appropriations Law-Vol. 11
Ctupter6

AvaUabUity of Appropriations: Amount

paid for services of cleaners, but it does not vest in the commisskme~ the discretion

to determine that the entire amount shall be paid for rent and that the cleaning

services shall be left unprovided for, or be provided for from other funds.”

Id. at 624. Although this result may at fmt glance seem inconsistent

fith the authorities previously cited, it would not have been possible

as a practical matter to rent oftlce space and totally eliminate cleaning

services, and the use of any other appropriation would have been

clearly improper. A factor which apparently influenced the decision

was that the “regular oftlce force” was somehow being coerced to do

the cleaning, and these were employees paid from a separate

appropriation. Id. Thus, 1 Comp. Gen. 623 should be viewed as an

exception base~on its own particular circumstances.

Page 6-169 GAO/OGC-92-13 Appmprlatlons Lsw-Vo~. II

$ ‘,
-re

Availability of Appropriations: Amount

%{”. :’ .“ ‘

program, although agency would have been equally free to fund the

program under the lump-sum appropriation); B-167656, June 18,

1971 (agency has discretion to discontinue a function funded under a

lump-sum appropriation to cope with a shortfall in appropriations);

4B Op. Off. Legal Counsel 701,704 n.7 (1980) (same point).

The more difficult question is whether the answer is the same where

there is no shortfall problem and where it is clear that Congress wants

the program funded. In International Union v. Donovan, cited above,

the court upheld an agency’s decision to allocate no funds to a

program funded by a lump-sum appropriation. Although there was in

that case a “congressional realization, if not a congressional intent,

that nothing would be expended” for the program in question, 746

F.2d at 859, it seems implicit from the court’s discussion of applicable

law that the answer would have been the same if legislative history

had “directed” that the program be funded. The same result would

seem to follow from 55 Comp. Gen. 812 (1976), discussed above,

holding that the entire unobligated balance of a lump-sum

appropriation should be considered available for one of the objects

included in the appropriation, at least for purposes of assessing

potential violations of the Antideficiency Act.

In B-114833, July 21, 1978, the Department of Agriculture wanted to

use its 1978 lump-sum Resource Conservation and Development

appropriation to fund existing projects rather than starting any new

ones, even though Congress had expressly provided funds for certain

new RC&D projects. Since the congressional action was stated in

committee reports but not in the statute itself, the Department’s

proposed course of action was legally permissible.

An early decision reaching a different result is 1 Comp. Gen. 623

(1922). The appropriation in question provided for “rent of offices of

the recorder of deeds, including services of cleaners as necessary, not

to exceed 30 cents per hour, . . . $6,000.” The Comptroller General

held that the entire $6,000 could not be spent for rent. The decision

stated:

“[S]ince [the appropriation act] provides that the amount appropriated shall cover

both rent and cleaning services, it must be held that the entire amount can not be

used for rent alone.

“

. . . The law leaves to the discretion of the commissioners the question as to what

portion of the amount appropriated shall be paid for rent and what portion shall be

Page 6-168 GAO/OGC-92-13 Appropriations hw-~ol. ~
Chapter 7

Obligation of Appropriations

A .

B .

c.

D .

E .

Introduction: Nature of an Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s o “ o Q “ “ s s “ “ “ o

Criteria for Recording Obligations (31 U.S.G. ~ 1601) . . . . . . . . . . . . . . . . . . . . . ...0.....

1.

2.

3.

4.

5.

6.

7.

8.

9.

Subsection (a)(l): Contracts .. ... ... ... ....O .O....a,<.,’o!”o””.””. “.””.”-””.”

a. BindingAgreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-0 c c ““.”””” “ “ -“.”.””” ““”””

b. Contract ’’inWriting” . . . . . . . . . . . . . . . . ...,.........””” .. ””. ”” ””. s.”.”” ..”””

c. Requirement ofSpecificity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-.....””””.” “o””.”

d. InvalidAward/Unauthorized Commitment . . . . . . . . . . . . . . . ““””0””””0”0-00”” ..””

e. Variations inQuantitytoBe Furnished . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....”o””””

f Amountto Rerecorded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .”. .” ””s. ”””s” SC”

g. AdministrativeApprovalofpayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..s ”s””s”

h. MiscellaneousContractud Obhgations . . . . . . . . . . . . . . . . . .....-.,...,”..o.Q.”.o

i. Interagency Transactions . . . . . . . . . . . . . . . . . . .. .. ... ... ”-. s””.” ...”.”.”. .“”””

(1) Economy Actvs. other authority . . . . . . . . . . . . . . . . . . . . ..........0. I . . . . . . “

(2) Orders from stock . . . . . . . . . . . . . . . . . . . . . ... ... . . . . ....0.... “ c “ “ . “ “ “ “ “ “ c

(3) Projectorders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OQO.O.””S”””””O” ““”

Subsection (a)(2):Loans . . . . . . . . . . . . . . . . . . . . . . ......,.”.”.”””0”0”””0 .“.”””””

Subsection(a)(3): InteragencyOrdersRequired byLaw . . . . . . . . . . . . . . . . . . . . . . . . . . .

Subsection(a)(4): OrdersWiihoutAdvertising . . . . . . . . . . . . . . . . . ........”.””””” ..”

Subsection(a)(5): GrantSandSubsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .“ss ”””s

a. Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . “.””” “-” o ““”” “ “ ““-””” “

b. Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...””””””””””””””” ““-o.”*o”

Subsection(a)(6): PendingLitigation . . . . . . . . . . . . . . . . .. ... ... ”” s””””” “..””.”...

Subsection(a)(7): EmploymentandTravel . . . . . . . . . . . . . . . . .. ... ... ... ””.”s ““”o””

a. Wages, Salaries,Annual Leave . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...” . “ . “ . . “ .“. “ “

b. Compensation PlansinForeign Countfies . . . . . . . . . . . . . . . .........o.,,.”....””

c. Training . . . . . . . . . . . . . . . . . . . .. .. .. ... ... ..””.s. .o.scoo”.*”””””’.-’ ““””.”

d. UniformAllowance . . . . . . . . . . . . . . . . .. ..o-. ... c.<O.C o....””c0”.’..o” ...””-”

e. Travel Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..””” “ . “ . “ ““ ““”.” .“”” “ .“”

f State Department: TravelOutside Continent.alUnitedStites . . . . . . . . . . . . . . . . . . . . . .

g. EmployeeTransfer/Relocation CoStS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Subsection (a)(8): PublicUtilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ““.,.”.......

Subsection(a)(9): Other LegalLiabihties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........

ContingentLiabilitkS . ............................0.. ...”............ .........

ReportingRequirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........”..... ..........

Deobligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....’.......o.. ..””’o..’”..”.. .

7-2

7-5

7-8

7-8

7-12

7-14

7-14

7-16

7-19

7-20

7-20

7-22

7-22

7-26

7-27

7-28

7-30

7-32

7-32

7-32

7-35

7-36

7-38

7-38

7-40

7-41

7-42

7-42

7-44

7-44

7-46

7-47

7-48

7-50

7-51

,,4p

Page 7-1 GAOKWC-92-13 J@PrOpI’i8tiOnShW-VO~~
GMM)GC-92-13 @XWOPddiOM Law-vol. 11

.g,
Cbapter7

ObIlgation of Appropriations

There is no legal requirement for you as an individual to keep track of

your “obligations.” For the government, there is.

The concept of “obligation” is central to appropriations law. This is

because of the principle, one of the most fundamental, that art

obligation must be charged against the relevant appropriation in

accordance with the rules relating to purpose, time, and amount. The

term “available for obligation” is used throughout this publication to

refer to availability as to purpose, time, and amount. This chapter will

explore exactly what art obligation is.

It would be nice to start with an all-inclusive and universally

applicable definition of “obligation.” Unfortunately, because of the

immense variety of transactions in which the government is involved,

such a definition does not exist. In fact, the Comptroller General has

noted that formulating an all-inclusive deftition would be

impracticable, if not impossible. B-116795, June 18, 1954. As stated

in B-192282, Apti 18, 1979, GAO–

“has generally avoided a universally applicable legal definition of the term

‘obligation,’ and has instead analyzed the nature of the particular transaction at issue

to determine whether an obligation has been incurred.”

At fmt glance, this passage appears to beg the question. (How can

you determine whether an obligation has been incurred if you don’t

fwst define what an obligation is?) It is perhaps more accurate to say

that GAO has defined “obligation” only in the most general terms, and

has applied the concept to individual transactions on a case-by-case

basis.

The most one finds in the decisions are general statements referring

to an obligation in such terms as “a definite commitment which

creates a legal liability of the Government for the payment of

appropriated funds for goods and services ordered or received.”

B-116795, June 18, 1954. See also 21 Comp. Gen. 1162, 1163 (1941)

(circular letter); B-222048, February 10, 1987; B-82368, July 20,

1954; B-24827, April 3, 1942; B-190, June 12, 1939. FYom the

earliest days, the Comptroller General has cautioned that the

obligating of appropriations must be “definite and certain.” A-5894,

December 3, 1924.

GAOKWC-92-13 Appropriations L8w-VO1. II
Chapter7

Obligation of Appropriations

Thus, in very general and simplified terms, an “obligation” is some

action that creates a liability or definite commitment on the part of the

government to make a disbursement at some later time.

An advance of funds to a working fund does not in itself serve to

obligate the funds. See 23 Comp. Gen. 668 (1944); B-180578-O. M.,

September 26, 1978. The same result holds for funds transferred to a

special “holding account” established for administrative convenience.

B-1 18638, November 4, 1974 (appropriations for District of

Columbia Public Defender Service under control of the Administrative

Office of the U.S. Courts are not obligated by transfer to a “Judicial

Trust Fund” established by the Administrative OffIce).

The typical question on obligations is framed in terms of when the

obligation may or must be “recorded,” that is, officially charged

against the spending agency’s appropriations. Restated, what action is

necessary or sufllcient to create an obligation? This is essential in

determining what fiscal year to charge, with all the consequences that

flow from that determination. It is also essential to the broader

concern of congressional control over the public purse.

Before proceeding with the spec~lcs, two generaI points should be

noted:

● For appropriations law purposes, the term “obligation” includes both

matured and unmatured commitments. A matured commitment is a

legal liability that is currently payable. An unmatured commitment is a

liability which is not yet payable but for which a definite commitment

nevertheless exists, For example, a contractual liability to pay for

goods which have been delivpred and accepted has “matured.” The

liability for monthly rental payments under a lease is largely

unmatured although the legal liability covers the entire rental period.

Both types of liability are “obligations.” The fact that an unmatured

liability may be subject to a right of cancellation does not negate the

obligation. A-97205, February 3, 1944, at 9–10. An %nmatured

liabili@” as described in this paragraph is different from a “contingent

liability” as discussed later in this chapter.

● The obligation takes place when the definite commitment is made,

even though the actual payment may not take place until the following

fwcal year. 56 Comp. Gen. 351 (1977); 23 Comp. Gent 862 (1944).

Page 7-4 GAOIOGC-92-13 Appropriations Law-Vol. 11

;:l;,,. ,, ,, . . . . . . . ,. . , ? ,. , : ‘ ,~g.
Chapter 7

Obligation of Appropriations

B. Criteria for The overrecording and the underrecording of obligations are equally

Recortig

improper. Overrecording (recording as obligations iterns which are

not) is usually done to prevent appropriations from expiring at the

Obligations (31 end of a f~cal year. Underrecording (failing to record legitimate

U.s.c. s 1501) obligations) makes it impossible to determine the precise status of the

appropriation and may result in violating the Antideficiency Act.

A 1953 decision put it this way:

“In order to determine the status of appropriations, both from the viewpoint of

management and the Congress, it is essential that obligations be recorded in the

accounting records on a factual and consistent basis throughout the Government.

Only by the following of sound practices in this regard can data on existing

obligations serve to indicate program accomplishments and be related to the amount

of additional appropriations required.” 32 Comp. Gen. 436,437 (1953).

The standards for the proper recording of obligations are found in 31

U.S.C. $ 1501(a), originally enacted as section 1311 of the

Supplemental Appropriation Act of 1955 (68 Stat. 830). A Senate

committee has described the origin of the statute as follows:

‘Section 1311 of the Supplemental Appropriation Act of 1955 resulted from the

diftkulty encountered by the House Appropriations Committee in obtaining reliable

f~es on obligations from the executive agencies in connection with the budget

review. It was not uncommon for the cornmitteea to receive two or three different set9

of f~ea as of the same date. This situation, together with rather vague explanations

of certain types of obligations particularly in the military departments], caused the

House Committee on Appropriations to institute studies of agency obligating

practices.

. . . .

“The result of these examinations laid the foundation for the committee’s conclusion

that loose practices had grown up in various agencies, particuhrly in the recording of

obligations in situations where no real obligation existed, and that by reason of these

practices the Congress did not have reliable information in the form of accurate

obligations on which to determine an agency’s future requirements. To correct this

situation, the committee, with the cooperation of the General Accounting OffIce and

the Bureau of the Budget, developed what has become the statutmy criterion by

which the validity of an obligation is determined. . . .“l

Thus, the primary purpose of 31 u.s.c. $1501 i8 to ensure that

agencies record only those transactions which meet specifkd

]=-Cotiw on Government OWRMOM, ‘Ca -

ement in the Federat

Government, S. Dec. No. 11, 87tMkmg., 1* Sesa. 85 (1~1).

Page 7-5 GAO/OOC-92-13 ApproPriattona L8w-VOL ~
Chapter 7

Obli@tion of Appropriatkms

standards for legitimate obligations. 54 Comp. Gen. 962,964 (1975);

51 Comp. Gen. 631,633 (1972); B-192036, September 11, 1978.2

Subsection (a) of 31 U.S.C. $1501 prescribes specific criteria for

recording obligations. The subsection begins by stating that “[a]n

amount shall be recorded as an obligation of the United States

Government only when supported by documentary evidence of. . . .“

Subsection (a) then goes onto list nine criteria for recording

obligations. Note that the statute requires “documentzuy evidence” to

support the recording in each instance. In one sense, these nine

criteria taken together may be said to comprise the “definition” of an

obligation.~

If a given transaction does not meet any of the criteria, then it is not a

proper obligation and may not be recorded as one. Once one of the

criteria is met, however, the agency not only may but must at that

point record the transaction as an obligation. While 31 U.S.C. f 1501

does not explicitly state that obligations must be recorded as they

arise or are incurred, it follows logically from an agency’s

responsibility to comply with the Antideficiency Act. GAO has made the

point in reports and decisions in various contexts. ~, Substantial

Understatement of Obligations for Separation Allowances for Foreign

National Employees, B-179343, October 21, 1974, at 6; FGMSD-75-20,

February 13,1975, at 3 (letter report); 65 Comp. Gen. 4,6 (1985);

B-226801, March 2, 1988; B-192036, September 11, 1978; A-97205,

February 3, 1944, at 10.

It is important to emphasize the relationship between the existence of

an obligation and the act of recording. Recording evidences the

obligation but does not create it. If a given transaction is not suftlcient

to constitute a valid obligation, recording it will not make it one. ~,

B-197274, February 16, 1982 (“reservation and notification” letter

held not to constitute an obligation, act of recording notwithstanding,

where letter did not impose legal liability on government and

z~fio~ 31 U,S,C. $1501 d- not expreasfy apply to the gowment of the Di*fict ‘f

Columbia, GAO has expreaaed the view that the aame criteria should be foliowed.

B-180678-O.M,, 8eptember 26, 1978. Tfde is becauae the proper recording of obflgations is the

ordyway to assure compliance with 31 U.S.C. !3 1341, a portion of the Antideficiency Act, which

does expreaaly apply to the government of the Diatrict of Columbia. District of Columbia

Self.Government and Governmental Reorgar&ation Act (ao-calfed “Home Rule” Act), Pub. L.

No. 93-198, ! 603(e), 87 Wt. 774,816 (1973).

%nancial Management in the Federal Government, -m note 1, at 86.

Page 7-6 GAO/OGC-92-19 ApjWO@@iOllS hW -vol. ~
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Obligation of Approprlation$

subsequent formation of contract was within agency’s control).

Conversely, failing to record a valid obligation in no way diminishes

its validity or affects the fiscal year to which it is properly chargeable.

~, B-226782, October 20, 1987 (Ietterof intent, executed in FY

1985 and found to constitute a contract, obligated FY 1985 funds,

notwithstanding agency’s failure to treat it as an obligation); 63

Comp. Gen. 525 (1984); 38 Comp. Gen. 81,82-83 (1958).

The precise amount of the government’s liability should be recorded

as the obligation where that amount is known. However, where the

precise amount is not known at the time the obligation is incurred, the

obligation should be recorded on the basis of the agency’s best

estimate. ~, 56 Comp. Gem 414, 418 (1977) and cases cited

therein; 21 Comp. Gen. 574 (1941). See also OMB Circular INo. A-34,

$322.1,22.2. Where ~ estimate is used, the basis for the estimate

must be shown orI the obligating document. As more precise data on

the liability becomes available, the obligation must be periodically

a~usted. GAO, Policy and Procedures Manual for Guidance of Federal

Agencies, title 7,$ 3.4.D (1990).

Retroactive a@stments to recorded obligations, like the initial

recordings themselves, must be supported by documentary evidence.

The use of statistical methods to make a@stments “lacks legal

foundation if the underlying transactions cannot be identi.t3ed and do

not support the calculated totals.” GAO report, Financial

Management: Defense Accounting A@stments for Stock Fund

Obligations Are Illegal, GAO/AFMD-87-l (March 11, 1987) at 6;

B-236940, October 17, 1989.

A related concept is the allocation of obligations for administrative

expenses (utility costs, computer services, etc.) between or among

programs funded under separate appropriations. There is no rule or

formula for this allocation apart from the general prescription that the

agency must use a supportable methodology. Merely relying on the

approved budget is not sufficient. See GAO report, Financial

Management: Improvements Needed in OSMRE’S Method of

Allocating Obligations, GAo/AFMD-89-89 (July 1989). An agency may

initially charge common-use items to a single appropriation as long as

it makes the appropriate a@stments from other benefiting

appropriations before or as of the end of the f~cal year. 31 U.S.C.

$1534. The allocation must be in proportion to the benefit. 70 Comp.

Gen. 592 (1991).

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Further procedural guidance may be found in OMB Circular No. A-34

(Instructions for Budget Execution); the Treasury Financial Manual;

and GAO’S Policy and Procedures Manual for Guidance of Federal

A@@% For the most p~~ the s~tutory criteria in31‘“s”c”

$ 1501(a) reflect standards that had been developed in prior decisions

of the Comptroller General over the years. See, ~, 18 Comp. Gen.

363 (1938); 16 Comp. Gen. 37 (1936). The remainder of this section

will explore the nine specitlc recording criteria.

1. Subsection (a)(l): Subsection (a)(1) of 31 U.S.C. ! 1501 establishes minimum

Contracts

requirements for recording obligations for contracts. Specifically,

there must be documentary evidence of–

“(l) a binding agreement between an agency and another person (including an

agency) that is–

“(A) in writing, in a way and form, and for a purpose authorized by law; and

“(B) executed before the end of the period of availability for obligation of the

appropriation or fund used for specitlc goods to be delivered, real property to be

bought or leased, or work or service to be provided.”

As seen in Chapter 5, the general rule for obligating fiscal year

appropriations by contract ~ that the contract imposing the obligation

must be made within the fiscal year sought to be charged and must

meet a bona fide need of that f~cal year. ~, 37 Comp. Gen. 155

(1957). This discussion will center on the timing of the obligation

from the perspective of 31 U.S.C. S 1501(a)(l).

Subsection (a)(l) actually imposes several ditTerent requirements

(1) a binding agreement; (2) in writing; (3) for a purpose authorized

bylaw; (4) executed before the expiration of the period of

obligatiorud availability; and (5) a contract calling for specitlc goods,

real property, work, or services.

a. Binding Agreement While the agreement must be legally binding (offer, acceptance,

consideration, made by authorized official), it does not have to be the

final “defmitized” contract. The Legislative history of subsection

(a)(1) makes this clear. The following excerpt is taken from the

conference report:

Page 7-8 GAO/OGC-92-i3 @p~pfitioMhW-VOi. ~
Clupter7

Obl.l@tion Of&prt#@@,iOXIS

“Section 131 l(a)(l) precludes the recording of an obligation unless it is supported

by documentary evidence of a binding agreement between the parties as specitled

therein. It is not necessary, however, that the binding agreement be the final formal

contract on any specifkxi form. The primary purpose is to require that there be an

offer and an acceptance imposing iiability on both parties. For example, an

authorized order by one agency on another agency of the Government, if accepted by

the latter and meeting the requirement of specificity, etc., is stdTicient. Likewise, a

letter of intent accepted by a contractor, ifsuf!lciently spec~lc and definitive to show

the purposes and scope of the contract finally to be executed, would constitute the

binding agreement required.”’

The following passage from 42 Comp. Gen. 733,734 (1963) remains

a useful general prescription:

‘“f’he question whether Government funds are obligated at any specific time is

answerable ordy in terms of an analysis of written arrangements and conditions

agreed to by the United States and the party with whom it is dealing If such analysis

discloses a legal duty on the part of the United States which constitutes a legal liabilily

or which could mature into a legal liability by virtue of actions on the pat of the other

Party beyond the control of the United States, an obligation of funds may generally be

stated to exist.”

In 35 Comp. Gen. 319 (1955) and more recently in 59 Comp. Gen.

431 (1980), the Comptroller General set forth the factors that must

be present in order for a binding agreement to exist for purposes of

31 U.S.C. $ 1501(a)(l) with respect to contracts awarded under

competitive procedures:

1. Each bid must have been in writing.

2. The acceptance of each bid must have been communicated to the

bidder in the same manner as the bid was made. If the bid was mailed,

the contract must have been placed in the mails before the close of the

fiscaI year. If the bid was delivered other than by mail, the contract

must have been delivered in like manner before the end of the fyear.

3: Each contract must have incorporated the terms and conditions of

the respective bid without qualifhtion. Otherwise, it must be viewed

as a counteroffer and there would be no binding agreement until

accepted by the contractor.

4H R Rep. N~, 2663, 83d ~ng., 2d 6@s. 18 (1964),quotd~~11%54! ‘1- 1*! 19*’ . .

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To illustrate, where the agency notfled the successful bidder of the

award by telephone near the end of w 1979 but did not mail the

contract document until FY 1980, there was no valid obligation of FY

1979 funds. 59 Comp. Gen. 431 (1980). See also 35 Comp. Gen. 319

(1955).5 A document is considered “mailed” when it is placed in the

custody of the Postal Service (given to postman or dropped in

mailbox or letter chute in ot%ce building); merely delivering the

document to an agency messenger with instructions to mail it is

insufficient. 59 Comp. Gen. at 433.

Similarly, there was no recordable obligation of W 1960 funds where

the agency erroneously mailed the notice of award to the wrong

bidder and did not notify the successful bidder until the first day of FY

1961.40 Comp. Gen. 147 (1960),

It is important to note that, in the above cases, the obligation was

invaiid only with respect to the f~cal year the agency wanted to

charge. The agency could still proceed to finalize the obligation but

would have to charge funds current in the subsequent f~cal year. 59

Comp. Gen. at 433; 40 Comp. Gen. at 148.

A mere request for an additional allocation with no indication of

acceptance does not create a recordable obligation. 39 Comp. Gen.

829 (1960). Similariy, a work order or purchase order maybe

recorded as an obligation only where it constitutes a binding

agreement for specific work or services. 34 Comp. Gen. 459 (1955).

A “letter of intent” is a preliminary document that mayor may not

constitute an obligation. At one extreme, it maybe nothing more than

an “agreement to agree” with neither party bound until execution of

the formal contract. ~, B-201O35, Februaxy 15, 1984, at 5. At the

other extreme, it may contain all the elements of a contract, in which

event it will create binding obligations. The crucial question is

whether the parties intended to be bound, determinable primarily

from the language actually used. Saul Bass &Associates v. United

States, 505 F.2d 1386 (Ct. Cl. 1974). For a good example of a letter

%’Ms is a relatively rare situation in which the earfy decisions were somewhat more “liberal.”

~, A-28429, August 27, 1929 (FY 1929 funds held oblfgated where bids were soficited and

received and the lowest bid authorized to be accepted during FY 1929 although formal contract

not executed until earfy FY 1930). The explicit language of 31 U.S.C. # 1601 would preclude this

result today, although use of a prelimimuy letter contract, dkmssed later in the text, would at

least pmtidly solve the problem.

Psge 7-10 GAO/OGC-92-lS Appl’OptiOOS kW -Vol. ~
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Obligation of Appropriations

of intent creating contractual obligations, see B-226782, October 20,

1987.

A letter of intent which amounts to a contract is also caiied a “letter

contract.” In the context of government procurement, it is used most

commonly when there is insufficient time to prepare and execute the

fuii contract before the end of the fiscal year. As indicated in the

legislative history quoted earlier, a “letter of intent” accepted by the

contractor may form the basis of an obligation if it is sufficiently

specific and definitive to show the purpose and scope of the contract.

21 Comp. Gen. 574 (1941); B-127518, May 10, 1956. Letters of

intent should be used “oniy under conditions of the utmost urgency. ”

33 Comp. Gen. 291,293 (1954]. Under the Federal Acquisition

Regulation, letter contracts may be useci–

“when (1) the Government’s interests demand that the contractor be given a binding

commitment so that work can start immediately and (2) negotiating a deffitive

contract is not possible in sufficient time to meet the requirement.”

FAR, 48 C.F.R. $ 16.603-2(a).

The amount to be obligated under a letter contract is the

government’s maximum liability under the ietter contract itself,

without regard to additional obligations anticipated to be inciuded in

the definitive contract or, restated, the amount necessary to cover

expenses to be incurred by the contractor prior to execution of the

definitive contract. The obligation is recorded against funds available

for obligation at the time the letter contract is issued. 34 Comp. Gen.

418,421 (1955); B-197274, September 23, 1983; B-197274,

February 16, 1982; B-127518, May 10, 1956. See also FAR, 48 C.F.R.

$$ 16.603-2(d) and 16.603-3(a).

Once the definitive contract is executed, the government’s liability

under the ietter contract is merged into it. If defmitization does not

occur until the foiiowing fiscai year, the definitive contract will

obligate funds of the iatter year, usuaiiy in the amount of the total

contract price iess an appropriate deduction for obligations under the

ietter contract. B-197274, September 23, 1983. In this regard, the

cited decision states, at page 5:

“The deftitized contract then supports obligating against the appropriation current

at the time it is entered into since it is, in fact, a bona fide need of that year. The

amount of the defmitized contract would ordinarily be the total contract costless

Page 7-11 GAO/OGC-92-13 Appropriations hW-~O1. ~
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Obli@tion of Appropriations

b. Contract “in Writing”

either the actual costs incurred under the ietter contract (when known) or the amount

of the maximum legai liability permitted by the letter contract (when the actual costs

cannot be determined).*

Letter contracts should be defmitized within 180 days. FAR, 48 C.F.R.

$ 16.603-2(c). Also, letter contracts should not be used to record

excess obligations as this distorts the agency’s funding picture. See

GAO rePOti, Contract ~cing: Obligations Exceed Deftitized Prices

on Unpriced Contracts, GAO/NSIAD-86-128 (May 1986).

Although the binding agreement under 31 U.S.C. $ 1501(a)(l) must be

“in writing,” the “writing” is not necessarily limited to words on a

piece of paper. The traditional mode of contract execution is to affii

original handwritten signatures to a document (paper) setting forth

the contract terms, and this is likely to remain the norm for the

foreseeable future. Change is in the winds, however, and traditional

interpretations are being reassessed in light of advancing computer

technologies. In 1983, GAO’S legal staff, in an internal memorandum to

one of GAO’S audit divisions, took note of modern legal trends and

advised that the ‘in writing” requirement could be satisfied by

computer-related media which produce tangible recordings of

information, such as punch cards, magnetic cards, tapes, or disks.

B-208863 (2)-0. M., May 23,1983.

Eight years later, the Comptroller General issued his fmt formal

decision on the topic, 71 Comp. Gen. 109 (1991). The National

Institute of Standards and Technology asked whether federal agencies

could use certain Electronic Data Interchange (EDI) technologies to

create valid contractual obligations for purposes of 31 U.S.C.

# 1501(a). Yes, replied the Comptroller, as long as there are adequate

safeguards and controls to provide no less certainty and protection of

the government’s interests as under a “paper and ink” method. The

decision states:

We conclude that EDI systems using message authentication codes which follow

NIST’S Computer Data Authentication Standard (Federaf Information Processing

ah Me option of the e~tom, it is questionable whether, for obl@ation P~, findting the

deduction to actual costs where known should be viewed as a general ride. Where the obligation

under the letter contract is not excessive and is otherwise proper (meets bona fide needs teat,

etc.), it is arguable that the full obligation under the letter contract, even ti~u performed

prior to deftitiaation, should nevertheless atand as an obligation against the prior year’s

appropriation.

Page 7-12 GAO/0GC92-13 Appropriations kw-vol. x
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Standard (FIRS) 113) [footnote omitted] or digital signatures following NIST’S Digital

Signature Standard, as currently proposed, can produce a form of evidence that is

acceptable under section 1501.”

While there may be some room for interpretation as to what

constitutes a “writing,” the writing, in some acceptable form, must

exist. Under the plain terms of the statute, an oral agreement may not

be recorded as an obligation. In United States v. American

Renaissance Lines, Inc., 494 F.2d 1059 (D.C. Cir. 1974), cert.

denied, 419 U.S. 1020, the court found that 31 US.C. $ 1501(a)(l)

“establishes virtually a statute of frauds” for the government’ and

held that neither party can judicially enforce an oral contract in

violation of the statute.

However, the Court of Claims and its successor, the Claims Court,

have taken the position that 31 U.S.C. $ 1501(a)(l) does not bar

recovery “outside of the contract” where stilcient additional facts

exist for the court to infer the necessary “meeting of minds” (contract

implied-in-fact). Narva Harris Construction Corp. v. United States,

574 F.2d 508 (Ct. Cl. 1978); Johns-Manville Corp. v. United States,

12 Cl. Ct. 1, 19–20 (1987). Cf. Kinzleyv. United States, 661 F.2d

187 (Ct. Cl. 1981). In additio~ according to the Claims Court, it is

also possible to have an express oral contract if the required elements

are present– “mutuality of intent to be bound, deftite offer,

unconditional acceptance, and consideration”–and if the government

official involved had actual authority to bind the government.

Edwards v. United States, 22 Cl. Ct.411, 420 (1991).

These would be examples of subsequently imposed liability where the

agency did not record—and lawfully could not have recorded—an

obligation when the events giving rise to the liability took place. If a

contractor received a judgment in this type of situation, the

obligational impact on the “contracting agency” would depend on

whether the case was subject to the Contract Disputes Act. If the Act

applies, the judgment would be payable initially from the permanent

judgment appropriation (31 U.S.C. !j 1304), to be reimbursed by the

agency from currently available appropriations. If the Act does not

apply, the judgment would be paid from the judgment appropriation

7A .tiuti of fmub. ~ ~ ~w ~wtig con~~ t.o bS in writing in order to be etiorceable.

Mc@ if not W, states have some version of such a statute. Strictly spealdng, as the Comptroller

General has noted, there is no federal statute of frauds. 39 Comp. Gen. 829,831 (1960). See

also 55 Comp. Gen. 833 (1976).

“%’

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Obligation Of &MV@dOiU

without reimbursement, and there would thus be no obligational

impact on the agency.

In B-118654, August 10, 1965, GAO concluded that a notice of award

signed by the contracting officer and issued before the close of the

f~cal year did not satisfy the requirements of 31 U.S,C. $ 1501(a)(l)

where it incorporated modifkations of the offer as to price and other

terms which had been agreed to orally during negotiations. The

reason is that there was no evidence in writing that the contractor had

agreed to the modifications. GAO conceded, however, that the

agency’s argument that there was documentary evidence of a binding

agreement for purposes of section 1501(a)(l) did have some merit. A

similar issue arose in a 1977 case. While the decision implies (without

mention of B-118654) that an obligation based on an award letter

which incorporated telephone conversations relating to pricing might

not be defeated if otherwise sufficient to satis~ 31 U.S.C. $ 1501(a)(l),

the potential defect in any event would not afford a basis for a third

party (in this case a protesting unsuccessful offeror) to object to the

contract’s legality. 56 Comp. Gen. 768,775 (1977).

c. Requirement of Specificity The statute requires documen~ evidence of a binding agreement for

specific goods or services. An agreement that fails this testis not a

valid obligation.

For example, a State Department contract under the Migration and

Refugee Assistance Program establishing a contingency fund “to

provide funds for refugee assistance by any means, organization or

other voluntary agency as determined by the Supervising Oftlcer” did

not meet the requirement of specificity and therefore was not a valid

obligation. B-147196, April 5, 1965.

Similarly, a purchase order which lacks a description of the products

to be provided is not sufficient to create a recordable obligation.

B-196109, October 23, 1979. In the cited decision, a purchase order

for “regulatory, warning, and guide signs based on information

supplied” on requisitions to be issued did not validly obligate FY 1978

funds where the requisitions were not sent to the supplier until after

the close of FY 1978.

d. Invalid AwarWLJnauthorized Mere a contract award is determined to be invalid, the effect is that

Commitment no binding agreement ever existed as required by 31 U.S.C.

Page 7-14 GAO/OGC.92-13 Appropriat.iom Law-Vol. 11

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., .“~ .“
Chapter 7

Obllgatlon of Appropriatlona

$ 1501(a)(l) and therefore there was no valid obligation of funds. 38

Comp. Gen. 190 (1958); B-157360, August 11, 1965. Under more

recent authorities discussed in Chapter 5, however, the original

obligation is not extinguished for @l purposes, and the funds remain

available post-expiration to fund a valid “replacement contract.” 70

Comp. Gen. 230 (1991); 68 Comp. Gen. 158 (1988). Where the

invalidity is determined under a bid protest, which will presumably

cover most such instances, the extended availability described in the

GAO decisions is statutorily defined as 90 working days after the final

ruling on the protest. 31 U.S,C. $1558. Thus, cases like 38 Comp. Gen.

190 must be regarded as modified to this extent. Of course, the

obligation does not survive post-expiration for anything other than a

valid replacement contract.

Where the Comptroller General awards bid preparation costs to a

successful protester under authority of 31 U.S.C. 3 3554(c), payment

should be charged to the agency’s procurement appropriations

current at the time GAO issued its decision. If the amount must be

verified prior to payment, the agency should record an estimated

obligation, using GAO’S decision as the obligating document. Upon

verification, the obligation is a~usted up or down as necessary, on the

basis of the documents substantiating the amount. B-199368.4,

January 19, 1983 (non-decision letter).

Claims resulting from unauthorized commitments raise obligation

questions in two general situations. If the circumstances surrounding

the unauthorized commitment are suftlcient to give rise to a contract

implied-in-fact, it maybe possible for the agency to ratify the

unauthorized act. If the ratification occurs in a subsequent fiscal year,

the obligation is chargeable to the prior year, i.e., the year in which

the need presumably arose and the claimant performed. B-208730,

January 6, 1983. If ratification is not available for whatever reason,

the only remaining possibility for payment is a quantum meruit

recovery under a theory of contract implied-in-law. The quantum

rneruit theory permits payment in limited circumstances even in cases

where there was no valid obligation, for example, where the

contractor has made partial delivery operating under what he believed

to be a valid contract. B-1 18428, September 21, 1954. The

obligational impact is the same as for ratification-payment is

chargeable to the fiscal year in which the claimant performed.

B-2108O8, May 24, 1984; B-207557, July 11, 1983.

Page 7-15 GAO/OGC-92-13 Appropriations Law-Vol. U
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Obligation of Appropriations

e. Variations in Quantity to Be In some types of contracts, the quantity of goods to be furnished or

Furnished services to be performed may vary. The quantity maybe indefinite or

it maybe stated in terms of a definite minimum with permissible

variation. Variations may be at the option of the government or the

contractor. The obligational treatment of this type of contract

depends on the exact nature of the contractual liabili~ imposed on

the government.

Before proceeding, it is important to define some terms. A

requirements contract is one in which the government agrees to

purchase all of its needs for the particular item or service during the

contract period from the contractor, and the contractor agrees to fill

all such needs. An indefinite-quantity contract is one in which the

contractor agrees to supply whatever quantity the government may

order, within limits, with the government under no obligation to use

that contractor for all of its requirements. FAR, 48 C.F.R. $$ 16.503(a),

16.504(a): Mason v. United States, 615 F.2d 1343 (Ct. Cl. 1980); . .7

Hemet Valley Flying Service Co. v.’ United States, 7C1. Ct. 512, -‘

51 5–16 (1985). Under either type of contract, the government orders

specific quantities from time to time by issuing a document variously

termed a work order, task order, delivery order, etc.

In a requirements contract, the government must state a realistic and

good faith estimate of its total anticipated requirements, based on the

best and most current information available. 48 C.F.R. !j 16.503(a)(l);

13-190855, March 31, 1978; B-188426, September 20, 1977.

Maximum and minimum quantities may be specified but are not

required. 48 C.F.R. $ 16.503(a)(2); B-226992.2, July 13, 1987;

Unlimited Enterprises, Export-import, Inc., ASBCA No. 34825,88-3

BCA 1120,908 (1988). Needs must relate to the contract period. 21

Comp. Gen. 961,964 (1942).

If, in the exercise of good faith, the anticipated requirements simply

do not materialize, the government is not obligated to purchase the

stated estimate or indeed, if no requirements arise, to place any

orders with the contractor beyond any required minimum.

AGS-Genesys Corp., ASBCA No. 35302, 89-2BCA1121,702 (1989);

World Contractors, Inc., ASBCA No. 20354,75-2 BCA 1111,536

(1975); 47 Comp. Gen. 365,370 (1968), The contractor assumes the

risk that non-guaranteed requirements may fall short of expectations,

and has no claim for a price a~ustment if they do. Medart, Inc. v.

Austin, 967 F.2d 579 (Fed. Cir. 1992); 37 Comp. Gen. 688 (1958). If,

Page 7-16 GAO/OGC-92-13 Appropriations IAW-VO1. 11
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Obligation of Appropiiationa

however, the government attempts to meet its requirements

elsewhere, including the development of in-house capability, or if

failure to place orders with the contractor for valid needs is otherwise

found to evidence lack of good faith, liability will result. ~,

Torncello v. United States, 681 F.2d 756 (Ct. Cl. 1982); Cleek

Aviation v. United States, 19 Cl. Ct. 552 (1990); Viktoria Transport

GmbH & Co., ASBCA No. 30371,88-3 BCA ?l 20,921 (1988);

California Bus Lines, ASBCA No. 19732,75-2 BCA q 11,601 (1975);

Henry Angelo & Sons, Inc., ASBCA No. 15082, 72-1 BCA II 9356

(1972); B-182266, April 1,1975.

An indefmite-quanti~ contract, under current regulations, must

include a minimum purchase requirement which must be more than

nominal. 48 C.F.R. $ 16.504(a). An indefinite-quantity contract without

a minimum purchase requirement is regarded as illusory and

unenforceable. It is no contract at all. Mason v. United States, 615

F.2d at 1346 n.5; TomceIlo v. United States, 681 F.2dat 761;

Modem Systems Technology Corp. V. United States, 24 Cl. Ct. 360

(1991). Apart from the specified minimum, the government is free to

obti- its requirements from other contractors. ‘Government Contract

Services, Inc., GSBCA No. 8447,88-1 BCA 120,255 (1987); Alta

Construction Co., PSBCA NO. 1395,87-2 BCA 1119,720 (1987~

What does all this signi~ from the perspective of obligating

appropriations? As we noted at the outset, the obligational impact of a

variable quantity contract depends on exactly what the government

has bound itself to do. A fairly simple generalization can be deduced

from the decisions: In a variable quantity contract (requirements or

indefinite-quantity), any required minimum purchase must be

obligated when the contract is executed; subsequent obligations occur

as work orders or delivery orders are placed, and are chargeable to

the fwcal year in which the order is placed.

Thus, in a variable quantity contract with no guaranteed minimum-or

any analogous situation in which there is no liability unless and until

an order is placed–there would be no recordable obligation at the

time of award. 63 Comp. Gen. 129 (1983); 60 Comp. Gen. 219

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Obligation of Appropriations

(1981); 34 Comp. Gen. 459,462 (1955); B-124901, October 26,

1955 (“call contract”).8 Obligations are recorded as orders are

placed.

The same approach applies to a contract for a freed quantity in which

the government reserves an option to purchase an additional quantity.

The contract price for the freed quantity is an obligation at the time

the contract is entered into; the reservation of the option ripens into

art obligation only if and when the government exercises the option.

19 Comp. Gen. 980 (1940).

A more recent application of these concepts is B-192036,

September 11, 1978. The National Park Service entered into a

construction contract for the development of a national historic site.

Part of the contract price was a “contingent sum” of $25,000 for

“Force Account Work,” described in the contract as miscellaneous

items of a minor nature not included in the bid schedule. No “Force

Account Work” was to be done except under written orders issued by

the contracting officer. Since a written order was required for the

performance of work, no part of the $25,000 could be recorded as an

obligation unless and until such orders were issued and accepted by

the contractor. That portion of the master contract itself which

provided for the Force Account Work was not sufficiently specifk to

create an obligation.

In a 1955 case, the Army entered into a contract for the procurement

of lumber. The contract contained a clause permitting a ten-percent

overshipment or undershipment of the quantity ordered. This type of

clause was standard in lumber procurement contracts. The

Comptroller General held that the Army could obligate the amount

necessary to pay for the maximurn quantities deliverable under the

contract. 34 Comp. Gen. 596 (1955), Here, the quantity was defdte

and the government was required to accept the permissible variation.

In angther 1955 case, the General Services Administration had

published in the Federal Register an offer to purchase chrome ore up

to a stated maximum quantity. Formal agreements would not be

executed until producers made actual tenders of the ore. The program

SAS ~WS such ~ 63 Comp. Gen. 129 illustrate, there can be many variations on the basic

indeftite-quantity theme. It should not be assumed that every variation will violste the current

FAR mirdmum purchase requirement.

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published in the Federal Register was a mere offer to purchase and

GSA could not obligate funds to cover the total quantity authorized.

Reason: there was no mutual assent and therefore no binding

agreement in writing until a producer responded to the offer and a

formal contract was executed. B-125644, November 21, 1955.

So-called “level of effort” contracts are conceptually related to the

“variation in quantity” cases. In one case, the Environmental

Protection Agency entered into a cost-plus-f~ed-fee contract for

various services at an EPA facility. The contractor’s contractual

obligation was expressed as a “level of effort” in terms of staff-hours.

The contractor was to provide up to a stated maximum number of

direct staff-hours, to be applied on the basis of work orders issued

during the course of the contract. Since the government was obligated

under the contract to order specific tasks, the contract was

sufficiently definitive to justi~ recording the full estimated contract

amount at the time of award. B-183184, May 30, 1975. See also 58

Comp. Gen. 471,474 (1979); B-199422, June 22, 1981 (non-decision

letter).

f. Amount to Be Recorded In the simple firm freed-price contract, the amount to be recorded

presents no problem. The contract price is the recordable obligation.

However, in many types of contracts, the final contract price cannot

be known at the time of award and an estimate must be recorded. The

basic principle–record your best estimate, ac@sting the obligation up

or down periodically as more precise information becomes

available-has already been summarized in our preliminary discussion

of 31 u.s.c. $ 1501(a).

Under a fixed-price contract with escalation, price redetermination, or

incentive provisions, the amount to be obligated initially is the f~ed

price stated in the contractor the target price in the case, for

example, of a contract with an incentive clause. 34 Comp. Gen. 418

(1955); B-133170, January 29, 1975; B-206283-0.M., February 17,

1983. Thus, in an incentive contract with a target price of $85 million

and a ceiling price of $100 million, the proper amount to record

initially as an obligation is the target price of $85 million. 55 Comp.

Gen. 812,824 (1976).

When obligations are recorded based on a target price, the agency

should establish appropriate safeguards to guard against violations of

the Antideficiency Act. This usually means the administrative

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reservation of sufficient funds to cover potential Iiability. 34 Comp.

Gen. 418 at 420–21; B-206283-0. M., Februmy 17, 1983.

g. Administrative Approval of In some cases, the contractual arrangement or related statutoxy or

Payment regulatory requirements may provide a process for administrative

review and approval as a prerequisite to payment. This mayor may

not affect the obligational process, depending on the purpose of the

review. (The review and approval here refers to a process in addition

to the normal review and approval of the voucher by a certi@ing

officer which is always required.)

To illustrate, in 46 Comp. Gen. 895 (1967), GAO approved a Veterans

Administration procedure under which charges for fee-basis

outpatient treatment of eligible veterans would be recorded as

obligations at the time VA administratively approved the vouchers.

Since the review and approval process was necessary to determine

whether the government should accept liability, no contractual

obligation arose until that time. See also B-133944, January 31, 1958,

and B-92679, July 24, 1950.

A 1977 case, B-137762.32, July 11, 1977, will further illustrate the

concept. The case concerned a contract between the Internal Revenue

Service and an informant. Under IRS regulations, there is no liability

to make payment until IRS has evaluated the worth of the information

and has assessed and collected any underpaid taxes and penalties. It is

at this point that an appropriate IRS official determines that a reward

should be paid and its amount, and it is at this point that a recordable

obligation arises.

Byway of contrast, the obligation for a court-appointed attorney

under the Criminai Justice Act occurs at the time of appointment and

not when the court approves the payment voucher, even though the

exact amount of the obligation is not determinable until the voucher is

approved. This is because the government becomes contractually

liable by the order of appointment, with subsequent court review of

the voucher intended only to insure the reasonableness of the

expenses incurred. Thus, payment must be charged to the fiscal year

in which the appointment was made. 50 Comp. Gen, 589 (1971).

h. Miscellaneous Contractual The core issue in many of the previously discussed cases has been

Obligations when a given transaction ripens into a recordable obligation, that is,

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precisely when the “definite commitment” occurs. Many of the cases

do not fit neatly into categories. Rather, the answer must be derived

by analyzing the nature of the contractual or statutory commitments

in the particular case.

A 1979 case dealt with a lease arrangement entered into by the Peace

Corps in Korea. Under a particular type of lease recognized by Korean

law, the lessee does not make installment rental payments. Instead,

the lessee makes an initial payment of approximately 50 percent of

the assessed valuation of the property. At the end of the lease, the

lessor is required to return the entire initial payment. The lessor

makes his profit by investing the initial payment at the local interest

rate. Since the lease is a binding contractual commitment and since

the entire amount of the initial payment may not be recoverable for a

number of reasons, GAO found it improper to treat the initial payment

as a mere advance or an account receivable (as in the case of travel

advances) and thus not reflected as an obligation. Rather, the amount

of the initial payment must be recorded as an obligation chargeable to

the fiscaJ year in which the lease is entered into, with subsequent

returns to be deposited in the Treasury as miscellaneous receipts.

B-192282, APril 18, 1979.

Several cases deal with court-related obligations. For example, the

obligation for fees of jurors-including retroactive increases

authorized by 28 U.S.C. $ 1871—occurs at the time the jury service is

performed. 54 Comp. Gen. 472 (1974). See also 50 Comp. Gen. 589

(1971), dealing with obligations under the Criminal Justice Act,

discussed above under “Administrative Approval of Payment.”

The recording of obligations for land commissioners appointed to

determine just compensation in land condemnation cases was

discussed in B-184782, February 26,1976, and 56 Comp. Gen. 414

(1977). The rules derived from these decisions are as follows:

● The obligation occurs at the time of appointment and is chargeable to

the fiscal year of appointment if a specific case is referred to the

commission in that fiscal year.

● Pendency of an action will satisfy the bona fide needs rule and will be

sufficient to support the obligation even though services are not

actually performed until the following fiscal year.

● Appointment of a “continuous” land commission creates no

obligation until a particular action is referred to it.

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● An amended court order increasing the compensation ofa particular

commissioner amounts to a new obligation and the full compensation

is chargeable to the appropriation current at the time of the amended

order.

● Avaiid obligation occurs under the above principles even though the

order of appointment does not expressly charge the costs to the

United States because, under the Constitution, the costs cannot be

assessed against the condemnee.

(Beginning with fiscal year 1978, the appropriation to compensate

land commissioners was switched from the Justice Department to the

Judiciary and since then has been a no-year appropriation. We retain

the above summary here to illustrate the analysis and because it may

have use by analogy in similar situations.)

i. Interagency Transactions It is not uncommon for federal agencies to provide goods or services

to other federal agencies. Subsection (a)(1) of 31 U.SC. $1501

expressly applies to interagency contracts. This, however, does not

embrace all interagency transactions. When an agency obtains goods

or services from another agency, the obligational treatment of the

transaction depends on whether or not the order is “required by law”

to be placed with the other agency. If it is “required by law,” the

transaction is governed by subsection (a)(3) of 31 US.C. $1501,

discussed later in this section. If it is not “required by law,”

subsection (a)(1) applies. Interagency orders not required by law are

sometimes termed “voluntary orders.” Thus, except for “required by

law” situations, the recording criteria are the same whether the

contract is with a private party or another federal agency.

(1) Economy Act vs. other authority

A m~or source of authority for voluntary interagency agreements is

the Economy Act, 31 U.S.C. $1535. An Economy Act

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agreement-assuming it meets the criteria of subsection (a)(I) -is

recorded as an obligation the same as any other contract.g However,

Economy Act agreements are subject to one additional requirement.

Under 31 U.S.C. $ 1535(d), the period of availability of funds

transferred pursuant to an Economy Act agreement may not exceed

the period of availability of the source appropriation. Thus, one-year

appropriations obligated by an Economy Act agreement must be

deobligated at the end of the fiscal year charged to the extent that the

performing agency has not performed or incurred valid obligations

under the agreement. 39 Comp. Gen. 317 (1959); 34 Comp. Gen.

418,421-22 (1955). It was, for example, improper for the Libraqy of

Congress to use annual funds transferred to it under Economy Act

agreements and unobligated by it prior to the end of the fiscal year to

provide services in the following fiscal year. Financial Audit: First

Audit of the Library of Congress Discloses Significant Problems,

GAO/AFMD-91-13 (August 1991). The reason for this requirement is to

prevent the Economy Act from being used to extend the obligational

life of an appropriation beyond that provided by Congress in the

appropriation act. 31 Comp. Gen. 83, 85 (1951). The deobligation

requirement of 31 U.S.C. $ 1535(d) does not apply to obligations

against no-year appropriations. 39 Comp. Gen. 317,319 (1959).

Where the agreement is based on some statutory authority other than

the Economy Act, the recording of the obligation is still governed by

31 U.S.C. $ 1501(a)(l). However, 31 U.S.C. $ 1535(d) does not apply.

In this situation, the obligation will remain payable in full from the

appropriation initially charged, regardless of when performance

occurs, in the same manner as contractual obligations generally,

subject, of course, to the bona fide needs rule and to any restrictions

in the legislation authorizing the agreement. Thus, it is necessary to

determine the correct statutory authority for any interagency

agreement in order to apply the proper obligational principles.

~~e detefination of whether an interagency agreement is “binding” for PurPoses of recording

under 31 U. SC. $ 1501(a)(l) is made in the same manner as if the contract were with a private

party-examining precisely what the parties have “committed” themselves to do umdcr the terms

of the agreement. However, an agreement between two government agencies cannot be legafly

“enforced” against a defaulting agency in the sense of compelling performance or obtaining

damages. Enforcement against another agency is largety a matter of comity and good faith.

Thus, the term “binding”’ in the context of interagency agreements reflects the undertakings

expressed in the agreement without regard to the legal consequences (or lack thereof) of

non-performance.

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The following three cases, involving interagency provision of services,

will illustrate these principles.

● Agreement under which funds were transferred from Department of

Health, Education, and Welfare to FederaJ Aviation Administration to

provide training for air traffic control trainees was found authorized

by Martpower Development and Training Act of 1962 rather than

Economy Act. Therefore, while initiaJ recording of obligation was

governed by 31 US.C. $ 1501(a)(l), funds remained available for

further obligation by FAA subject to time limits of Manpower Act

rather than deobligation requirement of 31 U.S.C. !j 1535(d). 51 Comp.

Gen. 766 (1972).

● Agreement entered into in FY 1976 between Administrative OffIce of

U.S. Courts and General Services Administration for design and

implementation of automated payroll system was authorized by

Federal Property and Administrative Services Act rather than

Economy Act. Since agreement met requirements of 31 U.S.C.

$ 1501(a)(l), it was properly recordable as a valid obligation against

FY 1976 funds and was not subject to 31 U.S.C. S 1535(d). 55 Comp.

Gen. 1497 (1976).

● Army Corps of Engineers entered into agreement with Department of

Housing and Urban Development to perform flood insurance studies

pursuant to orders placed by HUD. Since the agreement presumably

required the Corps to perform as HUD placed the orders, a recordable

obligation would arise when HUD placed art order under the

agreement. Since agreement was authorized by NationaJ Flood

Insurance Act rather than Economy Act, funds obligated by order

would remain obligated even though Corps did not complete

performance (or contract out for it) until following fiscal year.

B-167790, September 22, 1977.

A voluntary interagency order for goods is subject to the same basic

rules as a voluntary interagency order for services. If the order is

governed by the Economy Act and otherwise meets the criteria of 31

u.s.c., 5 1501(a)(l), it is recordable as an obligation when the order is

placed but is subject to the deobligation requirement of 31 U.S.C.

$ 1535(d). If the order is not governed by the Economy Act, it

constitutes an obligation only to the extent that the performing

agency has completed the work or has awarded contracts to fili the

order. For example, Military Interdepartmental Procurement Requests

(MIPR) are viewed as authorized by the Economy Act. Therefore,

while a MIPR may be initially recorded as an obligation under 31 U.S.C.

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$ 1501(a)(l), it is subject to the deobligation requirement of 31 U.S.C.

$ 1535(d) and is thus ultimately chargeable to appropriations current

when the performing component incurs @id obligations. 59 Comp.

Gen. 563 (1980); 34 Comp. Gen. 418,422 (1955).

Regardless of the statutory basis for the agreement, an obligation is

recordable under subsection (a)(]) only if the criteria of that

subsection–binding agreement, sufficiently specit3c, etc.–are met.

In B-193005, October 2, 1978, GAO considered the procurement of

crude oil for the Strategic Petroleum Reserve. Under the Federal

Property and Administrative Services Act, the General Services

Administration may procure materials for other federal agencies and

may delegate this authority. GSA had delegated the authority to

procure fuel commodities to the Secretary of Defense. Thus, the

Department of Energy could procure the oil through the Defense Fuel

Supply Center in a non-Economy Act transaction. An order placed by

the Department of Energy could be recorded as an obligation under

31 U.S.C. 3 1501(a)(l) ifit constituted a “binding agreement,” and the

funds would remain available for contracts awarded by Defense

beyond the original period of obligational availability.l” This result

would have been precluded by 31 U.S.C. $ 1535(d) had the transaction

been governed by the Economy Act. An order would constitute a

binding agreement for recording purposes if accepted by the

requisitioned agency, or if the requisitioned agency were required to

perform under the terms of a “master” agreement.

In 59 Comp. Gen. 602 (1980), GAO considered the procedure by

which the Bureau of Alcohol, Tobacco, and Firearms ordered “strip

stamps” from the Bureau of Engraving. (These are the excise tax

stamps one sees pasted across the caps of liquor bottles.) GAO

reviewed pertinent legislation and concluded that ATF was not

“required by law” to procure its strip stamps from the Bureau of

Engraving. Since individual orders’were not binding agreements, it

was essentially immaterial in one important respect whether the order

was governed by the Economy Act or some other law; in neither event

could ATF’s funds remain obligated beyond the last day of a fiscal

l(}ln ~ ~ubsequcnt letter LO the Senate Commitlee on Ener~ and Natural Resources, Me

Comptrrdlcr General pointed out that the 1978 decision would not affect the applicability of the

lmpoundmellt Conlrol Act 10 the Strategic Petroleum Reserve program since the statutory

definition of “deferral’” applies to expenditures as wefl as obligations. B-200685, December 23,

19s0.

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year to the extent an order remained unfilled. Funds could be

considered obligated at the end of a f~cd year only to the extent that

stamps were printed or in process or that the Bureau of Engraving

had entered into a contract with a third party to provide them.

Thus, a voluntary interagency order, whether authorized by the

Economy Act or some other law, is recordable under 31 U.S.C.

$ 1501(a)(l) only ifit constitutes a binding agreement and meets the

other criteria of that subsection. If it does, the applicability or

non-applicability of 31 U.S.C. $ 1535(d) then becomes relevant. Ifit

does not, the order constitutes an obligation only to the extent the

performing agency has completed the work or has awarded contracts

to have it done. In addition to 59 Comp. Gen. 602 and B-193005, see

39 Comp. Gen. 829 (1960); 34 Comp. Gen. 705,708 (1955); 23

Comp. Gen. 88 (1943); B-180578-O. M., September 26,1978.

Similarly, an order for an item not stocked by the requisitioned agency

(or, if out of stock, not routinely on order) is not a recordable

obligation until the requisitioned agency purchases the item or

executes a contract for it. The reason is that the order is not a binding

agreement. It is merely an offer which is accepted by the requisitioned

agency’s performance. The bssic rules in this area were established by

34 Comp. Gen. 705 (1955).

(2) Orders from stock

The obligational treatment of orders for items to be delivered from

stock of the requisitioned agency derives from 32 Comp. Gen. 436

(1953). An order for items to be delivered from stock is a recordable

obligation if(1) it is intended to meet a bona fide need of the fiscal

year in which the order is placed or to replace stock used in that fyear,” and (2) the order is firm and complete. To be firm and

complete, the order must request prompt delivev of specific available

stock items for a stated consideration and must be accepted by the

supplying agency in writing. “Available” means on hand or routinely

on order. However, acceptance is not required for common-use stock

items which are on hand or on order ad will be delivered promptly.

ll~e fad Mat the replwement stock wiU not be used until the fdkwhlgye~ ~ not ~fe~ ~

otherwise vaUd obligation. See 44 Comp. Gen. 695 (1965).

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Although these rules were developed prior to the enactment of 31

U.S.C. 3 1501(a)(l), they continue to govern the recording of

obligations under that statute. 34 Comp. Gen. 705 (1955); 34 Comp.

Gen. 418,422 (1955). Materials which are specially created for a

particular purpose are not “stock.” 44 Comp. Gem 695 (1965).

(3) Project orders

“Project orders” are authorized by 41 U.S.C. S 23, which provides:

“All orders or contracts for work or material or for the manufacture of material

wrt.aix@ to approved projects heretofore or hereafter placed with

Governrnent+wned establishments shall be considered aa obligations in the same

manner as provided for similar orders or contracts placed with commercial

manufacturers or private contractors, and the appropriations shall remain available

for the payment of the obligations so created as in the case of contracts or orders with

commercial manufacturers or private contractors.”lz

This statute, derived from eariier appropriation act provisions

appearing shortly after World War I, applies only to the military

departments, although the orders may be placed with any

“Government-owned establishment.” B-95760, June 27, 1950.13

Precisely why the statute was enacted is not clear. Some discussion of

its origins may be found in 26 Comp. Dec. 1022 (1920). The Coast

Guard has virtually identical authority in 14 U.S.C. 3151.

A project order is a valid and recordable obligation when the order is

issued and accepted, regardless of the fact that performan ce may not

be accomplished until after the expiration of the f~cal year. 1 Comp.

Gen. 175 (1921); B-135037-O. M., June 19, 1958. The statute does

not, however, authorize the use of the appropriations so obligated for

the purpose of replenishing stock used in connection with the order.

A-25603, May 15, 1929. The requirement of specificity applies to

project orders the same as any other recordable obligations under 31

U.S.C. S 1501(a)(l). B-126405, May 21, 1957.

l~ekm .approv~ pro~~,- w used in 41 U.s.c. 523, haa no sWci~ me@W. It refem

simply to “projects that have been approved by oftlcials having legal authority to do so.”

E-171049-O. M., February 1.7, 1972. cf. 26 Comp. Dec. 1022, 1023–24 (1920).

l~e ~otie of Eg57~ is not clem~ stated. The provision fii app=d ~ WMWIent

authori~ in the Army’s FY 1921 appropriation (41 Stat. 975). Had it been intended to apply to

all agencies, it would not have been necessary to repeat it for the Navy in 1922 (42 Wit. 812)

and the Coast Guard in 1942 (56 Stat. 328).

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Since a project order is not an Economy Act tmnsadI“on, the

deobligation requirement of 31 U.S.C. 5 1535(d) does not apply. 34

Comp. Gen. 418,422 (1955). See also 16 Comp. Gen. 752 (1937).

Also, unlike the Economy Act, 41 U.S.C. ~ 23 does not authorize

advance payment. Thus, advance payment for project orders is not

authorized unless permitted by some other statute. B-95760, June 27,

1950.

2. &dwxtion (a)(2): Loans Under31 U.S.C. $ 1501(a)(2), a recordable obligation exists when

there is documentary evidence of “a loan agreement showing the

amount and terms of repayment.”

A loan agreement is essentially contractual in nature. Thus, to have a

valid obligation, there must be a proposal by one party and an

acceptance by another. Approval of the loan application must be

communicated to the applicant within the f~czd year sought to be

charged, and there must be documentary evidence of that

communication. B-159999 -0. M., March 16, 1967. Where a loan

application is made in one fiscal year and approval is not

communicated to the applicant until the following f~cal year, the

obligation is chargeable to the later year. ~.; B-159999-O.M.,

December 14, 1966.

Telegraphic notification of approval of a loan application where the

amount of the loan and terms of repayment are thereby agreed upon

is legally acceptable. B-159999-O. M., December 14, 1966.

To support a recordable obligation under subsection (a)(2), the

agreement must be stilciently deftite and speciiic, just as in the case

of subsection (a)(1) obligations. To illustrate, the United States and

the government of Brazil entered into a loan agreement in 1964. As a

condition precedent to any disbursement under the agreement, Brazil

was to furnish a statement covering utilization of the funds. The funds

were.to be used for various economic and social development projects

% may, from time to time, be agreed upon in writing” by the

governments of the United States and Brazil. While the loan

agreement constituted a valid binding contract, it was not sufficiently

definite or spec~lc to validly obligate FY 1964 funds. The basic

agreement was little more than an “agreement to agree,” and an

obligation of funds could arise only when a particular “utilization

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statement” was submitted and approved. B-155708-O. M., April 26,

1965.

Prior to fiscal year 1992, the amount to be recorded in the case of a

loan was quite simple-the face amount of the loan. From the

budgetary perspective, this was undesirable because the obligation

was indistinguishable from any other cash outlay. By disregarding at

the obligational stage the fact that loans are supposed to be repaid,

this treatment did not reflect the true cost to the government of direct

loan programs. Congress addressed the situation in the Federal Credit

Reform Act of 1990, enacted as section 13201 of the Omnibus Budget

Reconciliation Act of 1990, Pub. L. No. 101-508,104 Stat. 1388,

1388-609, and codified at 2 U.S.C. $$ 661–661f (Supp. HI 1991). The

general approach of the FCRA is to require the advance provision of

budget authority to cover the subsidy portion of direct loans (in

recognition of the fact that not all loans are repaid), with the

non-subsidy portion (the portion expected to be repaid) financed

through borrowings from the Treasury. The Office of Management

and Budget has issued detailed implementing instructions in OMB

Circular No. A-34, Part VI (1991). The FCRA applies to new direct loan

obligations incurred on or after October 1, 1991.

FCRA defines “direct loan” as “a disbursement of fimds by the

Government to a non-Federai borrower under a contract that requires

the repayment of such funds with or without interest.” 2 U.S.C.

s 661a(l), A direct loan obligation is “a binding agreement by a

Federal agency to make a direct loan when specified conditions are

fulffled by the borrower.” @. $ 661a(2). The “cost” of a direct loan is

the estimated long-term cost to the government, taking into

consideration disbursements and repayments, calculated on a net

present value basis at the time of disbursement. ~. $ 661a(5).

Unless otherwise provided by statute, new direct loan obligations may

be incurred only to the extent that budget authority to cover their

costs is provided in advance. Id. $ 661c(b). Under this provision, the

typical appropriation will inclfide both an appropriation of budget

authority for the subsidy costs and a program ceiling (total face

amount of loans supportable by the cost appropriation). The

appropriation is made to a “program account.” When a direct loan

obligation is incurred, its cost is obligated against the program

account. The actual financing is done through a revolving, non-budget

“financing account.” Loan repayments are credited to the financing

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account. See generally OMB Circular No. A-34, $62.6. The

overobligation or overexpenditure of either the loan subsidy or the

credit level supportable by the enacted subsidy violates the

AntideficiencyAct. ~. 563.2.

3. Subsection (a)(3): The third standard for recording obligations, 31 U.S.C. $ 1501(a)(3), is

Interagency Orders “an order required by law to be placed with [a federal] agency.”

Required by hW

Subsection (a)(3) means exactly what it says. An order placed with

another government agency is recordable under this subsection only if

it is required by statute or statutory regulation to be placed with the

other agency. The subsection does not apply to orders which are

merely authorized rather than required. 34 Comp. Gen. 705 (1955).

An order required by law to be placed with another agency is not an

Economy Act transaction. Therefore, the deobligation requirement of

31 U.S.C. $ 1535(d) does not apply. 35 Comp. Gen. 3,5 (1955).

The fact that the work will be performed in the next f~cal year does

not defeat the obligation as long as the bona fide need testis met. 59

Comp. Gen. 386 (1980); 35 Comp. Gen. 3 (1955). Also, the fact that

the work is to be accomplished and reimbursement made through use

of a revolving fund is immaterial. 35 Comp. Gen. 3 (1955); 34 Comp.

Gen. 705 (1955).

A common example of “orders required by law” is printing and

binding to be done by the Government Printing OffIce. The rule is that

a requisition for printing services maybe recorded as an obligation

when placed if (1) there is a present need for the printing, and (2) the

requisition is accompanied by copy or specifications stilcient for

GPO to proceed with the job.

Thus, a requisition by the Commission on Fine Arts for the printing of

“Sixteenth Street Architecture, Volume I“ placed with GPO in FY 1977

and accompanied by manuscript and specifications obligated FY 1977

funds and was chargeable in its entirety to PY 1977, notwithstanding

that the printing would be done in the following f~czd year. 59 Comp.

Gen. 386 (1980). However, a requisition for U.S. Travel Service sales

promotional literature placed with GPO near the end of FY 1964 did

not obligate FY 1964 funds where no copy or manuscript was

furnished to GPO until FY 1965,44 Comp. Gen. 695 (1965). For other

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Obli@tlon of Appropriations

printing cases illustrating these rules, see 29 Comp. Gen. 489 (1950);

23 Comp. Gen. 82 (1943); B-154277, June 5, 1964; B-123964,

August 23, 1955; B-1 14619, April 17, 1953; B-50663, June 30, 1945;

B-35807, August 10, 1943; B-35967, August 4, 1943; B-34888,

June 21, 1943.

An agency may use a printing estimate furnished by GPO to establish

the level of funds to be obligated pending receipt of a bill reflecting

actual cost. However, the printing estimate alone, even if written,

unaccompanied by the placement of an order, is not sufficient to

create a valid and recordable obligation. B-182081, January 26, 1977,

affmed in B-182081, February 14, 1979. In the cited decision, there

was no valid obligation before the ordering commission went out of

existence and its appropriations ceased to be available for further

obligation. Therefore, there was n6 appropriation available to

reimburse GPO for work done under the invalid purported obligation.

GPO is required by Iaw to print certain congressional materials such

as the Congressional Record, and receives a “Printing and Binding”

appropriation for this purpose. For such items where no further

request or authorization is required, a copy of the basic law

authorizing the printing plus a copy of the appropriation constitute

the obligating documents. B-123964, August 23,1955.

Another common “order required bylaw” situation is building

alteration, management, and related services to be performed by the

General Services Administration. For example, a job order by the

Social Security .Administration for building repairs validly obligated

funds of the fiscal year in which the order was placed, by virtue of

subsection (a)(3), notwithstanding that GSA was unable to perform the

work until the following fiscal year. 35 Comp. Gen. 3 (1955). See also

B-158374, February 21, 1966. However, this result assumes

compliance with the bona fide need concept, Thus, an agreement for

work incident to the relocation of Federal Power Commission

employees placed in PY 1971 did not validly obligate FY 1971 funds

where it was clear that the relocation was not required to, and would

not, take place, nor would the space in question be made tenantable,

until the following fiscal year. B-95136-O. M., August 11, 1972. Orders

placed with GSA are further discussed in 34 Comp. Gen. 705 (1955).

As noted earlier, GAO has expressed the view that the recording

criteria of 31 U.S.C. $ 1501(a) should be followed in evaluating

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Obl@tion of Appropriations

obligations of the government of the District of Columbia. Thus,

orders by a department of the D.C. government for repairs and

improvements which are required by statute or statutory regulation to

be placed with the D.C. Department of General Services and

performed through use of the Repairs and Improvements Working

Fund create valid obligations when the orders are placed.

B-180578-O.M., September 26, 1978.

4. Subsection (a)(4): The fourth recording standard in 31 U.S.C. $ 1501(a) is–

Orders Without Advertising

“an order issued under a law authorizing purchases without advertising (A) when

necessary because of a public exigency; (B) for perishable subsistence supplies; or

(C) within specitic monetary limits.”

Subsection (a)(4) is limited to statutorily authorized purchases

without advertising in the three situations spec~led. The subsection

must be self-explanatory as there appear to be no Comptroller

General decisions under it.

5. Subsection (a)(5): In the case of federal assistance program funds, 31 U.S.C. $ 1501(a)(5)

Granb and Subsidies requires that the obligation be supported by documentary evidence of

a grantor subsidy payable:

“(A) from appropriations made for payment of, or contributions to, amounts required

to be paid in specitlc amounts freed 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.”

a. Grants In order to properly obligate an appropriation for an assistance

pro@am, 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. See 39

Comp. Gen. 317 (1959); 37 Comp. Gen. 861,863 (1958); 31 Comp.

Gen. 608 (1952); B-128190, June 2, 1958; B-114868 .01-O.M.,

March 17, 1976.

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obligation of Appro@atiolw

IrI this connection, GAO’S Accounting Principles and Standards state:

“Accounting for a federal assistance award begins with the execution of an agreement

or the approval of an application or similar document in which the amount and

purposea of the grant, the perforrnan ce periods, the obligations of the parties to the

award, and other terms are set out. A legal obligation to disbume the assistmce funds,

in accordance with the terms of the agreement, generally occurs with an executed

agreement or an approved application or similar docum ent.”1’

As a general proposition, four requirements must be met. to properly

obligate assistance funds:

There must be some action to establish a firm commitment on the part

of the United States.

The commitment must be unconditional on the part of the UNted

States. See 50 Comp. Gen. 857,862 (1971).

There m=be documentiuy evidence of the commitment. Champaign

County v. Law Enforcement Assistance AdmhMmtI“on, 611 F.2d

1200 (7th Cir. 1979) (court refused to regard documentation

requirement as “form over substance”); %126372, September 18,

1956.

The award terms must be communicated to the official grantee, and

where the grantee is required to comply with certain prerequisites,

such as putting up matching funds, it must also be accepted by the

grantee during the period of availability of the grant funds.

An illustration of this latter requirement is B-220527, December 16,

1985. The Economic Development Administration made an “offer of

grant” to a Connecticut municipality which would have required a

substantial outlay of funds by the municipality. The offer was

accepted by a town official who had no authority to accept the grant.

By its own municipal ordinance, only the town council could accept a

grant offer. By the time the town marshaled the resources to fulfill its

obligations under the grant and the unauthorized acceptance was

rattiled by the town council, the funds had expired for obligational

purposes. GAO held that no valid grant obligation on the part of the

government had ever been made. See aiso B-164990, Januaxy 10,

1969, finding an attempted obligation invalid where the program

legislation required approval of a proposed grant by the state

14GA0 poliq ~d prtiu~ MSXIUSI for Guidance of Federal Agencies, Title 2, APPendix I,

S G1O, pars. .03 (1984).

Wge 7-33 GAOKXC-92-UI @prOptiiOI’ii?) ~W -VOL tf

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governor and he had not yet agreed, even though the award

instruments had already been executed.

Once the appropriation has been properly obligated, perforrnance and

the actual disbursement of ilmds may carryover beyond the period of

obligational availability. 31 Comp. Gen. 608, 610 (1952); 20 Comp.

Gen. 370 (1941); B-37609, November 15, 1943; B-24827, April 3,

1942; B-124374-O.M., January 26,1956.

Applying the above principles, the Comptroller General found that a

document entitled “Approwd and Award of Grant” used by the

Economic Development Administration was sufficient for recording

grant obligations under the local public works program because it

“reflects the Administration’s acceptance of a grant application;

speciiies the project approved and the amount of fimding; and

imposes a deadline for affirmation by the grantee.” B-126652,

August 30, 1977.

If the above requirements are not met, then the appropriation is not

validly obligated. Thus, the Comptroller General found an attempted

obligation invalid in B-164990, September 6, 1968, where the grantee

corporation was not in existence when the obligation was recorded.

Also, the relevant program legislation must be examined to see if

there are any additional requirements.

The preceding cases mostly involve obligations evidenced by the

issuance of an award instrument. Questions may also arise over

exactly when an obligation “freed by law” or under a required plan

takes place. For example, under the Medicaid program, the obligation

occurs under a state plan when an entitlement is created in favor of

the state. This happens when a covered medical service is provided.

See B-164031(3).150, September 5,1979.

Also, where an agency is required to allocate funds to states on the

basis of a statutory formula, the formula establishes the obligation to

each recipient rather than the agency’s allocation since, if the

allocation is erroneous, the agency must @just the amounts paid each

recipient. See 41 Comp. Gen. 16 (1961); B-164031(3).150,

September 5, 1979. In this type of situation, the obligation occurs by

operation of law, even though there may have been no formal

recording. A decision discussing this concept in the context of the Job

Training Partnership Act is 63 Comp. Gen. 525 (1984). For a

“R’”

Page 7-34 GAO/OGC-92-13 &prOp*OIU Law-VOL M
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obligation of Appropriation

b. Subsidies

ditwussicw of ob~ation ad &rMigatim of funds under the now

defunct Comprehensive Employment and Train@ Act (the

predecessor of the Job Training Partnership Act) in the context of the

Impoundment Control Act, see B-200685, April 27,1981.

The rules for deobligation and reobligation of assistance funds are the

same as for appropriated funds generally. program legislation in a

given case may, of course, provide for different treatment. For

example, B-21 1323, January 3, 1984, considered a provision of the

Public Works and Economic Development Act of 1965 under which

funds apportioned to states remained available to the state until

expended. Under that particular provision, tick deobligated as the

result of a cost underrun could be reobligated by the state, without

fiscal year limitation, for purposes within the scope of the program

statute.

There have been relatively few eases dealing with the obligationrd

treatment of subsidies, although the principles should parallel those

for grants since they both derive from subsection (a)(5). In one case,

GAO considered legislation authorizing the former Federal Home Loan

Bank Board to make “interest a@strnent” payments to member

banks. The payments were designed to @just the effective rates of

interest charged by member banks on short- and long-term

borrowing, the objective being to stimulate residential construction

for low- and middle-income families. Funds were appropriated to the

Board for this purpose on a fiscal year basis. GAO concluded that an

obligation arose for purposes of 31 U.S.C. $ 1501(a)(5) when a Federal

Home Loan Bank made a fm and unconditional commitment in

writing to a member institution, provided that the commitment letter

included a reasonable expiration date. The funds would have to be

deobl.igated to the extent that a member institution failed to execute

loans prior to the specified expiration date. 50 Comp. Gen. 857

(1971).

In 65 Comp. Gen. 4 (1985), GAO advised the Department of Education

that mandatory interest subsidies under the Guaranteed Student Loan

Program should be recorded as obligations on a “best estimate” basis

as they arise, even if the recordings would exceed available budgetary

resources, Since the subsidies are not discretionary obligations but

are imposed by law, there would be no Antideficiency Act violation.

The decision overruled an earlier case (B-126372, September 18,

1956) which had held that the recording of obligations for mail rate

Page 7-35 GAOKIGC-92-13 AppmptiOllU J.Jsw-VOL ~
Chapter 7

Obligation of Appropriations

subsidies to air carriers could be deferred until the time of payment,

65 Comp. Gen. at 8 n,3.

In 64 Comp. Gen. 410 (1985), GAO considered obligations by the

Department of Housing and Urban Development for operating

subsidies to state public housing authorities for low-income housing

projects. Under the governing statute and regulations, the amount of

the subsidy was determined upon HUD’S approval of the state’s annual

operating budget, although the basic commitment stemmed from an

annual contribution contract, HUD’S practice, primarily for states

whose fiscal year coincides with that of the federal government, was

to record the obligation on the basis of an estimate, issued in a letter

of intent. GAO found this to be legally permissible, but cautioned that

HUD was required to ac@st the obligation up or down once it

approved the operating budget.

A 1983 decision, B-212145, September 27, 1983, discusses the use of

estimates subject to subsequent a~ustment for the recording of

obligations under the Payments in Lieu of Taxes Act, 31 U.S.C.

$$ 6901–6906.

From the perspective of the recording of obligations, these two

decisions–64 Comp. Gen. 410 and B-212145–are simply

applications of the general principle, previously noted, that best

estimates should be recorded when more precise information is not

available, subject to later a@stment.

6. Subsection (a)(6): The sixth standard for recording obligations is “a liability that may

Pending Litigation result from pending litigation.” 31 U.S.C. $ 1501(a)(6).

Despite its seemingly broad language, subsection (a)(6) has very

limited application. Most judgments against the United States are paid

from a permanent indefinite appropriation, 31 U.S.C. $1304, covered

in detail in Chapter 14. Accordingly, since the expenditure of agency

funds is not involved, judgments payable under 31 U.S.C. ~ 1304 have

no obligational impact on the respondent agency.

Not all judgments against the United States are paid from the

permanent judgment appropriation. Several types are payable from

agency funds. However, the mere fact that a judgment is payable from

agency funds does not make it subject to subsection (a)(6). Thus far,

Page 7-36 GAO/OGC-92-13 Appropriations Law-Voi. II
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Obli@on of Appropriations

the Comptroller General has applied subsection (a)(6) in only two

situations-land condemnation (35 Comp. Gen. 185 (1955)) and

certain impoundment litigation (54 Comp. Gen. 962 (1975)).

In land condemnation proceedings, the appropriation is obligated

when the request is made to the Attorney General to institute the

proceedings. 34 Comp. Gen. 418,423 (1955); 34 Comp. Gen. 67

(1954); 17 Comp. Gen. 664 (1938); 4 Comp. Gen. 206 (1924).

As stated in 35 Comp. Gen. 185, 187, subsection (a)(6) requires

recording an obligation in cases where the government is definitely

liable for the payment of money out of available appropriations and

the pending litigation is for the purpose of determining the amount of

the government’s liability. Thus, for judgments payable from agency

appropriations in other than land condemnation and impoundment

cases, the standard of 35 Comp. Gen. 185 should be applied to

determine whether an obligation must be recorded.

In cases where a judgment will be payable from agency funds but

recording is not required, 35 Comp, Gem 185 suggested that the

agency should nevertheless administratively reserve sufficient funds

to cover the contingent liabili~ to avoid a possible violation of the

Antideficiency Act. Id. at 187. While the administrative reservation

may still be a good i~ea for other reasons, the mqjority of more recent

cases (cited and summarized in Chapter 6 under the heading

IntentiF’actors Beyond Agency Control) have taken the position that

overobligations resulting from court-ordered payments do not violate

the Antideficiency Act.

It should be apparent that the preceding discussion applies to money

judgments-judgments directing the payment of money. In some types

of litigation, a court may order an agency to take some specifk action.

While compliance will result in the expenditure of agency funds, this

type of judgment is not within the scope of 35 Comp. Gen. 185. While

we have found no cases, it seems clear from the application of 31

U.S.C. $ 1501(a) in other contexts that no recordable obligation would

arise while this type of litigation is still “pending.”

Page 7-37 GAOIOGC-92-13 Appropriation Lllw-vol. II

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obli@ion of Approprktions

7. Subsection (a](7): Under 31 U.S.C. S 1501(a)(7), obligations are recordable when

Employment and Travel supported by documentary evidence of “employment or services of

persons or expenses of travel under law.” This subsection covers a

varie~ of loosely related obligations.

a. Wages, Salaries, Annual salaries of government employees, as well as related items that flow

Leave from those salary entitlements such as retirement fund contributions,

are obligations at the time the salaries are earned, that is, when the

seMces are rendered. 24 Comp. Gen. 676, 678 (1945).15 For

example, in 38 Comp. Gen. 316 (1958), the Commerce Department

wanted to treat the salaries of employees performing adrnuus “ “ trative

and engineering services on highway construction projects as part of

the construction contract costs. Under this procedure, the anticipated

expenses of the employees, salaries included, would be recorded as an

obligation at the time a contract was awarded, However, the

Comptroller General held that this would not constitute a valid

obligation under 31 U.S.C. S 1501. The employee expenses were not

part of the contract costs and could not be obligated before the

services were performed.

Subsection (a)(7) is not limited to permanent federal employees. It

applies as well to persons employed in other capacities, such as

temporary or intermittent employees or persons employed under a

personal services contract. In Kinziey v. United States, 661 F.2d 187

(Ct. Cl. 1981), for example, the court found various agency

correspondence sufficient compliance with subsection (a)(7) to

permit a claim for compensation for services rendered as a project

coordinator. Unlike subsection (a)(l), the court pointed out,

subsection (a)(7) does not require a binding agreement in writing

between the parties, but only documentary evidence of “employment

or services of persons.” Id. at 191. —

For persons compensated on an actual expense basis, it may be

necessary to record the obligation as an estimate, to be a@sted when

the services are actually performed. Documentation requirements to

support the obligation or subsequent claims are up to the agency.

~, B-217475, December 24,1986.

lbThe F~e~~~ ~fItiorWAutk)rit’J hM dSO ttppkd thk pficiple h ‘urn@ ‘ie

negotiability of varioua union propoaals. 8ee Fort Knox Teachers Asa’n and Roard of Education,

27 F. L.RA. 203 (No. 34, 1987); Fort Knox Teachers Ass’n and Fort Knox Dependent 8chools,

26 F. L.R.A. 934 (NO. 108, 1987).

Page 7-88 GAOK)GC-92-13 Appropriations kw-VOL 11

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Oblt@on of Apprupr&Iorts

When a pay increase is granted to wage board employees, the

effective date of the increase is governed by 5 U.S.C. $ 5344. This

effective date determines the government’s liabili~ to pay the

additional compensation. Therefore, the increase is chargeable to

appropriations currently available for payment of the wages for the

period to which the increases apply. 39 Comp. Gen. 422 (1959). This

is true regardless of the fact that appropriations maybe insufikient to

discharge the obligation and the agency may not yet have had time to

obtain a supplemental appropriation. The obligation in this situation is

considered “authorized bylaw” and therefore does not violate the

Antideficiency Act. Id. at 426. —

Annual leave status “is synonymous with a work or duty status.” 25

Comp. Gen. 687 (1946). As such, annual leave obligates

appropriations current at the time the leave is taken. ~.; 50 Comp.

Gen. 863,865 (1971); 17 Comp. Gen. 641 (1938). A separate

obligation for annual leave is necessary only when it becomes due and

payable as terminal leave. OMB Circular No. A-34, 523.2. Except for

employees paid from revolving funds (25 Comp. Gen. 687 (1946)), or

where there is some statutory indication to the contrary (B-70247,

January 9, 1948), the obligation for terminal leave is recorded against

appropriations for the fiscal year covering the employee’s last day of

active service. 25 Comp. Gen. 687, 688 (1946); 24 Comp. Gen. 578,

583 (1945).

Bonuses such as performance awards or incentive awards obligate

appropriations current at the time the awards are made. Thus, for

example, where performan ce awards to Senior Executive Service

ofllcials under 5 U.S.C. !+ 5384 were made in FY 1982 but actual

payment had to be split between FY 1982 and FY 1983 to stay within

statutory compensation ceilings, the entire amount of the awards

remained chargeable to FY 1982 funds. 64 Comp. Gen. 114, 115 n.2

(1984). The same principle would apply to other types of

discretionary payments; the administrative determination creates the

obligation. ~, B-80060, September 30, 1948.

Employees terminated by a reduction in force (RIF’) are entitled by

statute to severance pay. Severance pay is obligated on a pay period

by pay period basis. Thus, where a RIF occurs near the end of a fiscal

year and severance payments will extend into the following fti year,

it is improper to charge the entire amount of severance pay to the

Page 7.S9 GAO/OGC-92-19 ~PIvPtitioUS L@w -VOL ~

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Obli@tion Of &prOpdStiOM

fd year in which the MI? occurs. B-200170, July 28, 1981; OMB

Circuhr No. A-34, $ 23,2,’6

GAO reached a different result in B-200170, September 24, 1982. The

United States Metric Board was scheduled to terminate its existence

on September 30, 1982. Legislative history indicated that the Board’s

PY 1982 appropriation was intended to include severance pay, and no

appropriations had been requested for FY 1983. Under these

circumstances, severance payments to be made in FY 1983 were held

chargeable to the FY 1982 appropriation. A contrary result would have

meant that the FY 1982 funds would expire, and Congress would have

had to appropriate the same funds again for FY 1983.

b. Compensation Plans in By statute, the State Department is required to establish

Foreign Countries compensation plans for foreign national employees of the Foreign

Service in foreign countries. The plans are to be “based upon

prevailing wage rates and compensation practices. . . for

corresponding types of positions in the locality of employment,” to

the extent consistent with the public interest. 22 U.S.C. $ 3968(a)(l).

Under subsection (b) of 22 U.S.C. $3968, other government agencies

are authorized to adminkk r foreign national employee compensation

programs in accordance with the applicable provisions of the Foreign

Service Act. This provision, for example, authorized the Defense

Department to establish a pension and life insurance program for

foreign national employees in Bermuda, provided that it corresponded

to prevailing local practice. 40 Comp. Gen. 650 (1961).

Subsection (c) of 22 U.S.C. $3968 authorizes the Secretary of State to

prescribe regulations for local compensation plans applicable to all

federal agencies. To the extent this authority is not exercised,

however, the statute does not otherwise require that a plan

established by another agency conform to the State Department’s

plan..An agency establishing a local plan should, to the extent not

regulated by State, coordinate with other agencies operating in the

locality. 40 Comp. Gen. at 652. (As a practical matter, two agencies

operating in the same locality should not develop substantially

16GA0 ~~r~oW~ ~~vom~ on the issue of obl.i@ing fOr SWe~Ce P6Ys P~fe@m

coordina~ with OMB’S budget procedures, sulxwquently iswued in OMB Circular No. A-24. See

45 Comp. Gen. 584 (1906).

Page 7-40 GAO/OGC-92-13 Appropriation Law-Vol. II

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Obli@t.ion of Approprktiono

different plans, assuming both legitimately reflect prevailing local

practice.)

To the extent the authority of 22 U.S.C. ~ 3968 is exercised in a given

country, the obligational treatment of various elements of

compensation may vary from what would otherwise be required. For

example, Colombian law provides for the advance payment of accrued

severance pay to help the employee purchase or make improvements

on a home. Thus, under a compensation plan for foreign national

employees in Colombia, severance pay would be recorded as an

obligation against the f~cal year appropriation current at the time of

accrual. B-192511, February 5, 1979.

While 22 U.S.C. $3968 authorizes compensation plans based on local

practice, it does not permit automatic disregard of all other laws of

the United States. Thus, under the Colombian severance pay program

noted above, if the employee subsequently is terminated for cause or

othenvise loses eligibility, the agency must proceed with collection

action under the Federal Claims Collection Act, local practice to the

contrary nobvithstanding. B-192511, June 8, 1979. Similarly, accrued

severance pay retains its status as United States funds up to actual

disbursement and is therefore subject to applicable f~ca,l and fund

control requirements. B-199722, September 15, 1981 (severance pay

plan in Jordan).

In several foreign countries, foreign nationals employed by the United

States are entitled to be paid a “separation allowance” when they

resign, retire, or are otherwise separated through no fault of their

own. The allowance is based on length of service, rate of pay at time

of separation, and me of separation. Unlike severance pay for federal

employees, these separation allowances represent binding

commitments which accrue during the period of employment. As

such, they should be recorded as obligations when they are earned

rather than when they are paid. FGMSD-76-25, October 17, 1975;

~I@D-75-20, February 13, 1975; Substantial Understatements of

Obligations for Separation Allowances for Foreign National

Employees, B-179343, October 21, 1974. (These three items are GAO

reports, the fmt two being untitled letter reports.)

c. Trainin g The obligation for training frequently stems from a services contract

and to that extent is recordable under subsection (a)(1) rather than

Page 7-41 GAO/OGC-92-lS @prOptiOIIE L8w-VO1. a
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Obli@.lon Of&lmpZktiOM

d. Uniform Allowance

e. Travel Expenses 17

subsection (a)(7). The rules for training obligations are summarized

in Chapter 5, Section B.5.

The Federal Employees Uniform Act, 5 U.S.C. $5901, authorizes a

uniform allowance for each employee required by statute or

regulation to wear a uniform. The agency may furnish the uniform or

pay a cash allowance. Where an agency elects to pay an allowance, the

obligation arises when the employee incurs the expense and becomes

entitled to reimbursement. Thus, the appropriation chargeable is the

one currently available at the time the employee makes the

expenditure or incurs the debt. 38 Comp. Gen. 81 (1958).

The obligation of appropriations for expenses relating to travel was an

extremely fertile area and generated a large number of decisions

before 31 U.S.C. $1501 was enacted. The cases seem to involve every

conceivable permutation of facts involving trips or transactions

covering more than one fti year. The enactment of 31 W.S.C. S 1501

logically prompted the question of how the new statute affected the

prior decisions. It did not, replied the Comptroller General. Thus, the

starting point is that subsection (a)(7) incorporates prior GAO

decisions on obligations for travel. 35 Comp. Gen. 183 (1955); 34

Comp. Gen. 459 (1955).

The “leading case” in this area appears to have been 35 Comp. Gen.

183 (1955), which states the pertinent rules. The rules for traveI may

be summariz ed as follows: The issuance of a travel order in itself does

not constitute a contractual obligation. The travel order is merely an

authorization for the person specified to incur the obligation. The

obligation is not incurred until the travel is actually performed or until

a ticket is purchased, provided in the latter case the travel is to be

performed in the same f~cal year the ticket is purchased. 35 Comp.

Gen. at 185. A 1991 decision, 70 Comp. Gen. 469, reaffirmed the

principle that the expenses of temporzuy duty travel are chargeable to

the f~cal year or years in which they are actually incurred.

Some of the earlier cases in this evolutionary process areas follows:

17~ ~dion does not app~ to travel incident to employee tmfem. me ~~ for employee

transfem are set forth separately later.

P*ge 7-42 GAO/OGC-92-13 AppI’OptiiOIW L8w-VO]. ~
Cbapter 7

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● Where tickets are purchased in one fiscal year and the travel is

performed in the following fiscal year, the obligation is chargeable to

the year in which the travel is performed, even though early purchase

of the tickets may have been necessary to assure reservations. 27

Comp. Gen. 764 (1948); 26 Comp. Gen. 131 (1946).

● A “continuous journey” involving more than one segment obligates

funds of the year in which the ticket was purchased, as long as the trip

starts in that same fiscal year. However, procurement of

transportation en route is a new obligation. Similarly, a round-trip

ticket obligates funds at the time of purchase as long as the trip starts

in the same fiscal year. However, if the return portion of the ticket

cannot be used and a separate return ticket must be purchased, anew

obligation is created. 26 Comp. Gen. 961 (1947); A-36450, May 27,

1931.

“ Per diem incident to official travel accrues from day to day. Per diem

allowances are chargeable to appropriations current when the

allowances accrue (i.e., when the expenditures are made). Thus,

where travel begins in one fiscal year and extends into the next f~cal

year, the per diem obligation must be split along fiscal year lines, even

though the cost of the travel itself may have been chargeable in its

entirety to the prior fiscal year. 23 Comp. Gen. 197 (1943).

c Reimbursement on a mileage basis is chargeable to the fiscai year in

which the major portion of the travel occurred. If travel is begun

sufficiently prior to the end of a fiscal year to enable the employee to

complete a continuous journey before the close of the fiscal year, the

obligation is chargeable entirely to that year. However, if the travel is

begun so late in the fiscal year that the major portion of it is

performed in the succeeding fiscal year, it is chargeable to

appropriations for the succeeding year. 9 Comp. Gen. 458, 460

(1930); 2 Comp, Dec. 14 (1895).

● Where (1) an employee is authorized to travel by privately owned

vehicle at not to exceed the constructive cost of similar travel by rail,

(2) the trip starts in one fiscal year and extends into the following

f~cal year, and (3) the journey would have been completed in the

prior year had rail travel been used, the travel expense is chargeable

to the fiscal year in which the travel began. 30 Comp. Gen. 147

(1950).

Other cases involving obligations for travel expenses are: 16 Comp.

Gen. 926 (1937); 16 Comp. Gen. 858 (1937); 5 Comp. Gen. 1

(1925); 26 Comp. Dec. 86 (1919); B-134099, December 13, 1957;

Page 7-M GAO/OGC-92.13 Appropriations L&w-vo]o II

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Obligation of Appropriations

A-30477, April 20, 1939; A-75086, July 29, 1936; A-69370, April 10,

1936.

f. State Department: Travel By virtue of 22 U.S.C. $2677, appropriations available to the State

Outside Continental United Department for travel and transportation outside the continental

States United States “shall be available for such expenses when any part of

such travel or transportation begins in one fd year pursuant to

travel orders issued in that year, notwithstanding the fact that such

travel or transportation may not be completed during that same f~cd

year.” This provision appeared in appropriation acts starting in 1948

and was subsequently made permanent and codified. It has the effect

of excluding State Department travel or transportation outside the

continental United States from some of the earlier decisions. The

authority is permissive rather than mandatory. 42 Comp. Gen. 699

(1963).

Section 2677 applies to temporary duty travel as well as travel

incident to change of duty station. 71 Cornp. Gen. _ (B-246702,

August 6, 1992). In either case, expenses are chargeable to the year in

which the travel is ordered as long as some travel-related expense is

also incurred in that year, even though the physical travel may not

begin until the following year. Id. Travel-related expenses in this

context include miscellaneous ficidental expenses such as

inoculations and passports aS long as they are not incurred at a time

so far removed from the actual travel as to question their legitimacy

as incident to the travel. 30 Comp. Gen, 25 (1950). The statute also

permits charging the prior year for expenses incurred under amended

travel orders issued in the subsequent f~cal year as long as some part

of the travel or transportation began in the prior f~cal year. 29 Comp.

Gen. 142 (1949).

The statute does not permit retroactive charging of an expired

appropriation. Thus, the Comptroller General found it improper to

issue.a travel authorization in one fiscal year designating the

succeeding fiscal year as the appropriation to be charged, and then, at

the start of the succeeding f~cal year, cancel the authorization and

replace it with a new authorization retroactively designating the prior

year. 42 Comp. Gen. 699 (1963).

g. Employee A government employee transferred to a new duty station is entitled to

Transfer/Relocation Costs various allowances, primarily travel expenses of the employee and his

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Obl@tion of Appropriation

or her immediate family, and transportation and temporay storage of

household goods. 5 US.C. $5724. In addition, legislation enacted in

1967, now found at 5 U.S.C. $ 5724a, authorized several new @pes of

relocation expenses for transferred employees. Spec~lcaUy, they are:

(1) per diem allowance for employee’s immediate family en route

between old and new duty station; (2) expenses of one house-hunting

trip to new duty station; (3) temporary quarters allowance incident to

relocation; (4) certain expenses of real estate transactions incurred as

a result of the transfer; and (5) a miscellaneous expense allowance.

The leading case on the obligation of employee transfer expenses is

64 Comp. Gen. 45 (1984). The rule is that “for all [reimbumable]

travel and transportation expenses of a transferred employee, the

agency should record the obligation against the appropriation current

when the employee is issued travel orders.” Id. at 48. This treatment

applies to expenses stemming from employe=transfers; it does not

apply to expenses stemmin g from tempormy duty. 70 Comp. Gen.

469 (1991).

The rule of 64 Comp. Gen. 45 applies to obligations for extensions of

temporary quarters subsistence expenses–the obligation is

chargeable to the year in which the transfer order was issued, 64

Comp. Gen. 901 (1985). It also applies to dislocation allowances

payable to members of the armed services incident to a permanent

change of station move. 67 Comp. Gen. 474 (1988).

Agencies have discretionary authority under 5 U.S.C. $ 5724cto

contract with private fms for arranging the purchase of a transferred

employee’s old residence. Since this service is wholly discretional

and in no way an “entitlement,” the agency’s obligation to a relocation

firm stems from its contract with the fm, not from the employee’s

transfer. Thus, the obligation under one of these arrangements occurs

when a purchase order under the contract is awarded. 66 Comp. Gen.

554 (1987). (Since the obligation is evidenced by a written contract, it

would be recorded under subsection (a)(l).)

The decision at 64 Comp. Gen. 45 overruled prior inconsistent

decisions such as 28 Comp. Gen. 337 (1948) (storage) and B-122358,

August 4, 1976 (relocation expenses under 5 U.S.C. $ 5724a). In

assessing the impact of 64 Comp. Gen. 45, however, care must be

taken to determine precisely what has been overruled and what has

not. For example, since 64 Comp. Gen. 45 dealt with reimbursable

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Chapter 7

Obligation of Appropriations

expenses, prior decisions addressing the transportation of household

goods shipped directly by the government presumably remain valid. ]a

Also, 35 Comp. Gen. 183 (1955) should not be regarded as

“overruled,” notwithstanding language to the contrary in 64 Comp.

Gen. 45. There are two reasons for this. First, 35 Comp. Gen. 183 was

not limited to employee transfers, but dealt with travel in other

contexts as well, situations not involved in the 1984 decision. Second,

35 Comp. Gen. 183 states, at page 185:

“It may be stated, however, that we have no objection to recording tentatively as

obligations the estimated cost of transportation to be purchased and reimbursements

therefor to be earned, including reimbursements for transportation of household

effectq within the current f~cal year at the time the travel ordera are actually issued

where it is adnurus ‘ “ tratively determined desirable in order to avoid certain additional

accounting requirements; but all estimated amounts for travel and related expenses

so recorded should be acljusted to acturd obligations periodically. . . .“

This is not very different from the holding of 64 Comp. Gen. 45.

8. Subsection (a)(8): Public Under 31 U.S.C. s 1501(a)(8), a recordable obligation arises when

Utilities there is documentary evidence of “services provided by public

utilities.”l~

Government agencies are not required to enter into contracts with

public utilities when charges are based on rates that are freed by

regulatory bodies. However, contracts may be used if desired by the

utility or the agency. GAO, Policy and Procedures Manual for

Guidance of Federal Agencies, title 7,$ 6.2.C.5 (1990).

If there is a contract, monthly estimates of the cost of services to be

performed, based on past experience, maybe recorded as obligations.

If there is no contract, obligations should be recorded only on the

basis of services actualiy performed. 34 Comp. Gen. 459,462 (1955).

~sIf~e ~ovemment shipsthe god, the obligation occurs when a ~er Pick uP ‘e gpursuant to a government bill of lading. Ifaeparate bills of lading are issued covering different

S%@ents of the 8hiPment, each bill of lading is a separate and distinct obligation. ~, 31

Comp. Gen. 471 (1952).

l~~or @ the 1982 reco~l~tion of Title 31, subsection (a)(7) included public ut~ti~ ~ we~

w employment and travel expenses. The recodifkation logically separated public utilities into a

new subsection since it is unrelated to the other items. Thus, pre-1982 materirda refer to eight

subsections whereas there are now nine.

Page 7-46 GAO/OGC-92-13 APPmPtitiOIIS Law-VOL II
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Obligation of Appropriations

A statute relating to obligations for public utility services is 31 U.S.C.

~ 1308. Under this law, in making payments for telephone services

and for services like gas or electricity where the quantity is based on

metered readings, the entire payment for a billing period which begins

in one fiscal year and ends in another is chargeable to appropriations

current at the end of the billing period. If the charge covers several

fiscal years, 31 U.S.C. S 1308 does not apply. A charge covering

several fiscal years must be prorated so that the charge to any one

f~cal year appropriation will not exceed the cost of service for a

one-year period ending in that fiscal year. 19 Comp. Gen. 365 (1939).

GAO has construed this statute as applicable to teletypewriter services

as well. 34 Comp. Gen. 414 (1955).

The General Services Administration is authorized to enter into

contracts for public utility services for periods not exceeding 10

years. 40 U.S.C. $ 481(a)(3). A contract for the procurement of

telephone equipment and related services has been held subject to this

provision even where the provider was not a “traditional” form of

public utility. 62 Comp. Gen. 569 (1983). Noting that the concept of

what constitutes “public utility service” is flexible, the decision

emphasized that the nature of the product or service provided rather

than the nature of the provider should govern for purposes of 40 U.S.C.

$ 481(a)(3). 62 Comp. Gen. at 575. The decision also concluded that

GSA is not required to obligate the total estimated cost of a multi-year

contract under 40 U.S.C. $ 481(a)(3), but is required to obligate only

its annual costs. Id. at 572, 576.

.

9. Subsection (a)(g): Wer ‘l%efina lstandar dforrecordin gobligations, 31 U.S.C. s 1501(a)(9), is

Legal Liabilities documentary evidence of any “other legal liability of the Government

against an available appropriation or fund.”

This is sort of a catch-all category designed to pick up valid

obligations which are not covered by subsections (a)(1) through

(a)(8). 34 Comp. Gen. 418,424 (1955).

Thus far, the decisions provide very little guidance on the types of

situations that might be covered by subsection (a)(9). The few

decisions that mention subsection (a)(9) generally cite it in

conjunction with one of the other subsections and stop short of a

definitive statement as to its independent applicability. See, ~, 54

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Comp. Gen. 962 (1975) (impoundment litigation); B-192511,

February 5, 1979 (severance pay pIan under 22 u.S.C, $ 3968).

Another case, although not specifically citing subsection (a)(9),

pointed out a situation that would seemingly qualify under that

subsection: estimates of municipal tax liabilities on United States

property located in foreign countries, based on tax bills received in

prior years. 35 Comp. Gen.”319 (1955).

Thus, subsection (a)(9) must be applied on a case-by-case basis. If a

given item is a legal liability of the United States, if appropriations are

legally available for the item in terms of purpose and time, and if the

item does not fit under any of the other eight subsections, then

subsection (a)(9) should be considered.

C. Contingent A “contingent liability” is a potential liabili~ which may become an

Liabilities actual liability if some particular event happens or does not happen. A

more formal definition is:

“An existing condition, situation, or set of circumstances involving uncertainty as to a

possible loss to an agency that wifl ultimately be resolved when one or more future

events occur or fail to occur.”zo

If and when the contingency materializes, the liabiIity ripens into a

recordable obligation. GAO, Policy and Procedures Manual for

Guidance of Federal Agencies, title 7, $ 3.4.C. See also, ~, 62

Comp. Gen. 143, 145 (1983).

The contingent liability poses somewhat of a fiscal dilemma. On the

one hand, it is by definition not sufficiently definite or certain to

support the formal recording of an obligation. Yet on the other hand,

sound financial management, as well as Antideficiency Act

considerations, dictates that it somehow be recognized. The middle

ground between recording an obligation and doing nothing is the

“administrative reservation” or “commitment” of funds.z’ Reserves

for contingencies are recognized in both the Antideficiency Act (31

U.S.C. $ 1512(c)) and the Impoundment Control Act (2 U.S.C.

s 684(b)). Also, a contingent liability which is less than an obligation

20f.AO Gloww ~fTerm used in the Federal Budget process, p~-81-~7. at 86.

21~ee ~ GAO-ppM $ 3,4,E; B-2~820], April 15, 1991 (non-decis}on ‘etter).

Page 7-48 GAO/OGC-9Z-13 Appropriations Law-Vol. 11
Chapter7

Obligation of Appropriations

but nevertheless sufficiently important to warrant recognition should

be reflected in a footnote to pertinent financial statements. See 37

Comp. Gen. 691,692 (1958); see also 62 Comp. Gen. 143, 146

(1983).

The treatment of contingent liabilities is largely a matter of sound

judgment. “No hard and fast rule can be laid down as to the

circumstances that would require disclosure. Judgment would have to

be exercised with respect to the possible financial implications.” 37

Comp. Gen. at 694. The general question to ask in this context is

whether a given situation is sufficiently probable to justify recognition

or is iittle more than a mere possibility. Some guidance maybe found

in GAO’S Accounting Principles and Standards,zz and in 37 Comp. Gen.

691.

One example of a contingent liability which should be recognized is a

pending claim under the “changed conditions” clause of a contract.

37 Comp. Gen. 691 (1958). It is not a recordable obligation until

a@dicated and allowed. Another is an authorized indemnification

provision limited to appropriations available at the time of a loss.

54 Comp. Gen. 824, 826–27 (1975), overruling in part 42 Comp.

Gen. 708 (1963) to the extent the latter decision held establishment

of a reserve unnecessary.

Termination liability under a renewal option or similar contract is

another type of contingent liability. As a general proposition, “an

amount equal to the maximum contingent liability of the Government

[must be] always available for obligation from appropriations current

at the time the contract is made and at the time renewals thereof are

made.” 37 Comp, Gen. 155, 160 (1957). See also 43 Comp. Gen. 657

(1964); 8 Comp. Gen. 654 (1929). In some circumstances, GAO has

held that termination liability amounts to an actual obligation. 62

Comp. Gen. 143 (1983); B-238581, October 31, 1990.

Obligating funds for potential termination liability can tie up large

sufi for a long period of time. Administrative reservation is also an

imperfect solution because the reserved funds may have to give way

to higher priority items as the fiscal year progresses. Also, reservation

does not preseme the funds beyond their period of availability and has

WGAo, Pohg ad procedure9 Mmud for Guidance of Federd M encies, title 2, Appendix I,

$ C50 (1984).

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to be repeated each fisczd year. Congress in severaI instances has

provided for varying forms of alternative treatment of termination

liability. See 51 Comp. Gen. 598,604 (1972); B-I 74839, March .20,

1984; B-159141, August 18, 1967; B-1 12131, Jtiy 27, 1953.

D. Reporting When 31 U.S.C. $1501 was originally enacted in 1954, it required each

Requirements agency to prepare a report each year on the unliquidated obligations

and unobligated balance for each appropriation or fund under the

agency’s control. The reports were to be submitted to the Senate and

House Appropriations Committees, the (then) Bureau of the Budget,

and GAO. GAO was often asked by the appropriations committees to

review these reports.

After several years of reviewing reports, the appropriations

committees determined that the requirement had served its purpose,

and Congress amended the law in 1959 to revise and relax the

reporting procedures. The current reporting requirements are found

at 31 U.S.C. $$ 1108(c) and 1501(b).

Under 31 U.S.C. $ 1108(c), each agency, when submitting requests for

appropriations to the Office of Management and Budget, must report

that “the statement of obligations submitted with the request contains

obligations consistent with section 1501 of this title.” See 39 Comp.

Gen. 422,425 (1959). Implementing instructions are contained in

OMf3 Circular No. A-11 (Preparation and Submission of Budget

Estimates), $11.7. The reports must be certified by officials

designated by the agency head. The certification must be supported

by adequate records, and the agency must retain the records and

certifications in such form as to facilitate audit and reconciliation.

Officials designated to make the certifications may not redelegate the

responsibility.zs

The conference report on the original enactment of 31 U.S.C. $1501

specified that the officials designated to make the certifications

shoul”d be persons with overall responsibility for the recording of

obligations, and % no event should the designation be below the level

~~smple ~e~fication s~~men~ may be found in OMB CUCUlW No. A-1 1, 611.7, ~d GAO’S

Policy and Procedures Manual for Guidance of Federal Agencies, titie 7, $ 3.8A.

Page 7-50 GAO/OGC-92-13 Appropriations Lsw-VO1. 11
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Obligation of Appropriations

of the chief accounting officer of a mqjor bureau, service, or

constituent organizational unit.”24

The person who makes certifications under 31 U.S.C. $ 1108(c) is not a

“certifying officer” for purposes of personal accountability for the

funds in question. Although he or she may be coincidentally an

“authorized certi@ing officer,” the two functions are legally separate

and distinct. B-197559-O.M., May 13, 1980.

The statute does not require 100 percent verification of urdiquidated

obligations prior to certification. Agencies may use statistical

sampling. B-199967 -O. M., December 3, 1980.

In the case of transfer appropriation accounts under interagency

agreements, the certification official of the spending agency must

make the certifications to the head of the advancing agency and not to

the head of the spending agency. GAO, Poliw and Procedures Manual

for Guidance of Federal Agencies, title7,33.8.A.

Finally, 31 U.S.C. $ 1501(b) provides that any statement of obligations

furnished by any agency to the Congress or to any congressional

committee “shall include only those amounts that are obligations

consistent with subsection (a) of this section. ”

E. Deobligation

●

The definition of the term “deobligation” is a “downward a~ustment

of previously recorded obligations.”25 Deobligations occur for a

variety of reasons. Examples are:

Liquidation in amount less than amount of original obligation. ~,

B-207433, September 16, 1983 (cost underrun); B-183184, May 30,

1975 (agency called for less work than maximum provided under

level-of-effort contract).

Cancellation of projector contract.

Initial obligation determined to be invalid.

24~ R Rep No, 2663, 83d Cong,, 2d ,%s. 18 (1954), quoted in -cidM~agement b ‘he , .

Federal Government, S. Dec. No. 11, 87th Gong., 1st Sess. 88 (1961), and in 50 Comp. Gen.

857,862 (1971).

25GA0, Glossary of Terms Used in the Federal Budget Process, PAD-81-27, at 56.

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● Reduction of previously recorded estimate.

● Correction of bookkeeping errors or duplicate obligations.

In addition, deobligation maybe statutorily required in some

instances. An example is 31 U.S.C. 3 1535(d), requiring deobligation of

appropriations obligated under an Economy Act agreement to the

extent the performing agency has not incurred valid obligations under

the agreement by the end of the fiscal year.

For the most part, there are no special rules relating to deobligation.

Rather, the treatment of deobligations follows logically from the

principles previously discussed in this and preceding chapters. Thus–

“ Funds deobligated within the original period of obligational

availability are once again available for new obligations just as if they

had never been obligated in the first place. Naturally, any new

obligations are subject to the purpose, time, and amount restrictions

governing the source appropriation.

“ Funds deobligated after the expiration of the original period of

obligational availability are not available for new obligations. 64

Comp. Gen. 410 (1985); 52 Comp. Gen. 179 (1972). They maybe

retained as unobligated balances in the expired account until the

account is closed, however, and are available for a~ustments in

accordance with 31 U.S.C. 3 1553(a), as amended by Pub. L. No.

101-510,$1404 (1990).

A proper and urdiquidated obligation should not be deobligated unless

there is some valid reason for doing so. Absent a valid reason, it is

improper to deobligate funds solely to “free them up” for new

obligations. To do so risks violating the Antideficiency Act. For

example, where a government check issued in payment of some valid

obligation cannot be promptly negotiated (if, for example, it is

returned as undeliverable), it is improper to deobligate the funds and

use them for new obligations. 15 Comp. Gen. 489 (1935); A-44024,

September 21, 1942. (The two cited decisions deal with provisions of

law which have since changed, but the thrust of the decisions remains

the same.) The Antideficiency Act violation would occur if the payee

of the original check subsequently shows up and demands payment

but the funds are no longer available because they have been

reobligated and the account contains insufficient funds.

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Under some programs, an agency provides funds to an intermediary

which in turn distributes the funds to members of a class of

beneficiaries. The agency records the obligation when it provides, or

legally commits itself to provide, the funds to the intermediary. It is

undesirable for many reasons to permit the intermediary to hold the

funds indefinite~y prior to reallocation. Unless the program Legislation

provides otherwise, the agency may establish a reasonable cutoff date

at which time unused funds in the hands of the intermediary are

“recaptured” by the agency and deobligated. GAO recommended such

a course of action in 50 Comp. Gen. 857 (1971). If recapture occurs

during the period of availability, the funds maybe reobligated for

program purposes; if it occurs after the period of availability has

ended, the funds expire absent some contrary direction in the

governing legislation. ~.; Dabney v. Reagan,”No. 82 Civ. 2231-CSH

(S.D.N.Y. March 21, 1985).

Congress may occasionally by statute authorize an agency to

reobligate deobligated funds after expiration of the original period of

availability. This is called “deobligation-reobligation” (or

“deob-reob”) authority. Such authority exists only when expressly

granted by statute. Deobligation-reobligation authority generally

contemplates that funds will be deobligated only when the original

obligation ceases to exist and not as a device to effectively augment

the appropriation. See B-173240-0. M., January 23, 1973. Also,

absent statutory authority to the contrary, ‘deob-reob” authority

applies only to obligations and not to expenditures. Thus, repayments

to an appropriation afier expiration of the original period of

obligational availabili~ are not available for reobligation. B-121836,

April 22, 1955.

GAO/OGC-92-13 Appropriations tiW-VOi. II
GAOK)GC-92-13 APProptitiOIUl kw-vo]. II
Chapter 8

Continuing Resolutions

A. Introduction . .............,,,,,,,” ... ..s. ’” ”o” ”” ””oc ” c””””.””” ““. ””- ”” ”- ”O” ”

1. Definition and General Description . . . . . . . . . . . . . . . . . . . . . ................”..”...

2. Use ofAppropriationlVarran@ . . . . . . . . . . . . . . . . . . . . . . .....”............”......

B. RateforOperations . . . . . . . . . . . . . . . . ..”..”.......... ....*..............4.....”.

1. CurrentRate . . . . . . . . . . . . . . . . . . . . . . ...,.............’.... ........”.....’..”

2. Rate Not ExceedingCurrent~te . . . . . . . . . . . . . . . . ..”.”.”””.””..”. ...........”..

3. Spending Pattern UnderContimuing Resolution ............”... ....”.....”..””””.

a. PatternofObligations . . . . . . . . . . . . . . . . . . ..””....”............”....”.......

b. Apportionment . . . . . . . . . . . . . . . . ......”......... ..”OC..IO.--o”.. . . . . . . . . . .

4. Liquidation ofContractAuthority . . . . . . . . . . . . . . . . . . . . . ....................” ...

5. Rate for OperationsExceeds FinalAppropriation . . . ., . . ..””...’” ........”...... ..

C. Projects orActitities . . . . . . . . . . . . . . . . ....,””....””.. .“.............. .....”....

D. R,elationshiptoOtherLe@slation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...............

1. Not OtherwiseProvidedFor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ .“.

2. Status ofBillor BudgetEstimate UsedasReference ..,.,. . . . . . . . . . . . . . . . . . . . . . . . .

3. More RestrictiveAuthority . . . . . . . . . . . . . . . . ..--...........” ..”...”..”.o”oo. “o.

4. LackofAuthorizingLegislation . . . . . . . . . . . . . . . o..””................ ......””’..

E. Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........

1. Duration ofContinuingResolution . . . . . . . . . . . . . . . ............”..“.........”....

2, DurationofAppropriations . . . . . . . . . . . . . . . . . . . . . ..........”.’........”.......

3. Impoundment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....”......... ...............

8-2

8-2

8-6

8-8

8-8

8-10

8-12

8-12

8-14

8-15

8-15

8-17

8-20

8-20

8-20

8-22

8-24

8-28

8-28

8-29

8-30

GAO/OGC-92-1$ APP1’Opr<iOltS~W-VOLII
Chapter8

Continuing Resolutions

A. Introduction

1. Definition and General The term “continuing resolution” may be defined as follows:

Description

“Legislation enacted by Congress to provide budget authority for Federal agencies

and/or specifk activities to continue in operation until the regular appropriations are

enacted. Continuing resolutions are enacted when action on appropriations is not

completed by the beginning of a f~al year.”1

For the most part, continuing resolutions are temporary

appropriation acts. With a few exceptions to be noted later, they are

intended by Congress to be stop-gap measures enacted to keep

existing federal programs functioning after the expiration of previous

budget authority and until regular appropriation acts can be enacted.

Congress resorts to the continuing resolution when there is no regular

appropriation for a program or agency, perhaps because the two

Houses have not yet agreed on common language, because

authorizing legislation has not yet been enacted, or because the

President has vetoed an appropriation act passed by Congress. 58

Comp. Gen. 530,532 (1979). Also, given the size and complexity of

today’s government, the consequent complexity of the budget and

appropriations process, and the occasionally differing policy

objectives of the executive and legislative branches, it has become

increasingly difficult for Congress to enact all of the regular

appropriation acts before the f~cal year ends.

Continuing resolutions are nothing new. We have found

administrative decisions discussing them as far back as the 1880s.Z At

one time, they were called “temporary resolutions.” The term

“continuing resolution” came into widespread use in the early 1960s.s

In the 20 years from FY 1962 to FY 1981,85 percent of the

appropriation bills for federal agencies were enacted after the start of

IGAO, Glossary of Terms Wed in the Federal Budget Process, PAD-81-27 (3d ed. March 1981),

St 44.

24 ~Wence, ~tComp. WC. 116(1883); 3 Lawrence, MComP. Dec. 213 (1882)

~For ~ brief h~~c~ sketch, gee Lib~ of Con@’ess, COfI#e&OIUd Research *rVice! !??@@

Concepts and Terminolo gy: The Appropriations Phase, by Louis Fisher, GGR 74-210, Chapter V

(1974). Fisher identifies what may have been the first continuing resolution, an 1876 resolution

(19 Stat. 65) requested by President Grant. ~. at 31–32.

Page 8-2 GAOKM3C-92-13 Appropriations Law-vol. II
Chapter 8

Contl.nuingltesolutiolls

the fiscal year and thus necessitated continuing resolutions. GAO has

discussed the problems inherent in this situation in several reports:

Funding Gaps Jeopardize Federal Government Operations, PAD-81-31

(March 3, 1981), Continuing Resolutions and an Assessment of

Automatic Funding Approaches, GAO/AFMD-86-16 (January 1986), and

Government Shutdown: Permanent Funding Lapse Legislation

Needed, GAO/GGD-91-76 (June 1991). Funding gaps and the legal

problems they present are discussed separately in Chapter 6.

Continuing resolutions are enacted as joint resolutions making

continuing appropriations for a certain fiscal year. Although enacted

in this form rather than as an “act,” once passed by both Houses of

Congress and approved by the President, a continuing resolution

becomes a public law and has the same force and effect as any other

statute. B-152554, December 15, 1970; Oklahoma v. Weinberger,

360 F. Supp. 724, 726 (W.D. Okla. 1973). Since a continuing

resolution is a form of appropriation act, it often will include the same

types of restrictions and conditions that are commonly found in

regular appropriation acts. ~, B-2106O3, Februa~ 25, 1983 (ship

construction appropriation in continuing resolution making funds

available “only under a firm, f~ed price type contract”). Having said

this, however, it is necessary to note that continuing resolutions, at

least those in what we will call the “traditional form,” differ

considerably from regular appropriation acts.

Continuing resolutions may take different forms. The “traditional”

form, used consistently (with some variation) into the 1980s,

employed essentially standard language and was clearly a temporary

measure. An example of this form is the 1982 continuing resolution,

Pub. L. No. 97-92,95 Stat. 1183 (1981). When enacting continuing

resolutions in this form, there is clear indication that Congress intends

and expects that the normal authorization and appropriation process

will eventually produce appropriation acts which will replace or

terminate the budget authority contained in the resolution. Thus, a

continuing resolution of this type generally provides that funds

appropriated for an activity by the resolution will no longer be

available for obligation if the activity is later funded by a regular

appropriation act, or Congress indicates its intent to end the activity

by enacting an applicable appropriation act without providing for the

activity. 58 Comp, Gen. 530, 532 (1979). Obligations already

incurred under the resolution, however, may be liquidated.

Page 8-3 GAO/OGC-92-13 Appropriations Law-VOL II

,$v&
Chapter S

Qmtinuiag Resolutions

Unlike regular appropriation acts, continuing resolutions in their

traditional form do not usually appropriate specifkd sums of money.

Rather, they usually appropriate “such amounts as maybe necessary”

for continuing projects or activities at a certain “rate for operations.”

The rate for operations may be the amount provided for the activity in

an appropriation act that has passed both Houses but has not become

law; the lower of the amounts provided when each House has passed a

different act; the lower of the amounts provided either in an act which

has passed only one House or in the administration’s budget estimate;

the amount specified in a particular conference report; the lower of

either the amount provided in the budget estimate or the “current

rate”; or simply the current rate. Therefore, in order to determine the

sum of money appropriated for any given activity by this type of

continuing resolution, it is necessary to examine documents other

than the resolution itself. Some continuing resolutions have used a

combination of “formula appropriations” of the types described in

this paragraph and appropriations of specific dollar amounts. An

example is the 1984 continuing resolution, Pub. L. No. 98-107,97

Stat. 733 (1983).

There are times when Congress acknowledges at the outset that it is

not likely to enact one or more regular appropriation acts during the

current fiscal year. See, for example, the 1980 continuing resolution,

Pub. L. No. 96-86,93 Stat. 656 (1979), which provided budget

authority for the legislative branch for the entire f-year.

For a few years in the 1980s, Congress used a ve~ difTerent form of

continuing resolution, simply stringing together the complete texts of

appropriation biIls not yet enacted and enacting them together in a

single “omnibus” package. This approach reached its extreme in the

1988 continuing resolution, Pub. L. No. 100-202,101 Stat. 1329

(1987), which included the complete texts of all 13 of the regular

appropriation bills. This form of continuing resolution differs from the

traditional form in two key respects:

● Unlike the traditional continuing resolution, the “full text” version

amounts to an acknowledgement that no further action on the

unenacted bills will be forthcoming, and consequently provides

funding for the remainder of the f~cal year.

● When the entire text of an appropriation bill is incorporated into a

continuing resolution, the appropriations are in the form of spec~led

dollar amounts, the same as if the individual bill had been enacted.

Pege 8-4 GAo/oGc-9z-ls Appmpriatioae hw-vol. U
Chapter 8

Continuing Resolutions

The “full text” format generally does not raise the same issues of

statutory interpretation that arise under the traditional format.

However, it produces new ones. For example, in a continuing

resolution which consolidates the full texts of what would otherwise

have been several separate appropriation acts, GAO has construed the

term “this act” as referring only to the individual “appropriation act”

in which it appears rather than to the entire continuing resolution.

B-230110, April 11, 1988.

While the omnibus approach of the 1988 resolution may appear

convenient, it generated considerable controversy because, among

other reasons, it is virtually “veto-proof “–the President has little

choice but to sign the bill or bring the entire government to an abrupt

halt.

There was no continuing resolution for fiscal year 1989. AN 13 of the

appropriation bills were enacted on time, for what was reported to be

the first time in 12 years.4 For fiscal year 1990, Congress reverted to

the traditional type of continuing resolution. See Pub. L. No. 101-100,

103 Stat. 638 (1989).

Questions arising under continuing resolutions can be grouped

loosely into two broad categories. First are questions in which the fact

that a continuing resolution is involved is purely incidental, in other

words, questions which could have arisen just as easily under a

regular appropriation act. For example, one of the issues considered

in B-230110, April 11, 1988, was whether certain provisions in the

1988 resolution constituted permanent legislation. Cases in this

category are included with their respective topics throughout this

publication and are not repeated in this chapter.

Second are issues that are unique to continuing resolutions, and these

are the focus of the remainder of this chapter. For the most part, the

material deals with the traditional form of continuing resolution as it

is’this form that uses concepts and language found only in continuing

resolutions.

One point that should emerge from the GAO decisions and opinions is

the central role of legislative intent. To be sure, legislative intent

cannot change the plain meaning of a statute; Congress must enact

4AU Spending Bilk Completed on Time, New York Times, October 2, 1988, at 27.

Page 8-5 GAO/OGC-!?2-13 Appropriations Law-Vol. U

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Chapter S

Oontilluing Reeolutiona

what it intends in order to make it law. However, there are many cases

in which the statutory language alone does not provide a clear answer,

and indications of congressional intent expressed in well-established

methods, viewed in light of the purpose of the continuing resolution,

will tip the balance.

In one case, for example, a continuing resolution provided a

lump-sum appropriation for the National Oceanic and Atmospheric

Administration’s research and facilities account, and provided further

for the transfer of $1.8 million from the Fisheries Loan Fund. The fmt

continuing resolution for 1987 included the transfer provision and

was signed into law on October 1, 1986. The Fisheries Loan Fund was

scheduled to expire at “the close of September 30, 1986.” Under a

strictly technical reading, the $1.8 million ceased to be available once

the clock struck midnight on September 30. However, the

Comptroller General found the transfer provision effective, noting

that a contrary result would “frustrate the obvious intent of

Congress.” B-227658, August 7, 1987.

While many of the continuing resolution provisions to be discussed

will appear highly technical (because they are highly technical), there

is an essential logic to them, evolved over many years, which is more

readily seen from the perspective not of a spec~lc case or problem,

but of the overall goals and objectives of continuing resolutions and

their relationship to the rest of the budget and appropriations

process.

2. Use of Appropriation Funds, including funds appropriated under a continuing resolution,

warrants are drawn from the Treasury by means of an appropriation warran

(’ITS Form 6200).5 A warrant is the official document issued purs~mt

to law by the Secretary of the Treasury that establishes the amount of

money authorized to be withdrawn from the Treasury.e Under 31 U.S.C.

3 3323(a), warrants authorized by law are to be signed by the

Secre~ of the Treasury and countersigned by the Comptroller

General.

%reasury FhllCid hftlrllld, Vol. I, S 2-2040.

%’erms Ueedinthe Federal Budget Process, = note 1, at 81.

Page 8-6 GAOKIGC-92-13 APP~pI’htiOllS ~W-VOl. II
Chapter 8

continuing Resolutions

Requirements relating to Treasury warrants maybe waived. Section

115(a) of the Budget and Accounting Procedures Act of 1950,31

U.S.C. 3 3326(a), states:

‘(a) When the Secretary of the Treasury and. the Comptroller General decide that,

with suf!lcient safeguards, existing procedures maybe changed to simplify, improve,

and economize the control and accounting of pubIic money, they may prescribe joint

regulations for waiving any part of the requirements in effect on September 12, 1950,

that–

“(1) warrants be issued and countersigned for the receipt, retention, and

disbursement of public money and trust funda. . . .“

Under the authority of this section, the Secretary of the Treasury and

the Comptroller General have issued several joint regulations.7

In the specific context of appropriation warrants, the joint regulations

have been used to phase out the countersignature requirement. First,

Department of the Treasury-General Accounting 0ft3ce Joint

Regulation No. 5 (October 18, 1974) waived the requirement for all

appropriations except continuing resolutions. Next, Treasury-GAO

Joint Regulation No. 6 (October 1, 1983) further simplMed the

process by requiring issuance of a warrant and countersignature

under a continuing resolution only once, for the total amount

appropriated, unless a subsequent resolution changed the annual

amount. Finally, Treasury-GAO Joint Regulation No. 7, effective

January 1, 1991, eliminated the countersignature requirement

completely.

7me=W.GA0 Joint Wwom are included as an appendix m ‘n~e 7 of the GAO ‘ou~ ‘d

Procedmes Manual for Guidance of Federal Agenciea. Because of thefrnature, they are not

published in the Federal Register. Some of the earlier ones, but not those noted in the text, were

published in the annuaf “Comp. Gen.” volumes. TitJe 7 of the Policy and Procedures Manuaf is

the or@ GAO reference in which the regulations and amendments can be found together in a

single location.

Page 8-7 GAO/OGC-92-13 Appl’optitiOIW Law-VOL ~
Chapter 8

Continuing Re801utione

B. Rate for

Operations

1. Current Rate The current rate, as that term is used in continuing resolutions, is

equivalent to the total amount of money which was available for

obligation for an activity during the fiscal year immediately prior to

the one for which the continuing resolution is enacted.

The term ‘current rate” is used in continuing resolutions to indicate

the level of spending which Congress desires for a program. For

example, a resolution may appropriate sufficient funds to enable a

program to operate at a rate for operations “not in excess of the

current rate,” or at a rate “not in excess of the lower of the current

rate” or the rate provided in a certain bill. It is possible to read the

term “current rate” as referring to either the amount of money

available for the program in the preceding year, or an amount of

money suftlcient to enable continuation of the program at the level of

the preceding year. The two can be very different.

& a general proposition, GAO regards the term “current rate” as

referring to a sum of money rather than a program level. ~, 58

Comp. Gen. 530,533 (1979); B-194362, May 1, 1979. Thus, when a

continuing resolution appropriates in terms of the current rate, the

amount of money available under the resolution will be limited by that

rate, even though an increase in the minimum wage may force a

reduction in the number of people participating in an employment

program (B-194063, May 4, 1979), or an increase in the mandatory

level of assistance will reduce the number of meals provided under a

meals for the elderly program (B-194362, May 1, 1979).

The term “current rate” refers to the rate of operations carried on

within the appropriation for the prior f~al year. B-152554,

December 6, 1963. The current rate is equivalent to the total

appropriation, or the total funds which were available for obligation,

for an activity during the previous fiscal year. Edwardsv. Bowen, 785

F.2d 1440 (9th Cir. 1986); 64 Comp. Gen. 21 (1984); 58 Comp. Gen.

530,533 (1979); B-194063, May 4, 1979; B-194362, May 1, 1979;

B-164031(1), December 13, 1972. Funds administmtively transferred

from the account during the fiscal year, under authority contained in

substantive legislation, should not be deducted in determining the

current rate. B-197881, April 8, 1980; B-152554, November 4, 1974.

Page 8-8 GAO/OGC-92-13 Appropr&tiona Law-vo]. II
Chapter 8

Continuing Reaolutiona

It follows that funds transferred into the account during the fiscal year

pursuant to statutory authority should be excluded. B-197881,

Apd 8, 1980.

In those instances in which the program in question has been funded

by one-year appropriations in prior years, the current rate is equal to

the total funds appropriated for the program for the previous f~cal

year. ~, 64 Comp. Gen. 21,22 (1984); 58 Comp. Gen. 530 (1979);

B-194362, May 1, 1979. In those instances in which the program has

been funded by multiple-year or no-year appropriations in prior years,

the current rate is equal to the total funds appropriated for the

previous fiscal year plus the total of unobligated budget authority

carried over into that year from prior years. 58 Comp. Gen. 530

(1979); B-152554, October 9, 1970.

One apparent deviation from this calculation of current rate occurred

in 58 Comp. Gen. 530 (1979), a case involving the now obsolete

CETA (Comprehensive Employment and Training Act) program. In

that decision, the Comptroller General, in calculating the current rate

under the 1979 continuing resolution, included funds appropriated in

a 1977 appropriation act and obligated during 1977. Chxiinarily, ordy

funds appropriated by the fiscal year 1978 appropriation act, and

carryover funds unobligated at the beginning of fiscal year 1979,

would have been included in the current rate. However, in this

instance the funds appropriated in 1977 were included because it was

clear from the legislative history of the appropriation act that

Congress intended these funds to be an advance of appropriations for

fiscal year 1978. Accordingly, Congress did not appropriate funds for

this activity in the fiscal year 1978 appropriation act. Thus, in order to

ascertain the actual amount available for the activity for fiscal year

1978, it was necessary to include the advance funding provided by the

1977 appropriation act. The rationale used in this decision would

apply only when it is clear that Congress was providing advance

funding for the reference fiscal year in an earlier year’s appropriation

act.

Where funding for the preceding fiscal year covered only a part of that

year, it maybe appropriate to “annualize” the previous year’s

appropriation in order to determine the current rate. This was the

result in 61 Comp. Gen. 473 (1982), in which then 1981

appropriation for a particular program had been contained in a

supplemental appropriation act and was intended to cover only the

Page 8-9 GAO/OGC-92-19 Appropriations Law-Vol. II
Chapter8

continuing aesolution6

last quarter of the fiscal year. The current rate for purposes of the FY

1982 continuing resolution was four times the FY 1981 figure.

There are exceptions to the rule that “current rate” means a sum of

money rather than a program level. For example, GAO construed the

FY 1980 continuing resolution as appropriating sufficient funds to

support an increased number of Indochinese refugees in view of

explicit statements by both the Appropriations and the Budget

Committees that the resolution was intended to fund the higher

program level. B-197636, February 25, 1980. Also, the legislative

history of the FY 1981 continuing resolution (Pub. L. No. 96-369,94

Stat. 1351) indicated that in some instances “current rate” must be

interpreted so as to avoid reducing existing program levels.

It is always preferable for the exception to be specified in the

resolution itself. Starting with the first continuing resolution for fiscal

year 1983 (Pub. L. No. 97-276, 96 Stat. 1186 (1982)), Congress

began appropriating for the continuation of certain programs “at a

rate to maintain current operating levels.” GAO has construed this

language as meaning sufficient funds to maintain the program in

question at the same operating level as at the end of the immediately

preceding fiscal ~ear. B~20!1676, April 14, 1983; B=f?00!123,

NQvQmPW 161 l~s~ (ncm-decision letter) (inch-ding some discussion

of legislative history).

2. Rate Not Exceeding When a resolution appropriates funds to continue an activity at a rate

Current Rate for operations “not in excess of the current rate,” the amount of

funds appropriated by the resolution is equal to the current rate less

any unobligated balance carried over into the present year.

As discussed in the preceding section, the current rate is equivalent to

the total amount of funds that was available for obligation for a

project or activity in the preceding fiscal year. When the continuing

resolution appropriates funds to continue an activity at a rate for

operations “not in excess of the current rate,” it is the intent of

Congress that the activity have available for obligation in the present

fiscal year no more funds thfi it had available for obligation in the

preceding fiscal year. Therefore, if there is a balance of unobligated

funds which can be carried over into the present f~cal year, this

balance must be deducted from the current rate in determining the

amount of funds appropriated by the continuing resolution. If this

Page 8-10 GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 8

continuing EesolutioM

were not done, the program would be funded at a higher level in the

present year than it was in the preceding year, which is not permitted

by the language of the resolution. ~, 58 Comp. Gen. 530,535

(1979).

For example, suppose the continuing resolution for fwcal year 1992

appropriates stilcient funds to continue an activity at a rate not

exceeding the current rate. The current rate, or the total amount

which was available for obligation in f~cal year 1991, is $1,000,000.

Of this amount, $100,000 remains unobligated at the end of 1991,

and is available for obligation in 1992. If the activity is to operate at a

rate not to exceed the current rate, $1,000,000, then the resolution

can appropriate no more than the difference between the current rate

and the carryover from 1991 to 1992, or $900,000. If the resolution

were interpreted as appropriating the full current rate, then a total of

$1,100,000 would be available for f~cal year 1992, and the activi@

would be able to operate at a rate in excess of the current rate, a

result prohibited by the language of the resolution.

An unobligated balance which does not carryover into the present

f~cal year (the more common situation) does not have to be

deducted. B-152554, November 4, 1974.

A commonly encountered form of continuing resolution formula

appropriation is an amount not in excess of the current rate or the

rate provided in some reference item, whichever is lower. The

reference item may be an unenacted bill, a conference report, the

President’s budget estimate, etc. When the current rate produces the

lower figure-the situation encountered in 58 Comp. Gen. 530–the

above rule applies and an unobligated carryover balance must be

deducted to determine the amount appropriated by the continuing

resolution. However, when the current rate is not the lower of the two

referenced items, the rule does not necessarily apply.

Todlustrate, a continuing resolution appropriated funds for the Office

of Refugee Resettlement at a rate for operations not in excess of the

lower of the current rate or the rate authorized by a bill as passed by

the House of Representatives. The rate under the House-passed bill

was $50 million. The current rate was $77.5 million, of which $39

million remained unobligated at the end of the preceding f~czd year

and was authorized to be carried over into the current f~cal year. If

the continuing resolution had simply specified a rate not in excess of

Page 8-11 GAO/OGC-92-13 Appropriations Law-VoL II
Chapter 8

Continuing Resolutions

the current rate, or if the rate in the House-passed bill had been

greater than the current rate, it would have been necessary to deduct -

the $39 million carryover balance from the $77,5 million current rate

to determine the maximum funding level for the current year. Here,

however, the rate in the House-passed bill was the lower of the two.

Reasoning that the “current rate” already includes an unobligated

carryover balance, if any, whereas the rate in the House-passed bill

did not inciude a prior year’s balance, and supported by the legislative

history of the continuing resolution, the Comptroller General

concluded that the amount available for the current year was the

amount appropriated by the resolution, $50 million, plus the

unobligated carryover balance of $39 million, for a total of $89

million. 64 Comp. Gen. 649 (1985). The decision distinguished 58

Comp. Gen. 530, stating that “the rule with respect to deduction of

unobligated balances in 58 Comp. Gen. 530 is not applicable where

the lower of two referenced rates is not the current rate.” ~. at

652–53. The case went to court, and the Ninth Circuit Court of

Appeals reached the same result. Edwardsv. Bowen, 785 F.2d 1440

(9th Cir. 1986).

In sum, if a continuing resolution appropriates the lower of the

current rate or the rate in some reference item, you compare the two

numbers to determine which is lower before taking any unobligated

carryover balance into account. If the current rate is lower, you then

deduct the carryover balance to determine the funding level under the

continuing resolution. If the rate in the reference item is lower, the

funding level is the reference rate plus the carryover balance unless it

is clear that this is not what was intended.

3. Spending Pattern Under

Continuing Resolution

a. Pattern of Obligations An agency may determine the pattern of its obligations under a

continuing resolution so long as it operates under a plan which will

keep it within the rate for operations limit set by the resolution. If an

agency usually obligates most of its annual budget in the first month

or fwst quarter of the fiscal year, it may continue that pattern under

the resolution. If an agency usually obligates funds uniformly over the

entire year, it will be limited to that pattern under the resolution,

Page 8-12 GAO/OGC-92-13 APP1’0PtitioI18 kw-vol. II
Ch8pter8

OoOtimling Resolutiolla

unless it presents convincing reasons why its pattern must be changed

in the current f~cal year.

Continuing resolutions are often enacted to cover a limited period of

time, such as a month or a calendar quarter. The time limit stated in

the resolution is the maximum period of time during which funds

appropriated by the resolution are available for obligation.

However, this limited period of availability does not affect the amount

of money appropriated by the resolution. The rate for operations

specified in the resolution, whether in terms of an appropriation act

which has not yet become law, a budget estimate, or the current rate,

is an annual amount. The continuing resolution, in general, regardless

of its period of duration, appropriates this full annual amount. See

B-152554, November 4, 1974.

Because the appropriation under i continuing resolution is the full

annual amount, an agency may generally follow any pattern of

obligating funds, so long as it is operating under a plan which will

enable continuation of activities throughout the f~cal year within the

limits of the annual amount appropriated. Thus, under a resolution

with a duration of one month, and which appropriates funds at a rate

for operations not in excess of the current rate, the agency is not

necessarily limited to incurring obligations at the same rate it incurred

them in the corresponding month of the preceding year. B-152554,

December 6, 1963. The same principle applies when the resolution

appropriates funds at a rate to maintain current operating levels.

B-209676, April 14, 1983.

However, the pattern of obligations in prior years does provide a

framework for determining the proper pattern of obligations under

the continuing resolution. For example, if the activity is a formula

grant program in which nearly all appropriated funds are normally

obligated at the beginning of the f~cal year, then the full annual

amount should be made available to the agency under the resolution,

even though the resolution may be in effect for only one month.

However, if the activity is salaries and expenses, in which funds are

normally obligated uniformly throughout the year, then the amount

made available to the agency should be only one-twelfth of the annual

amount under a one-month resolution or one-fourth of the annual

amount under a calendar quarter resolution. B-152554, February 17,

1972.

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continuing Itemlutions

Congress can, of course, alter the pattern of obligations by the

language of the resolution. For example, if the resolution limits

obligations in any calendar quarter to one-fourth of the annual rate,

the agency is limited to that one-fourth rate regardless of its normal

pattern of obligations, B-152554, October 16, 1973. Further, even if

the resolution itseIf does not have such limitations, but the legislative

history clearly shows the intent of Congress that only one-fourth of

the annual rate be obligated each calendar quarter, only this amount

should be made available unless the agency can demonstrate a real

need to exceed that rate. B-152554, November 4, 1974.

b. Apportionment The requirement that appropriations be apportioned by the OffIce of

Management and Budget, imposed by the Antideficiency Act, applies

to funds appropriated by continuing resolution as well as regular

appropriations. See generally OMB Circular No. A-34, Part IV (1985).

Typically, OMB has permitted some continuing resolution funds to be

apportioned automatically. For example, if a given continuing

resolution covers 10 percent of a fiscal year, OMB may permit 10

percent of the appropriation to be apportioned automatically,

meaning that the agency can obligate this amount without seeking a

specific apportionment. Under such an arrangement, if program

requirements produced a need for additional funds, the agency would

have to seek an apportionment from OMB for the larger amount.

Apportionment requirements may vary from year to year because of

differences in duration and other aspects of applicable continuing

resolutions. A device OMB has commonly used to announce its

apportionment requirements for a given fiscal year is an OMB Bulletin

reflecting the particular continuing resolution for that year.

With the change in warrant procedures brought about by the

Treasury-GAO Joint Regulations discussed earlier, the apportionment

procqss plays an even more vital role in controlling an agency’s

pattern of obligations under a continuing resolution.

Page 8-14 GAO/OGC-92-13 Appropriations Law -Vol. II

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Chapter 8

Continuing Resolutions

4. Liquidation of Contract When in the preceding fiscal year Congress has provided an agency

Authority with contract authority, the continuing resolution must be interpreted

as appropriating suftlcient funds to liquidate that authority to the

extent it becomes due during the period covered by the continuing

resolution.

When an activity operates on the basis that in one year Congress

provides contract authority to the agency and in the next year

appropriates funds to liquidate that authority, then a continuing

resolution in the second year must be interpreted as appropriating

stilcient funds to liquidate the outstanding contract authority. The

term “contract authority” means express statutory authority to incur

contractual obligations in advance of appropriations. Thus, there is no

“rate for operations” limitation in connection with the liquidation of

due debts based on vahily executed contracts entered into under

statutory contract authority. In this context, rate for operations

limitations apply only to new contract authority for the current f~cal

year. B-114833, November 12, 1974.

5. Rate for Operations If an agency operating under a continuing resolution incurs

Exceeds Final obligations within the rate for operations limit, but Congress

Appropriation subsequently appropriates a total annual amount less than the amount

of these obligations, the obligations remain valid, B-152554,

February 17, 1972.

For example, a continuing resolution for a period of one month may

have a rate for operations limitation of the current rate. The activity

being funded is a grant program and the agency obligates the full

annual amount during the period of the resolution. Congress then

enacts a regular appropriation act which appropriates for the activity

an amount less than the obligations already incurred by the agency.

Under these circumstances, the obligations incurred by the agency

remain valid obligations of the United States.

Having established that the “excess” obligations remain valid, the

next question is how they are to be paid. At one time, GAO took the

position that an agency finding itself in this situation must not incur

any further obligations and must attempt to negotiate its obligations

downward to come within the amount of the final appropriation.

B-152554, February 17, 1972. If this is not possible, the agency

would have to seek a supplemental or deficiency appropriation. This

GAO/OGC-92-13 Appropriations Law-vol. 11
Chapter 8

Continuing Resolutions

position was based on a provision commonly appearing in continuing

resolutions along the following lines:

“Expenditures made pursuant to this joint resolution shaii be charged to the

applicable appropriation, fund, or authorization whenever a biii in which such

applicable appropriation, fund, or authorization is contained is enacted into iaw.”s

However, the 1972 opinion failed to take into consideration another

provision commonly included in continuing resolutions:

“Appropriations made and authority granted pursuant to this joint resolution shaii

cover all obligations or expenditures incurred for any program, project, or activity

during the period for which funds or authority for such projector activity are

available under this joint resolution.”v

When these two provisions are considered together, it becomes

apparent that the purpose of the first provision is merely to emphasize

that the funds appropriated by the continuing resolution are not in

addition to the funds later provided when the applicable regular

appropriation act is enacted. Accordingly, GAO modified the 1972

opinion and held that funds made available by a continuing resolution

remain available to pay validly incurred obligations which exceed the

amount of the final appropriation. 62 Comp. Gen. 9 (1982). See also

67 Comp. Gen. 474 (1988); B-207281, October 19, 1982.

Thus, obligations under a continuing resolution are treated as follows:

“When an annual appropriation act provides sufficient funding for an appropriation

account to cover obligations previously incurred under the authority of a continuing

resolution, any unpaid obligations are to be charged to and paid from the applicable

account established under the annual appropriation act. Similarly, to the extent the

annual act provides sufficient funding, those obligations which were incurred and

paid during the period of the continuing resolution must be charged to the account

created by the annual appropriation act. On the other hand, to the extent the armd

appropriation act does not provide sufficient funding for the appropriation account to

cover obligations validly incurred under a continuing resolution, the obligations in

excess of the amount provided by the annual act should be charged to and paid from

the appropriation account established under authority of the continuing resolution.

%&, Pub. L. No. iO1-100, 5104, 103 Stat. 638,640 (1989) (1990 continuing resolution).

Comparable provisions have been included in continuing resolutions for over a century. See, for

example, the FY 1883 contimdng resolution (22 Stat. 384) discussed in 3 Lawrence, ilrst Comp.

Dec. 2i3 (1882).

‘~, Pub. L. No. 101-100, supra note 8,5103.

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Chapter 8

Colttimling Resolutions

[Footnote omitted.] Thus the funds made available by the resolution muat remain

available to pay these obligation.”

62 Comp. Gen. 9, 11–12 (1982). However, to comply with the intent

of the lower appropriation, OMB requires that agencies “reduce

obligations in the most cost-effective way and to the maximum extent

possible.” OMB Circular No. A-34, $22.1. Thus, as GAO had advised in

1972, agencies are still required to make their best efforts to remain

within the amount of the final appropriation. The change recognized

in 62 Comp. Gen. 9 is that, to the extent an agency is unable to do so,

the appropriation made by the continuing resolution remains available

to liquidate the “excess” obligations.

C. Projects or “Projects or activities” as used in continuing resolutions may have

Activities two meanings. When dete rmining which government programs are

covered by the resolution, and the rate for operations limit, the term

“project or activity” refers to the total appropriation rather than to

speciiic activities. When determining whether an activity was

authorized or carried out in the preceding year, the term “projector

activity” may refer to the specitlc activity. The following paragraphs

will elaborate.

The term “projects or activities” is used in two contexts in continuing

resolutions. First, it is used in the appropriating language to indicate

which government programs are to be fimded and at what rate. Thus a

resolution might appropriate sufficient funds to continue “projects or

activities provided for” in a certain appropriation bill “to the extent

and in the manner” provided in the bill. Occasionally Congress will

use only the term “activities” by appropriating sufficient funds “for

continuing the following activities, but at a rate for operations not in

excess of the current rate.”

When used in this context, “projects or activities” or simply

“activities” does not refer to specific items contained as activities in

the ”administration’s budget submission or in a committee report.

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continuing Resolutioru

Rather, the term refers to the appropriation for the preceding fiscal

year. B-204449, November 18, 1981.’0 Thus, ifa resolution

appropriates funds to continue “projects or activities” under a certain

authorizing act at a rate for operations not exceeding the current rate,

the agency is operating within the limits of the resolution so long as

the total of obligations under the appropriation does not exceed the

current rate. WMin the appropriation, an agency may fund a

particular activity at a higher rate than that activity was funded in the

previous year and still not violate the current rate limitation, assuming

of course that the resolution itself does not provide to the contrary.

An exception to the interpretation that “projects or activities” refers

to the appropriation in existence in the preceding fd year occurred

in 58 Comp. Gen. 530 (1979). In prior years, Comprehensive

Employment and Training Act programs had been funded in two

separate appropriations, Employment and Training Assistance and

Tempora~ Employment Assistance. The individual programs under

the two appropriations differed only in that the number of jobs

provided under Temporary Employment Assistance depended on the

condition of the national economy.

Concurrently with the enactment of the 1979 continuing resolution,

Congress amended the CETA authorizing legislation so that certain

programs previously operating under the Temporary Employment

Assistance appropriation were to operate in f~cal year 1980 under the

Employment and Training Asistance appropriation. Under these

circumstances, if the phrase ‘activities under the Comprehensive

Employment and Training Act” in the continuing resolution had been

interpreted as referring to the two separate appropriations made in

the preceding year, and the current rates calculated accordingly, there

would have been insuff~cient funds available for the now increased

programs under the Employment and Training Assistance

appropriation, and a surplus of funds available for the decreased

programs under the Temporaxy Employment Assistance

appropriation. To avoid this result, the Comptroller General

1~~ ~~ition ~fotiow~ from decisions such w B-162447, Mmch 8) 1971, red h

conjunction with decisions on the availability of hunpsum appropriations. Of cou.me, if the

appropriation for the preceding f~cal year was a line-item appropriation, then the scope of

“project oractivi~” will be limited accordingly. 8ee 66 Comp. Gen. 484 (1987) (Speciaf

Defense Acquisition Fund, a revolving fund made avaifable by annual “limitation on obligations”

provisions, held a “projector activity” for purposes of appropriating language in a conthming

resolution).

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Chapter 8

Continuing Reaolutionn

interpreted the 1979 continuing resolution as appropriating a single

lump-sum amount for all CETA programs, based on the combined

current rates of the two appropriation accounts for the previous year.

See 58 Comp. Gen. at 535–36.

The term “projects or activities” has also been used in continuing

resolutions to prohibit the use of funds to start new programs. Thus,

many resolutions have contained a section stating that no funds made

available under the resolution shall be available to initiate or resume

any project or activity which was not conducted during the preceding

fiscal year. When used in this context, the term “projects or activities”

refers to the individual program rather than the total appropriation.

See 52 Comp. Gen. 270 (1972); 35 Comp. Gem 156 (1955).

One exception to this interpretation occurred in B-1 78131, March 8,

1973. In that instance, in the previous f~cal year funds were available

generally for construction of buildings, including plans and

specillcations. However, a specitlc construction project was not

actually under way during the previous year. Nonetheless it was

decided that, because funds were available generally for construction

in the previous year, this specific project was not a new projector

activity and thus could be funded under the continuing resolution.]]

In more recent years, Congress has resolved the differing

interpretations of “projector activity” by altering the language of the

new program limitation. Rather than limiting funds to programs which

were actually conducted in the preceding year, the more recent

resolutions prohibit use of funds appropriated by the resolution for

“any project or activity for which appropriations, funds, or other

authority were not available” during”the preceding f~cal year.lz Thus,

if an agency had authori~ and sufficient funds to carry out a

particular program in the preceding year, that program is not anew

project or activity regardless of whether it was actually operating in

the preceding year.

A variation occurred in 60 Comp. Gen. 263 (1981). A provision of the

Higher Education Act authorized loans to institutions of higher

1 Icf. 4 ~Wence, fimt Comp. Dec. 116 (1883), which concluded that obligatio~ made under a

co~tinuing resolution for certain building repaira not then authorized violated the Antideficiency

Act.

*%ee, for example, Pub. L. No. 101- 100,$ 101(c), 103 Stat. 638 (1989) (1990 continuing

resolution).

Page 8-19 GAOKIGC-92-13 Appropriations Law-Vol. II
Chapter 8

continuing lzeeolutiona

education from a revolving fund, not to exceed limitations specf~ed in

appropriation acts. Congress had not released money from the loan

fund since 1978. The FY 1981 continuing resolution provided funds to

the Department of Education based on its regular FY 1981

appropriation bill as passed by the House of Representatives. The

House-passed version included $25 million for the higher education

loans. Since the continuing resolution did not include a general

prohibition against using funds for projects not funded during the

preceding fiscal year, the $25 million from the loan fund was available

under the continuing resolution, notwithstanding that the program

had not been funded in the preceding year.

D. Relationship to

Other Legislation

1. Not Otherwise Provided cOntinU@ resolutions often appropriate funds to continue projec~

For “not otherwise provided for.” This language limits funding to those

programs which are not funded by any other appropriation act.

Programs which received funds under another appropriation act are

not covered by the resolution even though the authorizing legislation

which created the program is mentioned specitlcally in the continuing

resolution. See B-183433, March 28, 1979. For example, if a

resolution appropriates funds to continue activities under the Social

Security Act, and a specific program under the Social Security Act has

already been funded in a regular appropriation act, the resolution

does not appropriate any additional funds for that program.

2. Status of Bill or Budget When a continuing resolution appropriates funds at a rate for

Estimate Used as operations specified in a certain bill or in the administration’s budget

Reference estimate, the status of the bill or estimate on the date the resolution

passes is controlling, unless the resolution specfles some other

reference date.

A continuing resolution will often provide funds to continue activities

at a rate provided in a certain bill that has passed one or both Houses

of Congress, or at the rate provided in the administration’s budget

estimate. In such instances, the resolution is referring to the status of

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C!tmtlnuing Bssolutiom

the bill or budget estimate on the date the resolution became law.

B-164031(2).17, December 5, 1975; B-152098, January 30, 1970.

For example, the resolution may provide that activities are to be

continued at the current rate or at the rate provided in the budget

estimate, whichever is lower. The budget estimate referred to is the

one in existence at the time the resolution is enacted, and the rate for

operations cannot be increased by a subsequent upward revision of

the budget estimate. B-164031(2).17, December 5, 1975.

Similarly, ifa resolution provides that activities are to continue at the

rate provided in a certain appropriation bill, the resolution is referring

to the status of the bill on the date the resolution is enacted. A later

veto of the bill by the President would not affect the continuation of

programs under the resolution. B-152098, January 15, 1973.

Where a continuing resolution provides funds based on a reference

bill, this includes restrictions or limitations contained in the reference

bill, as well as the amounts appropriated, unless the continuing

resolution provides otherwise. 33 Comp. Gen. 20 (B-116069, July 10,

1953);la B-199966, September 10, 1980. In National Treasury

Employees Union v. DeVine, 733 F.2d 114 (D.C. Cir. 1984), the court

construed a provision in a reference bill prohibiting the

implementation of certain regulations, accepting without question the

restriction as having been “enacted into law” by a continuing

resolution which provided funds “to the extent and in the manner

provided for” in the reference bill. See also Connecticut v. Schweiker,

684 F.2d 979 (D.C. Cir. 1982), cert. denied, 459 U.S. 1207.

Obviously, the same result applies under a “full text” continuing

resolution. B-221694, April 8, 1986.

A provision in a continuing resolution using a reference bill may

incorporate legislative history, in which event the specified item of

legislative history will determine the controlling version of the

reference bill. For example, an issue in American Federation of

Government Employees v. DeVine, 525 F. Supp. 250 (D.D.C. 1981),

was whether the 1982 continuing resolution prohibited the Office of

Personnel Management from funding coverage of therapeutic

abortions in government health plans. The resolution funded

employee health benefits “under the authority and conditions set forth

Iwo decbio~ ~g~ on the -e p~e, hence the variation incitation fo~at.

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continuing Iteaolutiona

in H.R. 4121 as reported to the Senate on September 22, 1981.” An

earlier version of H.R. 4121 had included a provision barrin g the

funding of therapeutic abortions. However, the bill as reported to the

full Senate by the Appropriations Committee on September 22,1981,

dropped the provision. Accordingly, the continuing resolution could

not form the basis for refusing to fund therapeutic abortions in the

plaintiff’s 1982 health plan.

It is *O not uncommon for a continuing resolution to appropriate

funds as provided in a particular reference bilI at a rate for operations

provided for in the conference report on the reference bill. At a

minimum, this will include items on which the House and Senate

conferees agreed, as reflected in the conference report. If the

resolution also incorporates the “joint explanatory statement” portion

of the conference report, then it will enact those amendments

reported in “technical disagreement” as well. See B-221694, April 8,

1986; B-205523, November 18, 1981; B-204449, November 18,

1981.

3. More Restrictive The “more restrictive authority,” as that term is used in continuing

Authority resolutions, is the version of a bill which gives an agency less

discretion in obligating and disbursing funds under a certain program.

Continuing resolutions will often appropriate funds to continue

projects or activities at the rate provided in either the version of an

appropriation act that has passed the House or the version that has

passed the Senate, whichever is lower “or under the more restrictive

authority.” Under this kmguage, the version of the bill which

appropriates the lesser amount of money for an activity will be

controlling. If both versions of the bill appropriate the same amount,

the version which gives the agency less discretion in obligating and

disbursing funds under a program is the “more restrictive authority”

and will be the reference for continuing the program under the

resolution. B-210922, March 30, 1984; B-152098, March 26, 1973;

B-152554, December 15, 1970.

However, this provision may not be used to amend or nullify a

mandatory provision of prior permanent law. To illustrate, the Federal

Housing Administration was required by a provision of permanent law

to appoint an Assistant Commissioner to perform certain functions.

The position subsequently became controversial. For the first month

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Contlmlillg Resolutions

of fiscal year 1954, the agency operated under a continuing resolution

which included the “more restrictive authority” provision. Language

abolishing the position had been contained in one version of the

reference bill, but not both. The bill, when subsequently enacted,

abolished the position.

Under a strict application of the “more restrictive authority”

provision, it could be argued that there was no authority to continue

the employment of the Assistant Commissioner during the month

covered by the continuing resolution. Noting that “laws are to be

given a sensible construction where a literal application thereof would

lead to u@st or absurd consequences, which should be avoided if a

reasonable application is consistent with the legislative purpose,” the

Comptroller General held that the Assistant Commissioner could be

paid his salary for the month in question. B-116566, September 14,

1953. The decision concluded:

“[Manifestly the [more restrictive authority] language. . . was not designed to

amend or nullify prior permanent law which theretofore required, or might thereafter

require, the continuance of a spec~lc project or activity during July 1953. . . .

. . . .

“

. . . Accordingly, it is concluded that the words ‘the lesser amount or the more

restrictive authority’ as used in [the continuing resolution] had reference to such

funds and authority as theretofore were provided in appropriations for [the preceding

f~cal year], and which might be changed, enlarged or restricted from year to year.”

In addition, continuing resolutions frequently provide that a provision

“which by its terms is applicable to more than one appropriation” and

which was not included in the applicable appropriation act for the

preceding fiscal year, will not be applicable to funds or authority

under the resolution unless it was included in identical form in the

relevant appropriation bill as passed by both the House and the

Senate. Thus, in 52 Comp. Gen. 71 (1972), a provision in the House

version of the 1973 Labor Department appropriation act prohibited

the use of “funds appropriated by this Act” for Occupational Safely

and Health Act inspections of firms employing 25 persons or less. The

Senate version contained the identical version except that”1 5“ was

substituted for “25.” The continuing resolution for that year

contained both the “more restrictive authority” and the “applicable to

more than one appropriation” provisions. The Comptroller General

concluded that, even though the House provision was more

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Chapter 8

Contilmlng Resolutions

restrictive, the OSHA provision did not apply to funds under the

continuing resolution since it had not been contained in the 1972

appropriation act and by its terms it was applicable to more than one

appropriation (i.e., it applied to the entire appropriation act). See also

B-142011, August 6, 1969.

For purposes of the “applicable to more than one appropriation”

provision, GAO has construed the “applicable appropriation act for the

preceding fiscal year” as meaning the regular appropriation act for

the preceding year and not a supplemental. B-210922, March 30,

1984. (The cited decision also illustrates some of the complexities

encountered when the appropriation act for the preceding year was

itself a continuing resolution.)

4. Lack of Authorizing In order for a government agency to carqy out a program, the

Legislation program must first be authorized by law and then funded, usually by

means of regular appropriations. This section deals with the

relationship of continuing resolutions to programs whose

authorization has expired or is about to expire. The common issue is

the extent to which a continuing resolution provides authori@ to

continue the program after expiration of the underlying authorization.

As the following discussion will reveal, there are no easy answers. The

cases frequently involve a complex interrelationship of various

legislative actions (or inactions), and are not susceptible to any

meaningful formulation of simple rules. For the most part, the answer

is primarily a question of intent, circumscribed of course by statutory

language and aided by various rules of statutory construction.

We start with a fairly straightforward case. Toward the end of FY

1984, Congress was considering legislation (S.2456) to establish a

commission to study the Ukrainian famine of 1932–33. The bill

passed the Senate but was not enacted into law before the end of the

f~cal.year. The FY 1985 continuing resolution provided that “[t]here

are hereby appropriated $400,000 to carry out the provisions of

S.2456, as passed by the Senate on September 21, 1984.”14 If this

provision were not construed as authorizing the establishment and

operation of the coremission as well as the appropriation of funds, it

would have been absolutely meaningless. Accordingly, GAO concluded

14~b. L, N~. 98.473,$136,98 Stat. 1837, 1973 (1984)

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C-ontilmingltesolutionm

that the appropriation incorporated the substantive authority of

S.2456. B-219727, July 30, 1985. The result was supported by clear

and explicit legislative history.

In a 1975 case, GAO held that the specif3c inclusion of a program in a

continuing resolution will provide both authorization and funding to

continue the program despite the expiration of the appropriation

authorization legislation. Thus, for example, if the continuing

resolution specifically states that the School Breakfast Program is to

be continued under the resolution, the program maybe continued

although funding authorization legislation for the program expires

prior to or during the period the resolution is in effect. 55 Comp. Gen.

289 (1975). The same result would follow if the intent to continue the

program was made particularly clear in legislative history. 65 Comp.

Gen. 318,320-21 (1986).

The result in 55 Comp. Gen. 289 flows from two concepts. First, the

continuing resolution, as the later enactment, is the more recent

expression of congressional intent. Second, if Congress can

appropriate funds in excess of a specific ceiling in authorizing

legislation, which it can, then it should be able to appropriate funds to

continue a program whose funding authorization is about to expire, at

least where the authorization of appropriations is not a legal

prerequisite to the appropriation itself.

However, the “rule” of 55 Comp. Gen. 289 is not an absolute and the

result in any given case will depend on several variables. Although not

spelled out as such in any of the decisions, the variables may include:

the degree of specificity in the continuing resolution; the apparent

intent of Congress with respect to the expired program; whether what

has expired is an authorization of appropriations or the underlying

program authority itself; and the duration of the continuing resolution

(short-term vs. full fiscal year).

In one case, for example, “all authority” under the Manpower

Development and Training Act terminated on June 30, 1973. The

program was not specifkally provided for in the 1974 continuing

resolution, and the authority in fact was not reestablished until

enactment of the Comprehensive Employment and Training Act six

months later. Under these circumstances, the Claims Court held that,

in the absence of express language in the continuing resolution or

elsewhere, contracts entered into during the gap between expiration

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otmtht?lillg EewlutionY

of the MDTA and enactment of CETA were without legal authority and

did not bind the government. Consortium Venture Corp. v. United

States, 5 Cl. Ct. 47 (1984), aff’d mem., 765 F.2d 163 (Fed. Cir.

1985).

In another case, recent Defense Department authorization acts,

including the one for FY 1985, had authorized a test program

involving payment of a price differential to “labor surplus area”

contractors. The test program amounted to an exemption from

rmanent legislation prohibiting the payment of such differentials.

%e 1985 provision expired, of course, at the end of n 1985. The

1986 continuing resolution made no specific provision for the test

program nor was there any evidence of congressional intent to

continue the test program under the resolution. (This lack of intent

was confirmed when the 1986 authorization act was subsequently

enacted without the test program provision.) GAO found that the

Defense Logistics Agency’s failure to apply the price differential in

evaluating bids on a contract awarded under the continuing resolution

(even though the differential had been included in the solicitation

issued prior to the close of FY 1985) was not legally objectionable. 65

Comp. Gen. 318 (1986).

A more diftlcult case was presented in B-207186, February 10, 1989.

Congress enacted two pieces of legislation on December 22,1987.

One was a temporary extension of the Solar Bank, which had been

scheduled to go out of existence on September 30, 1987. Congress

had enacted several temporary extensions whiie it was considering

reauthorization, the one in question extending the Bank’s life to

March 15, 1988. The second piece of legislation was the final

continuing resolution for 1988 which funded the government for the

remainder of the fiscal year. The resolution included a specific

appropriation of $1.5 million for the Solar Bank, with a two-year

period of availability.

If the concept of 55 Comp. Gen. 289 were applied, the result would

have been that the specific appropriation in the continuing resolution,

in effect, reauthorized the Solar Bank as well. However, the “later

enactment of Congress” concept has little relevance when both laws

are enacted on the same day. In addition, in contrast to 55 Comp.

Gen. 289, there was no indication of congressional intent to continue

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continuing Resolution

the Solar Bank beyond the March 1988 expiration date. Therefore,

GAO distinguished prior cases, found that the two pieces of

legislation could be reconciled, and concluded that the resolution

merely appropriated funds for the Bank to use during the remainder

of its existence.

Another case involving a sunset provision is 71 Comp. Gen. 378

(1992). The legislation establishing the United States Commission on

Civil Rights provided for the Commission to terminate on September

30, 1991. During f~cd year 1991, Congress was working on the

Commission’s reauthorization and its regular FY 1992 appropriation.

Although both bills passed both Houses of Congress, neither was

enacted into law by September 30. The f~ continuing resolution for

FY 1992, with a cutoff date of October 29, 1991, expressly provided

funds for activities included in the Commission’s yet-unenacted 1992

appropriations bill. It was clear from all of this that Congress intended

the Commission to continue operating beyond September 30. Thus,

the continuing resolution effectively suspended the sunset date and

authorized the Commission to operate until October 28, 1991, when

the regular 1992 appropriation act was enacted, at which time the

regular appropriation provided similar authority until November 26,

when the reauthorization was enacted.

Appropriation bills sometimes contain provisions making the

availability of the appropriations contingent upon the enactment of

additional authorizing legislation. If a continuing resolution used a bill

with such a provision as a reference, and if the authorizing legislation

was not enacted, the amount contained in the appropriation bill, and

therefore the amount appropriated by the continuing resolution,

would be zero. To avoid this possibility, a continuing resolution may

contain a provision suspending the effectiveness of such

“contingency” provisions for the life of the resolution. ’G Such a

suspension provision will be applicable only until the referenced

appropriation bill is enacted into law. 55 Comp. Gen. 289,294

(1975).

]5GA0 had~~pp]jed w concept of 55 Comp. Gen. 289 in 65 comP. Qn. 524 (1986)!

holding that a spedllc provision in a regular appropriation act permitted the continuation of an

activity whose organic authority had expired at the end of the preceding fwal year. See also

B-164031(3), January 3, 1973.

16~, Pub. L. No. 102-109,$109, 105 Stat. 551,553 (1992 continuing resolution).

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Conttnulng Resolutions

E. Duration

1. Duration of Continuing Continuing resolutions generally provide that the budget authority

Resolution provided for an activity by the resolution shall remain available until

(a) enactment into law of a regular appropriation for the activity,

(b) enactment of the applicable appropriation by both Houses of

Congress without provision for the activity, or (c)a freed cutoff date,

whichever occurs fust.17 Once either of the fti two conditions

occurs, or the cutoff date passes, funds appropriated by the resolution

are no longer available for obligation and new obligations maybe

incurred only if a regular appropriation is made or if the termination

date of the resolution is extended.

The period of availability of funds under a continuing resolution can

be extended by Congress by amending the f~ed cutoff date stated in

the resolution. B-165731(1), November 10, 1971; B-152098,

January 30, 1970. The extension may run beyond the session of

Congress in which it is enacted. B-152554, December 15, 1970.

Thus, some fiscal years have seen a series of continuing resolutions,

informally designated “fwst, “ “second,” etc., up to “final.” This

happens as Congress extends the freed cutoff date for short time

periods until either all the regular appropriation acts are enacted or

Congress determines that some or all of the remaining bills will not be

enacted individually, in which event relevant portions of the resolution

will continue in effect for the remainder of the fiscal year.

The second condition of the standard duration provision-enactment

of the appropriation by both Houses without provision for the

activity-will be considered to have occurred only when it is clear that

Congress intended to terminate the activity. Thus, in B-164031(1),

March 14, 1974, although regular and supplemental appropriation

acts had been enacted without provision for a program, the

Comptroller General decided that funds for the program were still

available under the continuing resolution. In this case, the legislative

history indicated that in enacting the regular appropriation act,

Congress was providing funding for only some of the programs

normally funded by this act and was deferring consideration of other

17=, Pub. L. No. 102-109,$106,105 Stat. at 553.

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Chapter 8

Continuing ReaolutJons

programs, including the one in question. Therefore, the second

condition was not applicable. Moreover, because supplemental

appropriations are intended to provide funding only for new or

additional needs, omission of the program from the supplemental did

not trigger the second cutoff provision.

As discussed previously, once the applicable appropriation is enacted

into law, expenditures made under the continuing resolution are

charged to that appropriation, except that wdid obligations incurred

under the continuing resolution in excess of the amount finally

appropriated are charged to the account established under the

continuing resolution.

2. Duration of For the most part, the duration (period of obligational availability) of

Approp@ons an appropriation under a short-term continuing resolution does not

present problems. If you have, say, only one month to incur

obligations under a continuing resolution, it matters little that the

corresponding appropriation in a regular appropriation act might be a

multiple-year or no-year appropriation. Also, once the regular

appropriation is enacted, it supersedes the continuing resolution and

governs the period of availability. Questions may arise, however,

under continuing resolutions whose duration is the balance of the

fiscal year.

For example, the continuing resolution for fiscal year 1979 included

the standard duration provision described above, with a cutoff date of

September 30, 1979, the last day of the f~cal year. However, a

provision in the Comprehensive Employment and Training Act stated

that “notwithstanding any other provision of law, unless enacted in

specific limitation of the provisions of this subsection,”

appropriations to carry out the CETA program shall remain available

for two years. Applying the principle that a specific provision governs

over a more general one, it was held that funds appropriated for CETA

under the continuing resolution were available for obligation for two

years in accordance with the CETA provision. B-194063, May 4,

1979; B-1 15398.33, March 20, 1979.

A few years earlier, the United States District Court for the District of

Columbia had reached the same result in a case involving grants to

states under the Elementary and Secondary Education Act.

Pennsylvania. Weinberger, 367 F. Supp. 1378, 1384–85 (D.D.C.

Page 8-29 GAO/OGC-92-13 Appropriations IAW-VO1. II

,. ,.:g,,
Chapter 8

Continuing Resolutions

1973). The court stated, “[i]t is a basic premise of statutory

construction that in such circumstan ces the more specific measure

. . . is to be held controlling over the general measure where

inconsistencies arise in their application. ” Id. at 1385. —

Application of the same principle produced a similar result in

B-199966, September 10, 1980. The 1980 continuing resolution

appropriated funds for foreign economic assistance loans by

referencing the regular 1980 appropriation bill which had passed the

House but not the Senate. For that type of situation, the resolution

provided for continuation of projects or activities “under the

appropriation, fund, or authority granted by the one House [which

had passed the bill].” The House-passed bill gave the economic

assistance loan funds a two-year period of availability. The continuing

resolution also included the standard duration provision with a cutoff

date of September 30, 1980. Since the duration provision applied to

the entire resolution whereas the provision applicable to the loan

funds had a narrower scope, the latter provision was the more specific

one and the loan funds were therefore held to be available for two

years. See also 60 Comp. Gen. 263 (1981) for further discussion of

similar continuing resolution language.

In some instances, an extended period of availability is produced by a

specific exemption from the standard duration provision. For

example, the 1983 continuing resolution provided foreign assistance

funds “under the terms and conditions” set forth in the Foreign

Assistance Appropriation Act of 1982, and further exempted that

appropriation from the duration provision. Since under the 1982 act,

appropriations for the African Development Fund were to remain

available until expended, appropriations to the Fund under the

continuing resolution were also no-year funds. B-212876,

September 21, 1983. In view of the express exemption from the

duration provision, there was no need to apply the “specific vs.

general” rule because there was no conflict. See also B-210922,

March 30, 1984.

3. Impoundment The duration of a continuing resolution is relevant in determining the

application of the Impoundment Control Act. Impoundment in the

context of continuing resolutions was discussed in a letter to the

Chairman of the House Budget Committee, B-205053, December 31,

1981. Generally, a withholding from obligation of funds provided

Page 8-30 GAO/OGC-92-13 Appropriations Law-Vol. II
Clupter 8

Continuing Reoolntions

under a continuing resolution would constitute an impoundment.

Where the continuing resolution runs for only part of the f~cal year,

the withholding, even if proposed for the duration of the continuing

resolution, should be classfled as a deferral rather than a rescission.

WlthhoMing funds during a temporary continuing resolution is

different from withholding them for the life of a regular annual

appropriation in that, in the former situation, Congress is still

deliberating over the regular funding levels. Also, deferred fimds are

not perrnanently lost when a continuing resolution expires if a

subsequent funding measure is passed.

Under this interpretation, classification as a rescission would

presumably still be appropriate where a regular appropriation is never

passed, the agency is operating under continuing resolution authority

for the entire fwcal year, and the timing of a withholding is such that

insuftlcient opportunity would remain to utilize the tknds. See

B-1 15398, May 9, 1975.

The concepts in the two preceding paragraphs are reflected in OMB

circular No. A-34, $71.6 (1985).

Impoundment issues under continuing resolutions may arise in other

contexts as well. See, ~, 64 Comp. Gem 649 (1985) (failure to

make funds available based on good faith disagreement over

treatment of carryover balances in calculating rate for operations held

not to constitute an illegal rescission); B-209676, April 14, 1983 (no

improper impoundment where funds were apportioned on basis of

budget request although continuing resolution appropriated fhnds at

rate to maintain program level, as long as apportionment was

stilcient to maintain requisite program level).

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GAO/OGC-92-13 Appropriations Law -Vol. KI
Page 8-22 ~-82-1$ Appropcidiom Law-Vol. 1 1

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‘“””. ‘:%%
Liability and Relief of Accountzible Officers

A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........,..”.”.’.”..

B. Generttl Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.

2.

3.

4.

5.

6.

The Concepts ofLiabilityand Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...

Who IsanAccountable Officer? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......”....... .

a. Certifying Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........o.o.0”” “

b. DisbursingOfficers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......

c. Cashiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............”...”.’.“..”.

d. CollectingOfficers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

e. OtherAgents and Custodians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .“-.

Funds to WhichAccountabilityAttaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Appropriated Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............”...”.”

c. Funds HeldinTrust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....,.,.”,.,.”..... .

d. ItemsWhichAretheEquivalent ofCash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Kinds ofEventsProduce Liability? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

AmountofLiability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .“,.””...

Effect ofCriminal Prosecution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Acquittal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Order ofRestitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......”.”

C. PhysicalLossorDeficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......

1.

2.

3.

Statutory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D o . . . ....’...’

a. CivilianAgencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Military Disbursing Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Who CanGrantReIief? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ... ... ... ..*o. .....

StandardsforGrantingRelief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

c.

d

e.

f.

g.

h.

i.

j.

k.

StandardofNegligence . . . . . . . . . . . . . . . . . . . . . . .. .. .- .. ... ... .....o. ..o.....

Presumption ofNegligence/Burden ofProof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Actual Negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ProximateCause . . . . . . . . . . . . .4.,..... . . . . . . . . . . . . . . . . . . . . . ......”..”.”..

UnexplainedLoss orShortage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CornplianceWlth Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LossesinShipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........”’.....”.

Fire, Natural Disaster . . . . . . . . . . . . . . . = . . . . . . . . . . . . . . ...........”...........

LossbyTheft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....”.”.....

AgencySecurity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......”......”

Extenuating Circumstances . . . . . . . . . . . . . . . .. .. I . . . . . . . . . . ..........’.......

I.). llle~al OrlmProperPayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....”.”..

9-3

9-4

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GAO/OGC-92-13 AppI’Opt’i@iOllllkW-VoLII
CXupter9

LiaMlity and I&dlefofhcountable OfRcem

1.

2.

3.

4.

5.

Disbursement and Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . , , . . . , , , ., , ., , ... ,

a. Statutory Framework: Disbursement Under Executive Order 6166 . . . . . . . . . . . . . . . .

b. AutomatedPaymentSystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Statistical Sampling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

d. ProvisionalVoucherSandRelated Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

e. Facsimile Signaturesand Electronic Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

f. GAOAudit Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . .,...., . . . . . . . . ..,..,.0 . . . .

CertifyingOfficers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...00.,0 . . .

a. Duties andLiability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Applicabilityof31 u.s.c. $3528 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,00,.

DisbursingOfficers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Standards ofLiabilityand Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Some SpeciiicApplications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Check Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. Check Cashing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. Duplicate Check Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Errors inCheckIssuance Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Statute ofLimitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

E. Other ReliefStatutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Statutes RequiringAffmative Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Statutes Providing’’Automatic” Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F. Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. ReportingofIrregularities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. ObtainingRelief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Payments of$lOOorLess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Reliefvs. Grievance Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

G. CollectionAction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. AgaimtRecipknt .. .. .. ... .ti. .....,.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

z. Ag*stAccOun@leOfflcer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

~stitution, Reimbursement, and~storation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Restitution andReimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Restoration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Page9-2 GAO/OGC-92-19 @UO@8tiOMbW-vO~~

.;@a?. ; ,. /:: ,- .“. ’j~,,
ChaWer 9

Liability and Relief of Accountable Officers

A. Introduction The concept that a person should be held accountable for funds in his

or her care is not peculiar to the government. If you get a job as a

cashier at your local supermarket and come up short at the end of the

day, you will probably be forced to make up the shortage from your

own pocket. The store manager does not have to prove the loss was

your fault. The very fact that the money is not there is sufficient to

make you liable. Of course, if your cash register is emptied by an

armed robber and you are in no way implicated, you will be off the

hook.

Just like the private business enterprise, the government loses money

in many ways. It is lost; it is stolen; it is paid out improperly; it is

embezzled. Sometimes the money is recovered; often it is not. If

government funds are lost because of some employee’s misconduct or

carelessness, and if the responsible employee is not required to make

up the loss, the result is that the taxpayer ends up paying twice for the

same thing, or paying for nothing.

When you accept the job at the supermarket, you do so knowing

perfectly well that you wiIl be potentially liable for losses. There is no

reason why the government should operate any differently. If

anything, there is a stronger case for the liability of government

employees since they are, in effect, trustees for the taxpayers

(themselves included). A the Comptroller General once stated, “A

special trust responsibility exists with regard to public monies and

with this special trust goes personal financial responsibility.”

B-161457, October 30, 1969. This chapter will explore these

concepts-the liability and relief of government officers and

employees who are entrusted with public funds or who have certain

specific responsibilities in their disbursement. In government

language, they are called “accountable officers.”’

IThi~ ~hap~r de~~ ~oIe~ ~th accoW~b@ fOr fUndS by those c~ified m accomwb]e

ofticers. Other types of accountability-accountability by employees who are not accountable

officers or accountability for property other than funds-are covered in Chapter 13.

Page 9.3 GAO/OGC-92-13 Appropriations Law -Vol. II
Chapter9

LiaMlityand Relief of Accountable Offlcera

B. General Principles

1. The Concepts of Liability

and Relief

a, Liability The concept of accountability for public funds in the form of strict

personal liability evolved during the 19th century. Its origins can be

traced to a number of congressional enactments, some dating back to

the Nation’s infancy. The legislation establishing the Department of

the Treasury in 1789 included a provision directing the Comptroller

of the Treasury to “direct prosecutions for all delinquencies of

officers of the revenue” (1 Stat. 66). A few years later, in 1795,

Congress authorized the Comptroller to require “any person who has

received monies for which he is accountable to the United States” to

render “his accounts and vouchers, for the expenditure of the said

monies,” and to commence suit against anyone failing to do so

(1 stat. 441).

In 1846, Congress mandated that all government officials safeguard

public funds in their custody. The statute provided that–

“all public officers of whatsoever character, be, and they are hereby, required to keep

safely, without loaning, using, depositing in banks, or exchanging for other funds

than as allowed by this act, all the public money collected by them, or otherwise at

any time placed in their possession and custody, till the same is ordered, by the

proper department or officer of the government, to be transfemed or paid out . . . .“

Act of August 6, 1846, ch. 90, $6,9 Stat. 59,60. This statute still

exists, in modernized form, at 31 U.S.C. $ 3302(a).

These are civil provisions. Congress also addressed fiscal

accountability in a variety of criminal statutes. An important one is the

Act of June 14, 1866, ch. 122, 14 Stat. 64, which declared it to be the

duty ,of disbursing officers to use public funds entrusted to them “only

as . . . required for payments to be made. . . in pursuance of law,” and

made it a felony for a disbursing officer to, among other things,

Page 9-4

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GAO/OGC-92-13 Appropriations Law-Vol. II

,g,:.. ‘
Chapter 9

I&MUty and Relief of Accountable Offtcera

“apply any portion of the public money intrusted to him” for any

purpose not prescribed by law.z

The strict liability of accountable officers became firmly established in

a series of early Supreme Court decisions. In 1845, the Court upheld

liability in a case where money had been stolen with no fault or

negligence on the part of the accountable oftlcer. In an often-quoted

passage, the Court said:

“Public policy requires that every depositary of the public money should be held to a

strict accountability. Not only that he should exercise the highest degree of vigilance,

but that ‘he should keep safely’ the moneys which come to his hands. Any relaxation

of this condition would open a door to frauds, which might be practiced with

impunity. A depositary would have nothing more to do than to lay his plans and

arrange his proofs, so as to establish his loss, without laches on his part. Let such a

principle be applied to our postmasters, collectors of the customs, receivers of public

moneys, and others who receive more or less of the public funds, and what losses

might not be anticipated by the public?”

United States v. Prescott, 44 U.S. (3 How.) 578, 588–89 (1845).

While some might view this passage as unduly cynical of human

nature, it makes the important point that the laws relating to the

liability and relief of accountable officers are intended not only to give

the officers incentive to guard against theft by others, but also to

protect against dishonesty by the officers themselves.

An 1872 case, United States v. Thomas, 82 U.S. (15 Wall.) 337,

recognized that the liability announced in Prescott, while strict, was

not absolute. In that case, the Court refused to hold a customs official

liable for funds which had been forcibly taken by Confederate forces

during the Civil War. In formulating its conclusion, the Court

recognized two exceptions to the strict liability rule:

“[N]o rule of public policy requires an officer to account for moneys which have been

destroyed by an overruling necessity, or taken from him by a public enemy, without

any fault or negfect on his part.”

2This ~~tute ~W stiff exists ~d is found at 18 U.S.C. $653. Other provisions of tieCriminal

Code relevant to accountable officers include 18 U. S.C. s! 643 (faifure to render accounts), 648

(misuse of pubfic funds), and 649 (failure to deposit). The four provisions of Titfe 18 cited in

this note apply to “all persons charged with the safe-keeping, transfer, or disbursement of the

public money.” 18 U.S.C. $ 649(b).

Page 9-5 GAO/0GG92-13 Appropriations Law-Vol. II
Chapter 9

Liability and Belief of Accountable Officers

b. Surety Bonding

Id. at 352. The exceptions, however, are limited. In Smythe v. United

~@tes, 188 U.S. 156 (1903), the Court reviewed its precedents,

including Prescott and Thomas, and upheld the liability of a Mint

official for funds which had been destroyed by fire, finding the loss

attributable neither to “overruling necessity” nor to a public enemy.

The standard that has evolved from the cases and statutes noted is one

of strict liability. It is ollen said that an accountable officer is, in

effect, an “insurer” of the funds in his or her charge. ~, 64 Comp.

Gen. 303,304 (1985); 54 Comp. Gen. 112, 114 (1974); 48 Comp.

Gen. 566,567 (1969); 6 Comp. Gen. 404,406 (1926); United States

v. Heller, 1 F. Supp. 1, 6 (D. Md. 1932). The liability is automatic, and

arises by operation of law at the momenta physical loss occurs or an

erroneous payment is made. 70 Comp. Gen. 12, 14 (1990); 54 Comp.

Gen. at 114.

Apart from whatever statuto~ provisions may exist from time to time,

an accountable officer’s strict liability is based on public policy. ~,

Prescott, 44 U.S. at 587–88 (“The liability of the defendant. . . arises

out of . . . principles which are founded upon public policy”); Heller,

1 F. Supp. at 6 (strict liability “is imposed as a matter of public

policy”).

The early cases based liability on two grounds. One, as noted above,

was public policy, a consideration no less important now than it was

then. The second basis was the terms of the officer’s bond. Prior to

1972, the fidelity bonding of accountable officers was required by law.

See, ~, 22 Comp. Gen. 48 (1942); 21 Comp. Gen. 976 (1942). As

an examination of the statement of the case in decisions such as

Prescott, Thomas, and Smythe will reveal, the terms of the bond were

very similar to, and in fact were derived from, the 1846 “keep safely”

legislation quoted above. Thus, while the bond gave the government a

more certain means of recovery, it did not impose upon accountable

officers any duties that were not already required by statutes

a’l.he ~nding ~equ~ement h~ been for the protection of the government, not the accoun~b’e

officer. Under the bonding system, if the United States was compensated for a loss by the

bonding company, the comprmy succeeded to the rights of the United States and coufd seek

reimbursement from the accountable officer. 68 Comp. Gen. 470, 471 (1989); B-186922,

APril 8, 1977.

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Liability and Belief of Accountable Officers

In a 1962 report, GAO concluded that bonding was not cost-effective,4

and recommended legislation to repeal the bonding requirement.

Review of the Bonding Program for Employees of the Federal

Government, B-8201, March 29, 1962. Congress repealed the

requirement in 1972, and accountable officers are no longer bonded.

31 U.S.C. $9302. The last sentence of 31 US.C. $9302 states explicitly

that the prohibition on requiring surety bonds “does not affect the

personal financial liability” of individual oftlcers or employees. Thus,

elimination of the bonding requirement has no effect on the legal

liability of accountable officers. 54 Comp. Gen. 112 (1974);

B-191440, May 25, 1979.

c. Relief The early cases and statutes previously noted made no mention of

relief from liability.5 “Relief” in this context means art action, taken by

someone with the legal authority to do so, which absolves an

accountable officer from liability for a loss. Prior to the World War 11

period, with limited exceptions for certain accountable officers of the

armed forces, an accountable officer had but two relief options

available. First, a disbursing officer could bring an action in what was

then the Court of Claims under 28 U.S.C. 52512. Of course, the officer

would probably need legal representation and would incur other

expenses, none of which were reimbursable. Second, and this became

the most common approach, was private relief legislation, a

burdensome process for amounts which were often relatively small.

There was no mechanism for providing relief at the administrative

level, however meritorious the case. 4 Comp. Gen. 409 (1924); 27

Comp. Dec. 328 (1920).

Starting in 1941, Congress enacted a series of relief statutes, and

there is now a comprehensive statutory scheme for the administrative

relief of accountable officers who are found to be without fault. The

mi+or portion of this chapter deals with the application of this

legislation.

It is important to distinguish between liability and relief. It is not the

denial of relief that makes an accountable officer liable. The basic

dorigllmy, ~ccounwble officers had to pay for their own bonds. 33 ComP. Gen. 7 (1953).

Legislation efTective January 1, 1956, authorized the government to pay (69 Stat. 618).

‘The “public enemy” situation dealt with in the Thomaa case is not an example of relief. It is an

example of a situation in which liability does not attach to begin with.

Page 9-7 GAO/OGC-92-13 Appropriations L.sw-VoL II
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L&bllityand Relief of Accountable OHicere

legal liability of art accountable ofiicer arises automatically by virtue

of the loss and is not affected by any lack of fault or negligence on the

officer’s part; relief is a separate process, and may take lack of fault

into consideration to the extent authorized by the governing statute.G

54 Comp. Gen. 112 (1974); B-167126, August 28, 1978.

2. Who Is an Accountable An accountable officer is any government officer or employee who by

Officer? reason of his or her employment is responsible for or has custody of

government funds. 62 Comp. Gen. 476,479 (1983); 59 Comp. Gen.

113, 114 (1979); B-188894, September 29, 1977. Accountable

ofiicers encompass such officials as certifying officers, civiIian and

military disbursing officers, collecting officers, and other employees

who by virtue of their employment have custody of government funds.

With rare exceptions,7 other officials who may have a role in

authorizing expenditures (contracting officers, for example) are not

accountable officers for purposes of the laws discussed in this

chapter, although they may be made accountable in varying degrees

by agency regulation. See B-241856.2, September 23, 1992.

a. Cert@ing Officers Accountability for public funds in civilian agencies rests primarily with

the certif@g officer, a government oftlcer or employee whose job is

or includes certifying vouchers (including voucher schedules or

invoices used as vouchers) for payment. A certifying officer differs

from other accountable officers in one key respect: the certifying

officer has no public funds in his or her physical custody. Rather,

accountability is based on the nature of the function. A certifying

officer’s liability, discussed in detail later in this chapter, is prescribed

by 31 U.S.C. ! 3528. In brief, certifying oftlcers are responsible for the

%Vhile the generalizations in the text are true, as discussed later in this chapter, passage of time

can eliminate the government’s abifity to enforce liability in improper payment cases, even

without relief. In order to protect the government’s position, agencies should move promptly to

address an accountable officer’s liability. Implications in a few cases such as 70 Comp. Gen.

616,622-23 (1991), that an agency can never enforce an accountable officer’s liability for an

improper payment unfess it has fwst submitted the matter to GAO are misleading. See GAO’s

Policy and Procedures Manual for Guidance of Federrd Agencies, title 7, chap. 8, Wfich

describes agencies’ specific responsibilities in this area.

70n a few occwion5, GAO ~treated an officiaf who directs the ma~g of ~expen~ture =

accountable even though not falfing into one of the traditional categories of accountable off]cer.

61 Comp. Gen. 260,266 (1982) (illegaf entertainment expenditures “must be paid by the. . .

officials who authorized the expenditures”); 37 Comp. Gen. 360, 361 (1957) (cost of greeting

cards “is a personaf expense to be borne by the officer who ordered and sent the cards”); 7

Comp. Gen. 481,482 (1928) (same).

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UabLUty and Relief of Accountable Officers

b. Disbursing Officers

legality of proposed payments, and are liable for the amount of illegal

or improper payments resulting from their certifications.

A great many government officials make official “certifications” of

one type or another, but this does not make them “certifying offkers”

for purposes of accountability and liability. The concepts of

accountability and relief discussed in this chapter apply only to

“authorized certi~g officers” who certify vouchers upon which

moneys are to be paid out by disbursing officers in discharging a debt

or obligation of the government. 23 Comp. Gen. 953 (1944). This

may in appropriate circumstances include the head of a department or

agency. 31 U.S.C. $ 3325(a)(l); 21 Comp. Gen. 976, 979 (1942); 40

Op. Att’y Gen. 284 (1943). An authorized certi~g officer must be so

designated in writing. 31 U.S.C. s 3325(a)(l).

Thus, an employee who “certified” overtime assignments in the sense

of a timekeeper verifying that employees worked the hours of

overtime claimed could not be held liable for resulting overpayments

under an accountable officer theory. B-197109, March 24, 1980.

Similarly, art official who certifies that long-distance telephone calls

are necessary for official business as required by 31 U.S.C. s 1348(b) is

not an accountable officer. 65 Comp. Gen. 19, 20–21 (1985). The

same approach applies to various post-certification administrative

actions, the rule being that once a voucher has been duly certiiled by

an authorized official, subsequent administrative processing does not

constitute certification for purposes of 31 U.S.C. $3528.55 Comp.

Gen. 388,390 (1975). For example, the Comptroller General has held

that 31 U.S.C. $3528 does not apply to an “approving oftlcer” who

approves vouchers after they have been duly certified. 21 Comp. Gen.

841 (1942).

A disbursing officer is an officer or employee of a federal department

or agency, civilian or military, designated to disburse moneys and

render accounts in accordance with laws and regulations governing

the disbursement of public funds. The term is essentially self-defining.

As one court has stated:

“We do not fmd the term ‘disbursing officer’ statutorily defined, probably because it

is self-deftitive. It can mean nothing except an officer who is authorized to disburse

funds of the United States.”

GAOIOGC-92-13 Appropriations Law-Voi. 11
Chapter 9

Liability and Relief of Accountable Offlcera

c. Cashiers

Romneyv. United States, 167 F.2d 521,526 (D.C. Cir. 1948), cert.

denied, 334 U.S. 847.

Whether an employee is a “disbursing officer” depends more on the

nature of the person’s duties than on the title of his or her position. In

some cases, the job title will be “disbursing officer.” This is the title

for the disbursing officers of the Treasury Department who disburse

for most civilian agencies under 31 U.S.C. $3321. For the military

departments, which generally do their own disbursing, the title maybe

“finance and accounting officer.” As a general proposition, any

employee to whom public funds are entrusted for the purpose of

making payments from those funds will be regarded as a disbursing

officer. See B-151 156, December 30, 1963.

There may be more than one disbursing officer for a given

transaction. Military disbursing operations provide an example. The

account is often held in the name of a supervisory official such as a

Finance and Accounting Officer, with the actual payment made by

some subordinate (agent, cashier, deputy, etc.). Both are regarded as

disbursing officers for purposes of liability and relief although, as we

will discuss later, the standards for relief differ. E.g., 62 Comp. Gen.

476, 479–80 (1983); B-245127, September 18, 1991.

A cashier is an officer or employee of a federal department, agency, or

corporation who, having been recommended by the head of the

activity, has been designated as a cashier by the officer responsible

for making disbursements and is thereby authorized to perform

limited cash disbursing functions or other cash operations. Treasury

Financial Manual (TFM), Vol. I, s 4-3020. Cashiers must be designated

in writing. ~. $4-3025.

W:th respect to disbursing functions under 31 U.S.C. 53321, cashiers

are divided into five categories: (1) Class A Cashier (may not advance

imprest funds to another cashier except an alternate); (2) Class B

Cashier (may advance imprest funds to alternate or subcashier);

(3) Class D Cashier (receives funds solely for change-making

purposes); (4) Subcashier (may receive imprest funds from a Class B

or D cashier and is under supervision of same local office); and

(5) Alternate to a Cashier or Subcashier (functions during absence of

principal cashier but may act simultaneously if required by work

load). Fuller descriptions may be found in the Treasury Department’s

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Liability and Relief of Accountable Officera

d. Collecting Officers

,,,,<,.. ,. ,+.

supplement to the TFM entitled Manual of Procedures and Instructions

for Cashiers Operating Under 31 U.S.C. 3321 (July 1985).

Cashiers who are authorized to make payments from funds advanced

to them are regarded as a category of disbursing officer. They are

personally liable for any loss or shortage of funds in their custody

unless relieved by proper authority. Further discussion of the role and

responsibilities of cashiers maybe found in I TFM Chapter 4-3000 and

in the Cashiers Manual.

For the most part, a cashier will be operating with funds advanced by

his or her own employing agency. In some situations, however, such

as an authorized interagency agreement, the funds maybe advanced

by another agency. Liability and relief are the same in either case. 65

Comp. Gen. 666, 675–77 (1986).

Collecting officers are those who receive or collect money for the

government, such as Internal Revenue collectors or Customs

collectors. Collecting officers are accountable for all money collected.

~, 59 Comp. Gen. 113, 114 (1979); 3 Comp. Gen. 403 (1924); 1

Comp. Dec. 191 (1895); B-201673 et al., September 23, 1982. For

example, an Internal Revenue collector is responsible for the physical

safety of taxes collected, must pay over to the government alI taxes

collected, and must make good any money lost or stolen while in his

or her custody unless relieved. E.g., 60 Comp. Gen. 674 (1981).

However, under a lockbox arrangement whereby tax payments are

mailed to a financial institution at a post office box and then wired to a

Treasury account, Internal Revenue Service officials are not

accountable for funds in the possession of the financial institution

since they do not gain custody or control over those funds. B-223911,

February 24, 1987.

The clerk of a bankruptcy court, if one has been appointed under 28

U.S,C. S 156(b), is the accountable officer with respect to fees paid to

the court, as prescribed by 28 U.S.C. $1930, by parties commencing a

case under the Bankruptcy Code. 28 U.S.C. $ 156(O. This provision,

added in 1986, essentially codified the result of two GAO decisions

issued the previous year, 64 Comp. Gen. 535 (1985) and B-217236,

May 22, 1985.

In some situations, certain types of receipts maybe collected by a

contractor. Since the contractor is not a government officer or

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Chapter 9

Liability and Relief of Accountable Officers

e. Other Agents and

Custodians

employee, the various accountable officer statutes discussed

throughout this chapter do not apply, and the contractor’s liability is

governed by the terms of the contract. For example, a parking service

contract with the General Services Administration required the

contractor to collect parking fees at certain government buildings and

to remit those fees to GSA on a daily basis. One day, instead of

remitting the receipts, an official of the contractor took the money

home in a paper bag and claimed to have been robbed in a parking lot

near her residence. When GSA withheld the amount of the loss from

contract payments, the contractor tried to argue that the risk of loss

should fall upon the government. The Claims Court disagreed. Since

the contract terms were clear and the contractor failed to comply, the

contractor was held responsible for the loss. Miracle Contractors,

Inc. v. United States, 5 Cl. Ct. 466 (1984).

The Department of Agriculture has statutory authority to use

volunteers to collect user fees in national forests. The volunteers,

private individuals, are to be bonded, with the cost of the bonds paid

by the Department. 16 U.S.C. $ 4601-6a(k). In 68 Comp. Gen. 470

(1989), GAO concurred with the Department that the volunteers could

be regarded as agents of the Forest Service and, as such, eligible for

relief for non-negligent losses. The practical significance of this

decision is that it would be difficult to recruit volunteers if they faced

potential liability for non-negligent losses, a possibility that would

exist even under a surety bond. ~. at 471.

Occasionally, officers and employees who do not fit into any of the

preceding categories, and who may not even be directly involved in

government fiscal operations, are given custody of federal funds and

thereby become accountable officers for the funds placed in their

charge. Note in this connection that the “safekeeping” mandate of 31

U.S.C. $ 3302(a) (made unmistakably clear by reference to the original

1846 language quoted earlier), applies to any government employee,

regardless of job description, to whom public funds are entrusted in

connection with the performance of government business. See, ~,

B-170012, February 3, 1972.

Examples of employees in this general custodial category include: a

special messenger delivering cash to another location, B-188413,

June 30, 1977; a messenger sent to the bank to cash checks,

B-226695, May 26, 1987; State Department employees responsible

for packaging and shipping funds to an overseas embassy, B-193830,

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Liability and Relief of Accountable officers

October 1, 1979; an officer in charge of a laundry operation on an

Army base who had been advanced public funds to be held as a

change fund, B-155149, October 21, 1964; and a Department of

Energy special counsel with control over petroleum overcharge

refunds, B-200170, April 1, 1981.

As with disbursing officers, there maybe more than one accountable

officer in a given case, and the concept of accountability is not limited

to the person in whose name the account is officially held nor is it

limited to the person or persons for whom relief is officially

requested. For example, accounts in the regional offices of the U.S.

Customs Service are typically held in the name of the Regional

Commissioner. While the Regional Commissioner is therefore an

accountable officer with respect to that account, subordinate

employees who actually handle the funds are also accountable

officers. B-197324, March 7, 1980; B-193673, May 25, 1979. The

same principle applies to the various service centers of the Internal

Revenue Service. q, 60 Comp. Gen. 674 (1981).

As demonstrated by the Customs and IRS situations, as well as the

many cases involving military finance and accounting officers, a

supervisory official will bean accountable ofllcer if that official has

actual custody of public funds, or if the account is held in the official’s

name, regardless of who has physical custody. Absent these factors,

however, a supervisor is not an accountable officer and does not

become one merely because he or she supervises one. ~,

B-214286, Jdy 20, 1984; B-194782, August 13, 1979.

In each case, it is necessary to examine the particular facts and

circumstances to determine who had responsibility for or custody of

the funds during the relevant stages of the occurrence or transaction.

Thus, in B-193830, October 1, 1979, money shipped from the State

Department to the American Embassy in Paraguay never reached its

destination. While the funds were chargeable to the account of the

Cl~s B cashier at the Embassy, the State Department employees

responsible for packaging and shipping the funds were also

accountable officers with respect to that transaction. In another case,

a new Class B cashier had been recommended at a Peace Corps office

in Western Samoa, and had in fact been doing the job, but his official

designation was not made until after the loss in question. Since the

new cashier, even though not yet formally designated, had possession

of the funds at the time of the loss, he was an accountable officer.

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Liability and Belief of Accountable Officers

However, since the former cashier retained responsibility for the

imprest fund until formally replaced, he too was an accountable

ofiicer. B-188881, May 8, 1978.

In sum, any government officer or employee who physically handles

government funds, even if only occasionally, is accountable for those

funds while in his or her custody.

It maybe impossible, although this wiil happen only in extremely rare

cases, to specify exactly who the proper accountable officer is. For

example, the Drug Enforcement Administration used a flash roll of

650$100 bills and discovered that 15 bills had been replaced by

counterfeits scattered throughout the roll. (The “roll” was actually a

number of stacks.) The roll had been used in a number of

investigations and in each instance, the transactions (transfers from

cashier to investigators, returns to cashier, transfers between

different groups of investigators) were recorded on receipts and the

money was counted. While it was thus possible to determine precisely

who had the roll on any given day, there was no way to determine

when the substitution took pIace and hence to establish to whom the

loss should be attributed. B-191891, June 16, 1980.

3. Funds to Which When we talk about the liability of accountable officers, we

Accountability Attaches deliberately use the broad term “public funds.” As a general

proposition, for purposes of accountability, “public funds” consists of

three categories: appropriated funds, funds received by the

government from nongovernment sources, and funds held in trust. It

is important to emphasize that when we refer to certain funds as

“nonaccountable” in the course of this discussion, all we mean is that

the funds are not subject to the laws governing the liability and relief

of accountable officers. Liability for losses may still attach on some

other basis.

a. Appropriated Funds Appropriated funds are accountable funds. The funds may be in the

Treasury, which is where most appropriated funds remain pending

disbursement, or they maybe in the form of cash advanced to a

government ofiicer or employee for some authorized purpose.

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L&bllityand Relief of Accountile Offkera

(1) Irnprest funds

The definitions of the various types of cashier refer primarily to the

use of “imprest funds.” An imprest fund is essentially a petty cash

fund. More specifically, it is a freed-cash fund (i.e., a freed dollar

amount) advanced to a cashier for cash disbursements or other cash

requirement purposes as specifically authorized. An irnprest fund may

be either a statioruuy fund, such as a change-making fund, or a

revolving fund. Tressury Financial Manual (TFM), Vol. I, $4-3020.

Imprest funds are commonly used for such things as small purchases,

travel advances, and authorized emergency salary payments.

Guidance on the use of irnprest funds may be found in GAO’S Policy

and Procedures Manual for Guidance of Federal Agencies, title 7,

$6.8, I TFM chapter 4-3000, and the Federal Acquisition Regulation

(FAR), 48 C.F.R. subpart 13.4. Agencies using imprest funds are

required to issue implementing re$julations. I TFM $ 4-3030; FAR, 48

C.F.R. $ Is.dos(c). Except to the extent specified in an agency’s own

re@ations (~, B-220466 et al., December 9, 1986), there are no

subject matter limitations on the kinds of services payable from

irnprest funds. 65 Comp. Gen. 806 (1986).

Imprest funds of the revolving type are replenished to the freed

amount as spent or used. As replenishment are needed,

replenishment vouchers are submitted through the cert@ing officer

to the disbursing officer. Replenishment vouchers must be supported

by receipts or other evidence of the expenditures.

At any given time, an imprest fund may consist of cash, uncashed

government checks, and other documents such as unpaid

reimbursement vouchers, sales slips, invoices, or other receipts for

cash payments. An imprest fund cashier must at all times be able to

account for the full amount of the fund. I TFMs 4-3040.80. For

example, if a cash box containing a $1,000 imprest fund disappears,

and at the time of disappearance the box contained $500 in cash and

$500 in receipts for which reimbursement vouchers had not yet been

issued, the loss to the government is the full $1,000 and the cashier is

accountable for that full amount. A cashier’s failure to keep adequate

records, thus making proper reconciliation impossible, is negligence.

B-189084, January 15, 1980.

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Loss of a replenishment check before it reaches the cashier is not a

situation requiring relief of the cashier. The proper procedure in such

a situation is to report the loss to the disbursing office which issued

the check to obtain a replacement. B-203025, October 30, 1981.

If in the government’s interests, a checking account maybe setup in a

private bank for imprest fund disbursements as long as adequate

control procedures are developed. B-1 17566, April 29, 1959. Use of

depositary accounts must be approved by the agency head or

designee, is authorized only for cash withdrawal transactions, and

should be limited to situations in which there is “strong justification. ”

I TFM $4-3040.60. The account maybe interest-bearing, in which

event any interest earned must be deposited in the Treasury as

miscellaneous receipts. Id.

.

The method of imprest fund accountability changed starting with

fiscal year 1985. Prior to that time, funds advanced to cashiers by

Treasury disbursing officers were not “charged” to the agency’s

appropriations at the time of the advance but were carried on the

disbursing officers’ records of accountability. The cashiers were

regarded as agents of the disbursing officers. In fact, it was common

to refer to cashiers as “agent cashiers.” E.g., A-89775, March 21,

1945. Charges were made to the applicable appropriation or fund

accounts only when replenishment checks were issued. Relief

requests had to be submitted through the Treasury’s Chief Disbursing

Oftlcer.

In 1983, the Treasury Department proposed removing imprest fund

advances from the disbursing officers’ accountability inasmuch as the

transactions were beyond the disbursing officers’ control. GAO

concurred. B-21281 9-O. M., May 25, 1984. The current. procedures

are discussed in 70 Comp. Gen. 481 (1991). In brief, the charge to the

agency’s appropriation is now made at the time of the initial advance.

However, since the advance does not qualify as an obligation under31

U. S. C., S 1501, the charge must be in the form of a “commitment.” or

“reservation.” In general, the actual obligation occurs when the

advance is used and the cashier seeks replenishment. The preliminary

charge is necessary to protect against violating the Antideficiency Act.

Except for certain procedural matters (relief requests are no longer

processed through the applicable disbursing officer), the changes

have no effect on the cashier’s liability as an accountable officer.

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LhMIIty aad lteliefofkcountdle OMcera

An alternative approach to managing imprest funds is the “third-party

draft” procedure described in I TIM $4-3040.70. In brief, an agency

may, with written approval from its Treasury Fhmncia.1 Center, retain

a contractor to provide the agency with payment instruments, not to

exceed a face value of $1,000 each, drawn on the contractor’s

account. The agency then uses these drafts for its imprest fund

tmwactions, and reimburses the contractor for properly payable

drafts which the contractor has paid. Since the funds being disbursed

from the imprest fund under this system are not government funds,

personal liability does not attach to the cashier. ~.; GAO Policy and

Procedures Manual, title 7,$ 6.8.B.

(2) Flash rolls

Law enforcement officers on undercover assignments frequently need

a supply of cash to support their operations, for example, to purchase

contraband or to use as a gambling stake. This money, often advanced

from an imprest fund, is called a “flash roll.” By the very nature of the

activities involved, flash roll money is at high risk to begin with.

It is clear that a flash roll in the hands of a law enforcement agent

retains its status as government funds. Garciav. United States, 469

U.S. 70 (1984) (flash roll held to be money of the United States for

purposes of 18 U.S.C. !-$ 2114, which makes it a criminal offense to

assault a custodian of government money). However, flash roll money

will be accountable in some situations and nonaccountable in others,

depending on the nature of the loss. If the loss is within the risk

inherent in the operation, such as the suspect absconding with the

money, it is not viewed as an “accountable officer” loss but maybe

handled internally by the agency. If the agency, under its internal

investigation procedures, finds the agent with custody of the funds to

have been negligent, it should hold the agent liable to the extent

provided in its regulations. Otherwise, it may simply record the loss as

a necessary expense against the appropriation which financed the

o~ration. If, on the other hand, the loss occurs in the course of the

operation but is unrelated to carrying out its purpose, the accountable

officer laws apply. The decision first recognizing this distinction is 61

Comp. Gen. 313 (1982), applying it in the context of Drug

Enforcement Administration undercover operations.8

6~or dw~iom, ~u~h ~ 519zoIq A-t 14, 1978, which had treated ~ fl~h ro~ lows =

accountable o!Tker loses, were moditkd accordingly. 61 Comp. Gen. at 316.

Page 9-17 GAO/OGC-92-13 Appropriations Law-Vol. II
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UaMMtyaad Relief of Aecoantable OMcere

The fact pattern in the Garcia case illustrates the nonaccountable

situation. A Secret Service agent had been given a flash roll to buy

counterfeit currency from suspects in Miami. The agent met the

suspects in a park. One of the suspects pulled a semi-automatic pistol

and demanded the money. Other Secret Service agents rushed to the

scene and apprehended the suspects, one of whom was trying to run

off with the money. Of course there was no loss since the money was

recovered. If the second suspect had gotten away with the money,

however, the loss could have been treated as an expense of the

operation, without the need to seek relief for anyone. GAO decisions

finding flash roll losses “nonaccountable” under the standards of 61

Comp. Gen. 313 are B-238222, February 21, 1990 (suspect stole

flash roll during drug arrest); B-232253, August 12, 1988 (informant

stole money provided to rent undercover apartment); and B-205426,

September 16, 1982 (federal agent robbed at gunpoint while trying to

purchase illegal firearms).

An example of a case which remains subject to the accountable officer

1~~~ ~q ~.~1$$58, J* 24, 1985. A federal agent, posing as a

narcotics trafficker, stopped at a telephone booth to make a call. Two

women approached the booth, which did not have a door. One

diverted the agent’s attention while the other picked his pocket. The

loss, while certainly incident to the undercover operation, was

unrelated to its central purpose. Relief was granted. Other cases are:

s 64 Comp. Gen. 140 (1984) (agent set shoulder bag containing flash

money on airport counter and left it unattended for several minutes

while making ticket arrangements; relief denied).

● B-2105O7, April 4, 1983 (briefcase containing funds stolen when

agent set it down in coffee shop for 15–20 seconds to remove jacket;

relief granted).

● B-220492, December 10, 1985 (agent left funds in glove

compartment while making phone call in high crime area; agency

found him negligent).

As 64 Comp. Gen. 140 and B-2105O7 point out, losses which occur

while flash money is being transported to the location where it is

intended to be used are at best incidental to the operation and are thus

governed by the accountable oftlcer laws.

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The conspicuous display of a flash roll is not in and of itself

negligence where necessary to the agent’s undercover role. B-194919,

November 26, 1980.

(3) Travel advances

Travel advances are authorized by 5 U.S.C. 55705. The statute

expressly directs the recovery, from the traveler or from his or her

estate, of advances not used for allowable travel expenses.

A travel advance is “based upon the employee’s prospective

entitlement to reimbursement” (B-178595, June 27, 1973), and is

essentially for the convenience of the traveler. If it were not

authorized, the traveler would have little choice but to use personal

funds and then seek reimbursement at the end of the travel. Travel

advances in the hands of the traveler are regarded as nonaccountable

and hence not governed by the accountable offker laws. Rather, they

are treated as loans for the personal benefit of the traveler. As such, if

the funds are lost or stolen while in the traveler’s custody, regardless

of the presence or absence of fault attributable to the traveler, the

funds must be recovered as provided by 5 U.S.C. $5705, and the

accountable officer relief statutes do not apply. 54 Comp. Gen. 190

(1974); B-206245, April 26, 1982; B-183489, June 30,1975. The

same principle applies to traveler’s checks. 64 Comp. Gen. 456, 460

(1985).

In many cases, a messenger or some other clerical employee picks up

the funds for the traveler. If the funds are lost or stolen while in the

intermediary’s custody, and use of the intermediwy was the traveler’s

choice, the intermediary is the agent of the traveler and the traveler,

having constructively received the funds, remains liable. B-204387,

February 24, 1982; B-200867, March 30, 1981. However, if use of the

intermediary is required by agency or local policy, then the

intermediary is the agent of the government and the traveler is not

liable. 67 Comp. Gen. 402 (1988).

Even though the accountable oftlcer relief statutes do not apply, it

may be possible to effectively “relieve” the non-negligent traveler by

considering a claim under the Military Personnel and Civilian

Employees’ Claims Act of 1964,31 U.SC. $3721, to the extent

permissible under the agency’s implementing regulations. B-208639,

October 5, 1982; B-197927, September 12, 1980.

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b. Receipts

c. Funds Held in Trust

Travel advances returned to government custody for reasons such as

postponement of the travel regain their status as accountable funds,

and an employee receiving custody of these funds is governed by the

laws relating to the liability and relief of accountable officem.

B-200404, February 12, 1981; B-170012, March 14, 1972; B-170012,

May 3, 1971. Also, where an advance greatly exceeds the employee’s

legitimate travel expense needs and it is clear that the excess is

intended to be used for operational purposes, the excess over

reasonable needs may be treated as accountable funds and not part of

the ‘loan.” B-196804, July 1, 1980.

In our definitions of governmental receipts and offsetting collections

in Chapter 2, we noted that the government receives funds from

nongovernment sources (a) from the exercise of its sovereign powers

(e.g., tax collections, customs duties, court frees), and (b) from a

variety of business-type activities (e.g., sale of publications). These

collections, whether they are to be deposited in the Treasury as

miscellaneous receipts or credited to some agency appropriation or

fund, are accountable funds from the moment of receipt. Some

examples are 64 Comp. Gen. 535 (1985) (fees paid to bankruptcy

court); 60 Comp. Gen. 674 (1981) (tax collections); B2001 70,

April 1, 1981 (petroleum overcharge refunds); B-194782, August 25,

1980 (recreational fee collections).

When the government holds private funds in a trust capacity, it is

obligated, by virtue of its fiduciary duty, to pay over those funds to the

rightful owners at the proper time. Thus, although the funds are not

appropriated funds, they are nevertheless accountable funds. The

principle has been stated as follows:

“[T]he same relationship between an accountable offh!er and the United States is

required with respect to trust funds of a private character obtained and held for some

particular purpose sanctioned by law as is required with respect to public funds.”

6 Comp. Gen. 515, 517 (1927). The Court of Claims said the same

thing in Woog v. United States, 48 Ct. Cl. 80 (1913).

A common example is the Department of Veterans Affairs “Personal

Funds of Patients” (PFOP) account. Patients, upon admission to a VA

hospital, may deposit personal funds in this account for safekeeping

and use as needed. Upon release, the balance is returned to the

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d. Items Which Are the

Equivalent of Cash

patient. Patient funds in the PFOP account have been consistently

treated as accountable funds. 68 Comp. Gen. 600 (1989); 68 Comp.

Gen. 371 (1989); B-226911, October 19, 1987; B-221447, April 2,

1986; B-215477, November 5, 1984; B-208888, September 28, 1984.

Another example is private funds of litigants deposited in a registry

account of a court of the United States, to be heid pending

distribution by order of the court in accordance with 28 U.S.C. 552041

and 2042. These are also accountable funds under the trust fund

concept. 64 Comp. Gen. 535 (1985); 6 Comp. Gen. 515 (1927);

B-200108iB-198558, January 23, 1981. See also Osborn v. United

States, 91 U.S. 474 (1875) (court can summarily compel restitution of

funds improperly withdrawn from registry account by former

ofilcers).

Other situations applying the trust fund concept are 67 Comp. Gen.

342 (1988) (Indian trust accounts administered by Bureau of Indian

Affairs); 17 Comp. Gen. 786 (1938) (United States Naval Academy

laundry fund); B-190205, November 14, 1977 (foreign currencies

accepted in connection with accommodation exchanges authorized by

31 U.S.C. $ 3342); and A-22805, November 30, 1929 (funds taken

from prisoners at the time of their confinement, to be held in their

behal~. See also69Comp.Gen.314 (1990) (BIA may contract with

private bank for ministerial aspects of trust fund disbursements, but

government disbursing officer must retain responsibility for

managerial and judgmental aspects).

Not all nongovernment funds in the custody of a government official

are held in a trust capacity. For example, in B-164419 -0. M., May 20,

1969, GAO distinguished between funds of a foreign government held

by the United States incident to a cooperative agreement (trust

funds), and funds of a private contractor held by a government oftlcial

for safekeeping as a favor to the contractor. The latter situation was a

mere bailment for the benefit of the contractor, and the official was

not an accountable officer with respect to those funds.

The concepts of accountability and liability discussed in this chapter

apply primarily to money. However, for reasons which should be

apparent, accountability also attaches to certain non-cash items which

are negotiable by the bearer or are otherwise the equivalent of cash.

Examples are:

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● Traveler’s checks in the custody of an accountable officer. 64 Comp.

Gen. 456 (1985); B-235147.2, August 14,1991.

● Food stamps. B-221580, October 24, 1986 (non-decision letter).

● Government Transportation Requests. B-239387, April 24, 1991.

● Military payment certificates. B-127937-O. M., August 2, 1956.

Q Treasury bondswith interest coupons attached. B-190506,

November 28,1977, affhmed on reconsideration, B-190506,

December 20, 1979.

In the second decision in B-190506, it was contended that loss of the

bonds did not really result in a loss to the government because neither

the bonds nor the coupons had been cashed and a “stop notice” had

been placed with the Federal Reserve Bank. GAO could not agree,

however, since the bonds were bearer bonds and the stop notice does

not completely extinguish the government’s liability to pay on them.

(The Treasury Department no longer issues coupon bonds, although

many older ones are still outstanding.)

4. What Kinds of Events The generic term for losses which trigger an accountable officer’s

Produce Liability? liability is ‘f~cal irregularity.” See GAO, Policy and Procedures

Manual for Guidance of Federal Agencies, title 7, $8.2. Fiscal

irregularities are divided into two broad categories: (1) physical loss

or deficiency, and (2) illegal or improper payment. Since, as we will

see, the relief statutes are expressly tied to these categories, the

proper classiilcation of a fiscal irregularity is the essential first step in

determining which statute to apply.

A working definition of “physical loss or deficiency” maybe found in

B-202074, Jtiy 21, 1983:

“In sum, ‘physical loss or deficiency’ includes such things as loss by theft or

burglary, loss in shipment, and 10SS or destruction by fire, accident, or natural

disaster. It also includes the totally unexplained loss, that is, a shortage or deficiency

with absolutely no evidence to explain the disappearance. . . . Finally, . . . kOSSIM

resulting from fraud or embezzlement by subordinate finance pemonnel may. . . be

treated as physical 10ssss.”

This definition has been repeated in several subsequent decisions

such as 70 Comp. Gen. 616,621 (1991) and 65 Comp. Gen. 881,883

(1986). A loss resulting from a bank failure would also be treated as a

physical loss. See 18 Comp. Gen. 639 (1939); 20 Op. Att’y Gen. 24

(1891). —

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The second type of fiscal irregularity is the “illegal, improper, or

incorrect payment.” 31 U.S.C. 3$ 3527(c), 3528(a)(4). The keyword

here is “payrnent”– “the disbursement of public funds by a disbursing

oftlcer or his subordinate.” B-202074, July 21, 1983. Improper

payments include such things as payments obtained by fraud, whether

by nongovemment persons or by government employees other than

subordinate finance personnel; erroneous payments or overpayments

resulting from human or mechanical error attributable to the

government; payments prohibited by statute; and disbursements for

unauthorized purposes. The legislative history of 31 U.S.C. 3 3527(c),

the improper payment relief statute for disbursing officers, describes

an improper payment as a payment “which the Comptroller General

finds is not in strict technical conformity” with the law. Excerpts from

the pertinent committee reports are quoted in 49 Comp. Gen. 38,40

(1969) and in B-202074, cited above.

A loss resulting from an uncollectible personal check maybe an

improper payment or a physical loss, depending on the

circumstances. If the loss results from an authorized check-cashing

transaction, it is an improper payment because government funds

were disbursed to the bearer. 70 Comp. Gen. 616 (1991). However, if

the check is tendered to pay an obligation owed to the United States

or to purchase something from the government, the loss, to the extent

an accountable loss exists, would be a physical loss. In this

connection, Treasury regulations provide:

“All checks received by any Governrnent officer are accepted subject to collection. If

any check cannot be collected in full or is lost or destroyed before collection, the

administrative agency concerned is responsible for obtaining the proper payment. A

payment by check is not effective urdess and until the full proceeds have been

received.”

I Treasury Financial Manual $5-2010. If a personal check is accepted

subject to collection, and if the government does not exchange value

for the check, any resulting loss is not a loss within the scope of the

accountable officer laws and may be a@.@ed administratively by the

agency. If, however, an accountable officer purports to accept a

personal check in satisfaction of an obligation due the United States

(rather than for collection only), or if the government parts with

something of value in exchange for the check (e.g., sale of

government property), a resulting loss is treated as a physical loss.

B-201673 et al., September 23, 1982. See also 3 Comp. Gen. 403

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(1924); A-44019, March 15, 1934; A-24693, October 30,1929. The

distinction is summarized in the following passage from B-201673:

“If a check tendered in payment of a free, duty, or penalty becomes uncollectible, it

may be argued that the Government incurs a bs in the sense that it does not have

money to which it was legally entitled, but it has not lost anything that it already had.

When the check is in exchange for property, the Government has lost the property,

the value of which is measured by the agreed-upon sales price. Of course, recovery of

the property will remove or mitigate the loss.”

The concept of B-201673 has also been applied to a check seized as

forfeiture under the Currency and Foreign Transactions Reporting Act

and subsequently returned as uncollectible. B-208398, September 29,

1983.

A conceptually similar case is B-216279, October 9, 1984. A teller at a

Customs Service auction gave a receipt to a customer and negligently

failed to collect the tendered funds. It was suggested that there was no

loss because the teller never had physical possession of the funds.

However, the applicable relief statute (31 U.S.C. 5 3527) uses the

terms “physical loss or deficiency” in the disjunctive, and there was

clearly a deficiency in the teller’s account to the extent of the property

turned over in exchange for the lost payment.

While every fiscal irregularity by definition involves a loss or

deficiency for which someone is accountable, not every loss or

deficiency is a fiscal irregularity which triggers accountability. For

example, an accountable officer is not liable for interest lost on

collections which should have been deposited promptly but were not.

64 Comp. Gen. 303 (1985) (failure to deposit collections in

designated depositary); B-190290, November 28, 1977 (increased

interest charges on funds borrowed from Treasury, no net loss to

United States).

Also, losses resulting from the imperfect exercise of judgment in

routine business operations, where no law has been violated, do not

create accountable oftlcer liability. 65 Comp. Gen. 881 (1986) (loss

to Internal Revenue Service Tax Lien Revolving Fund caused by sale

of property for substantially less than amount for which it had been

redeemed).

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5. AInount of Liability As a general proposition, the amount for which an accountable officer

is liable is easy to determine: It is the amount of the physical loss or

improper payment, reduced by any amounts recovered from the

recipient (thief, improper payee, etc.). ~, 65 Comp. Gen. 858,

863–64 (1986); B-194727, October 30, 1979.

There is an exception, discussed in 65 Comp. Gen. 858,863-64, in

which amounts recovered from the recipient should not be used to

reduce the amount of the accountable officer’s liability. A loss may

result from a series of transactions spanning several years, each

transaction giving rise to a separate debt. By the time the loss is

discovered, recovery from the accountable officer may be partialIy

barred by the 3-year statute of limitations found in 31 U.S.C. 3 3526(c).

This, however, does not affect the indebtedness of the recipient

which, in this situation, will exceed the liability of the accountable

ofllcer. Under the Federal Claims Collection Standards, a debtor

owing multiple debts may specify the allocation of a voluntary partial

payment. If the recipientidebtor fails to so speci~, or if payment is

involuntary, the collecting agency may allocate the money among the

various debts in accordance with the best interests of the United

States. Generally, “the best interests of the United States are clearly

served by applying payments made by the recipients to the class of

debt for which only the recipients are liable” (id. at 864), i.e., those

for which recovery from the accountable offic~ is time-barred. Thus,

in this type of situation, partial recoveries from the recipient should

first be applied to the time-barred debt of the accountable oftlcer until

any such amounts have been recouped, and only thereafter used to

reduce the accountable officer’s remaining liability.

A judgment obtained against some third party (improper payee, thief,

etc.) is only “potential unrealized value” and does not reduce the

accountable officer’s liabili~ until it is actualiy collected. B-147747,

December 28, 1961; B-194727, October 30, 1979 (non-decision

letter),

The liability of an accountable officer does not include interest and

penalties assessed against the recipient. B-235037, September 18,

1989.

The liability of an accountable officer resulting from the payment of

fraudulent travel claims is the amount of the fraudulent payment and

does not include non-fraudulent amounts paid for the same day(s). 70

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Comp. Gem 463 (1991). Previously GAO had included both, under the

so-called “tainted day” rule. The 1991 decision distinguishes

fraudulent payees from fraudulent claimants, concluding that the

tainted day rule does not apply to paid claims.

When determining the amount of a loss for which an accountable

officer is to be held liable, the government does not “net” overages

against shortages. In GAO’S view, such “netting” would weaken

internal controls over the accounting for cash balances. B-2 12370,

November 15, 1983; B-199447, March 17, 1981.9As noted in

B-199447, overages must generally be deposited in the Treasury as

miscellaneous receipts.

In almost all cases, the amount of iin accountable officer’s liability is

preciseiy determinable at the outset. It maybe reduced by recoveries,

but it will not increase. One exception is illustrated in B-239387,

April 24, 1991, in which an agency held an empioyee accountable for

a booklet of missing or stolen Government Transportation Requests.

Because the amount of the government’s loss could not be known

until the GTRs were actually used and the government forced to honor

them, additional liability accrued as each GTR was used overtime.

6. Effect of Criminal As we noted previously, the body of law governing the liability and

Prosecution relief of accountable officers is designed not only to induce proper

care but also to protect against dishonesty by the officers themselves.

This section summarizes the relationship between criminal

prosecution and civil liability.

a. Acquittal Acquittal in a criminal proceeding does not extinguish civil liability

and does not bar subsequent civil actions to enforce that liability as

long as they are remedial rather than punitive. Helvering v. Mitchell,

303 U.S. 391 (1938). The reason is the difference in burden of proof.

Acqqittal means only that the government was unable to prove guilt

beyond a reasonable doubt, a standard higher than that for civil

liability. “That acquittal on a criminal charge is not a bar to a civil

action by the Government, remedial in its nature, arising out of the

same facts on which the criminal proceeding was based has long been

9A ~.utotiy ~ufio~ed ~W1ce “f-net%” g- and deficiencies in an account is 31 use.

5 3342(c)(2) (certain check-cashing and exchange transactions), discussed later in this chapter.

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b. Order of Restitution

;:7 : .,, ;.,

. .

settled.” Id. at 397. See also B-239134, April 22, 1991 (non-decision

letter) (conviction on only a portion of the loss).

The rules are the same for acquittal (or reversal of a conviction) by a

military court-martial. Serrano v. United States, 612 F.2d 525 (Ct. Cl.

1979) (acquittal held not to bar agency from imposing civil liability

and withholding pay of accountable officer).

It follows that an accountable officer’s civil liability will be unaffected

by the fact that a grand jury has refused to return an indictment.

B-186922, APril 8, 1977.

A court may order a defendant to make monetary restitution to the

victim, either as part of the sentence (18 U.S.C. $ 3556) or as a

condition of probation (18 U.S.C. $ 3563(b)(3)). In either case, the

relevant terms and procedures are governed by 18 U.S.C. $$3663 and

3664. Restitution may be ordered in a lump sum or in installments. 18

U.S.C. 5 3663(f). These are general crimin al statutes, and would apply

fully where the defendant is an accountable officer and the United

States is the victim as well as the prosecutor.

The statutory scheme clearly recognizes the possibility of subsequent

civil proceedings by the United States as victim against the

accountable officer. Any amounts paid to a victim under a restitution

order must be set off against amounts recovered in a subsequent civil

action. 18 US.C. $ 3663(e)(2). In such an action, the previously

convicted defendant cannot deny the “essential allegations” of the

offense. 18 U.S.C. S 3664(e).

Where restitution is ordered in full, payable in installments, it has

been held that the victim may nevertheless obtain a civil judgment for

the unpaid balance, even though there has been no default in the

installment payments. Teachers Insurance and Annuity Association v.

Green, 636 F. Supp. 415 (S. D.N.Y. 1986). “Future payments that do

not fully compensate a victim in present value terms cannot be a bar

to a civil judgment.” Id. at 418. See also — B-128437-O. M., August 3,

1956.

Where restitution is ordered in an amount less than the full amount of

the loss, civil liability for the balance would remain, subject to the

statutory setoff requirement. See 64 Comp. Gen. 303 (1985),

reaching this result under a p~r version of the legislation. The

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decision further suggests that, if the record indicates that the court

thought it was ordering restitution in full, it might be desirable to seek

amendment of the restitution order. Obviously, the fact of conviction

precludes any consideration of administrative relief. —Id. at 304.

The preceding paragraphs are presented from the perspective of

restitution by the accountable officer. Similar principles would apply

with respect to restitution by a responsible party other than the

accountable officer. See, ~, B-193673, May 25, 1979, modified on

other grounds by B-2~673 et al., September 23, 1982 (partial

restitution by thief reduces amount of accountable offker’s liability).

C. Physical Loss or

Deficiency

1. Statutory Provisions

a. Civilian Agencies

The two principal statutes authorizing administrative relief from

liability for the physical loss or deficiency of public funds are 31 U.S.C.

3$ 3527(a) and 3527(b). Subsection (a) applies to the civihan

agencies and to accountable officers of the armed forces other than

disbursing officers. Subsection (b) applies to disbursing officers of

the armed forces.

The physical loss or deficiency relief statute applicable to accountable

officers generally, 31 u.s.c. $ 3527(a), was originally enacted in 1947

(61 Stat. 720). Its justification, similar to that for all relief statutes,

was Summarized by the Senate Committee on Expenditures in the

Executive Departments as follows:

“The justi!lcation. . . is that, at the present time, relief of the kind with which this bill

is concerned is required to be granted either through passage of a special relief bill by

the Congress or by the ffling of suit by the responsible person in the United Statea

Court of Claims, the latter to be done at the personal expense of the responsible

person. Both methods are costly and time consuming.”

S. Rep. No. 379, 80th Cong., 1st Sess., reprinted in 1947 U.S. Code

Cong. Service 1546.

Before the actual relief mechanism is triggered, two threshold issues

must be satisfied. First, the loss must be a physical loss or deficiency

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and not an improper payment. 31 U.S.C. s 3527(a)(2). Second, the

person for whom relief is desired must be an “accountable oftlcer.”la

The legislative history confirms that this includes the general

custodial category:

“There are many agents of the Government who do not disburse but who,

nevertheless, are fully responsible for funds. . . entrusted to their charge and, for that

reason, the committee bill has been broadened to include that class of personnel.”

S. Rep. No. 379, 1947 U.S. Code Cong. Service at 1547.

Once it has been determined that there has been a physical loss or

deficiency of “public money, vouchers, checks, securities, or records”

for which an accountable oftlcer is liable, the statute authorizes the

Comptroller General to grant relief from that liability if the head of the

agency involved makes two administrative determinations (31 U.S.C.

$ 3527(a)(l)), and if the Comptroller General agrees with those

determinations ($ 3527(a)(3)).

First, the agency head must determine that the accountable officer

was carrying out official duties at the time of the loss, or that the loss

was attributable to the actor omission of a subordinate of the

accountable officer. Note that this is stated in the disjunctive. The

second part, loss attributable to a subordinate, is designed to cover

the situation, found in several agencies such as the Internal Revenue

Service and the Customs Service, in which the account is in the name

of a supervisory official who does not actually handle the funds. In

this situation, both persons are accountable, and relief of one does not

necessarily meart relief of the other.

Second, the agency head must determine that the loss was not

attributable to fault or negligence on the part of the accountable

officer. This determination is necessary regardless of which part of

the first determination applies. Thus, while lack of fault does not

affect the automatic imposition of liability, it does provide the basis

for ielief.

1’%his statute wilf not apply to certifying oftlcers since they do not have actual custody of funds.

However, a certifying oftker could conceivably have other duties or supervisory responsibilities

and thus be accountable, and efigible for relief under 31 U.S.C. $ 3527(a), in that capacity.

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Generally, the requirement that the accountable officer must have

been acting in the discharge of official duties does not present

probiems. Thus, in the typical case, the central question becomes

whether GAO is able to concur with the administrative determination

that the loss occurred without fault or negligence on the part of the

accountable officer. In reviewing relief cases over the years, GAO has

developed a number of standards, the application of which to a given

case requires a careful analysis of the particular facts. Many factors

may bear on the conclusion in any given case, and the result will be

determined by the interrelationship of these factors.

Section 3527(a) applies to accountable officers of “an agency,”

defined in 31 u.s.c. $101 as any “department, agency, or

instrumentaIity of the United States Government. ” Thus, section

3527(a) has been construed as applicable to the judicial branch

(B-200108/B-198558, January 23, 1981; B-197021, May 9, 1980;

B-191440, May 25, 1979; B-185486, Februaxy 5, 1976), and to

agencies of the legislative branch (B-192503 -O. M., January 8, 1979,

denying relief to a GAO employee). Whether it applies to the Senate or

House of Representatives is unclear. R has also been construed as

applicable to those government corporations which are subject to

GAO’S account settlement authority. B-88578, August 21, 1951;

B-88578 -O. M., August 21, 1951.

b. Military Disbursing Officers The need for physical loss relief authority for military disbursing

off~cers became highlighted during World War I when several ships

were sunk with funds and records on board. The first permanent

administrative relief statute was enacted in 1919 and applied only to

the Navy (41 Stat. 132). The Army received similar legislation in 1944

(58 Stat. 800). The two were combined in 1955 and expanded to

cover all of the military departments (69 Stat. 687). The legislation is

now codified at 31 U.S.C, $ 3527(b). The origins of the 1919 law are

described in 7 Comp. Gen. 374, 377–78 (1927); the statutory

evolution is detailed in B-202074, July 21, 1983. The statute applies

to both civilian and military personnel of the various military

departments. B-151 156, December 30, 1963.

As with section 3527(a), two threshold issues must be satisfied before

the relief mechanism comes into play. First, like section 3527(a),

section 3527(b) applies only to physical losses or deficiencies and not

to improper payments. 31 U.S.C. $ 3527(b)(l)(B); 7 Comp. Gen. 374

(1927); 2 Comp. Gen. 277 (1922); B-202074, Juiy 21, 1983. The

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.g, ‘:

statute was intended to authorize relief in appropriate cases for losses

“such as losses by fire, ship sinkings, thefts or physicaI losses

resulting from enemy action or otherwise.” B-75978, June 1, 1948.

Thus, a loss in shipment is cognizable under section 3527(b).

B-200437, October 21, 1980. However, the making of a travel

advance to an employee who terminated his employment without

accounting for the advance is not a physical loss but rather “a

payment voluntarily made by the disbursing officer in the course of

his duties.” B-75978, June 1, 1948.

Second–and here the two statutes differ-section 3527(b) applies

only to disbursing officers and not to nondisbursing accountable

ofilcers. B-194782, August 13, 1979; B-194780, August 8, 1979;

B-151 156, December 30, 1963; B-144467, December 19, 1960

(“while all disbursing officers are accountable officers, all

accountable officers are not disbursing officers”). As each of the cited

cases points out, physical loss relief for nondisbursing accountable

officers of the military departments must be sought under 31 U.S.C.

s 3527(a).

Section 3527(b) is also similar to section 3527(a) in that, once it has

been determined that a loss is properly cognizable under the statute,

the applicable agency head must determine that (1) the disbursing

officer was carrying out official duties at the time of the loss or

deficiency (prior versions of the statute, and hence many GAO

decisions, use the military term “line of duty status”), and (2) the loss

occurred without fault or negligence on the part of the disbursing

oftlcer. The first determination, 31 U.S.C, $ 3527(b)(l)(A), does not

expressly include the “loss attributable to subordinate” clause found

in section 3527(a). However, it is applied in the same manner. See

B-155149, October 21, 1964; B-151 156, December 30, 1963. —

The administrative determinations are conclusive on GAO. al U.S.C.

s 3527(b)(2). Thus, once the determinations are made, the granting

of relief is mandatory. Unlike section 3527(a), if the situation is

properly cognizable under section 3527(b), GAO has no discretion in

the matter. Agency determinations on the threshold issues–what is a

physical loss and who is a disbursing officer-are not conclusive.

B-151156, December 30, 1963.

Section 3527(b) is not the “exclusive remedy” with respect to

physical losses of military disbursing officers. It exists side-by-side

Page 9-31 GAO/OGC-92-13 Appropriationa hw-vol. II
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Liabili@ and Relief of Accountable OfY&cers

with section 3527(a). Thus, for losses cognizable under 31 U.S.C.

$ 3527(b), the disbursing officer (or the applicable Secretary) has an

option to proceed under either statute. B-151 156, December 30,

1963. Of course, for the most part there would be little to gain by

electing to proceed under section 3527(a) if section 3527(b) is also

available.

2. Who Can Grant Relief?

a. 31 u.s.c. # 3527(a) The statute confers the authority to grant relief on the Comptroller

General. At one time, every case, no matter how small the amount,

involved an exchange of correspondence–a letter from the agency to

GAO requesting relief, and a letter from GAO back to the agency

granting or denying it. By 1969, after 20 years of experience under

the statute, a set of standards had developed, and it became apparent

that there was no need for GAO to actually review every case. In that

year, GAO inaugurated the practice of setting a dollar amount, initially

$150, below which agencies could apply the standards and grant or

deny relief accordingly without the need to obtain formal concurrence

from GAO.

GAO has raised the amount several times over the years and has used

various formats to announce the increase. ” The current ceiling is

$3,000. B-243749, October 22, 1991. The authorization applies to

physical losses or deficiencies and, with a few exceptions to be noted

later, not to improper payments. 61 Comp. Gen. 646 (1982); 59

Comp. Gen. 113 (1979). As stated in 61 Comp. Gen. at 647:

“For the most part, the law governing the physicaf 10SS or deficiency of Government

funds is clear, and most cases center around the determination of whether there was

any contributing negligence on the part of the accountable officer. Our numerous

decisions in this area shoufd provide adequate guidance to agencies in resolving most

smaller losses. ”

The $3,000 limitation applies to “single incidents or the total of

similar incidents which occur about the same time and involve the

1 IThe $150 ~uthor~ation W~ eshbhsfled by B-161457, August 1, 1969 (cUcdW 1etter). It w~

raised to $500 in 1974. B-161457, August 14, 1974 (circular letter); 54 Comp. Gem 112 (1974).

A 1983 revision to title 7 of GAO’s Policy and Procedures Manual for Guidance of Federat

Agencies {7 GAO-PPM $28.14, TS No. 7-40, July 14, 1983) raised it to $750. hother revision of

the Policy and Procedures Manual raised it to $1,000. 7GAO-PPM58.9.C (T8 No. 7-42,

February 12, 1990).

Page 9-32 GAO/OGC-92-13 APPro@ationa Law-vol. 11
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Li8bSlity and Itelief of Accountable Officera

same accountable officer.” GAO, Policy and Procedures Manual for

Guidance of Federal Agencies, title 7, $ 8.9.C (1990). Thus, two

losses arising from the same theft, one under the limit and one over,

should be combined for purposes of relief. B-189795, September 23,

1977. In B-193380, September 25, 1979, an imprest fund cashier

discovered a $300 shortage while reconciling her cash and

subvouchers. A few days later, her supervisor, upon returning from

vacation, found an additional $500 missing. Since the losses occurred

under very similar circumstances, GAO agreed with the agency that

they should be treated together for purposes of seeking relief.

Another case, B-187139, October 25, 1978, involved losses of $1,500,

$60, and $50. Since there was no indication that the losses were

related, the agency was advised to resolve the $60 and $50 losses

administratively. (The ceiling was $500 at the time of B-193380 and

B-187139.)

Thus, in cases of physical loss or deficiency, it is necessary to request

relief from GAO only if the amount involved is $3,000 or more. For

below-ceiling losses, GAO’S concurrence is, in effect, granted

categorically provided the matter is properly cognizable under the

statute, the agency makes the required determinations, and the

administrative resolution is accomplished in accordance with the

standards set forth in the GAO decisions. ~, B-206817,

February 10, 1983; B-204740, November 25, 1981. Each agency

should maintain a central control record of its below-ceiling

resolutions, should document the basis for its decisions, and should

retain that documentation for subsequent internal or external audit or

review. 7 GAO-PPM $ 8.9.C (1990). Also, agencies should ensure the

independence of the official or entity making the relief decisions.

B-243749, October 22, 1991.

If an agency inadvertently submits a relief request to GAO for a

below-ceiling loss, GAO’S policy is simply to return the case with a

brief explanation. ~,B-214086, February 2, 1984. GAO will also

provide any further guidance that may appear helpful.

As a practical matter, GAO’S authorization for below-ceiling

administrative resolution is relevant only where the agency believes

relief should be granted. In these cases, the need for an exchange of

correspondence is eliminated, and the relief process is quicker, more

streamlined, and less costly. If the agency believes relief should not be

granted, its refusal to support relief effectively ends the matter

Page 9-33 GAO/OGC-92-13 Appropriations Law-Vol. 11
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Llabilityand RelSefof Accountable offlcem

b. 31 U.S.C. $ 3527(b)

c. Role of Administrative

Deterrrdnations

regardless of the amount. GAO will not review an agency’s refusal to

grant relief in a below-ceiling case. 59 Comp. Gen. 113,114 (1979).

Like 31 U.S.C. $ 3527(a), section 3527(b) also specifies the

Comptroller General as the relieving authority. However, by virtue of

the mandatory nature of section 3527(b), the monetary ceiling

concept used in civilian relief cases has much less relevance to

military disbursing offker losses.

By circular letter B-198451, February 5, 1981, GAO notified the

military departments of a change in procedures under 31 U.S.C.

$ 3527(b). Since GAO has no discretion with respect to the agency

determinations and relief is mandatory as long as the determinations

are made, there is no need for GAO to review any of those

determinations on a case-by-case basis. Thus, there is no need for the

agency to submit a formal request for relief regardless of the amount

involved. As long as the case is properly cognizable under 31 U.S.C.

$ 3527(b) (i.e., it involves a disbursing oftlcer and a physical loss or

deficiency), it is sufficient for purposes of compliance with the statute

for the agency to make the required determinations and to retain the

documentation on file for audit purposes. Of course, should there be a

question as to whether a particular case is properly cognizable under

the statute, GAO is available to provide guidance.

Both of the relief statutes described above require two essentially

identical administrative determinations as prerequisites to granting

relief. It is the making of those determinations that triggers the ability

to grant relief. If the agency cannot in good faith make those

determinations, the legal authority to grant administrative relief

simply does not exist, regardless of the amount involved and

regardless of who is actually granting relief in any given case. GAO will

not review an agency’s refusal to make the determinations under

either statute, and has no authority to “direct” an agency to make

them. In this sense, an agency’s refusal to make the required

determinations is final. The best discussion of this point is found in 59

Comp. Gen. 113 (1979) (case arose under section 3527(a) but point

applies equally to both statutes).

While GAO’S role under section 3527(a) is somewhat greater than

under section 3527(b), that role is still limited to concurring with

determinations made by the agency. GAO cannot make those

Page 9-34 GAO/OGC-92-19 APprOptitiOI16 Law-VO1. ~
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LiaMlkyand Relief of Accountable Officers

determinations for the agency. If they are absent, whatever the

reason, relief cannot be granted regardless of the apparent merits of

the case. There are numerous decisions to this effect. A few of them

are B-217209, December 11, 1984; B-204464, January 19, 1982; and

B-197616, March 24, 1980. The determinations are as much required

in below-ceiling cases as they are in cases submitted to GAO. 59 Comp.

Gen. 113 (1979).

On occasion GAO has been willing to infer a determination that the loss

occurred while the accountable officer was carrying out official duties

where that determination was not expressly stated but the facts make

it clear and there is no question that relief will be granted. ~,

B-244723, October 29, 1991; B-235180, May 11, 1989; B-199020,

August 18, 1980; B-195435, September 12, 1979. However, the

determination of no contributing fault or negligence will not be

inferred but must be expressly stated. It is not suftlcient to state that

the investigative report did not produce affirmative evidence of fault

or negligence. B-167126, August 9, 1976. Nor is it sufficient to state

that there is “no evidence of willful misconduct.” B-217724,

March 25, 1985.

As a practical matter, it will simplify the relief process if the agency’s

request explicitly states all required determinations. It is best simply

to follow the wording of the statute.

Agency determinations required by a relief statute must be made by an

agency official authorized to do so. ~, B-184028, October 24,

1975. Section 3527(a) requires determinations by the “head of the

agency.” Section 3527(b) specifies the “appropriate Secretary.” Of

course in most cases the authority under either statute will be

delegated. It has been held that, absent a clear expression of

legislative intent to the contrary, the authority to make determinations

under these statutes may be delegated only to officials authorized by

law to act in place of the agency head, or to an Assistant Secretary. 29

Comp. Gen. 151 (1949). Many agency heads have separate statutory

authority to delegate and redelegate, and this of course will be

sufficient. See, e.g., 22 U.S.C. 52658 (Secretary of State). As far as

GAO is concerne~the form of the delegation is immaterial although it

should, of course, be in writing. Documentation of delegations need

not be furnished to GAO, nor need it be specified in relief requests, but

should be available if requested. 7 GAO-PPM $ 8.9.B (1990).

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Lkldli@ and Relief of Accountable Of&em

If, under agency procedures, the determinations are made in the fwst

instance by someone other than the designated of?lcial (e.g., aboard

of inquiry), the relief request must explicitly state the designated

official’s concurrence. B-207062, July 20, 1982.

3. Standards for Granting

Relief

a. Standard of Negligence Again, it is important to distinguish between liability and relief. The

presence or absence of negligence has nothing to do with an

accountable officer’s basic liability. The law is not that an accountable

officer is Iiable for negligent losses. The officer is strictly liable for all

losses, but may be relieved if found to be free from fault or

negligence. It has frequently been stated that an accountable oftlcer

must exercise “the highest degree of care in the performance of his

duty.” ~, 48 Comp. Gen. 566, 567–68 (1969); B-186922,

August 26, 1976; B-182386, April 24, 1975. Statements of this type,

however, have little practical use in applying the relief statutes.

In evaluating the facts to determine whether or not an accountable

officer was negligent, GAO applies the standard of “reasonable care.”

54 Comp. Gen. 112 (1974); B-196790, February 7, 1980. This is the

standard of simple or ordinary negligence, not gross negligence. 54

Comp. Gen. at 115; B-158699, September 6, 1968. The standard has

been stated as what the reasonably prudent and careful person would

have done to take care of his or her own property of like description

under like circumstances. B-209569, April 13, 1983; B-193673,

May 25, 1979; Malone v. United States, 5 Ct. Cl. 486,489 (1869).

This is an objective standard, that is, it does not vary with such factors

as the age and experience of the particular accountable officer.

The doctrine of comparative negligence (allocating the loss based on

the degree of fault) does not apply under the relief statutes.

B-211962, July 20, 1983; B-190506, November 28,1977.

b. Presumption of The mere fact that a loss or deficiency has occurred gives rise to a

Negligence/Burden of Proof presumption of negligence on the part of the accountable oftlcer. The

presumption may be rebutted by evidence to the contr~, but it is the

accountable officer’s burden to produce the evidence. The

government does not have to produce evidence to establish that the

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Ldabllityand Itelkfof Accountable Ofllcem

‘% ‘ %?’ ‘. “., “’:

accountable offker was at fault in order to hold the oftlcer liable.

Rather, to be entitled to relief, the accountable officer must produce

evidence to show that there was no contributing fault or negligence on

his or her part, i.e., that he or she exercised the requisite degree of

care.

This rule originated in decisions of the Court of Claims under 28 U.S.C.

$2512, before any of the administrative relief statutes existed, and

has been consistently followed. An early and often quoted statement is

the following from Boggs v. United States, 44 Ct. Cl. 367,384 (1909):

“[T]here is at the outset a presumption of liability, and the burden of proof must rest

upon the oftlcer who has sustained the loss.”

A later case quoting and applying Boggs is O’Neal v. United States, 60

Ct. Cl. 413 (1925). More recently, the court said:

“[T]he Government does not have the burden of proving fault or neghgence on the

part of plaintiff; plaintiff has the sole burden of proving that he was without fault or

negligence in order to qualify for [relief].”

Serrano v. United States, 612 F.2d 525, 532–33 (Ct. Cl. 1979).

GAO follows the same rule, stating it in literally dozens of relief cases.

~, 67 Comp. Gen. 6 (1987); 65 Comp. Gen. 876 (1986); 54 Comp.

Gen. 112 (1974); 48 Comp. Gen. 566 (1969).lZ

The amount and types of evidence that will suffice to rebut the

presumption vary with the facts and circumstances of the particular

case. However, there must be affirmative evidence. It is not enough to

rely on the absence of implicating evidence, nor is the mere

administrative determination that there was no fault or negligence,

unsupported by evidence, stilcient to rebut the presumption. ~,

70 Comp. Gen. 12, 14 (1990); B-204647, February 8, 1982;

B-167126, August 9, 1976.

lzMaay decisions prior to 1970, such as 48 Comp. Gen. 566, deal with postal employees. Since

enactment of the Postal Reorgsnizstion Act of 1970, responsibility for the refief of postal

employees is with the United States Postal Service. 39 US,C. $ 2601; 50 Comp. Gen. 731

(1971); B-164786, October 8,1970. While the Comptroffer General no longer relieves postal

employees, the principles enunciated in the earlier decisions are nonetheless applicable to other

accountable officers.

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Liab~and Relief ofkcoontable Officera

If the record clearly establishes that the loss resulted from burglary or

robbery, the presumption is easily rebutted. But the evidence does not

have to explain the loss with absolute certain~. If the evidence is not

ail that clear, the accountable officer may still be able to rebut the

presumption by presenting evidence tending to corroborate the

likelihood of theft or showing that some factor beyond his control was

the proximate cause of the loss. If such evidence exists, and if the

record shows that the accountable oftlcer complied fully with all

applicable regulations and procedures, the agency’s determination of

no fault or negligence will usually be accepted and relief granted.

GAO will consider the results of a polygraph (lie detector) test as an

additional factor in the equation, but does not regard those resub,

standing alone, as dispositive. This applies whether the results are

favorable (B-206745, August 9, 1982; B-204647, February 8, 1982;

B-142326, March 31, 1960; B-182829 -O. M., February 3, 1975) or

unfavorable (B-209569, April 13, 1983; see also B-192567, August 4,

1983, aff’d upon reconsideration, B-192567, June 21, 1988).

Another situation in which the presumption is easily rebutted is where

the accountable officer does not have control of the funds at the time

of the loss. An example is losses occurring while the accountable

ofilcer is on leave or duty absence. As a practical matter, relief will be

granted unless there is evidence of actual contributing negligence on

the part of the accountable ofllcer. B-196960, November 18, 1980;

B-184028, March 2, 1976; B-175756-0. M., June 14, 1972. Of course,

where contributing negligence exists, relief will be denied and the role

of the presumption never comes into play. B-182480, Februay 3,

1975.

The presumption of negligence is occasionally criticized as unduly

harsh. However, it is necessary both in order to preseme the concept

of accountability and to protect the government against dishonesty as

well as negligence. See B-167126, August 28, 1978; B-191440,

May 25, 1979. As stated in one decision, the presumption of

negligence—

“is a reasonable and legal basis for the denial of relief where the accountable officers

have control of the funda and the means available for their safekeeping but the

shortage nevertheless occurs without evidence of forcible entry or other conclusive

explanation which would exclude negligence as the proximate cause of the loss.”

GAO/OGC-92-13 @pmptiiOl19 Law-VO1. ~
Chapter 9

Ikbffltyand Relief of Accountable Officers

c. Actual Negligence

B-166519, October 6, 1969. Indeed, if liability is strict and automatic,

a legal presumption against the accountable officer is virtually

necessary as a starting point.

If the facts indicate negligence on the part of the accountable officer,

and if it appears that the negligence was the proximate cause of the

loss, then relief must be denied.

One group of cases involves failure to lock a safe. It is negligence for

an accountable oftlcer to place money in a safe in an area which is

accessible to others, and then leave the safe unlocked for a period of

time when he or she is not physically present. ~, B-190506,

November 28, 1977; B-139886, July 2, 1959. It is also negligence to

leave a safe unattended in a “day lock” position. B-199790,

August 26, 1980; B-188733, March 29,1979, affd, B-188733,

January 17, 1980; B-187708, April 6, 1977. Compare B-180863, April

24, 1975, in which an accountable officer who had left a safe on ‘day

lock” was relieved in view of her lack of knowledge or instruction

regarding the day lock mechanism. Thus, an accountable officer who

leaves a safe unlocked (either by leaving the door open or closing the

door but not rotating the combination dial), and then leaves the office

for lunch or for the night will be denied relief. B204173, January 11,

1982, aff’d, B-204173, November 9, 1982; B-183559, August 28,

1975; B-180957, Apd 24, 1975; B-142597, Apti 29, 1960;

B-181648 -O.M., August 21, 1974.

Merely being physically present may not be enough. A degree of

attentiveness, dictated by the circumstances and common sense, is

also required. In B-17371 O-O. M., December 7, 1971, relief was denied

where the cashier did not lock the safe while a stranger, posing as a

building maintenance man, entered the cashier’s cage ostensibly to

repair the air conditioning system and erected a temporary barrier

between the cashier and the safe.

Another group involves the failure to use available security facilities.

As we will see in our discussion of agency security, a good

rule-of-thumb for the accountable officer is: You do the best you can

with what is available to you. Failure to do so, without compeilirtg

justification, does not meet the standard of reasonable care. 8ome

examples in which relief was denied are:

GAO/OGC.92-13 APPmptitiOW LIJW-VOI. ~
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Llabil$tyand Rellefof Accountable Offlcem

● Funds disappeared from bar-locking fde cabinet. Combination safe

was available but not used. B-192567, June 21, 1988.

● Cashier left funds overnight in locked desk drawer instead of safe

provided for that purpose. B-177730-O.M., February 9, 1973.

● Cashier left funds in unlocked drawer while at lunch instead of locked

drawer provided for that purpose. B-161229-O. M., April 20, 1967.

● Accountable officer left unlocked cash box in safe to which several

other persons had access. B-172614-O. M., May 4, 1971;

B-167596-O. M., August 21, 1969.

Inattentiveness or simple carelessness which facilitates a loss may

constitute negligence and thus preclude relief. 64 Comp. Gen. 140

(1984) (shoulder bag with money left unattended on airport counter

for several minutes); B-233937, May 8, 1989 (bag With money set on

ledge in crowded restaurant); B-208888, September 28, 1984

(evidence suggested that funds were placed on desk and inadvertently

knocked into trash can); B-127204, April 13, 1956 (pay envelopes left

on top of desk in cashier’s cage 19 inches from window opening on

hallway to which many persons had access).

The best way to know how much cash you have is to count it. Failure

to do so where reasonable prudence would dictate otherwise is

negligence. B-247581, June 4, 1992 (alternate cashier failed to count

cash upon receipt from principal or upon return to principal);

B-206820, September 9, 1982 (accountable officer handed money

over to another employee without counting it or obtaining receipt);

B-193380, September 25, 1979 (cashier cashed checks at bank and

failed to count the cash received).

A deficiency in an accountable officer’s account caused by the

acceptance of a counterfeit note constitutes a physical loss for

purposes of 31 U.S.C. $ 3527(a). B-140836, October 3, 1960;

B-108452, May 15, 1952; B-1013OI, July 19, 1951. Whether

accepting counterfeit money is negligence depends on the facts of the

particular case, primarily whether the counterfeit was readily

detectable. B-239724, October 11, 1990; B-191891, June 16, 1980;

B-163627-O. M., March 11, 1968. (Relief was granted in these three

cases.) If the quality of the counterfeit is such that a prudent person in

the same situation would question the authenticity of the bill, relief

should not be granted. B-155287, September 5, 1967. Also, failure to

check a bill against a posted list of serial numbers will generally be

viewed as negligence. B-155287, September 5, 1967; B166514-O.M.,

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IhMUty and Ikdief of Accountable Officers

July 23, 1969. Finally, failure without compelling justification to use

an available counterfeit detection machine is negligence. B-243685,

July 1, 1991.

Other examples of conduct which does or does not constitute

negligence are scattered throughout this chapter, e.g., the sections on

compliance with regulations and agency security. In all cases,

including those which cannot be neatly categorized, the approach is to

apply the standard of reasonable care to the conduct of the

accountable ofilcer in light of all surrounding facts and

circumstances. For example, in B-196790, February 7, 1980, a

patient at a Veterans Affairs hospital, patient “X”, had obtained a

cashier’s check from a bank on May 9, 1978. On September 12, 1978,

another patient, patient “Y”, presented the check at the hospital for

deposit to patient X’s personal funds account. On the following day,

patient X withdrew the money and left. The bank refused to honor the

check because, unknown to hospital personnel, patient X had gone to

the bank on May 17, stated that he had never received the check, and

the bank had refunded its face value. As noted in the decision, patient

X had “cleverly managed to double his bank account by collecting the

same funds twice.” The issue was whether it was negligence for the

hospital cashier to accept the check dated four months earlier or to

permit patient X to withdraw the funds the day after the check was

deposited. GAO considered the nature of a cashier’s check, noted the

absence of applicable regulations, applied the reasonable care

standard, and granted relief, but recommended that the agency

pursue further collection efforts against the bank.

d. Proximate Cause An accountable officer maybe found negligent and nevertheless

relieved from liability if it can be shown that the negligence was not

the “proximate cause” of the loss or shortage. A precise deftition of

the term “proximate cause” does not exist. ls The concept means that,

first, there must be a cause-and-effect relationship between the

negligence and the loss. In other words, the negligence must have

contributed to the loss. However, as one authority notes, the cause of

an event can be argued in a philosophical sense to “go back to the

l~”~ere iS ~r~p5 no~g iII the enwe field of law which has called forth more dkWeemenG

or upon which the opinions are in such a welter of confusion.” Prosaer and KeeWm, The Law of

T=, $41 (5th ed. 1984).

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LiaMlityand Belkfof Accountable Officers

dawn of human events” and its consequences can “go forward to

eternity.”14 Obviously a line must be drawn someplace. Thus, the

concept also means that the cause-and-effect relationship must be

reasonably foreseeable; that is, a reasonably prudent person should

have anticipated that a given consequence could reasonably follow

from a given act.

Before proceeding, we must refer again to the accountable oflicer’s

burden of proof. The Court of Claims said, in Serrano v. United

States, 612 F.2d 525, 531–32 (Ct. Cl. 1979):

“It is argued that the. . . fault or negligence involved must be the proximate cause of

the loss. Thus the Secret.my. . . could not deny relief urdess the loss was proximately

attributable to plaintiff. This argument has no merit. If such an argument were to be

accepted by this court, it would shift the burden of proof. . . to the Government. . . .

“Shitting of the burden of proof, and forcing the Government to prove that plainti.tTs

conduct was a proximate cause of the loss, would be intolerable. This shift would

negate the special responsibility that disbursing officers have in handling public

funds.” (Emphasis in original.)

Thus, the government does not have to prove causation anymore than

it has to prove negligence. Rather, the accountable ofilcer who has

been negligent must, in order to be eligible for relief, show that some

other factor or combination of factors was the proximate cause of the

loss, or at least that the totality of evidence makes it impossible to fm

responsibility.

In analyzing proximate cause, it may be helpful to ask certain

questions. First, if the accountable officer had not been negligent,

would the loss have occurred anyway? If the answer to this question is

yes, the negligence is not the proximate cause of the loss and relief

will probably be granted. However, it may not be possible to answer

this question with any degree of certainty. If not, the next question to

ask is whether the negligence was a “substantial factor” in bringing

about the loss. If this question is answered yes, relief will probably be

denied. A couple of simple examples will illustrate:

(a) An accountable ot%cer leaves cash visible and unguarded on a

desk top while at lunch, during which time the money disappears.

14id.

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LIabUttyand lleliefof Accoun@bk OQker8

There can be no question that the negligence was the proximate cause

of the loss.

(b) As noted previously, failure to count cash received at a bank

window is negligence. Suppose, however, that the accountable officer

is attacked and robbed by armed marauders while returnin gto the

office. The failure to count the cash, even though negligent, would not

be the proximate cause of the loss since presumably the robbers

would have taken the entire amount anyway.

A good illustration is B-201173, August 18, 1981. Twelve armed men

in two Volkswagen minibuses broke into the West African

Consolidated Services Center at the American Embassy in Lagos,

Nigeria. They forcibly entered the cashier’s office and proceeded to

carry the safe down the stairs. The burglars dropped the safe while

carrying it, the safe opened upon being dropped, and the burglars

took the money and fled. The reason the safe opened when dropped

was that the cashier had not locked it, clearly an act of negligence.

However, even if the safe had been locked, the burglars would

presumably have continued to carry it away, loaded it onto their

minibus, and forcibly opened it somewhere else. Thus, the cashier’s

failure to Iock the safe, while negligent, was not the proximate cause

of the loss.

Proximate cause considerations are often relevant in cases involving

weaknesses in agency security, and the topic is explored further under

the Agency Security heading.

The following are a few additional examples of cases in which relief

was granted even though the accountable officer was or may have

been negligent, because the negligence was found not to be the

proximate cause of the loss or deficiency.

● Accountable officer left safe combination in unlocked desk drawer.

Burglars found combination and looted safe. Had this been the entire

story, relief could not be granted. However, burglars also pried open

locked desk drawers throughout the ofilce. Thus, locking the desk

drawer would most likely not have prevented the theft. B-229587,

Januaqy 6, 1988.

● Accountable officer in Afghanistan negligently turned over custody of

funds to unauthorized person. Money was taken by rioters in severe

civil disturbance. Relief was granted because negligence was not the

Page 9-43 GAOKJGC-92-18 Approprktiom Law-vol. II
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●

●

●

e. Unexplained Loss or

Shortage

proximate cause of the loss. (Whether the person holding the funds

was or was not an authorized custodian was not a matter of particular

concern to the rioters.) B-144148-0. M., November 1, 1960.

Cashier discovered loss upon return from two-week absence. It could

not be veriiled whether she had locked the safe when she left.

However, time of loss could not be pinpointed, other persons worked

out of the same safe, and it would have been opened daily for normal

business during her absence. Thus, even if she had failed to lock the

safe (negligence), proximate cause chain was much too conjectural.

B-191942, September 12, 1979.

Even if there is a clearly identified intervening cause, relief may still

be denied depending on the extent to which the accountable officer’s

negligence facilitated the intervening cause or contributed to the loss.

In such a case, the negligence will be viewed as the proximate cause

notwithstanding the intervening cause. The following cases will

illustrate.

Accountable officer failed to make daily deposits of collections as

required by regulations. Funds were stolen from locked safe in

burglary. Relief was denied because officer’s negligence was

proximate cause of loss in that funds would not have been in the safe

to be stolen if they had been properly deposited. B-71445, June 20,

1949. See also B-203726, July 10, 1981; B-164449, December 8,

1969; B-168672 -0. M., June 22, 1970.

Accountable ofllcer negligently left safe on “day lock” position (door

closed, dial or handie partially turned but not rotated, so that partial

turning in one direction, without knowledge of combination, will

permit door to open). Thief broke into premises, opened safe without

using force, and stole funds. Relief was denied because negligence

facilitated theft by making it possible for thief to open safe without

force or knowledge of combination. B-188733, March 29, 1979, aff’d,

B-188733, January 17, 1980.

The cases cited under the Actual Negligence heading all contained

clear evidence of negligence on the part of the accountable officer.

Absent a proximate cause issue, these cases are relatively easy to

resolve. Such evidence, however, is not necessary in order to deny

relief in the situation we refer to as the “unexplained loss or

shortage.” In the typical case, a safe is opened at the beginning of a

business day and money is found missing, or an internal audit reveals

a shortage in an account. There is no evidence of negligence or

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Liability and Eeliefof Accountable OfXleem

misconduct on the part of the accountable officer; there is no

evidence of burglmy or any other reason for the disappearance. All

that is known with any certainty is that the money is gone. In other

words, the loss or shortage is totally unexplained. In many cases, a

formal investigation confm this conclusion.

The presumption of negligence has perhaps its clearest impact in the

unexplained loss situation. If the burden of proof is on the

accountable officer to establish eligibility for relief, the denial of relief

follows necessarily. Since there is no evidence to rebut the

presumption, there is no basis on which to grant relief. The

presumption and its application to unexplained losses were discussed

in 48 Comp. Gen. 566, 567-68 (1969) as follows:

“While there is no positive or afihmative evidence of negligence on the part of [the

accountable ofllcer] in connection with this 10SS, we have repeatedly held that

positive or affiiative evidence of negligence is not necessary, and that the mere fact

that an unexplained shortage occurred ia, in and of itself, stilcient to raise an

inference or presumption of negligence. A Government off]cial charged with the

custody and handling of public moneys. . . is expected to exercise the highest degree

of care in the performance of his duty and, when funds. . . disappear without

explanation or evident reason, the presumption naturally arises that the responsible

official was derelict in some way..hforeover, granting relief to Government officials

for unexplained losses or shortagea of this nature might tend to make such offlciala

lax in the performance of their duties.”15

The rationale is fairly simple. Money does not just getup and walk

away. If it is missing, there is an excellent chance that someone took

it. If the accountable officer exercised the requisite degree of care and

properly safeguarded the funds, it is unlikely that anyone else could

have taken the money without leaving some evidence of forced entw.

Therefore, where there is no evidence to explain a loss, the leading

probabilities are that the accountable officer either took the money or

was negligent in some way that facilitated theft by someone else. Be

that as it may, denial of relief in an unexplained loss case is not

inte,nded to imply dishonesty by the particular accountable officer; it

means merely that there was insufficient evidence to rebut the

applicable legal presumption. See B-122688, September 25, 1956.

Despite the strictness of the rule, there are many unexplained ioss

cases in which the presumption can be rebutted and relief granted. By

15A fm ad~tio~ e~ples are 70 Comp. Gen. 389 (1991); B-213427, Ikcernber 13* 1983,

atTd upon reconsideration, B-213427, March 14, 1984; B-159987, 8eptember 21, 1966.

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Liability and Relief of Accountable Of!lcers

deftition, the evidence will not be sufficient to “explain” the loss,

otherwise there wouldn’t bean unexplained loss to begin with. There

is no simple formula to apply in determining the kinds or amount of

evidence that will rebut the presumption. It is necessaxy to evaluate

the totality of available evidence, including statements by the

accountable officer and other agency personnel, investigation reports,

and any relevant circumstantial evidence.

In some cases, for example, it may be possible to reasonably conclude

that arty negligence that may have occurred was not the proximate

cause of the loss. These cases tend to involve security weaknesses and

are discussed under the Agency Security heading. The evidence, in

conjunction with the lack of any evidence to the contrary and the

agency’s “no fault or negligence” determination, supports the

granting of relief.

Since the burden of proof rests with the accountable officer, the

accountable ofllcer’s own statements take on a particular relevance in

establishing due care, and relief should never be denied without

obtaining and carefully analyzing them, Naturally, the more speciilc

and detailed the statement is, and the more closely tied to the time of

the loss, the more helpful it will be. While the accountable officer’s

statement is obviously self-serving and may not be enough if there are

no other supporting factors, it has been enough to tip the balance in

favor of granting relief when combined with other evidence, however

sIight or circumstantial, which by itself would not have been

suffkient.]6

f. Compliance With

Regulations

If a particular activity of an accountable officer is governed by a

regdation, failure to follow that regulation will be considered

negligence. If that failure is the proximate cause of a loss or

deficiency, relief must be denied. 70 Comp. Gen. 12 (1990); 54

Comp. Gen. 112, 116 (1974). The relationship of this rule to the

standard of reasonable care discussed earlier is the premise that the

prudent person exercising the requisite degree of care will become

familiar with, and will follow, applicable regulations. Indeed, it has

‘6~, B-242830, September 24, 1991 (cashier’s statement supported by another employee;

safe had been opened for ordy one transaction in early afternoon); B-214080, March 25, 1986

(cashier made sworn and unrefuted statement to local police and Secret Service); B-21 OO17,

June 8, 1983 (cashier’s statement corroborated by witness); 5188733, March 29,1979

(forcible entry to o~ce but not to safe itself; cashier’6 statement that he locked safe on day of

robbery accepted).

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IAaldlitY md Belief of Accountable OfflceM

been stated that accountable officers have a duty to famihrize

themselves with pertinent Treasury Department and agency rules and

regulations. B-229207, July 11, 1988; B-193380, September 25,

1979.

Treasury Department regulations on disbursing, applicable to aI.I

agencies for which Treasury disburses under 31 U.S.C. $3321, are

found in the Treasury Financial Manual. Treasury regulations

governing cashiers are found in I TFM Part 4, Chapter 3000, and in the

Treasury Department’s TFM supplement entitled Manual of

Procedures and Instructions for Cashiers. The TYeasury manuals

establish general requirements for sound cash control, and failure to

comply may result in the denial of relief. ~, 70 Comp. Gen. 12

(1990) (cashier, contrary to Cashiers’ Manual, kept copy of safe

combination taped to underside of desk pull-out panel).

The same principle applies with respect to violations of individual

agency regulations and written instructions. ~, B-193380,

September 25, 1979 (cashier Violated agency regulations by placing

the key to a locked cash box in an unlocked cash box and then leaving

both in a locked safe to which more than one person had the

combination). The decision further pointed out that oral instructions

to the cashier to leave the cash box unlocked could not be considered

to supersede published agency regulations. However, if agency

regulations are demonstrably ambiguous, relief may be granted.

B-169848-O. M., December 8, 1971.

Negligence will not be imputed to an accountable oftlcer who fails to

comply with regulations where full compliance is prevented by

circumstances beyond his or her control. This recognizes the fact that

compliance is sometimes up to the agency and beyond the control of

the individual. For example, violating a regulation which requires that

funds be kept in a safe is not negligence where the agency has failed

to provide the safe. B-78617, June 24, 1949.

Also, as with other types of negligence, failure to follow regulations

will not prevent the granting of relief if the failure was not the

proximate cause of the loss or deficiency. B-229207, July 11, 1988;

B-229587, Januwy 6, 1988; B-185666, Jtiy 27, 1976; Libbyv.

United States, 81 F. Supp. 722, 727 (Ct. Cl. 1948). In B-185666, for

example, a cashier kept her cash box key and safe combination in a

sealed envelope in an unlocked desk drawer, in violation of the

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Liability and Relief of Aeeoun@ble Offlcera

Treasury Cashiers’ Manual. Relief was nevertheless granted because

the seal on the envelope had not been broken and the negligence

could therefore not have contributed to the loss.

While failure to comply with regulations is generally considered

negligence, the converse is not always true. To be sure, the fact that

an accountable officer has complied with all applicable regulations

and instructions is highly significant in evaluating eligibility for relief.

It is not conclusive, however, because the accountable ofticer might

have been negligent in a matter not covered by the regulations. In a

1979 case, an accountable officer accepted a $10,000 personal check

at a Customs auction sale and turned over the property without

attempting to ver@ the existence or adequacy of the purchaser’s

account. The check bounced. It was not clear whether existing

regulations applied to that situation. Even without regulations,

however, accepting a personal check for a large amount without

attempting veriilcation was viewed as not meeting the standard of

reasonable care, and relief was denied. B-193673, May 25, 1979,

modified on other grounds, B-201673 et al., September 23, 1982.

g. Losses in Shipment Government funds are occasionally lost or stolen in shipment. The

Postal Service or other carrier is the agent of the sender, and funds in

shipment remain in the “custody” of the accountable ofilcer who

shipped them until delivered, notwithstanding the fact that they are in

the physical possession of the carrier. B-185905-O. M., April 23, 1976.

Thus, a loss in shipment is a physical loss for which an accountable

ofilcer is liable.

For the most part, relief for losses in shipment is the same as relief for

other losses, and the rules discussed in this chapter with respect to

negligence and proximate cause apply. For example, relief was denied

in one case because transmitting cash by ordinary first-class mail

rather than registered or certified mail was held not to meet the

reasonable care standard. B-164450-O. M., September 5, 1968.

However, relief for losses in shipment differs from relief for other

losses in one important respect. A loss in shipment is not viewed as an

“unexplained loss” and there is no presumption of negligence.

B-164450-O. M., September 5, 1968. The reason for this distinction is

that there is no basis to infer negligence when a loss occurs while

funds are totally beyond the control of the accountable officer. Thus,

where funds are lost in shipment, in the absence of positive evidence

GAO/OGC-92-13 Appropriations Law -Vol. II
Chapter 9

LIabiMtyand Relkfof Accountable Officers

of fault or negligence, an accountable officer will be relieved if he or

she conformed fully with applicable regulations and procedures for

the handling and safeguarding of the funds and they were nevertheless

lost or stolen. B-142058, March 18, 1960; B-126362, February 21,

1956; B-119567, January 10, 1955; B-95504, June 16,1950.

The Government Losses in Shipment Act (GLISA), 40 U.S.C.

$$ 721–729, authorizes agencies to ffle claims with the Treasury

Department for funds or other valuables lost or destroyed in

shipment. The Treasury Department has a revolving fund for the

payment of these claims and hss issued regulations, found at 31 C.F.R.

Parts 361 and 362, to implement the statute. The Treasury

Department will generally disallow a claim unless there has been strict

compliance with the statute and regulations. See, ~, B-200437,

October 21, 1980. “

If a loss in shipment occurs, the agency should first consider fding a

claim under the Government Losses in Shipment Act, and should seek

relief only if this fails, DeniaI of a GLISA claim should prompt further

inquiry since it suggests the possibility that someone at the point of

shipment may have been negligent, but it will not automatically

preclude the granting of relief. For example, it is possible for a claim

to be denied for reasons that do not suggest negligence. In B-126362,

February 21, 1956, the accountable officer had reimbursed the

government from personal funds, and a claim under GLISA was

denied because there was no longer any loss. GAO nevertheless

granted relief and the accountable officer was reimbursed.

Disallowance of a GLISA claim for failure to strictly comply with the

regulations carries with it an even stronger suggestion of negligence,

but it is still appropriate to examine the facts and circumstances of

the particular case to evaluate the relationship of the noncompliance

to the loss. For example, GAO granted relief in B-191645, October 5,

1979, despite the denial of a GLISA claim, because there was no

question that the funds had arrived at their initial destination although

they never reached the intended recipient. Even if there had been

negligence at the point of shipment, it could not have been the

proximate cause of the loss. See also B-193830, October 1, 1979, and

B-193830, March 30, 1979 (both cases arising from the same loss).

h. Fire, Natural Disaster Earlier in this chapter, we noted the Supreme Court’s conclusion in

United States v. Thomas, 82 U.S. (15 Wall.) 337,352 (1872), that

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Llabilityand Belief of Accountable Offlcere

strict liability (and hence the need for relief) would not attach in two

situations: funds destroyed by an “overruling necessity” and funds

taken by a “public enemy,” provided there is no contributing fault or

negligence by the accountable ofllcer. The Court gave only one

example of an “overruling necessity”:

“Suppose an earthquake should swallow up the building and safe containing the

money, is there no condition implied in the law by which to exonerate the receiver

from responsibility?”

Id. at 348. We are aware of no subsequent judicial attempts to further

~efme “overruling necessity,” although some administrative

formulations have used the term “acts of God.” ~, 48 Comp. Gen.

566,567 (1969). Thus, at the very least, assuming no contributing

fault or negligence, an accountable ofticer is not liable for funds lost

or destroyed in an earthquake, and hence there is no need to seek

relief. Contributing negligence might occur, for example, if an

accountable officer failed to periodically deposit collections and funds

were therefore on hand which should not have been. See B-71445,

June 20, 1949.

GAO granted relief in one case invohing an earthquake, B-229 153,

October 29, 1987, in which most of the funds were recovered. While

arguably there was no need to seek relief in that case, it makes no

difference as a practical matter since relief would be granted as a

matter of routine unless there is contributing negligence, in which

event the accountable officer would be liable even under Thomas.

Whatever the scope of the “overruling necessity” exception, it is clear

that it does not extend to destruction by fwe, even though money

destroyed by fwe is no longer available to be used by anyone else and

can be replaced simply by printing new money. In Smythe v. United

States, 188 U.S. 156, 173–74 (1903), the Supreme Court declined to

apply Thomas and expressly rejected the argument that an ?

accountable officer’s liability for notes destroyed by fme should be

limited to the cost of printing new notes. See also 1 Comp, Dec. 191

(1895), in which the Comptroller of the Treasury similarly declined to

apply the Thomas exception to a loss by fire, Thus, a loss by fwe is a

physical loss for which the accountable officer is liable, but for which

relief will be granted under 31 U.S.C. 53527 if the statutory conditions

are met. Examples are B-212515, December 21, 1983, and B-203726,

July 10, 1981.
●

Chapter 9

LbMIJtyand Relief of Accountable Offlcers

i. Loss by Theft If money is taken in a burglary, robbery, or other form of theft, the

accountable officer will be relieved of liability if the following

conditions are met:

1. There is sufficient evidence that a theft took place;]7

2. There is no evidence implicating, or indicating contributing

negligence by, the accountable officer; and

3. The agency has made the administrative determinations required by

the relief statute.

The fact patterns tend to fall into several well-defined categories.

(1) Burglary: forced entrj

Forced entry cases tend to be fairly straightforward. In the typical

case, a government office is broken into while the office is closed for

the night or over a weekend, and money is stolen. Evidence of the

forced entry is clear. As long as there is no evidence implicating the

accountable officer, no other contributing fault or negligence, and the

requisite administrative determinations are made, relief is granted. A

few examples follow:18

● Burglars broke into the weMing shop at a government laboratow,

took a blowtorch and acetylene tanks to the administrative oftlce and

used them to cut open the safe. B-242773, February 20, 1991.

● Cashier’s office was robbed over a weekend. Office had been forcibly

entered, but there was no evidence of forced entry into the safe.

Federal Bureau of Investigation found no evidence of negligence or

breach of security by any government personnel associated with the

office. B-193174, November 29, 1978.

● Persons unknown broke front door lock of Bureau of Irtdian Affaim

office in Alaska and removed safe on sled. Sled tracks led to an

abandoned building in which the safe was found with its door

removed. B-182590, February 3, 1975.

IiThe mere designation of a 10SS as a “burglary” without Supporting evidence ~ not enoW@ @

remove it from the “unexplained loss” category. ~,B-210358, July 21, 1983.

l~here me numerous forced entry cws in which GAO @*d reuef uderscircumstances. A few additional examples are 5230607, June 20, 1988; B-205428,

December 31, 1981; 8-201651, Februaiy 9, 1981.

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● Unsecured bolt cutters found on premises used to remove safe

padlock. No contributing negligence because there was no separate

facility in which to secure the tools. B-202290, June 5, 1981.

The same principles apply to theft from a hotel room. 69 Comp. Gen.

586 (1990); B-229847, January 29, 1988.

(2) Armed robbery

In this situation, one or more individuals, armed or credibly

pretending to be armed, robs an accountable officer. Again, as long as

there is no evidence implicating the accountable officer and no

contributing negligence, relief is readily granted, The accountable

officer is not expected to risk his or her life by resisting. Some

illustrative cases follow:lg

● Gunman entered cashier’s office, knocked cashier unconscious, and

robbed safe. B-235458, August 23, 1990.

● Man entered cashier’s office in a veterans hospital and handed cashier

a note demanding all of her $20 bills. Although he did not display a

weapon, he said he was armed. B-191579, May 22, 1978. Avery

similar case is B-237420, December 8, 1989 (man gave cashier note

indicating bomb threat; upon running off with the money, he left a

second note saying “no bomb”).

Depending on the circumstances, it is not necessa~ that the thief be,

or pretend to be, armed. An example is the common purse-snatching

incident. B-197021, May 9, 1980; B-193866, March 14, 1979.

(3) Riot, public disturbance

This category includes the popular pastime of ransacking American

embassies. The Supreme Court’s second exception in United States v.

Thomas (see Fire, Natural Disaster heading) to an accountable

oftlcer’s strict liability is funds taken by a “public enemy.” That case

concerned the Civil War. As with the “overruling necessity”

exception, we are aware of no further definition of “public enemy” in

this context, and the cases cited here have consistently been treated

as accountable officer losses. In any event, relief is routinely granted

l~~me other e~ple9 me B-217773, Mmch 18, 1985; B-21 1945, JuO 18, 1983; B201 126,

hIWJY 27, 1981.

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LhMMty-d Relief of Aecount=ble OMcera

●

●

●

unless there is contributing negligence. Thus, GAO granted relief in the

following cases:zo

Funds taken during attack on American Embassy in Tehran, Iran.

B-229753, December 30, 1987; B-194666, August 6, 1979 (separate

attacks, both occurring in 1979).

Armed soldiers forced entry into U.S. Information Agency compound

in Beirut, Lebanon, and looted safe. B-195435, September 12, 1979.

Safes looted by Cuban detainees during prison riot. B-232252,

January 5, 1989; B-230796, April 8, 1988.

(4) Evidence less than certain

In all of the cases cited above dealing with forced entry, armed

robbery, or rioting, the fact that a theft had taken place was beyond

question. However, there are many cases in which the evidence of

theft is not all that clear. The losses are unexplained in the sense that

what happened cannot be determined with any certainty. The problem

then becomes whether the indications of theft are sui%cient to classify

the loss as a theft and to rebut the presumption of negligence.

These tend to be the most difficult cases to resolve. The diftlculty

stems from the fact, which we have noted previously, that the

accountable officer laws are designed to protect the government

against dishonesty as well as negligence. On the one hand, an

accountable officer who did all he or she could to safeguard the funds

should be relieved of liability. But on the other hand, the application

of the relief statutes should not provide a blueprint for (or absolution

from) dishonesty. Recognizing that complete certainty is impossible

in many if not most cases, the decisions try to achieve a balance

between these two considerations. Thus, GAO gives weight to the

administrative determinations and to statements of the individuals

concerned, but these factors cannot be conclusive and the decision

will be based on all of the evidence. Other relevant factors include

how and where the safe combination was stored, when it was last

changed, whether the combination dial was susceptible of observation

while the safe was being opened, access to the safe and to the facility

itself, and the safeguarding of keys to cash boxes.

20~er ~xapk.~ we B.z4937Z, Au@St 13, 1992 (Somalia); B-230606.2, *P~m~r 611988

(Iran); B-227422, June 18, 1987 (Tripoli); B-207059, July i, 1982 (Chad); B-190205,

November 14, 1977 (Zaire).

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Liability and l?edief of Accountable Officera

For example, in B-198836, June 26, 1980, funds were kept in the

bottom drawer of a four-drawer fde cabinet. Each drawer had a

separate key lock and the cabinet itself was secured by a steel bar and

padlock. Upon arriving at work one morning, the cashier found the

bottom drawer slightly out of alignment with several pry marks on its

edges. A police investigation was inconclusive. GAO viewed the

evidence as sufficient to support a conclusion of burglary and, since

the record contained no indication of negligence on the part of the

cashier, granted relief.

In another case, a safe was found unlocked with no signs of forcible

entry. However, there was evidence that a thief had entered the office

door by breaking a window. The accountable officer stated that he had

locked the safe before going home the previous evening, and there

was no evidence to contradict this or to indicate any other negligence.

GAO accepted the accountable officer’s uncontroverted statement and

granted relief, B-188733, March 29, 1979. See also B-21 OO17, June 8,

1983.

In B-170596-O, M., November 16, 1970, the accountable officer stated

that she had found the padlock on and locked in reverse from the way

she always locked it. Her statement was corroborated by the agency

investigation. In addition, the lock did not conform to agency

specifications, but this was not the cashier’s responsibility. She had

used the facilities officially provided for her. Relief was granted.

Relief was also granted in B-170615-O. M., November 23, 1971,

reversing upon reconsideration B-170615 -O. M., December 2, 1970.

In that case, there was some evidence that the office lock had been

pried open but there were no signs of forcible entry into the safe. This

suggested the possibility of negligence either in failing to lock the safe

or in not adequately safeguarding the combination. However, the

accountable oftlcer’s supervisor stated that he (the supervisor) had

locked the safe at the close of business on the preceding workday, and

two safe company representatives provided statements that the safe

was vulnerable and could have been opened by anyone with some

knowledge of safe combinations.

The occurrence of more than one loss under similar circumstances

within a relatively short time will tend to corroborate the likelihood of

theft. B-199021, September 2, 1980; B-193416, October 25, 1979. In

B-1 99021, two losses occurred in the same building within several

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●

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●

weeks of each other. All agency security procedures had been

foilowed and the record indicated that the cashier had exercised a

very high degree of care in safeguarding the funds. In B-193416, the

fwst loss was totally unexplained and the entire cash box disappeared

a week later. The safe combination had been kept in a sealed envelope

in a “working safe” to which other employees had access. Although

the seal on the envelope was not broken, an investigation showed that,

while the combination could not be read by holding the envelope up to

normal light, it could be read by holding it up to stronger light. In

neither case was there any evidence of forcible entry or of negligence

on the part of the accountable officer. Balancing the various relevant

factors in each case, GAO granted relief.

The disappearance of an entire cash box will also be viewed as an

indication of theft. However, this factor standing alone will not be

conclusive since there is nothing to prevent a dishonest employee

from simply taking the whole box rather than a handful of money

from it. Signs of forced entry to the safe or fde cabinet will naturally

reinforce the theft conclusitm. -,B-229136, January 22, 1988;

B-186190, May 11, 1976. Far more difiicult are cases in which a cash

box disappears with no signs of forcible entry to the container in

which it was kept. Note the various additional factors viewed as

relevant in each of the following cases:

B-223602, August 25, 1986. Police were able to open fde cabinet with

a different key, and other thefts had occurred around the same time.

Relief granted.

B-189658, September 20, 1977. Safe was not rated for burglary

protection and could have been opened fairly easily by manipulating

the combination dial. Relief granted.

B-189896, November 1, 1977. Supervisor’s secre~ maintained a

log of all safe and bar-lock combinations, a breach of security which

could have resulted in the compromise of the combination. Relief

granted.

B-173133-O. M., December 10, 1973. Cashier locked safe and checked

it in the presence of a guard. Several other employees had access to

the safe combination. Relief granted. Multiple access also contributed

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to the granting of relief in B-217945, July 23, 1985, and B-212605,

Apti 19, 1984.2’

● B-183284, June 17, 1975. Safe was malfunctioning at time of loss.

Relief granted.

● B-211649, August 2, 1983. Extensive security violations attributable

to agency. Relief granted. A similar case is B-197799, June 18, 1980.

c B-185666, July 27, 1976. Some evidence of forced entry to door of

cashier’s office but not to safe or safe drawer. Cash box later found in

men’s room. Negligence by cashier in improperly storing keys and

safe combination in unlocked desk drawer not proximate cause of loss

since seal on envelope was found intact. Relief granted.

“ B-191942, September 12, 1979. Cash box disappeared during

two-week absence of cashier. Even sssuming cashier negligently

failed to lock safe prior to her absence, there was no way to establish

this as the proximate cause of the loss since box had been kept in a

‘working safe” which would have been opened daily in her absence.

Relief granted.

c B-182480, February 3, 1975. Cashier went on leave without properly

securing key to file cabinet or entrusting it to an alternate. Relief

denied.

“ B-184028, March 2, 1976. Cashier had been experiencing diftlculty

trying to lock the safe and stated she might have left it unlocked

inadvertently. Relief denied,

To Summarize the “cash box” cases, the disappearance of art entire

cash box suggests theft but is not conclusive. In such cases, even

though the cause of the loss cannot be definitely attributed, relief will

probably be granted if there is uncontroverted evidence that the safe

was locked, no other evidence of contributing fault or negligence on

the part of the accountable officer, and especially if there are other

factors present tending to corroborate the likelihood of theft. In no

case has relief been granted based solely on the fact that a cash box

disappeared; without more, it is simply another type of unexplained

loss for which there is no basis for relief.

(5) Embezzlement

The term “embezzlement” means the fraudulent misappropriation of

property by someone to whom it has lawfully been entrusted. Black’s

21A key inqu~ in this type of c~e, and a crucial factor in deciding Whether to ~~t or dew

relief, is the extent to which the accountable officer is responsible for the non-exclusive access

to the safe combination.

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j. Agency Security

Law Dictionary 522 (6th ed. 1990). Losses due to embezzlement or

fraudulent acts of subordinate finance personnel, acting alone or in

collusion with others, are treated as physical losses and relief wiIl be

granted if the statutory conditions are met. B-202074, July 21, 1983,

at 6; B-21 1763, July 8, 1983; B-133862-O. M., November 29, 1957;

B-101375 -O. M., April 16, 1951.

An illustrative group of cases involves the embezzlement of tax

collections, under various schemes, by employees of the Internal

Revenue Service. In each case the IRS pursued the perpetrators, and

most were prosecuted and convicted. The IRS recovered what it could

from the (now former) employees, and sought relief for the balance

for the pertinent supervisor in whose name the account was held. In

each case, GAO agreed with the “no fault or negligence” determination

and granted relief. B-2441 13, November 1, 1991; B-226214 et al.,

June 18, 1987; B-215501, November 5, 1984; B-192567,November 3,

1978; B-191722, August 7,. 1978; B-191781, June 30, 1978.

The accountable officer in each of the IRS cases was a supervisor who

did not actually handle the funds. The approach to evaluating the

presence or absence of negligence when the accountable ofilcer is a

supervisor is to review the existence and adequacy of internal controls

and procedures and to ask whether the accountable officer provided

reasonable supervision. If internal controls and management

procedures are reasonable and were being followed, relief will be

granted. As noted in B-2262 14, the standard does not expect

perfection and recognizes that a clever criminal scheme can outwit the

most carefully established and supervised system.

Losses resulting from the fraudulent acts of other than subordinate

finance personnel (e.g., payments on fraudulent vouchers) are not

physical losses but must be treated as improper payments. 2 Comp.

Gen. 277 (1922); B-202074, July 21, 1983; B-76903, July 13, 1948;

B-133862 -O. M., November 29, 1957.

In evaluating virtually any physical loss case, physical security-the

existence, adequacy, and use of safekeeping facilities and

procedures–is a crucial consideration. The Treasury Department’s

Manual of Procedures and Instructions for Cashiers sets forth many of

the requirements. For example, the cashiers’ manual provides that

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safe combinations should be changed annually, whenever there is a

change of cashiers, or when the combination has been compromised,

and prescribes procedures for safeguarding the combination. It also

reflects what is perhaps the most fundamental principle of sound cash

control—that an employee with custody of public funds should have

exclusive control over those funds. In addition, agencies should have

their own specific regulations or instructions tailored to individual

circumstances.

The first step in analyzing the effect of a security violation or

deficiency is to determine whether the violation or deficiency is

attributable to the accountable officer or to the agency. Two

fundamental premises drive this analysis: (1) the accountable officer

is responsible for safeguarding the funds in his or her custody; and

(2) the agency is responsible for providing adequate means to do so.

Adequate means includes both physical facilities and administrative

procedures.

Basically, if the accountable officer fails to use the facilities and

procedures that have been provided, this failure will be viewed as

negligence and, unless some other factor appears to be the proximate

cause of the loss, will preclude the granting of relief. Several examples

have been previously cited under the Actual Negligence heading.

Another element of the accountable officer’s responsibility is the duty

to report security weaknesses to appropriate supervisory personnel.

~, 63 Comp. Gen. 489,492 (1984), rev’d on other grounds, 65

Comp. Gen. 876 (1986). If the agency fails to respond, a loss

attributable to the reported weakness is not the accountable officer’s

fault. ~,B-235147.2, August 14, 1991; B-208511, May 9, 1983.

Ultimately, an accountable officer can do no more than use the best

that has been made available, and relief will not be denied for failure

to follow adequate security measures which are beyond the

accountable officer’s control. ~, B-226947, July 27, 1987 (U.S.

Mint employees stole coins from temporarily leased facility which was

incapable of adequate security); B-207062, May 12, 1983 (agent kept

collections in his possession because, upon returning to office at 4:30

p.m., he found all storage facilities locked and all senior officials had

left for the day); B-210245, February 10, 1983 (lockable gun cabinet

was the most secure item available); B-186190, May 11, 1976 (funds

kept in safe with padlock because combination safe, which had been

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ordered, had not yet arrived); B-7861 7, June 24, 1949 (agency failed

to provide safe). Of course, the accountable officer is expected to act

to correct weaknesses which are subject to his or her control.

B-127204, April 13, 1956.

The principle that relief will be granted if the agency fails to provide

adequate security and that failure is viewed as the proximate cause of

the loss manifests itself in a variety of contexts. One group of cases

involves multiple violations. In B-182386, April 24, 1975, imprest

funds were found missing when a safe was opened for audit. The

accountable officer was found to be negligent for faiiing to follow

approved procedures. However, the agency’s investigation disclosed a

number of security violations attributable to the agency. Two cashiers

operated from the same cash box; transfers of custody were not

documented; the safe combination had not been changed despite

several changes of cashiers; at least five persons knew the safe

combination. The agency, in recommending relief, concluded that the

loss was caused by “pervasive laxity in the protection and

administration of the funds . . . on all levels.” GAO agreed, noting that

the lax security “precludes the definite placement of responsibility”

for the loss, and granted relief.

In several later unexplained loss cases (no sign of forcible entry, no

indication of fault or negligence on the part of the accountable

officer), GAO has regarded overall lax security on the part of the

agency, similar to that in B-182386, as the proximate cause of the loss

and thus granted relief. B-243324, April 17, 1991; B-229778,

September 2, 1988; B-226847, June 25, 1987; B-217876, April 29,

1986; B-21 1962, December 10, 1985; B-21 1649, August 2, 1983. All

of these cases involved numerous security violations beyond the

accountable officer’s control, and several adopt the “pervasive laxity”

characterization of B-182386.

However, in order for relief to be granted, security weaknesses

att~butable to the agency need not rise to the level of “pervasive

laxity” encountered in the cases cited in the preceding paragraph.

Thus, relief will usually be granted where several persons other than

the accountable oftlcer have access to the funds through knowledge

of the safe combination since “multiple access” makes it impossible

to attribute the loss to the accountable officer. B-235072, July 5,

1989; B-228884, October 13, 1987; B-214080, March 25, 1986;

B-21 1233, June 28, 1983; B-209569, April 13, 1983; B-196855,

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December 9, 1981; B-199034, February 9, 1981. Additional cases are

cited in our earlier discussion of missing cash boxes.

If multiple access to a safe will support the granting of relief for

otherwise unexplained losses, it follows that multiple access to a cash

box or drawer will have the same effect. The Treasury cashiers’

manual provides that cashiers should never work out of the same cash

box or drawer. Violation of this requirement, where beyond the

control of the accountable officer, is a security breach which, in

appropriate cases, has supported the granting of relief. B-227714,

October 20, 1987; B-204647, Febrwuy 8, 1982. If it is necessary for

more than one cashier to work out of the same safe, the safe should

preferably have separate built-in locking drawers rather than

removable cash boxes. B-191942, September 12, 1979.

The following security deficiencies have aIso contributed to the

granting of relief:

● Safe malfunctioning, defective, or otherwise not secure. B-221447,

June 1, 1987; B-215477, November 5, 1984; B-183284, June 17,

1975.

● Cash box could be opened with other keys. B-203646, November 30,

1981; B-197270, March 7, 1980.

c Failure to change safe combination as required by Treasury

regulations, B-21 1233, June 28, 1983; B-196855, December 8, 1981.

(Both cases also involve multiple access.)

● Safe combination and key to cash drawer were kept in an unlocked

desk drawer. B-177963-0. M., March 21, 1973. (The result would

most likely be different if the violation were the fauk of the

accountable officer or if the accountable officer passively acquiesced

in the breach. See B-185666, July 27, 1976.)

● Crimping device used to seaI cash bags did not use sequentially

numbered seals and was accessible to several employees. B-246988,

February 27, 1992.

The preceding cases are mostly unexplained losses. It naturaIly

follows that security violations of the type noted will contribute to

rebutting the presumption of negligence in cases where there is clear

evidence of theft. In B-184493, October 8, 1975, for example, there

was evidence of forced entry to the oftlce door but not to the safe. The

record showed that, despite the accountable officer’s best efforts, it

was impossible for him to shield the dial from observation while

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opening the safe. In view of the office layout, the position of the safe,

and the number of persons allowed access to the office, GAO granted

relief.zz Other examples are B-180664-O. M., April 23, 1974 (multiple

access to safe), and B-170251 -O. M., October 24, 1972 (insecure

safe).

If there is evidence of negligence on the part of the accountable

officer in cor@nction with security deficiencies attributable to the

agency, the accountable officer’s negligence must be bakmced against

the agency’s negligence. Relief may be granted or denied based

largely on the proximate cause analysis. As with the unexplained loss

cases, relief has been granted in a number of cases where the agency’s

violations could be said to amount to “pervasive laxity.” B-235147.2,

August 14, 1991; B-197799, June 19, 1980; B-182386, April 24,

1975; B-169756 -O. M., July 8, 1970. Similarly, agency security

violations which do not amount to pervasive laxity may support the

granting of relief. Such violations must either be the proximate cause

of the loss or make it impossible to attribute the loss to the

accountable officer. In a 1971 case, for example, a cashier kept the

combinations to three safes on an adding machine tape in her wallet.

The agency failed to change the combinations after the wallet was

stolen. Also, safe company representatives stated that one safe was

vulnerable and could readily have been opened. The fact that only the

vulnerable safe had been robbed supported the conclusion that the

stolen combinations had not been used. B-1 70615-O. M.,

November 23, 1971. Other cases in which agency security violations

were found to override negligence by the accountable officer are

B-232744, December 9, 1988 (safe combination not changed despite

several requests by accountable officer following possible

compromise); B-205985, July 12, 1982 (multiple access, safe

combination not changed as required); B-199128, November 7, 1980

(multiple access); B-191440, May 25, 1979 (two cashiers working out

of same drawer).

The result in these cases should not be taken too far. Poor agency

security does not guarantee relief; it is merely artother factor to

consider in the proximate cause equation. Another relevant factor is

the nature and extent of the accountable officer’s efforts to improve

the situation.

zz~ explwation of N@may or may not be sufficient, depending on the Particular fac@.

See — B-170012, August 11, 1970; B-127204, April 13,1956.

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●

Where security weaknesses exist, a supervisor will normally be in a

better position to take or initiate corrective action, and a supervisor

who is also an accountable offker maybe found negligent for failing

to do so. 63 Comp. Gem 489 (1984), reversed upon reconsideration

(new evidence), 65 Comp. Gen. 876 (1986); 60 Comp. Gen. 674,676

(1981). However, anew supervisor should not be held immediately

responsible for the situation he or she inherited. B-209715, April 4,

1983 (supervisor relieved in pervasive laxi~ situation where loss

occurred only a week after he became accountable).

A close reading of the numerous security cases reveals the somewhat

anomalous resuk that an accountable oftlcer who works in a sloppy

operation stands a much better chance of being relieved than one who

works in a well-managed office. True as this may be, it would be

wrong to hold accountable officers liable for conditions beyond their

control. Rather, the solution lies in the proper recognition and

implementation of the responsibility of each agency, mandated by the

Federal Managers’ Financial Integrity Act of 1982,31 U.S.C.

$ 3512(c)(1), to safeguard its assets against loss and

misappropriation.

k. Extenuating Circumstances Since relief under 31 U.S.C. $$ 3527(a) and (b) is a creature of statute,

it must be granted or denied solely in accordance with the statutory

conditions. When Congress desires that “equitable” concerns be

taken into consideration, it expressly so states. Ex~pIes are waiver

statutes such as 5 U.S.C. $5584 and 10 U.S.C. $2774. In contrast, the

physical loss relief statutes do not authorize the granting of relief on

the basis of equitable considerations or extenuating or mitigating

circumstances.

Thus, where an accountable officer has been found negligent, the

following factors have been held not relevant, nor are they sufficient

to rebut the presumption of negligence:

● Hea~work load. 67 Comp. Gen. 6 (1987); 48 Comp. Gen. 566

(1969); B-241201, August 23,1991.

● Good work record; long period of loyal and dependable service;

evidence of accountable officer’s good reputation and character.

B-204173, November 9, 1982; B-170012, August 11, 1970;

B-158699, September 6, 1968.

s Inexperience; inadequate training or supervision. 70 Comp. Gen. 389

(1991); B-189084, January 3, 1979; B-191051, July 31,1978.

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● Financial hardship ofhavingto repay loss. B241478, April 5, 1991;

B-216279.2, December 30, 1985.

● Acceptance of extra duties by the accountable oflicer; shortage of

personnel. B-186127, September 1, 1976.

D. Illegal or Improper

Payment

1. Disbursement and In order to understand the laws governing liability and relief for

Accountability improper payments, and how the application of those laws has

evolved over the last quarter of the 20th centwy, it is helpful to start

by Summarizing, from the accountability perspective, a few points

relating to how the federal government disburses its money.

a. Statutory Framework: For most of the 19th century and the early decades of the 20th

Disbursement Under

Executive Order 6166

century, federal disbursement was decentralized. Each agency had its

own disbursing office(s), and the function was performed by a small

army of disbursing officers and clerks (who were accountable

ofllcers) scattered among the various agencies and throughout the

country. In part, the reason for this was the primitive state of

communication and transportation then existing. One of the

weaknesses of this system was that, in many cases, vouchem were

prepared, examined, and paid by the same person. 20 Comp. Dec.

859,869 (1914). This resulted in the growth of large disbursing

offices in several agencies, some of which exceeded in size that of the

Treawuy Department. Annual Report of the Comptroller General of

the United States for the Fiscal Year Ended June 30, 1939, at 98.

From the perspective of accountability for improper payments, the

modern legal structure of federal disbursing evolved in three mq’or

steps. First, Congress enacted legislation in 1912 (37 Stat. 375), the

remnants of which are found at 31 U.S.C. $ 3521(a), to prohibit

disbursing officers from preparing and auditing their own vouchers.

With this newly mandated separation of voucher preparation and

examination from actwd payment, payment was accomplished by

having some other administrative official “cert~” the correctness of

the voucher to the disbursing ofilcer. The 1912 legislation was thus

the genesis of what would later become a new class of accountable

officer-the certifying officer.

.?*; .

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Disbursing officers remained accountable for improper payments, the

standard now reflecting the more limited nature of the function. Since

the 1912 law was intended to prohibit the disbursing officer from

duplicating the detailed voucher examination already performed by

the “certifying officer,” disbursing officers were held liabIe only for

errors apparent on the face of the voucher, as well as, of course,

payments prohibited by law or for which no appropriation was

available. 20 Comp. Dec. 859 (1914). In a sense, the 1912 statute

operated in part as a relief statute, with credit being allowed or

disallowed in the disbursing officer’s account based on the application

of this standard. ~, 4 Comp. Gen. 991 (1925); 3 Comp. Gen. 441

(1924).

The second major step in the evolution was section 4 of Executive

Order No. 6166, signed by President Roosevelt on June 10, 1933. The

first paragraph of section 4, codified at 31 U.S.C. $ 3321(a),

consolidated the disbursing function in the Treasury Department,

eliminating the separate disbursing offices of the other executive

departments. The second paragraph, 31 U.S.C. $ 3321(b), authorizes

Treasury to delegate disbursing authority to other executive agencies

for purposes of efficiency and economy. The third paragraph gave

new emphasis to the certification function:

“The Division of Disbursement [Treasury Department] shall disburse moneys only

upon the certification of persons by law duly authorized to incur obligations upon

behalf of the United States. The function of accountability for improper certillcation

shall be transferred to such persons, and no disbursing officer shall be held

accountable therefor.”

The following year, Executive Order No. 6728, May 29, 1934,

exempted the military departments, except for salaries and expenses

in the District of Columbia, from the centralization. This exemption,

and an exemption for the United States Marshals Service which

originated in a 1940 reorganization plan, are codified at 31 U.S.C.

s 3321(c). Executive Order 6166 provided the framework for the

disbursing system still in effect today. Apart from the specified

exemptions, the certi~ing officer is now an employee of the spending

agency, and the disbursing officer is an employee of the Treasury

Department.

Disbursing officers continued to be liable for their own errors, as

under the 1912 legislation. ~, 13 Comp. Gen. 469 (1934).

However, a major consequence of Executive Order 6166 was to make

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the certifying officer an accountable officer as well. The cert@ing

officer became liable for improper payments “caused solely by an

improper certification as to matters not within the knowledge of or

available to the disbursing officer.” 13 Comp. Gen. 326,329 (1934).

See also 15 Comp. Gen. 986 (1936); 15 Comp. Gen. 362 (1935).

Over the next few years, confusion and disagreement developed as to

the precise relationship of certifying officers and disbursing ofilcers

with respect to liability for improper payments. In the Annual Report

of the Comptroller General of the United States for the Fiscal Year

Ended June 30, 1940, at pages 63–66, GAO summ arized the problem

and recommended legislation to specfi the allocation of

responsibilities “to provide the ciosest possible relationship between

liability and fault” (~. at 64).

The third major evolutionary step was the enactment of Public Law

77-389,55 Stat. 875 (1941) to implement GAO’S recommendation.

Section 1,31 U.S.C. 3 3325(a), reflects the substance of the third

paragraph of Executive Order 6166, $4, quoted above. It requires

that a disbursing officer disburse money only in accordance with a

voucher certitled by the head of the spending agency or an authorized

certifying officer who, except for some interagency transactions, will

also bean employee of the spending agency. As with the amended

Executive Order 6166 itself, section 3325(a) does not apply to

disbursements of the military departments except for salaries and

expenses in the District of Columbia. 31 U.S.C. $ 3325(b). The rest of

the statute, which we will discuss in detail later, delineates the

responsibilities of certifying and disbursing officers, and provides a

mechanism for the administrative relief of certifjdng oftlcers.

(Comparable authority to relieve disbursing ofilcers from liability for

improper payments was not to come about until 1955.) Further detail

on the federal disbursement system maybe found in I Treasury

Financial Manual, Chapter 4, and GAO’S Policy and Procedures

Manual for Guidance of Federal Agencies, title 7, chapter 6.

It should be apparent that control of the public treasury must repose

in the hands of federal officials. However, this does not mean that

every task in the disbursement process must be performed by a

government employee. For example, GAO has advised that the Bureau

of Indian Affairs is authorized as a matter of law to contract with a

private bank to perform certain ministerial or operational aspects of

disbursing Indian trust fund money, such as printing checks,

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delivering checks to payees, and debiting amounts from accounts.

However, in order to comply with 31 U.S.C. $$3321 and 3325, a

federal disbursing officer must retain managerial and judgmental

responsibility. 69 Comp. Gen. 314 (1990). The decision concluded:

“[W]e see no reason to object to a contractual arrangement whereby a private

contractor provides disbursement services, so long as a government disbursing

of!lcer remains responsible for reviewing and overseeing the disbursement operations

through agency installed controls designed to assure accurate and proper

disbursements.” ~. at 278.

To intrude further into this responsibility would require clear

statutory authority. ~,B-210545-O. M., June 6, 1983 (Indian Health

Service would need statutory authority to use f~cal intermediaries to

pay claims by providers; memorandum cites examples of such

authority in Medicare Legislation).

b. Automated Payment

Systems

The statutory framework we have just described came into existence

at a time when all disbursing was done manually. The certimg

oftlcer and his or her staff would review the supporting

documentation for each payment voucher. The certifying officer

would then sign the voucher, certifying to its legality and accuracy,

and send it on to the disbursing officer. Many disbursements are still

processed manually. However, the increased use of automated

payment systems has changed the way certi~ng offkers must

operate. Perhaps the clearest example is payroll certification. A

certifying officer may be asked to certify a grand total accompanied

by computer tapes containing payrolls involving millions of dollars.

There is no way the certifying officer can verify that each payment is

accurate and legal. Even if it were reasonably possible, the cost of

doing it would be prohibitive.

Wkh the onslaught of the computer age, it was natural and inevitable

to ask how accountability would function in a computerized

environment. Since many of the assumptions of a manual system were

unrealistic under an automated system, something had to change. GAO

reviewed the impact of computerization in a report entitled New

Methods Needed for Checking Payments Made by Computers,

FWMSD-76-82 (November 7, 1977). The report recognized that, while

the cert~ng officer’s basic legal liability remains, the conditions

under which a certifying officer maybe relieved under an automated

payment system must be different to reflect the new realities. The

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approach to relief in this context stems from the following premises

discussed in the report:

(1) In automated systems, evidence that the payments are accurate

and legal must relate to the.system rather than to individwd

transactions.

(2) Certi~g and disbursing officers should be provided with

information showing that the system on which they are largely

compelled to rely is functioning properly.

(3) Reviews should be made at least annually, supplemented by

interim checks of mqjor system changes, to determine that the

automated systems are operating effectively and can be relied on to

produce payments that are accurate and legal.

The report then concluded:

“In the future, when a certifying or disbursing oftlcer requests relief from an illegal,

improper, or incorrect payment made using an automated system, GAO will continue

to require the officer to show that he or she was not negligent in certifying payments

later determined to be illegal or inaccurate. However, consideration will be given to

whether or not the officer possessed evidence at the time of the payment approval

that the system could be relied on to produce accurate and legal payments. In cases in

which the designated assistant secretary or comparable official provides the agency

head and GAO with a written statement that effective system controls could not be

implemented prior to voucher preparation and certifies that the payments are

otherwise proper, GAO will not consider the absence of such controls as evidence of

negligence in determining whether the certifying official should be held liable for any

erroneous payment prior to receipt of an advance decision. Of course, the traditional

requirements that due care be exercised in making the payments and that diligent

effort be made to recoup any erroneous payments will still be considered in any

requests for waiver of liability. Also, should the certi@ng oftlcial fail to take

reasonable steps to establish adequate controk for future paymenta, the reaaons for

such failure will be taken into account in any requests for waiver of liability

concerning such future payments.” FGMSD-76-82 at 17–18.

A few years later, the concepts and premises of the GAO report were

explored and reported, with implementing recommendations, in a key

study by the Joint Financial Management Improvement Program

GAO/OGC-92-13 &pmptitiO1’lE kW -Vol. ~
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entitled Assuring Accurate and Legal Payments-The Roles of

Certi@g Officers in Federal Government (June 1980).W Rwther

guidance from the internal control perspective may be found in OMB

Circulars A-123 and A-127, title 7 of the GAO Policy and Procedures

Manual, and a GAO pamphlet entitled Critical Factors in Developing

Automated Accounting and Financial Management Systems (1987).

Thus, in considering requests for relief under an automated payment

system where verification of individual transactions is impossible as a

practical matter, the basic question will be the reasonableness of the

certifying officer’s reliance on the system to continually produce legal

and accurate payments. B-178564, January 27, 1978 (confting the

conceptual feasibility of using automated systems to perform preaudit

functions under various child nutrition programs). See also B-201965,

June 15, 1982. Contexts in which system reliance is relevant are

discussed in 69 Comp. Gen. 85 (1989) (automated “ZIP plus 4“

address correction system) and 59 Comp. Gen. 597 (1980)

(electronic funds transfer program).

Regardless of what system is used, there is of course no authority to

make known overpayments. B-205851, June 17, 1982;

B-203993-0. M., Jdy 12, 1982.

c. Statistical Sampling Statistical sampling is a procedure whereby a random selection of

items from a universe is examined, and the results of that examination

are then projected to the entire universe based on the laws of

probability. In 1963, the Comptroller General held that reliance on a

statistical sampling plan for the internal examination of vouchers

prior to certification would not operate to relieve a certifying off~cer

from liability for improper or erroneous payments. 43 Comp. Gen. 36

(1963). GAO recognized in the decision that an adequate statistical

sampling plan could produce overall savings to the government, but

was forced to conclude that it was not authorized under existing law.

In response to this, Congress enacted legislation in 1964, now found

at 31 U.S.C. $$ 3521(b)–(d). The statute authorizes agency heads,

upon determining that economies will result, to prescribe the use of

adequate and effective statistical sampling procedures in the

~$The J~Ip is a joint ~detig of GAO, the OffIce of Management ~d ~-~ ~ ‘w

Department, and the OffIce of Peraonnel Management.

Page 9-68 GAo/oGc-92-13 Approprlatlons Llsw-voL II
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LisMUtyand Relief of Accountable Officers

prepayment examination of disbursement vouchers. GAO has appiied

this authority, for example, to conclude that agencies may use

statistical sampling for the long-distance telephone call certifications

required by 31 U.S.C. $ 1348(b), which are a necessary prerequisite to

certi~ng the payment vouchers. 63 Comp. Gen. 241 (1984); 57

Comp. Gen. 321 (1978).

As originally enacted, 31 U.S.C. $ 3521(b) was limited to vouchers not

exceeding $100. A 1975 amendment to the statute removed the $100

limit and authorized the Comptroller General to prescribe maximum

dollar limits. The current limit is $2,500. GAO Policy and Procedures

Manual for Guidance of Federal Agencies, title 7, $ 7.4.E (1990). For

further guidance, see the Policy and Procedures Manual, title 7,

Appendix III, and GAO, Program Evaluation and Methodology

Division, Using Statistical Sampling (April 1986). For vouchers over

the prescribed limit, unless GAO has approved an exception (7

GAO-PPM App. HI, sec. B), 43 Comp. Gem 36 would continue to

apply.

The relevance of all this to accountable officers is spelled out in the

statute. A certi~g or disbursing officer acting in good faith and in

conformity with an authorized statistical sampling procedure will not

be held liable for any certification or payment on a voucher which was

not subject to specific examination because of the procedure.

However, this does not affect the liability of the payee or recipient of

the improper payment, and relief may be denied if the agency has not

diligently pursued collection action against the recipient. 31 U.S.C.

53 3521(c), (d).

GAO has approved the use of statistical sampling to test the reliability

of accelerated payment or “fast pay” systems. ~, 60 Comp. Gen.

602,606 (1981). In 67 Comp. Gen. 194 (1988), GAO for the fmt time

considered the use of statistical sampling for post-payment audit in

conjunction with “fast pay” procedures. The question arose in

connection with a General Services Administration proposal to revise

its procedures for paying and auditing utility invoices. GAO approved

the proposal in concept, subject to several conditions: (1) the

economic benefit to the government must exceed the risk of loss;

(2) the plan must provide for a meaningftd sampling of all invoices

not subject to 100 percent audit; and (3) the plan must provide a

reliable and defensible basis for the certification of payments. GAO

then considered and approved GSA’S specitlc plan in 68 Comp. Gen.

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618 (1989). As a general proposition, however, approaching the

problem through system improvements is preferable to an alternative

that involves relaxing controls or audit requirements. 7 GAO-PPM

$ 7.4.F (1990).

d. Provisional Vouchers and Apart from questions of automation or statistical sampling, proposals

Related Matters arise from time to time, prompted by a variety of legitimate concerns,

to expedite or simplify the payment process. Proposals of this type

invariably raise the potential for overpayments or erroneous

payments. Therefore, their consequences in terms of the liability and

relief of certifying and disbursing officers must always be considered.

A 1974 case involved a proposal by the Environmental Protection

Agency for the certification of “provisional vouchers” for periodic

payments under cost-type contracts. Under the proposal, monthly

vouchers certified for payment would be essentially unaudited except

for basic mathematical and cumulative cost checks, subject to

a@stment upon audit when the contract is completed. Under this

system, as with statistical sampling, some errors could escape

detection. However, certifying officers wouId not have the benefit of

the protection afforded by the statistical sampling legislation. Since

there would be a complete audit upon contract completion, the

provisional vouchers could be certitled upon a somewhat lesser

standard of prepayment examination, but GAO pointed out that any

such system should provide, at a minimum, for periodic audit of the

provisional vouchers. To better protect the certifying officers, GAO

suggested following a Defense Department procedure under which

“batch audits” of accumulated vouchers are conducted as frequently

as deemed necessary based on the reliability of each contractor’s

accounting and billing procedures, but not less than annually, again

subject to final audit upon contract completion. B-180264, March 11,

1974.

In order to meet processing deadlines, time and attendance forms are

often “certified” by appropriate supervisory personnel before the end

of the pay period covered, raising the possibility that information for

the latter days of the pay period may turn out to be erroneous. Since

necessary a@stments can easily be made in the subsequent pay

period and since the risk of loss to the government is viewed as

remote, the provisional certification of payroll vouchers based on

these “provisional” time and attendance records is acceptable.

B-145729, August 17, 1977 (internal memorandum).

Page 9-70 GAON3GC-92-13 Approprktiono Mw-VO1. II
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Simplification plans may be prompted by nothing more exotic than

understafflng of audit resources. In B-201408, April 19, 1982, an

agency proposed an “audit resources utilization plan” whereby it

would (1) attempt to identi~ high risk contractors through preaward

questiomaires; (2) for low risk contracts below a monetary limit,

substitute desk audits for field contract audits; and (3) encourage the

use of systems audits where possible. GAO found no “conceptual

objection” to the proposal, noting that the final audits discussed in

B-180264 did not necessarily have to be field audits, but emphasized

that high risk contractors should be subject to contract audits in all

cases. The decision also discusses the certifying officer’s role.

Another type of simplification proposal involves lessening the degree

of scrutiny on small payments. For example, the Department of

Veterans Affairs is authorized to reimburse certain low-cost supplies

furnished to veterans under statutory training and rehabilitation

programs. Experience taught the VA that participants could

reasonably be expected to incur at least $35 of reimbursable supply

expenses. The VA proposed to waive documentation and review

requirements on invoices of up to $35 for miscellaneous supplies, and

to pay essentially unsupported invoices up to that amount.24 GAO

concurred, but added that the VA should be able to demonstrate that

prior audits have not revealed a significant number of false or

inappropriate claims, and that it has internal controls adequate to

detect multiple claims for the same individual. B-221949, June 30,

1987. An unstated consequence of the decision is that a certifying

officer who relied on the system, assuming it was setup in accordance

with the specified criteria, would be relieved from IiabiIity should any

of the payments turn out to be erroneous.

One of the precedents relied on in B-221949 is B-179724, January 14,

1974, holding that, in certain circumstances, a cash register checkout

tape identifying at least the general category for each item is suftlcient

documentation for small purchase certitlcations. The rationale was

the reality of commercial practice:

“Certain businesses selling consumer type products, such as grocery stores and

hardware stores, whose sales frequently comprise small numbers of items having low

unit costs, do not as a matter of ordiruuy business practice provide customers

z4~voice~ my ~ ~=d ~ Plwe of vouchers to support disbursements Ss 10IU * ~~

 Con* w

required information. GAO Policy and procedures Manual for Guidance of Federal Agencies, title

7,$ 6.2.C (1990); I’rreasury FiluUICid hhlld $4-2025.20.

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Ltatdlity and Relief of Accountable Officero

receipts containing detailed descriptions for each item. It is impractical to develop

more detailed descriptive type receipts for such purchases.”

As with B-221949, the unstated consequence is that an accountable

offker relying on the decision and otherwise exercising due care

would be relieved from liability for improper payments.

e. Facsimile Signatures and Signature devices other than the traditional pen-and-ink signature are

Electronic Certification called “facsimile signatures.” The term has been defined as “an

impression of a signature made by a rubber stamp, metal plate, or

other mechanical contrivance.” B-194970, July 3, 1979. As a general

proposition, there is no prohibition on the use of facsimile signatures

on financial documents as long as adequate controls and safeguards

are observed. The rule was stated as follows in B-481 23, November 5,

1965 (non-decision letter):

“Generally, an acceptable facsimile of a signature may be made by a robber stamp

impression or maybe reproduced on a metal plate or by other mechanical

contrivances, the validity of which is derived from a signed original. An otherwise

proper document may be so authenticated mechanically with the knowledge and

consent or under an express delegation of authority from the signer of the original

provided that appropriate safeguards are observed in those respects.”

The rule has statutory recognition. In any federal statute unless

otherwise specified, the term “signature” includes “a mark when the

person making the same intended it as such.” 1 U.S.C. s 1; 65 Comp.

Gen. 806,810 (1986).

When facsimile signatures are to be used by government officials, the

safeguards should include:

● Standards for the authorization of the use of facsimile signatures.

● An enumeration of the types of documents on which facsimile

signatures may be used.

● Physical control of the signature device to prevent unauthorized use.

c Notitlcation to officirds authorized to use facsimile signatures that use

of a signature device in no way lessens their responsibility or liability.

B-140697, October 28, 1959 (approving use of facsimile signatures in

the execution of contracts). Other cases approving the use or

acceptance of facsimile signatures are 40 Comp. Gen. 5 (1960) (use

by Air Force on purchase orders for small purchases); 33 Comp. Gen.

297 (1954) (certiilcation of invoice bearing only rubber stamp

Page 9-72 GAO/OGC-92-13 Appropriations hW-VO1. II

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Liability and Relief of Accountable Officers

signature of vendor); B-194970, July 3, 1979 (certification of

voucher/purchase order bearing only facsimile signature of

contracting officer); B-150395, December 21, 1962 (use by Navy on

purchase orders); B-10459O, September 12, 1951 (use on vouchers in

federal educational grant programs); B-126776-0.M., March 5, 1956

(use by Army on certificates of availability of government quarters

and/or mess in support of militaqy travel vouchers) .25

A more recent case held that payment could be certiiled on the basis

of a contractor’s facsimile (“fax”) invoice, again provided that the

agency has adequate internal controls to guard against fraud and

overpayments. B-242185, February 13, 1991, citing several cases

authorizing the acceptance of carbon copies.

One place where facsimile signatures are not permitted is the

Standard Form 210, the signature/designation card for certifying

officem which must be filed with the Treasury Department and which

must bear the certi~g officer’s original, manual signature.

I Treasury Financial Mruuud $ 4-2040 .30e.

Most of the cases cited thus far have involved relatively primitive

devices such as rubber stamps or signature machines. When we move

into the realm of computerized data transmission, the equipment is far

more sophisticated but the underlying principles are the same-there

is no prohibition but there must be adequate safeguards.

In the 1980s, GAO and the Treasury Department began to consider the

feasibility of electronic certification of payment vouchers. In a 1984

memorandum to one of GAO’S audit divisions, GAO’S General Counsel

agreed with the Treasury Department that there is no specillc legal

requirement that a certifying officer’s cert~lcation be limited to

writing on paper. Then, applying the precedent of the earlier rubber

stamp cases, the memorandum concluded that electronic certitlcation,

with adequate safeguards, was not legally objectionable. The

“signature” could bean appropriate symbol adopted by the certifying

officer, which should be unique, within the certitjhg oftlcer’s sole

control or custody, and capable of verification by the disbursing

ofticer. B-216035-0. M., September 20, 1984. Treasury subsequently

developed a proposal for a prototype electronic certification system,

~s~ ~u~ ,-.-.e, B.36459, Apd (5, 1944, SUg@Millg tit U= of f~~e s@@WH ‘mehow

required GAO approval has not been followed and should be disregarded.

Page 9-73 GAO/OGC-92-18 Appropriations Law-Vol. II

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. ,.
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L18bility and Rel.lef of Accountable Officers

f. GAO Audit Exceptions

which GAO found to adequately satisfy the statutory requirements for

voucher certification and payment. B-2 16035-O. M., 8eptember 25,

1987.20

“Taking an exception” is a device GAO uses to forrrudly notify an

accountable officer of a fiscal imegukirity which may result in

personal liability. Today, this device is very rarely used. At one time,

accountable officers had to submit all of their account documents to

GAO, and GAO “settled” the accounts (31 U.S.C. $ 3526(a)) by

physically examining each piece of paper. Exceptions were common

during that era. The nature of the process has evolved in recent

decades in recognition of the increased responsibility of agencies in

establishing their own financial systems and controls. Account

settlement now is more a matter of systems evaluation and the review

of administrative surveillance and the effectiveness of collection and

disbursement procedures. Examination of individual transactions by

GAO is minimal. See 7 GAO-PPM $8.5 (1990). However, f~cal

irregularities still come to GAO’S attention in various ways (through its

normal audit activities, agency irregularity reports, etc.), and GAO may

invoke the exception procedure when warranted by the

circumstances. The process is summarized in 7 GAO-PPM 58.6

(1990). Examples are noted in 65 Comp. Gen. 858,861 (1986)

(massive travel fraud scheme), and B-194727, October 30,1979

(fraudulent misappropriation of mass transit grant funds by

government employee).

The first step in the exception process is the issuance of a “Notice of

Exception” to the agency concerned. The issuance of a Notice of

Exception does not itself constitute a definite determination of

liability. It has been described as “in the nature of a challenge to the

propriety of a certifying officer’s action in certifying the voucher for

payment.” B-6961 1, October 27, 1947, The certi~ng or disbursing

officer, through his or her agency, then has the opportunity to

respond to the exception. It is the accountable officer’s responsibility

to establish the propriety of the payment. 13 Comp. Gen. 311 (1934).

If the reply to the exception is satisfactory, the exception is

withdrawn. ~, B-78091, November 2, 1948. If the reply does not

26A ~eW~ue ~ tie~~felec&oNc techno]o~ in creating obligations uder 31 USC.

$1501. The topic is covered, with citations, in Chapter 7.

Page 9-74 GAO/OGC-92-13 @PTO@WiOIl13 kw-voi. 11
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IJabilityand Belief of Accountable Officera

provide a satisfacto~ basis to remove the exception, the item is

“disallowed” in the account.

Technically, the term “disallowance” applies only to disbursing

oftlcers since a certifying oftlcer does not have physical custody of

funds and does not have an “account” in the same sense that a

disbursing officer does. Thus, strictly speaking, GAO ‘disallows an

expenditure” in the account of a disbursing officer and “raises a

charge” against a cert@ing officer. See 32 Comp. Gen. 499, 501

(1953); A-48860, April 14,1950. For account settlement purposes, a

certi~g officer’s “account” consists of the certified vouchers and

supporting documents on the basis of which payments have been

made by a disbursing officer and included in the disbursing oftlcer’s

account for a particular accounting period. B-147293-O. M.,

February 21, 1962.

The taking of an exception does not preclude submission of a relief

request under applicable relief legislation. As a practical matter, if the

agency has been unable to respond satisfactorily to the Notice of

Exception, the likelihood of there being adequate basis for relief is

diminished correspondingly. However, as in 65 Comp. Gen. 858, it

can happen, and the possibility should therefore not be dismissed.

2. Certifying OfYicers

a. Duties and Liability As we have seen, a certifying officer is the ofllcial who certii3es a

payment voucher to a disbursing officer. The responsibility and

accountability of certi@g officers are specfled in 31 U.S.C.

5 3528(a), part of the previously noted 1941 legislation enacted to

clari~ the roles of accountable ofllcers under Executive Order 6166.

The certifying ofllcer is responsible for (1) the existence and

correctness of the facts stated in the certifkate, voucher, and

supporting documentation; (2) the correctness of computations on

the voucher; and (3) the legali~ of a proposed payment under the

appropriation or fund involved. The statute fiuther provides that a

certifying officer will be accountable for the amount of any “illegal,

improper, or incorrect” payment resulting from his or her false or

misleading certification, as well as for any payment prohibited by law

or which does not represent a legal obligation under the appropriation

or fund involved.

Page 9-75 GAO/OGC-92-19 @pmpridOl19 Law-VOi. ~
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LiabililJI and Belief of Accountable offlcera

There is a recurring appropriation act provision, discussed in Chapter

4 under the heading “Employment of Aliens,” which bars the use of

appropriated funds to pay the compensation of a government

employee who is not a United States citizen, subject to certain

exceptions. The provision applies only to employees whose post of

duty is in the continental United States. Thus, a certifying officer (or

disbursing officer) in the continental United States must be a U.S.

citizen unless one of the exceptions applies, There is no comparable

requirement applicable to employees outside the continental United

States. B-206288 -O. M., August 4, 1982.

A certifying officer must normally be an employee of the agency

whose funds are being spent, but may be an employee of artother

agency under an authorized interagency transaction or agreement. 59

Comp. Gen. 471 (1980); 44 Comp. Gen. 100 (1964).

A certifying officer is liable the moment an improper payment is made

as the result of an erroneous or misleading certification. ~, 54

Comp. Gen. 112, 114 (1974). This is true whether the certification

involves a matter of fact, a question of law, or a mixed question of law

and fact. 55 Comp. Gen. 297, 298 (1975) (citing several other cases).

As a general proposition, the government looks first to the certi~g

officer for reimbursement even though some other agency employee

may be liable to the certifying officer under administrative

regulations. 32 Comp. Gen. 332 (1953); 15 Comp. Gen. 962 (1936).

Also, the certifying officer’s liability does not depend on the

government’s ability or lack of ability to recoup from the recipient of

the improper payment. 31 Comp. Gen. 17 (1951); 28 Comp. Gen. 17,

20 (1948). What this means is that the government is not obligated to

seek first to recoup from the recipient, although it frequently does so,

and of course any recovery from the recipient will reduce the

certi~g officer’s liability, at least in most cases.

Occasionally there may be two certif@ng officers involved with a

given payment, so-called “successive certifications.” The rule is that

the responsibility of the cert@ing officer certifying the basic voucher

is not diminished by the subsequent action. GAO stated the principle as

follows in a letter to the Secretary of the Treasury, B-142380,

March 30, 1960, quoted in 67 Comp. Gen. 457,466 (1988):

“Where the certifying officer who certifies the voucher and schedule of payments is

different from the certifying officer who certifies the basic vouchers, . . . the certifying

officer who certifies the basic vouchers is responsible for the correctness of such

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Liability and Relief of Aeeountable Officers

vouchers and the certifying ofticer who certitles the voucher-schedule is responsible

only for errors made in the preparation of the voucher-schedule.”

An illustration of how this principle may apply is 55 Comp. Gen. 388

(1975), involving the liability of General Services Administration

certifying officers under interagency service and support agreements

with certain independent agencies. Under the arrangement in

question, the agency would assume certification responsibility for the

basic expenditure vouchers, but they would be processed for final

payment through GSA, with GSA preparing and certifying a master

voucher and schedule to be accompanied by a master magnetic tape.

Again quoting the above passage from B-142380, GAO concluded that

the legal liability of the GSA certifying ofllcer would be limited to

errors made in the final processing.

Similarly, the statutory accountability does not apply to an ofilcial

who certifies an “a@stment voucher” used to make a@slxnents

between accounts or funds in the Treasury in respect of an obligation

already paid and which therefore does not involve paying money out

of the Treasury to discharge an obligation. 23 Comp. Gen. 953

(1944). Although certification even in this situation should not be

reduced to a “matter of form,” the accountability would attach to the

certifying officer who certified the basic payment voucher. See 23

Comp. Gen. 181, 183–84 (1943).

The function of certification is not perfi.umtory, but involves a high

degree of responsibility. 55 Comp. Gen. 297,299 (1975); 20 Comp.

Gen. 182, 184 (1940). This responsibility is not alleviated by the press

of other work. B-147747, December 28, 1961.Z7 It also involves an

element of verification, the extent of which depends on the

circumstances. For example, a voucher for goods or services should

be supported by evidence that the goods were received or the services

performed, 39 Comp. Gen. 548 (1960). Generally, an independent

investigation of the facts is not contemplated. ~, 28 Comp. Gen.

571 (1949). Similarly, where proper administrative safeguards exist,

cetii~g officers need not examine time, attendance, and leave

27But we B138601, Jrmu~ 18, 1960, in Which the VOhe of work- men

co~ion in a somewhat extreme case.

Page 9-77 GAO/OGC-92-13 Appropriations Law-Vol. II
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Liability and Relief of Accountable OMcers

records in order to certify the correctness of amounts shown on

payrolls submitted to them. 31 Comp. Gen. 17 (1951 ).28A 1982

decision, 61 Comp. Gen. 477, reviewed the safeguards proposed by a

Bonneville Power Administration certifying oftlcer for certi@’ing

recurring payments to a regional planning body, and found them

adequate to satis~ 31 U.S.C. 53528.

Whatever else the certifying officer’s verification burden may or may

not involve, it certainly involves questioning items on the face of

vouchers or supporting documents which simply do not look right.

For example, a certifying officer who certifies a voucher for payment

in the full amount claimed, disregarding the fact that the

accompanying records indicate an outstanding indebtedness to the

government against which the sum claimed is available for offset, is

accountable for any resulting overpayment. 28 Comp. Gen. 425

(1949). Similarly, certifying a voucher in the full amount within a

prompt payment discount period without taking the discount will

result in liability for the amount of the lost discount. However, a

certifying officer is not liable for failing, even if negligently, to certify

a voucher within the time discount period. 45 Comp. Gen. 447

(1966).

A clear illustration of a certifying officer’s responsibility and liability

occurred when a Department of Transportation employee fraudulently

misappropriated more than $850,000 in 1977. The fraud was

discovered by virtue of the employee’s ostentatious purchases,

including several luxury automobiles and a “topless” bar in

Washington, D.C. The employee was found guilty and sent to jail.

However, investigation revealed negligence on the part of a

Department certif@ng officer. The employee had perpetrated the

fraud by inserting his own name on six payment vouchers for Urban

Mass Transportation Administration grants. Each voucher contained a

list of approximately ten payees with individual amounts, and the total

amount, and each had been certified by the certifying officer. The

negligence occurred in one of two ways. If the employee inserted his

own name and address on the voucher before presenting it to the

certifying officer, the certifying officer was negligent in not spotting

the name of an individual (whose name he should have known) with

Z6Mmy of the ~@~ noted ~ the teti, such as 31 Comp. Gen. 17, ~o~ under ~u~ ~m.

While they would stilf apply under a manual system, it is important to keep in mind the

previously discussed differences in approach between manual and automated systems.

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an address in suburban Maryland on a list of payees the rest of which

were mass transit agencies. If the employee presented a partial

voucher and added his own name after it was certified, the total as

presented to the certif@g officer could not have agreed with the sum

of the individual amounts, and the certifying officer was negligent in

not veri~g the computation. GAO raised exceptions to the certi@ing

officer’s account, and advised the Department of Transportation that

it must proceed with collection action against the certifying ofilcer for

the full amount of the excepted payments less any amounts recovered

from the employee or through the sale of assets, like the topless bar,

which the Justice Department seized. See B-194727, October 30,

1979. Apparently in view of the clear negligence, relief was never

requested.

At this point, it should be noted that no one involved in the process

remotely expects that the government will be able to recover several

hundred thousand dollars from a certifying officer, or from any other

accountable officer, except perhaps one who has him(her)self stolen

the money. However, the burden of having to repay even a portion in

cases of losses of this size sends an important message and reinforces

the certain if indeterminable deterrent effect of the statute.

Certifying officers should not certify payment vouchers that are

unsupported by pertinent documentation indicating that procedural

safeguards regarding payment have been observed. Vouchers that are

deficient in this regard should be returned to the appropriate

administrative officials for proper approvals and supporting

documents. B-179916, March 11, 1974.

An area in which a certi@ing officer’s duty to question is minimal is

payments to a contractor determined under a statutory or contractual

disputes procedure. In the absence of fraud or bad faith by the

contractor, a payment determination made under a disputes clause

procedure is final and conclusive and may not be questioned by a

cert@ing officer, GAO, or the Justice Department. S&E Contractor,

Inc. v. United States, 406 US. 1 (1972); B-201408, April 19, 1982. It

does not follow that any administrative settlement is entitled to the

same effect. In B-239592, August 23, 1991, GAO found that an

“informal settlement” of a personnel action between an agency and

one of its employees was without legal authority, and found the

certifying officer liable for the unauthorized payments. (A subsequent

letter, B-239592.2, September 1, 1992, clarified that this meant the

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Liability and Relief of Accountable Offkers

authorized certifying officer, not an official who had signed certain

documents as “approving official” but was not responsible for

determining the legality of the payment.)

A different issue involving an administrative settlement arose in 67

Comp. Gen. 385 (1988). After an investigation by federal and state

ofllcials, the Forest Service determined that it was responsible for a

fire in a national forest in Oregon, and reimbursed the state for fire

suppression expenses incurred under a cooperative agreement.

Subsequently, a private landowner ”sued for damages resulting from

the same fire, and the court made a finding of fact that the Forest

Service was not liable. The certifying officer was concerned that the

court’s finding might have the effect of invalidating the prior payment

to Oregon and making him liable for an erroneous payment. The

decision concluded that the payment was proper when made, and that

the court finding did not impose any duty on the certifying officer to

reopen and reexamine it.

A certifying officer has the statutory right to seek and obtain an

advance decision from the Comptroller General regarding the

lawfulness of any payment to be certified. 31 U.S.C. $3529. This

procedure will insulate against liability. Following the advice of

agency counsel, on the other hand, does not guarantee protection

against liability. ~, 55 Comp. Gen. 297 (1975). Having said this,

we do not wish to imply that consulting agency counsel is a pointless

gesture. On the contrary, it is to be encouraged. Seeking internal legal

advice prior to certification of matters on which the certifying officer

is unsure will in many cases obviate any need for an advance decision.

In other cases it may help define those situations in which consulting

GAO may be desirable.

As a final note, the Treasury Department has published a supplement

to the Treasury Financial Manual entitled Now That You’re a

Certifying Officer (1983). Written expressly for certif@ng officers, it

pro~des a good overview of the importance of the job and the

responsibilities which accompany it.

b. Applicability of 31 U.S.C. There are two m~or exceptions to 31 U.S.C. $ 3528(a). First, it applies

~ 3528 only to the executive branch. While section 3528(a) is not limited by

its terms to the executive branch, 31 U.S.C. $ 3325(a), the basic

requirement that disbursing officers disburse only upon duly certified

vouchers, is expressly limited to the executive branch, and sections

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3325(a) and 3528(a) originated as sections 1 and 2 of the same 1941

enactment. Thus, GAO has concluded that 31 U.S.C. 3 3528(a) does not

apply to the legislative branch. 21 Comp. Gen. 987 (1942); B-191036,

July 7, 1978; B-236141.2, February 23, 1990 (internal

memorandum). See also B-39695, March 27, 1945. It has also been

held that 31 U.S.C. $ 3325(a) does not apply to the judicial branch.

B-6061/A-51607, April 27, 1942. It follows that section 3528(a)

would be equally inapplicable to the judicial branch. B-236141.2,

cited above.

The second mqjor exception, previously noted, is the exemption

contained in 31 U.S.C. 5 3528(d) for the military departments except

for salaries and expenses in the District of Columbia.

Some legislative branch agencies now have their own legislation

patterned after 31 U.S.C. $3528. Those that do not, as well as the

miiitary departments, nevertheless have the authority, within their

discretion, to create their own certi~g officers and to make them

accountable by administrative regulation. The degree of

accountability is up to the agency. The 1990 memorandum cited

above, B-2361 41.2, contains a detailed discussion. An arrangement of

this type can include a mechanism for administrative relief. Id.

However, relief would have to be granted or denied by the ag~ncy

itseif, not by GAO. 21 Comp, Gen. at 989; B-191036, July 7, 1978.

Also, a system of cert@ing officer accountability established by an

agency exempt from 31 U.S.C. $3528 would not automatically

eliminate the statutory accountability of the disbursing ofilcer, who

remains the primary accountable officer. 22 Comp. Gen. 48, 51

(1942); 21 Comp. Gent at 988–89; B-213720, October 2,1984.

Notwithstanding 31 U.S.C. $ 3528(d), it is possible for section 3528 to

apply to military departments, albeit only in rare situations. The

exemption “was intended to relate to the functions of actually

disbursing funds-to the paying of vouchers, etc.” B-24356,

March 18, 1942, quoted in 44 Comp. Gen. 818,820 (1965). Thus, ifa

situation were to occur in which a military disbursing officer were

functioning as a certifying officer with the actual disbursement to be

made by another agency, such as Treasury, section 3528 would apply.

For example, prior to the Treasury Department’s recertification

procedures for replacement checks, discussed later in this chapter,

the military departments issued their own replacement checks by

virtue of a specific delegation from Treasury under 31 U.S.C.

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c. Relief

$ 3331(f). Replacement checks beyond the scope of the delegation

had to be issued by Treasury, with the military disbursing officer

functioning essentially as a certifying officer. Relief for losses in these

cases was handled under 31 U.S.C. 33528. The case with the most

detailed discussion is B-215380 et al., July 23,1984.

Informally known as the Cert@ing Officers’ Relief Act, 31 U.S.C.

$ 3528(b) establishes a mechanism for the administrative relief of

certi~ng officers governed by 31 U.S.C. $ 3528(a). There are two

standards for relief. The Comptroller General may relieve a cert@ing

officer from liability for an illegal, improper, or incorrect payment

upon determining that–

(1) the certification was based on ofilcial records and the cert@ing

ol%cer did not know, and by reasonable diligence and inquiry could

not have discovered, the actual facts; or

(2) the obligation was incurred in good faith, the payment was not

specifically prohibited by statute, and the United States received value

for the payment.

Under either standard, relief may be denied if the agency fails to

diligently pursue collection action against the recipient of the

improper payment. 31 U.S.C. $ 3528(b)(2).

Unlike the physical loss relief statutes previously discussed, 31 U.S.C.

$ 3528(b) does not require administrative determinations by the

agency as a prerequisite to relief. The determinations under section

3528(b) are made by the Comptroller General. Also, the relief

standards under section 3528(b) are stated in the alternative; relief

may be granted if either of the two standards can be established. It

makes no difference whether the improper payment is discovered by

GAO or the agency concerned. B-137435-O. M., October 14, 1958.

ReIief is discretionary (the statute says “may relieve”), although no

case has been discovered in which a certifying ofilcer who met either

of the standards was not relieved.

There is no special form of request under 31 U.S.C. 5 3528(b). Relief

may be requested by the agency on behalf of the certifying officer, or

directly by the certif~ng officer. See, ~, 31 Comp. Gen. 653 (1952)

for an example of the latter. Relief requests must present sufficient

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information to permit GAO to make one of the required fmdirtgs. ~,

B-191900, Jdy 21, 1978.

One of the objectives of 31 US.C. s 3528(b) was to reduce the volume

of private relief legislation recommended on behalf of certifying

officers. The legislative history of the statute indicates that art agency

should seek relief from GAO before considering relief legislation. As to

those “less meritorious cases” in which relief maybe denied, relief

legislation remains art available option. 30 Comp. Gem 298 (1951).

The fwst relief standard, 31 U.S.C. S 3528(b)(l)(A), relates essentially

to the certification of incorrect facts, and permits relief if the

certification was based on ofllcial records and if the certifying ofilcer

did not know, and could not reasonably have learned, the actual facts.

GAO has never attempted to formulate a general rule as to what acts

may support relief from the certification of incorrect facts. Rather, the

approach is as stated in 55 Comp. Gen. 297, 299–300 (1975):

“[W]e have sought to apply the relief provisions by considering the practical

conditions and procedures under which certitlcations of fact are made. Consequently,

the diligence to be required of a certifying oftlcer before requests for relief under the

act will be considered favorably is a matter of degree dependent upon the practical

conditions prevailing at the time of certitlcation, the sufficiency of the ~‘ve

procedures protecting the interest of the Government, and the apparency of the

error.”

For example, Social Security Administration cert@ing officers who

certi~ large numbers of awards each month may, apart from obvious

errors, rely on the award documents presented for certtilcation.

B-1 19248-O. M., April 14, 1954.

In B-237419, December 5, 1989, relief was granted to a Forest

Service certifying officer who certified the refund of a timber

purchaser’s cash bond deposit without knowing that the refund had

already been made, The ce~ifjdng oftlcer had followed proper

procedures by checking to see if the money had been refunded, but

did not discover the prior payment because it had not been properly

recorded. Also, the agency was pursuing collection efforts against the

payee.

Another case in which relief was granted under subsection (b)(l)(A)

is B-246415, JuIy 28, 1992. A certifying officer paid a contract invoice

to a financing institution to which payments had been assigned under

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the Assignment of Claims Act without discovering that the contract

file contained a prior assignment. The contracting offker had

erroneously acknowledged the second assignment when he should

have either rejected it or invalidated the first one. The agen~

remained liable to the fwst assignee and was unable to recover the

improper payment from the second. The certi@ing officer had

checked the contract fde, and neither agency procedures nor

reasonable diligence required her to keep looking once she found

what appeared on its face to be a properly acknowledged assignment.

The case also illustrates how an agency (the Panama Canal

Commission in this case) should respond to a loss-by reviewing its

procedures to determine if they can be improved, within reason, to

prevent recurrence. In this instance, the agency began requiring that

contract fdes include a “milestone” log, and that assignments be

tabbed in the file and reviewed prior to acknowledgment.

As a general rule, a certifying officer may not escape liability for

losses resulting from improper certtilcation merely by stating either

that he was not in a position to determine that each item on a voucher

was correctly stated, or that he must depend on the correctness of the

computations of his subordinates. A cert@ing officer who relies upon

statements and computations of subordinates must assume

responsibility for the correctness of their statements and

computations, unless it can be shown that neither the certifying

officer nor his or her subordinates, in the reasonable exercise of care

and diligence, could have known the true facts. 55 Comp. Gen. 297,

299 (1975); 26 Comp. Gen. 578 (1947); 20 Comp. Gen. 182 (1940).

In 49 Comp. Gen. 486 (1970), a certifying officer asked if he would be

held accountable where his own agency would not tell him exactly

what he was being asked to certify. The agency took the position that

the expenses in question were confidential and could be disclosed

only to those with a need to know, which did not include the certifying

officer. GAO disagreed. The situation would be different if the agency

were operating under “unvouchered expenditure” authority such as

31 U.S.C. $ 3526(e)(2). Under that type of authority, a certi@ing

oftlcer who is not informed of the objector purpose of the

expenditure is not accountable for its legality. 24 Comp. Gen. 544

(1945). In the case at hand, however, the agency had no such

authority, Therefore, the certifying oftlcer would not be protected

against liability if he certified a voucher without knowing what it

represented. As GAO pointed out several years later, any other answer

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would defeat the purpose of the certillcation requirement, which is to

protect the United States against illegzd or erroneous payments. 55

Comp. Gen. 297,299 (1975). Except for statutorily authorized

urwouchered expenditures, “I don’t know and they wouldn’t tell me”

cannot be suffkient.

The second relief standard, 31 U.S.C. $! 3528(b)(l)(B), contains three

elements, all of which must be satisfied-obligation incurred in good

faith, payment not speciilcally prohibited, United States received

value for the payment. If a certifying officer quatiles for relief under

this standard, it becomes irrelevant whether he or she could also have

qualified under the first standard. This is particularly useful because,

in many cases, what would constitute reasonable diligence and inquiry

for purposes of the frost standard is far from clear.

There is no simple formula for determining good faith. One authority

attempts to define the term as follows:

“Good faith is an intangible and abstract quality with no technical meaning or

statutory definition, and it encompasses, among other things, an honest belief, the

absence of malice and the absence of design to defraud. . . . Honesty of intention, and

freedom from knowledge of circumstances which ought to put the holder upon

inquiry.”

Black’s Law Dictionary 693 (6th ed. 1990). An important factor in

evaluating good faith for purposes of 31 U.S.C. $3528 is whether the

certifying officer had, or reasonably should have had, doubt regarding

the propriety of the payment and, if so, what he or she did about it.

Whether the certi~ng officer reasonably should have been in doubt

depends on a weighing of all surrounding facts and circumstances and

cannot be resolved by any “hard and fast rule.” 70 Comp, Gen. 723,

726 (199 1). In many cases; good faith is found simply by the absence

of any evidence to the contrary. Id. —

At o,ne time, the failure to obtain an advance decision from GAO on

matters considered doubtful was viewed as an impediment to

establishing good faith. ~, 14 Comp. Gen. 578,583 (1935).

Depending on the circumstances, following the advice or instructions

of some administrative official in lieu of seeking an advance decision

may not constitute “reasonable inquiry” under the first relief standard

of 31 U.S.C. $3528.31 Comp. Gen. 653 (1952). However, it has

become increasingly recognized that consulting agency counsel is a

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relevant factor in demonstrating good faith under the second

standard. B-191900, Jtiy 21, 1978; B-127160, Apti 3, 1961.

To understand the second element– “no law specifkally prohibited

the payment”-it is helpful to note the language of the original 1941

enactment, which was “the payment was not contrary to any statutory

provision speciilcally prohibiting payments of the character involved”

(55 Stat. 875–76). This means statutes which expressly prohibit

payments for spec~lc items or services. 70 Comp. Gen. 723,726

(1991); B-191900, July 21,1978. An example would be 40 U.S.C. $34,

which prohibits the rental of space in the District of Columbia without

specifk authority. 46 Comp. Gen. 135 (1966).29 Other examples are

31 U.S.C. $ 1348(a) (telephones in private residences) and 44 U.S.C.

S 3702 (newspaper advertisements).

Under this interpretation, the phrase “no law specitlcally prohibited

the payment” is not the same as the more general “payment

prohibited by law.” It does not include violations of general f~cal

statutes such as the Antideficiency Act (31 U.S.C. $ 1341) or the

general purpose statute (31 U.S.C. $ 1301(a)). B-142871 -O. M.,

September 15, 1961.s0

The third eiement, value received, normally implies the receipt of

goods or services with a readily determinable dollar value. ~,

B-241879, April 26, 1991 (automatic data processing equipment

maintenance contract extended without proper delegation of

procurement authority, services were performed). However, in

appropriate circumstances, an intangible item may constitute value

received where the payment in question has achieved a desired

program result. B-191900, July 21, 1978; B-127160, April 3, 1961.

zg~tho~ the ~u~ is no loWer construed as prohibiting the rental of short-term ~~erence

facilities, it is still an example of a specflc prohibition as contemplated by 31 U.S.C. 33528.

Ooone ~= B.222048, Febru~ I(), 1987, implying that an Antide!lciency Act ~o~on ‘odd

prechde relief under 31 U.S.C. 5 3528(b)(l)(B), is inconsistent with the weight of authority as

diacuesed in the text.

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LiabiJity and Belief of Accountable Offlcen!

3. Disbursing Officers

a. Standards of Liability and As with certifying officers, the responsibilities and accountability of

Relief disbursing ofllcers are mandated by statute. A disbursing ofticer in the

executive branch must (1) disburse money only in accordance with

vouchers certified by the head of the spending agency or an

authorized certifying officer, and (2) examine the vouchers to the

extent necessary to determine that they are (a) in proper form,

(b) certified and approved, and (c) correctly computed on the basis of

the facts certified. The disbursing oftlcer is accountable for these

functions, except that accountability for the correctness of

computations lies with the certifying officer. 31 U.S.C. s 3325(a) .31

Disbursing oftlcers render their accounts quarterly. 31 U.S.C.

!$ 3522(a)(l).

The administrative relief provision for disbursing officers is 31 U.S.C.

$ 3527(c), enacted in 1955 (69 Stat. 687). The Comptroller General is

authorized to relieve present or former disbursing officers from

liability for deficiencies in their accounts resulting from illegal,

improper, or incorrect payments, upon determining that the payment

was not the result of bad faith or lack of reasonable care by the

disbursing officer. The determination may be made by the agency and

concurred in by GAO, or it may be made by GAO on its own initiative. “

As in the case of certifying officers, relief maybe denied if the agency

concerned fails to diligently pursue collection action against the

recipient of the improper payment.

The statute further provides that the granting of relief under section

3527(c) does not affect the liability or authorize the relief of the

beneficiary or recipient of the improper payment, nor does it diminish

the government’s duty to pursue collection action against the

beneficiary or recipient. 31 U.S.C. S 3527(d)(2).

In contrast with the certi~ng officer relief statute, 31 U.S.C. $ 3527(c)

is nt5t limited to the executive branch. ~, B-200108/B-198558,

~IShce 31 U,S.C. ~ 3325(a) O*WMI u part of the 1941 Iegialationdesbed ~ cresponsibifities under 31 U.S.C. $ 3321(a) (Executive Order 6166), and since section 332](a)

does not apply to the mifitary departments except for safaries and expenses in the District of

Columbia, section 3325(a) has the same exemption, found at 31 U.S.C. S 3325(b). Mifitary

disbursing officers are nevertheless fully accountable.

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January 23, 1981 (judicial branch]. WMin the executive branch, it

applies to military and civilian agencies alike.32 Thus, the relief

authori~ of 31 U.S.C. $ 3527(c) is not limited only to those disbursing

officers whose duties are prescribed by 31 U.S.C. S 3325(a).

The relief statute contemplates the consideration of individual cases

and does not authorize the blanket relief of unknown disbursing

officers for unknown amounts. B-165743, May 11, 1973.

Once it is determined that there has been an improper payment for

which a disbursing officer is accountable, and that relief is desired,

the primary issue is whether the payment was or was not the result of

bad faith or lack of reasonable care on the part of the disbursing

officer. “Bad faith” is difficult to define with any precision. It is

somewhere between negligence and actual dishonesty, and closer to

the latter. One authority gives us the following:

The opposite of ‘good faith,’ generally implying or involving actual or constructive

fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfii some

duty or some contractual obligation, not prompted by an honest mistake as to one’s

rights or duties, but by some interested or sinister motive. Term ‘bad faith’ is not

simply bad judgment or negligence, but rather it implies the conscious doing of a

wrong because of dishonest purpose or moral obliquity; . . . .“

Black’s Law Dictiomuy 139 (6th ed. 1990). Bad faith cases tend to be

relatively uncommon. Far more common are cases invoking the

reasonable care standard, This standard-whether the disbursing

officer exercised reasonable care under the circumstances-is the

legal definition of negligence, artd is the same standard applied in

physical loss cases. 65 Comp. Gen. 858, 861–62 (1986); 54 Comp.

Gen. 112 (1974).

The determination of whether a payment was or was not the result of

bad faith or lack of due care must be made on the basis of the facts

and circumstances surrounding the particular payment in question. A

high error rate in the disbursing office involved does not automatically

establish lack of due care in the making of a particular payment, nor

does a low error rate and a record of an exemplary operation

automatically establish due care. B-141038-O. M., November 17,

~2A~ from the absence of my limiting language in the statute itself, this is ~~ from

references to Defense Department input in the legklative history. S. Rep. No. 1185, 84th Cong.,

1st Sess. 3 (1955); H.R. Rep. No. 996, S4th Cong., let 8ess. 2 (1965).

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LlabiMtyand Belief of Accountable Officers

1959; B-136027-O. M., June 13, 1958. The continued existence of an

“inherently dangerous” procedure, however, does indicate iack of due

care on the part of the responsible disbursing officer. B-162629 -O.M.,

November 9, 1967.

It is Mlcult, if not impossible, to state hard and fast rules applicable

inflexibly to all cases involving relief under the provisions of 31 U.S.C.

$ 3527(c). What maybe considered good faith and the exercise of due

care in one set of circumstances may not be so considered in another.

However, it maybe stated generally that GAO will grant relief where

(1) the agency has made proper efforts to collect from the recipient of

the improper payment, (2) the agency has determined that the

payment was not the result of bad faith or lack of due care on the part

of the disbursing oftlcer, and (3) no evidence to the contrary is

available. Also, relief may be granted without the administrative

determination where due care and the absence of bad faith are evident

from the facts.

Actual negligence which contributes to an improper payment will, of

course, preclude the granting of relief. For example, making a

payment on the basis of documents which have been obviously

altered, without fmt seeking clarification, is not the exercise of due

care. B-233276, October 31, 1989, aff’d upon reconsideration,

B-233276, June 20, 1990; B-138593-O.M., February 18, 1959;

B-13591 O-O. M., July 14, 1958. Similarly, relief was denied in the

following cases:

● Disbursing officer made duplicate payments on voucher schedule

covering payments already mmde. Disbursing officer had requested

guidance on new procedures, and “duplicate” schedule with

instructions had been sent to her in response to that request, with a

cover letter clearly stating that the schedule covered payments

previously made. The payment could only have been due to lack of

due care. B-142051, March 22, 1960.

● Disbursing officer continued to pay New Mexico gasoline tax after

State Attorney General and Judge Advocate General had both

concluded that the United States was not liable for the tax. Although

the disbursing officer was aware of the rulings, he claimed that he had

not received specific instructions to stop paying. B-135811, May 29,

1959.

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Llsbility and Relief of Accountable Officera

● Disbursing oftlcer reimbursed imprest fund on the basis of fictitious

requisitions not supported by dealers’ invoices or delivery slips.

B-137723-0.M., December 10,1958.

As with physical losses, failure to follow applicable regulations is

generally regarded as negligence, and if an improper payment is

attributable to that failure, relief will be denied. 54 Comp. Gen. 112,

116 (1974); 44 Comp. Gen. 160 (1964). Compliance with regulations

will help establish due care, but the mere fact of compliance with

regulations which are clearly insuftkient may not always satisfy the

standard. B-192558, December 7, 1978.

The concept of proximate cause is also applicable, and relief is

appropriate where any negligence that may have existed was not the

proximate cause of the improper payment. In one case, for example,

local operating procedures at a military installation were found

inadequate because they permitted personal checks to be cashed

without checking identification cards. However, since the cashiem

checked ID cards on their own initiative, and did so in the case for

which relief was sought, the inadequacy could not have contributed to

the loss. B-221415, March 26, 1986. For other examples, see

B-227436, Jdy 2, 1987, and B-217663, July 16, 1985.

The essence of negligence is the existence of a duty to exercise

reasonable care in a particular situation and the violation of that duty.

In B-188744, July 15, 1977, a Bureau of Indian Affairs disbursing

ofiicer erroneously made a payment to the wrong heir. Unknown to

him, the probate and title determinations on which he had based the

payment had been reopened and revised. Under established

procedures, the disbursing officer was neither required nor expected

to verify inheritance determinations. Since the verification was not

within the scope of his duty, and was not something anyone in his

position would reasonably be expected to do, there was no lack of due

care. See also B-137223 -O. M,, January 18, 1960. Thus, negligence

will generally not be imputed to a disbursing officer where payment is

made on the basis of facts of record upon which the disbursing officer

is or reasonably can be expected to rely, even though such facts are

subsequently found to be erroneous. This assumes that there is

nothing on the face of the documents presented to the disbursing

officer which should reasonably have alerted him or her that

something appeared to be wrong.

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A disbursing oftlcer is accountable for payments made by his or her

subordinates. However, relief may be granted under 31 U.S.C.

3 3527(c) if the improper payment was not the result of bad faith or

lack of due care attributable to the disbursing officer personally.

B-141038-O.M., November 17, 1959. Where the actual disbursement

is made by a subordinate, relief for the supervisory disbursing officer

requires a showing that the disbursing officer exercised adequate

supervision. Adequate supervision in this context means that the

disbursing officer (1) maintained an adequate system of controls and

procedures to avoid errors, and (2) took appropriate steps to ensure

that the system was effective and was being followed at the time of the

payment in question. ~, 62 Comp. Gen. 476,480 (1983). A relief

request must contain suftlcient information to enable an independent

evaluation. B-235037, September 18, 1989.

GAO has not attempted to define the elements of an adequate

supervisor system. There can in fact be no freed formula, as the

system will vary based on such factors as the size of the disbursing

operation and the types of payments or transactions involved.

Nevertheless, several elements which commonly appear in good

systems can be identified (although no single case lists them as such):

(1) Compliance with agency regulations. For example, a military

disbursing ofllce will need to ensure compliance with any pertinent

directives of the Defense Department, the particular military

department involved, and the parent command.

(2) Locally developed instructions (often called standard operating

procedures or SOPS) tailored to the needs of the particular disbursing

office. Relief requests should include copies of any relevant SOPS.

While SOPS are extremely helpful, the lack of a written SOP will not in

and of itself cause a system to “flunk” the relief standard. ~,

B-215226, APrii 16, 1985.

(3) Training. This includes both initial training for new personnel and

periodic refresher training, again tailored to the needs of the

particular office. Training in this context does not necessari ly mean

formal classroom training, but may be in the form of on-the-job

training and may include such devices as reading fdes which are

circulated periodically and especially when pertinent changes occur.

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(4) Periodic review or inspection by the supervisor. The forms this

may take will vary with the size and nature of the operation.

The adequacy of a supervisory system is not, nor could it realistically

be, measured against a zero-error standard. Many cases have made

the point that a skillfully executed criminal scheme can occasionally

oulxvit an adequate and well-supervised system. ~, B-241880,

August 14, 1991; B-202911, June 29, 1981. Similarly, human error

will occur even in the most carefully established and supervised

system. The best system cannot be expected to eliminate or detect

every clerical error by a subordinate. ~, B-224961, September 8,

1987; B-212336, August 8, 1983.

The cases also recognize that, in a large operation, the supervisory

disbursing oftlcer cannot reasonably be expected to personally review

every check that is issued or every cash payment that is made. ~,

B-215734, November 5, 1984 (check cashed with fraudulent

endorsement); B-194877, July 12, 1979 (amounts of two payments

inadvertently switched, resulting in overpayment to one payee);

B-187180, September 21, 1976 (wrong amounts inserted on checks).

Thus, it is possible for a supervisor to be relieved for an error by a

subordinate which, if attributable to the disbursing offker personally,

would have resulted in the denial of relief. We previously cited several

cases denying relief for payments made on the basis of obviously

altered documents. These were cases in which the disbursing oftlcer

saw or should have seen the documents. Relief has been granted for

similar losses occurring in otherwise adequate systems under which

the supervisor was not required to see, and in fact did not see, the

altered document. B-141038-O. M., November 17, 1959.

Where the subordinate who made the payment is also an accountable

officer (a cashier, for example), the standard for relieving the

subordinate is whether the individual complied with established

procedures and whether anything occurred which should reasonably

have made the individual suspicious that something was wrong. ~,

B-233997.3, November 25, 1991; B-241880, August 14, 1991.

Depending on the particular facts, in cases involving two disbursing

officers accountable for a payment, one a supervisor and the other a

subordinate, it is possible for relief to be granted to both, denied to

both, or granted to one and denied to the other. Examples of cases

applying the above standards in which relief was granted to the

supervisor but not the subordinate are B-231503, June 28, 1988

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Liability and Relief of Accoontile Offkem

(cashier failed to observe annotations on voucher), and B214436,

April 6,1984 (agency declined to seek relief for subordinate who had

failed to follow established procedures).

In our coverage of physical loss cases, we emphasized the importance

of statements by the accountable officer. The principle applies equally

in improper payment cases. The existence of adequate controls and

procedures is usually documented, but this is not always the case, and

the passage of time may make it impossible to locate a copy of the

specific version of the SOPS in effect at the time of the payment. Also,

testimony of the accountable ofllcer(s) and other involved persons is

often the only way of establishing how the controls and procedures

were being implemented at the time of the payment. While the

disbursing officer’s own statement is obviously not disinterested and

cannot be regarded as conclusive, it is always given appropriate

weight and, as with unexplained loss cases, has often been enough to

tip the balance in favor of relief where the record contains no

controverting evidence or where document.ay evidence is no longer

available. Examples are B-234962, September 28, 1989; B-215226,

APril 16, 1985; B-217637, March 18, 1985; B-216726, January 9,

1985; B-215833, December 21, 1984; and B-212603 et al.,

December 12, 1984.

Finally, a disbursing officer has the same statutory right as a

cetiifying officer to obtain an advance decision from the Comptroller

General. 31 US.C. $3529. Obviously, if the decision is to serve the

purpose of protecting the disbursing officer, the request must include

the facts which gave rise to the doubt. 20 Comp, Gen. 759 (1941).

Following administrative advice in lieu of seeking a GAO decision may,

depending on the circumstances, bear upon the issue of whether the

disbursing officer exercised due care. ~, 49 Comp. Gen. 38

(1969). We previously noted that consulting agency counsel will help

a certifying officer establish good faith. There is no reason why it

should not equally help a disbursing officer establish good faith and

due”care, although it may not be enough if the advice received flies in

the face of contrary information in the hands of the disbursing officer.

~, 65 Comp. Gen. 858 (1986), affd upon reconsideration,

B-217114.5, June 8, 1990. Whichever course of action is chosen, the

disbursing officer faced with a doubtful payment needs to do

something. The road to relief will be very diftlcult if a disbursing

officer who is admittedly in doubt proceeds to make the payment

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I&bility and Relief of Accountable Officere

without consulting either GAO or appropriate agency officials. See 23

Comp. Gen. 578 (1944).

b. Some Speci13c Applications The federal government disburses money in an immense variety of

situations-payments to employees (salary, allowances, awards),

payments to contractors, payments under assistance programs,

payments to various claimants, etc. Every situation in which proper

payments can be made presents the potential for improper payments,

resulting from such things as fraud, government error, or the

misapplication of legal authority or limitations. To illustrate some of

the situations that may arise, we present here a selection of improper

payments for which relief has been sought under 31 U.S.C. $ 3527(c).

In each case, the relief question was approached by applying the

principles and standards discussed in Section D.3.a.

In view of the differences in disbursement systems between the

military departments and the civilian agencies, a large proportion of

the cases involve military disbursing officers, and several would be

certi~g officer cases if they occurred in civilian agencies. A few of

the situations can arise only in the military departments.

(1) Fraudulent travel claims

Cases under this heading range from single payments to massive

schemes. They involve two distinct situations–fraudulently obtained

travel advances and payments based on fraudulent travel vouchers.

In B-240654, February 6, 1991, an imposter, using falsified travel

orders and a phony military identification card, obtained travel

advances at six Air Force bases totalling nearly $74,000. The Air

Force was able to identify the imposter and he was arrested, but

committed suicide before trial. In another case, an individual stole an

identification card from an athletic locker at the Pentagon and used it

to obtain travel advances at several Army installations. The fraud was

successful because the thief bore a sufficient resemblance to the

card’s owner. B-217440/B-217440.2, April 16, 1985; B-217440,

February 13, 1985. The losses in these cases were attributed to

skillfully executed criminal activities. Other cases involving

fraudulently obtained travel advances include B-246371, June 23,

1992; B-234962, September 28, 1989; B-221395, March 26, 1986;

and B-210648, March 15, 1984.

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The second group of cases is similar except that the fraudulent

document is a travel voucher rather than a travel order. Several

related cases involve a conspiracy carried out over several years by

employees of the Army Corps of Engineers. Basically, the employees

presented vouchers based on fraudulent lodging receipts, often

provided by friends or relatives. The scheme eluded detection for

several years until it was discovered that the providers of the receipts,

who had “verified” the accuracy of the receipts to the Corps, were

themselves participants in the fraud. The disbursing offker in one

district was relieved in part, but relief was denied for payments made

after he had received information putting him on notice of the

possibility of fraud. 65 Comp. Gen. 858 (1986). In another district,

the disbursing officer stopped making payments immediately upon

being advised of the investigation, and was relieved in full.

B-217114.2, February 3, 1988,

A simpler situation is B-215737, November 5, 1984, in which an

individual presented to an Army cashier a travel voucher which had

been issued to someone else. Relief was granted to the Finance and

Accounting Ofllcer, but denied to the cashier because she failed to

compare the name on the presenter’s identification card with the

(different) name on the voucher. Some additional fraudulent travel

voucher cases are B-22927A, January 15, 1988; B-222915,

September 16, 1987; B-213824, July 13, 1987; and B-224832, July 2,

1987.

[2) Other cash payments fraudulently obtained

It maybe noted, somewhat cynically, that if there is a way to obtain

cash from the federal government, someone wili try to do it

fraudulently. In some cases, losses can be prevented by the exercise

of due care. In 68 Comp. Gen. 371 (1989), for example, an individual

deposited two “Greenback Money Drafts” in the patients’ account at a

VA hospital. These are drafts, resembling checks, which the issuing

bank provides to various public places. A person with an account in

the issuing bank can sign one of the forms and cash it elsewhere. The

back of the form explicitly states, “You must call [the issuing bank]

before cashing,” so that the bank can veri~ the existence of the

account and the sufficiency of funds. In this instance, the cashier

accepted the drafts without calling the issuing bank, the patient

withdrew the funds shortly thereafter, and it was subsequently

discovered that the drafts had been fraudulently negotiated. Relief was

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IAabUl@ and Relief of Accountable Officem

denied because of the cashier’s negligent failure to follow the explicit

printed instructions.

In another case, relief was denied to a cashier who made a cash

payment to a courier without requiring any identification. The courier

turned out to be an imposter. B-178953, August 2, 1973.

In many cases, due care will not prevent the loss, and relief is granted.

Illustrative cases involving miscellaneous military cash payments,

similar to the travel advance cases noted above, are B-245127,

September 18,1991 (transientheaccession payment); B-226174,

June 18, 1987 (casual payment); B-215226, April 16, 1985 (special

reenlistment bonus); and B-209717.2, July 1, 1983 (military pay

voucher with separation orders). Relief was denied to a cashier in

another casual payment case, B-227209, August 5, 1987, for

neglecting to spot inconsistencies on the face of the voucher.

(3) Military separation vouchers

The cases under this heading involve overpayments on military

separation vouchers attributable to government error rather than

fraud on the part of the recipient. In each case, the supervisory

disbursing officer was relieved, illustrating the previously noted

proposition that even a well-established and carefully supervised

system of controls and procedures cannot be expected to totally

eliminate human error.

In B-230842, April 13, 1988, and B-227412, July 2, 1987, a cashier

made an overpayment by using the amount from the wrong block on

the voucher. In B-228946, January 15, 1988, the cashier failed to

clear a previous transaction from her adding machine. In all three

cases, the agency sought relief for the supervisor while holding the

cashier liable. Similar cases are B-222685, June 20, 1986; B-221453,

June 18, 1986; and B-212293, November 21, 1983. Relief has been

granted to the cashier in cases where the cashier followed applicable

procedures and the error was attributable to someone else. ~,

B-226614, May 6, 1987; B-221471, January 7, 1986.

(4) Assignm ent of contract payments

Under the Assignment of Claims Act, 31 IJ.S.C. $3727 and 41 U.S.C.

$15, when a contractor assigns future contract payments to a

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financing institution (assignee), the assignee must fde written notice

of the assignment and a copy of the assignment with the pertinent

disbursing officer. Once this is done, the government’s obligation is to

make future payments to the assignee, and payments made directly to

the contractor are erroneous.

In B-213720, October 2, 1984, an assignment under an Army Corps of

Engineers contract was properly fded with the disbursing officer, who

acknowledged receipt but neglected to retain a copy. Also, a copy was

inexplicably not placed in the contract ffle. A few months later, an

invoice was submitted clearly stating that payment should be made to

the assignee bank. A voucher examiner functioning as a certi@ing

officer failed to make appropriate inquiry to confirm the existence of

the assignment, and instead followed the advice of the purchasing

agent to pay the contractor. The disbursing officer then made

payment to the contractor, notwithstanding the information on the

face of the invoice indicating the existence of an assignment. Since the

Army voucher examiner was not a statutory certi@ing ofiicer, primary

liability remained with the disbursing officer. Given the disbursing

officer’s failure to retain a copy of the assignment and to verify the

proper payee, relief was denied.

In other cases in which a military finance and accounting officer is

responsible for both certifying and disbursing functions, relief has

been granted where the errors are solely those of subordinates and

there is no lack of due care attributable to the disbursing ofticer

personally. B-216246, May 22, 1985 (voucher examiner/certifying

officer failed to follow standard operating procedures, nothing on face

of voucher to suggest existence of assignment); B-214273,

December 11, 1984 (unknown clerk had misfded notice of

assignment, office processed over 3,000 vouchers a month and could

pre-audit only on random basis).

(5) Improper purpose/payment beyond scope of legal authority

Most improper purpose and similar cases will be certi~g officer

cases. Those that involve disbursing officers are either military cases

or disbursements by imprest fund cashiers. The point to remember is

that relief is governed by the standards of 31 U.S.C. $ 3527(c), and the

fact that a payment is unauthorized does not automatically indicate

lack of due care.

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Several imprest fund cashiers have been relieved where the vouchers

were proper on their face and included approvals by appropriate

agency officials, including a contracting ofilcer. B-221940, October 7,

1987 (refreshments at seminar); B-211265, June 28, 1983 (air

ptiler); B-203553, February 22, 1983 (air purifier). Prior approvals

of similar purchases may also be relevant in establishing due care. 61

Comp. Gen. 634,637 (1982). Note that the purchase in each case was

not plainly illegal. (Refreshments may be authorized under the

Government Employees Training Act and air purifiers are authorized

in some situations.)

In B-217668, September 12, 1986, relief was denied to an Army

Finance and Accounting Officer who purchased beer for troops

engaged in a joint military exercise. While the beer could have been

purchased with nonappropriated funds (or–dare we suggest-paid for

by the individuals who drank it), it is not an appropriate use of the

taxpayers’ money. The decision recognized that relief might

nevertheless be possible if the standards for relief of a supervisor

under 31 U.S.C. 5 3527(c) were met, but the record did not contain

sufficient information to enable an independent judgment.

4. Check hSSX?S

a. Check Cashing Operations Check cashing by disbursing oftlcers is governed by 31 U.S.C. $3342.

Subsection (a) authorizes disbursing officers to:

“(l) cash and negotiate negotiable instruments payable in United States currency or

currency of a foreign country;

‘(2) exchange United States currency, coins, and negotiable instmments and

currency, coins, and negotiable instruments of foreign countries; and

“(3) cash checks drawn on the Treasury to accommodate UNted States citizens in a

foreign country [only ifpreaented by a payee who is a United States citiaen and

satisfactory local banking facilities are not available].”

Transactions under subsections (a)(1) and (a)(2) are authorized for

official purposes or to accommodate certain classes of persons,

inchding government personnel, hospitalized veterans, contractors

working on government projects, and authorized nongovemment

agencies operating with government agencies. 31 U.S.C. $ 3342(b).

These are sometimes called “accommodation transactions.” The

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statute applies to legislative branch (and presumably judicial branch)

agencies as well as executive branch agencies. 64 Comp. Gen. 152

(1984). The Tressu~ Department is authorized to issue implementing

regulations and may delegate that authority to other agencies. 31

U.S.C. $ 3342(d).

Of particular relevance here are31U.S.C.$33342(c)(2) and (c)(3):

‘(2) The head of an agency having jurisdiction over a disbursing of!lcial may offset,

within the same f~cal year, a deficiency resulting from a transac tion under subsection

(a) of this section with a gain from a transaction under subsection (a). A gain in the

account of a disbursing official not used to offset deficiencies under subsection (a)

shall be deposited in the Treasury as miscellaneous receipts.

“(3) Amounts necessary to adjust for deficiencies in the account of a disbursing

official because of transact”ions under subsection (a) of this section are authorized to

be appropriated.”

One important application of the offsetting authority of 31 U.S.C.

s 3342(c)(2) is losses resulting from certain foreign currency

exchange transactions, and cases involving this application we noted

later in this chapter. However, nothing in the statute limits it to

foreign exchange transactions. The offsetting authority applies by its

terms to “a deficiency resulting from a transaction under subsection

(a),” and this includes check cashing operations as authorized by

subsections (a)(1) and (b).

Decisions rendered shortly after the statute was enacted applied it to

uncollectible checks cashed over forged endorsements and explicitly

recognized the statute as a form of relief. The first such case was 27

Comp.Gen.211 (1947), stating at 213:

“Since the cashing of a check is an operation authorized under the act, any loss

arising out of such transaction properly may be considered as coming within the

purview of the term ‘any deficiencies’ for which relief is contemplated under the

act.” .

This holding was followed ih 27 Comp. Gen. 663 (1948). The original

version of 31 U.S.C. 53342, enacted in 1944 (58 Stat. 921), did not

include the offsetting authority. See B-39771, September 26, 1950. It

was added in 1953 (67 Stat. 62). Thus, the “relief” referred to in 27

Comp.Gen.211 and 27 Comp. Gen. 663 was simply the authority to

use agency appropriations to a~ust the deficiencies. Both cases

involved the Army, which at the time received annual appropriations

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Liability and Relief of Aeeountable Offlcera

for this purpose. The Army was thus in a position to invoke the

statute, and the a~”ustments had the effeet of relieving the disbursing

Ofikrfil

FOr the ritti fuiii dEctidiM, ME primgpj~~ ~s~bj!~hed by ~~ EOrnp-

~en. .21 i mw littlg uac, rmd check cofitiing IMMM W’BM UW IF@!!

were mostly treated as improper paymen~ requiring relief Illldt?r

whatever authorities were available (31 U.S.C. S 3527(c) since 1955).

A 1991 decision to the Air Force, 70 Comp. Gem 616, changed this

and, in effect, reverted to the approach of 27 Comp. Gen. 211, now

augmented by the offsetting authority. After reviewing precedent and

legislative history, the decision concluded that-

“section 3342 may be applied to check cashing losses. Thus, an sgency may use

section 3342 to offset losses from cashing uncollectible checks with gains from other

section 3342(a) activities.”

Offsetting under section 3342(c)(2) is done on a fiscal-year basis. Art

uncollectible check becomes a deficiency not when it is cashed by the

disbursing officer, but when it is dishonored and returned to be

charged to the disbursing officer’s account. If these events occur in

different fiscal years, the deficiency is chargeable to the latter year.

B-120737, December 27, 1954. If an item is charged as a deficiency in

one year and collected in a subsequent year, the collection should be

charged to the fiscal year account in which the collection is made

regardless of the fiscal year in which the deficiency was charged. Id. —

For checks cashed within the authority of 31 U.S.C. $3342, following

the procedures of that statute eliminates the need to pursue relief

under 31 U.S.C. $ 3527(c). If there is a net gain in an account for a

given fiscal year, the net gain is deposited in the Treasury as

miscellaneous receipts, and that ends the matter. If there is a net loss,

and the agency is able to make an a@ustment from an available

appropriation, the ac@stment clears the disbursing officer’s account

and similarly ends the matter. A net loss resulting from the application

of 31 U.S.C. $ 3342(c) is not an Antideficiency Act violation. 61 Comp.

Gen. 649 (1982).

It must be emphasized that 31 U.S.C. $3342 does not make an

agency’s appropriations available for these ac(justments. It merely

authorizes appropriations for that purpose. For disbursing officers

within the Department of Defense, permanent authority exists to use

appropriated funds for “losses in the accounts of disbursing officials

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Liability and Relief of Accountable Oilkers

government issues a replacement check, and (3) both checks are

negotiated.

Replacement checks are issued under the authority of 31 U.S.C.

$3331. If an original check “is lost, stolen, destroyed in any part, or is

so defaced that the value to the owner or holder is impaired,” the

Secretary of the Treasury may issue a replacement check, and may

delegate that authori~to other agencies. 31 U.S.C. 5$ 3331(b), (f).

The Secretary has discretionary authority to require an

indemnification agreement from the owner or holder prior to issuing

the replacement check. Id. — $ 3331(e).

The current system for issuing replacement checks, developed by the

Treasury Department in the mid- 1980s, is reflected in 31 C.F.R. Parts

245 and 248, I Treasury Financial Manual Chapter 4-7000, and TFM

Bulletin No. 83-28 (August 2, 1983).’~ In brief, upon receipt of a claim

for loss or nonreceipt of an original check, the spending agency may

certify anew payment. 31 C.F.R. $245.5. In agencies for which

Treasury disburses, an agency certifying officer certitles the

replacement check to a Treasury disbursing officer. For agencies

which do their own disbursing, most notably the military departments,

the “recertification” is an internal procedure based on agency as well

as Treasury regulations. The replacement check, which has a different

serial number from the original check, is called a “recertified check.”

Formerly, most replacement checks were ‘substitute checks” with the

same serial number as the original check. With the implementation of

the recertification procedure, Treasury announced that substitute

checks would generally no longer be available. TFM Bulletin No.

83-28, para. 2.34

The Treasury regulations specify the responsibiIities of the payee. If

the original check shows up before the claimant receives the

replacement check, the claimant should notify the agency and follow

the agency’s instructions. 31 c..F.R. $ 245.8(a). If the original check

shows up after receipt of the replacement check, the claimant is to

return the original to the issuing agency. “Under no circumstances

aaprior ~Dproache~ had produced Complex problems and were _sfactoW. ‘ee 62 Comp”

Gen. 91 (1982) and GAO report Millions Paid Out in Duplicate and Forged Government Checks,

AFMD-81-68 (October 1, 1981).

~4The reg~ations now Uw the te~ “substitute check” OIdY in 31 C.F.R. p@ 248 k ‘ie Con@W

of “depositary checks, ” checks drawn on accounta maintained in depositary banks in U.S.

territories or foreign countries.

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LkMUt-yamd Belief of Accountable OMcera

● Thief steals someone else’s personal checks and cashes them in

coqiunction with stolen or fraudulent identification. B-246418,

February 3, 1992; B-240440, March 27, 1991; B-212588, August 14,

1984.

● Thief cashes checks from a fraudulently established checking account

in the name of some other real or fictitious person. B-229827,

~tI.IUl~ 14, 1988; B-221415, March 26, 1986; B-220737/B-220981,

December 10, 1985.

2. Fraudulent endorsement of government check. In this situation, a

thief steals a legitimately issued government check (paycheck, tax

refund check, etc.) and cashes it with the aid of stolen or fraudulent

identification. ~, B-227436, July 2, 1987; B-216726, January 9,

1985; and B-214436, Apfi 6, 1984.

3. Fraudulent alteration of amount on government check. If the

amount is fraudulently raised by the payee, the liability of the

disbursing oftlcer is the difference between the original amount and

the fraudulent amount. B-228859, September 11, 1987. If the amount

is altered and the check cashed by someone other than the payee, the

disbursing officer’s liability is the full amount of the payment.

B-221 144, April 22, 1986.

The opportunity for fraudulent alteration of amounts naturally

decreases when the amount is also spelled out in words on the face of

the check. 62 Comp. Gen. 476, 481 (1983). However, spelling the

amount out in words is not required on government checks, and

Treasury checks generally do not do so. See I Treasury Financial

Manual $ 4-5050.45c (T/L 496). If a disbursing officer is in

compliance with the TFM and applicable agency regulations, relief will

not be denied solely because the amount is not written out in words.

65 Comp. Gen. 299 (1986); B-209697, November 21, 1983.

4. Postal money order. The authority of 31 U.S.C. s 3342(a)(1) is not

limited to checks but applies to “negotiable instruments” generally,

which includes postal money orders. ~,B-217663, July 16, 1985

(fraudulent alteration of amount); B-213874, September 6,1984

(forged endorsement).

b. Duplicate Check Losses A duplicate check loss, as we use the term here, is a loss resulting

when (1) a payee claims nonreceipt of an original check, (2) the

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Liability and Relief of Accountable Officers

chapter for improper payments generally. As with other relief

situations, lack of due care, failure to follow established procedures

for example, wili not preclude relief if it was not the proximate cause

of the loss. 70 Comp. Gen. 298 (1991); B-225932, March 27, 1987.

Treasury regulations encourage, but do not require, the agency to

obtain a signed statement from the claimant before issuing or

certifying a replacement check. 1 TFM $ 4-7060.20a. If the agency’s

own regulations require the statement, failure to obtain it will

generally be regarded as lack of due care. Relief is granted or denied

based on application of the proximate cause concept. 70 Comp. Gen.

298 (1991); B-225932, March 27, 1987. If the statement is obtained

but turns out to be a misrepresentation, it is not the accountable

officer’s fault. B-247062, June 9, 1992. In 70 Comp. Gen. 9 (1990),

GAO advised the Navy that it could waive its own requirement for

claimant statements where a box containing over 4,600 checks was

lost en route to the Philippines, and obtaining individual statements

prior to issuing replacement checks would have caused undue delay

and hardship.

GAO has expressed concern over issuing replacement checks

prematurely, that is, without giving the original check a reasonable

time to arrive. While the timing is essentially a matter of agency

discretion, it is also a factor which may bear upon the issue of due

care. 63 Comp. Gen. 337 (1984). Timing should include risk

assessment. Thus, a shorter waiting period maybe appropriate where

the payee has a continuing relationship with the agency and

recoupment by offset is therefore presumably easier. I TFM

$ 4-7060 .20e; B-2261 16, February 20, 1987. As a general

proposition, GAO will not question awaiting period of at least 3

working days. 63 Comp. Gen. 337; I TFM $ 4-7060.20a. For checks

mailed prior to the actual payment date, the 3-day period may include

mailing days. B-230658, June 14, 1988. Awaiting period of less than

3 days needs to be specifhllyjustified. See B-215433/B-215515,

Ju,ly 2, 1984. A good example is B-24636~February 3, 1992 (payee

who was in Virginia could not have received original check

inadvertently mailed to Florida).

It is possible, although the cases are (and should be) rare, for

duplicate check losses to occur with checks issued to a bank under

direct deposit procedures. Recoupment efforts should be directed

against the bank which made the error, leaving it to the bank to then

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Lhbklity and Relief of Accountable Offkeru

should both the original and replacement checks be cashed.” Id.

$ 245.8(b).

—

Payees do not always read Treasury regulations, however, and

sometimes cash both checks. Since the agency’s obligation is to make

payment once, cashing both checks results in an erroneous payment

for which some accountable officer is liable unless relieved. In the

most common situation, the payee cashes both checks. The first check

satisfies the government’s original obligation, and issuing the

replacement check is an authorized transaction. Thus, the loss occurs

“when the second check is wrongfully presented and paid. (The actual

sequence in which the payee negotiates the original check and the

replacement check is immaterial.)” 62 Comp. Gen. 91,94 (1982).

Depending on the agency and the nature of the error, the proper relief

statute will be either 31 U.S.C. $3528 (cert@ng oflicer) or 31 U.S.C.

$ 3527(c) (disbursing officer). For the military departments, even

though they may employ a “recertification” procedure, the proper

statute is section 3527(c). 66 Comp. Gen. 192, 194 (1987).

GAO’S frost relief decision under the recertification procedure was 65

Comp. Gen.811 (1986). Reiief for a duplicate check loss is granted if

(1) the accountable officer followed applicable regulations and

procedures, (2) there is no indication of bad faith, and (3) the agency

has pursued or is pursuing adequate collection action to recover the

overpayment. ~. at 812. This is essentially the same standard that had

been applied under the former “substitute check” system. ~, 65

Comp. Gen. 812,813 (1986); 62 Comp. Gen. 91,97 (1982). A few

more recent cases applying this standard are 70 Comp. Gen. 298

(1991) (Navy); B-237343, January 23,1991 (Army); and B-232773,

January 12, 1989 (Defense Logistics Agency). Of course, reIief cannot

be granted until a loss actually occurs. 70 Comp. Gen. 9, 12 (1990);

66 Comp. Gen. 192, 194 (1987). The documentation required to

support a relief request in a duplicate check case is spelled out in

B-221720, May 8, 1986, and includes such things as copies of both

checks, the claim of nonreceipt, the agency’s stop payment request,

Treasury’s debit voucher, and documentation of collection efforts.

If the disbursing officer is a supervisor and the duplicate check is

actually issued by a subordinate, both are accountable ofilcers for

purposes of liability and relief. 62 Comp. Gen. 476, 479–80 (1983);

B-213471 et al., January 24, 1984; B-212576 et al., December 2,

1983. The relief standards are those set forth in Section D.3.a of this

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(military).’5 Section C.2 of this chapter contains more detail on how

the $3,000 limit operates.

In the cases cited and discussed thus far, it was the payee who

negotiated both checks. Where the original check is fraudulently

negotiated by someone else, the situation is a bit different. Here, the

replacement check rather than the ori@nal check satisfies the

government’s obligation to the payee, and the loss results from

negotiating the original check. 66 Comp. Gen. 192, 194 (1987). More

precisely, the loss results from payment on the original check since

there is nothing improper or incorrect in issuing it. Id. If forgery is

established, Treasury will seek to recover from the b=nk which

negotiated the check. See B-232772, October 17, 1989.

c. Errors in Check Issuance The October 1991 decisions just cited authorizing administrative

Process resolution of duplicate check losses not exceeding $3,000 extended

the authorization to another category of erroneous payments-those

resulting from “mechanical andor clerical errors during the check

issuance process.” Thus, agencies may grant or deny relief for losses

in this category within the monetary ceiling, as with duplicate check

losses, in accordance with applicable statutes, regulations, and GAO

decisions. B-243749, October 22, 1991 (civilian); B-244972,

October 22, 1991 (military). The relief standards are the same as

those previously discussed for other types of improper or erroneous

payments.

Cases under this heading may result from any type of check

payment-salary payments, payments to contractors, benefit

payments, etc.—and include a variety of fact patterns. A few cases

invoiving erroneous tax refund checks will illustrate. In each case, the

disbursing officer was a director of one of Treasury’s regional

financial centers (formerly called disbursing centers), a supervisory

official. In B-241098/B-241137, December 27, 1990, the printing

system rejected two checks and automatically produced substitutes;

the printing operator failed to remove and void the original checks;

the originals and substitutes were issued and cashed by the payees. In

B-187180, September 21, 1976, a keypunching error transposed two

numerals, resulting in issuance of a check for $718 instead of the

o~he ~roce= a~u~y s~ed with a limited authorization for the Army, B21437~, Odober 9,

1987, revoked by the more inclusive B-244972.

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recover from the individual depositor as an independent transaction.

B-21543 UB-215432, January 2, 1985. Related decisions arising from

the same set of losses are B-215432.3, August 22, 1991 (finally

granting relief upon documentation of collection efforts), and

B-215432 ~,July 6, 1984.

An agency’s internal controls and procedures form an important line

of defense against duplicate check losses. One agency, for example,

will issue a recertified check prior to obtaining the status of the

original check only if the employee has sufficient funds in his or her

retirement account to cover a potential loss, and requires specific

clearances upon termination of employment. These procedures, GAO

commented, “will better safeguard federal funds.” B-23261 5,

September 28, 1988. Agencies should also develop guidelines for

dealing with persons requesting several replacement checks within a

relatively short time period. Three replacement check requests within

an 1 l-month period, for example, should trigger some concern.

B-221398, September 19, 1986. Guidelines may include such things

as counseling employees to take advantage of direct deposit

procedures and delaying recertification until the status of the original

check has been determined. The exact content of any such guidelines

is up to the agency. B-21 7947/B-226384, March 27, 1987; B-220500,

September 12, 1986. Indemnification agreements may be desirable in

some circumstances, even where not required. See 66 Comp. Gen.

192, 194–95 (1987). Chargeback data received from Treasury should

be processed and forwarded to the pertinent finance office as

promptly as possible. B-226316et al., April 9, 1987.

Cases occasionally present variations on the factual theme, but the

basic relief approach is the same. ~, B-226769, July 29, 1987

(agency issued replacement for wrong check); B-195396, October 1,

1979 (agency inadvertently issued two replacement checks).

In our coverage of physical losses, we discussed the dollar amount

GAO ,has established, currently $3,000, below which agencies may

grant relief without the need for GAO involvement. In October 1991,

GAO started extending the limit selectively to certain categories of

improper payments, one of which is duplicate check losses. For

duplicate check losses not exceeding $3,000, agencies may grant or

deny relief administratively, without the need for GAO concurrence, in

accordance with applicable statutes, regulations, and GAO decisions.

B-243749, October 22, 1991 (civilian); B-244972, October 22, 1991

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type that will occasionally escape even in a well-established and

carefully supervised system. B-195106, July 12, 1979.

9 Malfunction of feed mechanism on printing machine caused one check

to skip, printing the inscription on the next check. The f~st check was

replaced without noticing the duplicate; both checks were issued.

Relief was granted on the same basis as in B-195106. B-212431,

November 21, 1983.

“Clerical error” means human error without contributing mechanical

malfunction. Relief standards remain the same. The cases noted in the

following groupings, as with the last three tax refund cases cited

above, are intended to illustrate factual variations.

. 1. Payment of wrong amount. The person preparing a check for a

military separation voucher misread a dollar sign as the number “8,”

and printed a check for $899 instead of the correct amount of $99.

B-238863, July 11, 1991. A voucher examiner preparing a partial

payment to a contractor erroneously used the total amount due on the

contract instead of the amount of the partial payment. B-22741O,

August 18, 1987.

2. Payment to wrong person. A clerk consolidating two contract

payment vouchers in a single check payable to a credit union

erroneously listed only one account number, causing an overpayment

to one contractor and necessitating a replacement check to the other.

B-238802, December 31, 1990. Further examples are B-234197,

March 15, 1989 (misreading of documents resulted in payment to

subcontractor instead of prime contractor); B-229126, November 3,

1987 (keypunch error generated payment to wrong contractor);

B-212336, August 8, 1983 (voluntary child support allotment paid to

wrong person due to error in assignment of organization code);

B-192109, June 3, 1981 (check issued to wrong person with slightly

different name than correct payee); B-194877, July 12, 1979

(amounts of two checks inadvertently switched).

3. Duplicate payment. Treasury Financial Center was issuing

replacements for a batch of mutilated checks. One mutilated check

became separated from the rest and was erroneously released along

with its replacement. A computer operator had failed to verifi each

replacement check against the corresponding mutilated check.

Because controls were in place which would have prevented the error

had they been followed, and considering the large volume of work at

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correct amount of $178. In B-235037, September 18, 1989, an

overpayment was made due to an error during the “typing operation

and proof reading process.” Relief was granted in the first two cases

by applying the standards for relieving a supervisor; in the third, it

was denied because the request contained neither a description of

relevant controls and procedures nor statements by the individuals

concerned.

One more tax refund case illustrates the immutable law that anything

that can happen will happen. A tax refund check intended for John

and Ruth Puncsak of San Francisco was drawn payable to “J. and R.

Puncsak,” and erroneously sent to Joe and Rose Puncsak, also of San

Francisco, who were not entitled to a refund but instead owed money

to the Internal Revenue Service. The check was cashed, Joe and Rose

claiming that they endorsed the check but then lost it. GAO advised the

IRS to raise a charge against the account of the responsible

accountable officer. B-1 12491, April 17, 1953. (Since this case

predated the enactment of 31 U.S.C. $ 3527(c), there was no way to

consider administrative relief.)

As B-241098/B-241 137 demonstrates, most mechanical errors are not

purely mechanical, but involve human error as well, such as failure to

spot the error during a verification process. Also, many of these cases

involve the issuance of duplicate checks, the difference between these

and the previously discussed duplicate check losses being that these

losses do not result from a claim of nonreceipt but from the

simultaneous issuance of duplicate checks attributable to government

error. Similar cases involving other types of payments are B-239371,

June 13, 1990; B-239094, June 13, 1990; B-237082 et al., May 8,

1990; B-235044 et al., March 20, 1990; and B-235036, October 17,

1989. Some factual variations follow:

● Machine that stuffs checks into envelopes was misaligned, obscuring

the names and addresses. Treasury decided to shred the original

checks and reissue them. One of the originals was inadvertently

delivered rather than shredded, causing a duplicate payment.

B-245586, November 12, 1991.

● Due to mechanical failure, a check”printing machine failed to advance

a voucher schedule and a second check was issued to a person with

the same name but different middle initial than the correct payee. A

clerk failed to notice the error during verification. In view of the

volume of work at the disbursing center, the error was viewed as the

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September 15, 1982. Once an accountable ofiicer’s liability has been

timely established, section 3526(c) does not limit the government’s

recovery from that officer. 31 U.S.C. $ 3526(c)(4)(B).

The statute of limitations of 31 U.S.C. $ 3526(c) applies only to

improper payments and not to physical losses or deficiencies. 60

Comp. Gen. 674 (1981). An accountable officer’s liability for a

physical loss or deficiency is wholly independent of anyone’s “raising

a charge” against that officer’s account.

The original version of 31 U.S.C. $ 3526(c) was enacted at a time when

all accounts were physically transmitted to GAO for settlement, GAO

reviewed every piece of paper, and then issued a certifkate of

sett~ement to the accountable otllcer, “disallowing” credit for

questionable items. As a result of changes in audit methods, this is no

longer done. Rather, accounts are now retained by the various

agencies, and an account is regarded as settled by operation of law at

the end of the 3-year period except for unresolved items. GAO Policy

and Procedures Manual for Guidance of Federal Agencies, title 7,

$8.7.

To reflect these changes in audit procedures, the date a “substantially

complete” account is in the hands of the agency and available for

audit is now generally considered as the point from which the 3-year

period begins to run. E@, B-181466, July 10, 1974 (non-decision

letter). Assuming that supporting documents are available at the end

of the time period covered by an accountable officer’s statement of

accountability, this will usually mean the date on which that statement

of accountability is certified. 7 GAO-PPM $8.7. There are situations,

however, in which the 3-year period does not begin to run until some

later date. Where a loss is due to fraud, the period begins when the

loss is discovered and reported to appropriate agency officials.

B-239802, April 3, 1991; B-239122, February 21, 1991. Where an

agency has no way of knowing that an improper payment has

occurred until it receives a debit voucher from the Treasury

Department (duplicate check losses, for example), the 3-year period

begins to run when the agency receives the debit voucher. B-226393,

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the disbursing center, relief was granted to the disbursing officer, the

center’s director. (The computer operator is not an accountable

officer.) B-231551, September 12, 1988.

Most duplicate payments are recovered, but many either are not or

involve the expense of collection action or litigation. Especially in the

area of payments to contractors, duplicate payment losses can involve

large amounts. GAO surveyed a number of agencies in the mid- 1980s,

and emphasized the importance of adequate internal controls. ~,

General Services Administration Needs to Improve its Internal

Controls to Prevent Duplicate Payments, GAO/AFMD-85-70 (August 20,

1985]; Strengthening Internal Controls Would Help the Department

of Justice Reduce Duplicate Payments, GAO/AFMD-85-72 (August ZO,

1985). A case involving a duplicate payment to a contractor in which

relief was granted on the basis of adequate controls is B-24 1019.2,

February 7, 1992.

5. Wd7.lte of Limitations The accounts of accountable officers must be settled by GAO within

three years “after the date the Comptroller General receives the

account.” 31 U.S.C. $ 3526(c)(l). Once this 3-year period has expired,

no charges may be raised against the account except for losses due to

fraud or crirninal action on the part of the accountable officer. Id.

$ 3526(c)(2). Enacted in 1947 (61 Stat. 101), this legislation –

effectively operates as a limitation on establishing an accountable

oftlcer’s liability for improper expenditures. As the Defense

Department pointed out in recommending the legislation, a time

limitation is desirable because passage of time diminishes the chances

of recovering from the payee or recipient, leaving the liability solely

with the accountable officer. S. Rep. No. 99, 80th Cong., 1st Sess.

(1947), reprinted in 1947 U.S. Code Cong. Serv. 1075, 1077–78.

Unlike other statutes of limitations which merely affect the remedy

(for example, by barring the commencement of legal proceedings), 31

U.S.C. $ 3526(c) completely eliminates the debt. B-181466,

November 19, 1974 (non-decision letter). Once an account has been

settled, it cannot be reopened (except for fraud or criminality, as

noted above), and the authority to grant or deny relief no longer

exists. Thus, an accountable officer can escape liability for an

improper expenditure if the government does not raise a charge

against the account within the 3-year period. ~, 62 Comp. Gen.

498 (1983); B-223372, December 4, 1989; B-198451.2,

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E. Other Relief The relief statutes discussed thus far–31 U.S.C. 5$ 3527(a), (b), (c),

Statutes and 3528—are the ones most commonly encountered and will cover

the vast mqjority of cases. Several others exist, however. Our listing

here is not intended to be complete.

1. Statutes Requiring The statutes in this group are similar to 31 U.S.C. $s 3527 and 3528 in

Affirmative Action that they require someone to actualiy make a relief decision.

a. United States Claims Court The relief authority of the Claims Court is found in two provisions of

law:

“The United States Ckdrns Court shall have jurisdiction to render judgment upon any

claim by a disbursing officer of the United States or by his administrator or executor

for relief from responsibility for iosa, in line of duty, of Government funds, vouchers,

records, or other papers in his charge, ” 28 US.C. $1496.

“Whenever the United States Claims Court finds that any loss by a disbursing ofllcer

of the United States was without his fault or negligence, it shall render a judgment

setting forth the amount thereof, and the General Accounting OffIce shall allow the

oftlcer such amount as a credit in the settlement of hia accounts. ” 28 U.S.C. $2512.

These provisions, which originated together in legislation enacted in

1866 (14 Stat. 44), predate all of the other relief statutes and were

once the only relief mechanism available apart from private relief

legislation. The Supreme Court has termed the Claims Court

legislation ‘a very curious provision” in that it permits a disbursing

ofllcer to establish a defense to a claim which “the government can

only establish judicially in some other court.” United States v. Clark,

96 U.S. (6 Otto) 37, 43 (1877). In effect, it authorizes the Ckdrns

Court to render a declarato~ (as opposed to money) judgment.

Ralcon, Inc. v. United States, 13 Cl. Ct. 294,300 (1987). Now, in view

of the comprehensive scheme of administrative relief Congress has

enacted, the Claims Court statute is rarely used.

b. Legislative Branch Agencies Since 31 U.S.C. $3728, the primary certi~ng officer relief statute,

does not apply to the legislative branch, Congress has enacted

specific statutes for several legislative branch agencies authorizing or

requiring the designation of certifying oftlcers, establishing their

accountability, and authorizing the Comptroller General to grant

relief. Patterned after 31 U.S.C. $3728, they are: 2 U.S.C. 3 142b

(Library of Congress); 2 U.S.C. S 142e (Congressional Budget Oi%ce);

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April 29, 1988. If the date of receipt cannot be determined, the date of

the debit voucher is used. Id.s(j —

If art irregularity has not been resolved by the agency within two years

from the time the statute of limitations begins to run, the irregularity

should at that time be reported to GAO. This maybe in the form of a

relief request or a copy of the agency’s irregularity report. This is

designed to provide adequate time to consider a relief request or to

otherwise prevent expiration of the statute of limitations where

necessary. 7 GAO-PPM $ 8.4.C. See also, ~, 62 Comp. Gen. 476,

480 (1983); B-227538, July 8, 1987; B-217741, October 15, 1985. Of

course, nothing prevents an agency from seeking relief sooner if

appropriate.

k noted above, the 3-year limitation does not apply to losses

attributable to fraud or other criminal action by the accountable

oftlcer. 31 U.S.C. $ 3526(c)(2). It is automatically suspended during

war. Id. $ 3526(c)(3). And it may be suspended by the Comptroller

Gene~d with respect to a specific item to get additional evidence or

explanation necessary to settle an account. ~. $ 3526(g). This may

be in the form of a timely Notice of Exception (B-2261 76, May 26,

1987), or other written notification (B-239592, August 23, 1991;

B-239140, July 12, 1991). The mere submission of a relief request

within the 3-year period, however, is not enough. 62 Comp. Gen. 91,

98 (1982); B-220689, September 24,1986.

Finally, 31 U.S.C. s 3526(c) deals solely with the liability of an

accountable officer. It has no effect on the liability of the payee or

recipient of an improper payment. It does not establish a limitation on

recoveries against the improper payee or recipient, nor does it affect

the agency’s obligation to pursue collection action against the payee

or recipient. 31 U.S.C. $ 3526(c)(4)(A); Arnold v. United States, 404

F.2d 953 (Ct. Cl. 1968); B-205587, June 1, 1982.

~~~or de~fii~m ~d not been entirely ciear on precisely which date tO We. ~,B-~~0689,

September 24, 1986 (date of debit voucher); B213874, September 6, 1984 (irdosion in

statement of accountability). B226393 established the propositions stated in the text and

moditled prior decisions accordingly.

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b. Compromise of Under the Federal Claims Collection Act, if a debt claim is

Indebtedness compromised in accordance with the statute and implementing

regulations, no accountable officer will be held liable for the portion

unrecovered by virtue of the compromise. 31 U.S.C. S 371 l(d).

c. Foreign Exchange

Transactions

Earlier in this chapter we discussed 31 U.S.C. $ 3342(c), which

authorizes, with respect to activities authorized under section

3342(a), losses to be offset against gains on a fiscal-year basis, and

also authorizes appropriations to make a@.@ments for net losses.

Our prior discussion was in the context of check cashing operations.

Another important use of 31 U.S.C. $ 3342(c) is accounting for certain

foreign exchange losses. To implement this authority in the foreign

exchange area, the Treasury Department has issued regulations

(Treasury Department Circular No. 830 and I Treasury Financial

Manual Chapter 4-9000), and has established an account entitled

“Gains and Deficiencies on Exchange Transactions” (I TFM

$ 4-9090.10). As with the check cashing context, the relevant point

here is that the use of 31 U.S.C. $ 3342(c) accomplishes the necessary

account a~ustment and obviates the need to seek relief for any

accountable officer.

One use of the Gains and Deficiencies account is the adjustment of

losses due to exchange rate fluctuations. ~, 64 Comp. Gen. 152

(1984) (restoration of losses in Library of Congress foreign currency

accounts attributable to currency devaluations); 61 Comp. Gen. 649

(1982) (determination of proper exchange rate); B-245760,

January 16, 1992 (devaluation of Laotian currency). However, in

order to use the Gains and Deficiencies account, losses must result

from “disbursing officer transactions” of the type authorized by 31

U.S,C. $ 3342(a). 45 Comp. Gen. 493 (1966). In that case, the

American Embassy in Cairo had made a payment for certain property

in Egyptian pounds. The sales agreement was not executed and the

money was refunded. At the time of the refund, the exchange rate had

changed and the same amount of Egyptian pounds was worthless in

U.S. dollars, resulting in a loss to the account. GAO agreed with the

Treasury Department that the loss resulted from an administrative

collection and not from a disbursing officer transaction, and should

therefore be borne by the relevant program appropriation rather than

the Gains and Deficiencies account.

GAO has also considered the use of the Gains and Deficiencies account

in a number of cases invoking Vietnamese and Cambodian currency

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2 U.S.C. $ 142f (Office of Technology Assessment); and 44 U.S.C. $308

(Government Printing Office).

c, Savings Bond Redemption Losses resulting from the redemption of savings bonds are replaced

Losses from the fund used to pay claims under the Government Losses in

Shipment Act. 31 U.S.C. $ 3126(a). The statute further provides that

“an officer or employee of the Department of the Treasury is relieved

from liability to the United States Government for the loss when the

Secretary [of the Treasuy] decides that the loss did not result from

the fault or negligence of the. . . otllcer, or employee.” Relief is

mandatory if the government does not give the officer or employee

written notice of his or her liability or potential liability within 10

years from the date of the erroneous payment. Id. —

2. statutes Providing The statutes in this group either (1) provide that taking a certain

“Automatic” Relief authorized action which might otherwise be regarded as creating a

loss will not result in accountable officer liability, or (2) authorize the

resolution of certain losses in such a manner as not to produce

liability.

a. Waiver of Indebtedness Many statutes authorize the government to waive the recovery of

indebtedness resulting from various overpayments or erroneous

payments if certain conditions are met. Waiver statutes commonly

include a provision to the effect that accountable officers will not be

held liable for any amounts waived. For example, the statutes

authorizing waiver of overpayments of pay and allowances require

that full credit be given in the accounts of accountable officers for any

amounts waived under the statute. 5 U.S.C. S 5584(d) (civilian

employees); 10 u.S.C. $ 2774(d) (military personnel); 32 U.S.C.

$ 716(d) (National Guard). Once waiver is granted, the payment is

deemed valid and there is no need to consider the question of relief.

~,, B-184947, March 21, 1978. This result applies even where relief

has been denied under the applicable relief statute. B-1 77841 -O. M.,

October 23, 1973.

Examples of comparable provisions in other waiver statutes are 5

U.S.C. $ 8129(c) (overpayments under Federal Employees

Compensation Act), 38 U.S.C. $ 5302(d) (overpayment of veterans’

benefits) and 42 U.S.C, $ 404(c) (Social Security Act).

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noted that the plaintiff’s participation in the proceeds would preclude

recovery from the Check Forgery Insurance Fund. 467 F.2d at 930.

The bank presenting a check to the Treasury for payment guarantees

the genuineness of prior endorsements. 31 C.F.R. $240.5. Thus, in

many cases, the government will be able to recover from the

presenting bank~~, Olson v. United States, 437 F.2d 981, 986–87

(Ct. Cl. 1971), cert. denied, 404 U.S. 939.

There is no mention of accountable officers in 31 U.S.C. $3343.

However, a payment from the Check Forgery Insurance Fund means

that only one payment is charged to the appropriations of the agency

incurring the original obligation, with the effect that no accountable

officer of that agency incurs any liability. See B-10929, February 1,

1972.

e. Secretary of the Treamuy Enacted in 1947 (61 Stat. 730), 31 US.C. ~ 3333 provides that the

Secretmy of the Treasury will not be liable for payments made “in due

course and without negligence” of checks drawn on the Treasury or a

depositary, or other obligations guaranteed or assumed by the United

States, and that the Comptroller General “shall credit” the

appropriate accounts for such payments. At one time, many duplicate

check losses were handled under 31 U.S.C. $3333. See 62 Comp. Gen.

91 (1982). It was Treasury’s practice to accumulate the cases and

submit them in groups, ~, B-1 15388, October 12, 1976, and

B-71585, February 24, 1948, with credit being allowed as a matter of

routine. With the development of Treasury’s previously discussed

recertification procedure, much of the need to invoke 31 U.S.C. 33333

evaporated. While many of the earlier cases involved an exchange of

correspondence between Treasury and GAO, nothing in the statute

requires it, especially since GAO no longer maintains accounts and

“relief” is mandatory anyway.

f. Other Statutes There are several other statutes affecting the liability of accountable

ofilcers in a variety of contexts. A few of them are:

● 5 U.S.C. $8321. Accountable officers are not liable for payments in

violation of statutes prescribing forfeiture of retirement annuities or

retired pay as long as the payments are made “in due course and

without fraud, collusion, or gross negligence.” The reason for this

statute was to avoid having to deny relief under 31 U.S.C. $ 3528(b) for

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after the American evacuation from those countries in the mid-1970s.

56 Comp. Gen. 791 (1977), overruled in part by 61 Comp. Gen. 132

(1981) (piaster currency physically abandoned or left in accounts in

Vietnam chargeable to Gains and Deficiencies); B197708, April 8,

1980 (Vietnamese and Cambodian currency received by Treasury

from U.S. disbursing officers at exchange rate in effect at time of

evacuation subsequently became valueless; loss held to be of the type

contemplated by 31 U.S.C. 5 3342(c)). However, U.S. currency which

was thought to have been burned but which subsequently turned up in

the United States had to be treated as a physical loss. 56 Comp. Gen.

at 793–96. (Relief was granted for this loss under 31 U.S.C. $ 3527(a)

in B-209978, July 18, 1983.)

d. Check Forgery Insurance The Check Forgery Insurance Fund is a revolving fund the purpose of

Fund which is to make replacement payments to payees whose Treasury

checks have been lost or stolen and cashed over a forged

endorsement in limited situations. 31 U.S.C. $3343. Before the Fund

may be used, four conditions must be satisfied: (1) the check is lost or

stolen without fault of the payee; (2) the check is subsequently

negotiated over the payee’s forged endorsement; (3) the payee did not

participate in any part of the proceeds of the check; and (4) recovery

from the forger or other liable party has been or will be delayed or

Unsuccessful.ni Id. $ 3343(b). Any recoveries are restored to the Ilmd.

Id. 5 3343(d). –

—

A forged endorsement for purposes of the statute has been held to

include an unauthorized endorsement purported to be made in a

representative capacity. Strann v. United States, 2 Cl. Ct. 782 (1983)

(plaintiffs attorney endorsed tax refund check without authority).

The third condition, participation in the proceeds, does not require a

knowing participation. Koch v. Department of Health, Education, and

Welfare, 590 F.2d 260 (8th Cir, 1978); Dudenv. United States, 467

F.2d 924 (Ct. Cl. 1972). In Duden, for example, the plaintiffs former

husband endorsed her name on a tax refund check and subsequently

paid her part of the proceeds for support. She had no way of knowing

that the payment came from those proceeds. While the endorsement

was held not to be a forgery under the facts involved, the court also

37T0 fac~hte ~roSecution, GAfj hZIS advocated the emctment Ofa federaf--or1aw ‘or

forged ’heaaury checka. Forgery of U.S. Treasury Checka-Federal Misdemeanor Law Needed,

GAO/GGD-84-6 (November 17, 1983).

Page 9-116 GAO/OGC-92-lS Appmpriationa Lnw-Vol. 11
Chapter 9

Liability and Relief of Accountable Offlcera

all; above-ceiling losses should be reported only if unresolved at the

end of the 2-year period. Of course, the agency may request relief

sooner if desired.

2. Obtaining Relief The GAO official designated to exercise the Comptroller General’s

authority under the various relief statutes is the Associate General

Counsel, Accounting and Financial Management Division, OffIce of

General Counsel. Relief requests where GAO action is necessary

should be addressed to GAO’S Office of General Counsel. The request

may be in simple letter format and should include all items specitled

in 7 GAO-PPM $ 8.12.C. These include a copy of the irregularity

report, a description of collection actions taken, and any required

administrative determinations. Of particular importance is a written

statement by the accountable ofllcer or a notation that the

accountable officer chooses not to submit a separate statement. Relief

will be granted or denied in the form of a letter addressed to the

official who submitted the request.

In arty case in which GAO has denied relief, the agency, or the

accountable officer through appropriate administrative channels, may

ask GAO to reconsider. GAO will not hesitate to reverse a decision

shown to be wrong. Any request for reconsideration should set forth

the errors which the applicant believes have been made, and should

include evidence (not mere unsupported allegations) to support the

basis for relief, for example, that the original denial failed to consider

certain evidence or to give it appropriate weight or relied too heavily

on other evidence in the record. Denials of relief are often based not

so much on the merits of the case but simply on the failure of the

original request to include sufficient information to enable an

independent evaluation. Of course, if the agency cannot or is unwilling

to make a required statutory determination, there is nothing GAO can

do and a request for reconsideration is pointless.

3. Payments of $100 or In B-161457, July 14, 1976, a circular letter to all department and

Less agency heads, disbursing and certifying officers, the Comptroller

General advised as follows:

“[I]n lieu of requesting a decision by the Comptroller General for items of $25 or

less, disbursing and certif@g officers may herea.tter rely upon written advice from an

agency officiai designated by the head of each department or agency. A copy of the

document containing such advice should be attached to the voucher and the propriety

Page 9-119 GAO/OGC-92-13 Appropriations Law-Vol. 11
Chapter 9

Liabilkyand Relief of Accountable Offkere

payments made in good faith solely because the payments are

specifically prohibited by law. B-122068, March 18, 1955.

● 31 U.S.C. $ 3521(c). Previously noted, this statute protects

accountable officers from liability for losses under an authorized

statistical sampling procedure.

c 42 U.S.C. $ 659(f). Disbursing officers are not liable for payments

under garnishment process which is “regular on its face” and in

compliance with 42 U.S.C. $659. See 61 Comp. Gen. 229 (1982).

F. Procedures

1. Reporting of Agencies are required to document each fiscal irregularity that affects

Irregularities the account of an accountable officer, regardless of how it is

discovered. The report is retained as part of the account records and a

copy provided to the accountable officer and, in certain situations, to

GAO. GAO, Policy and Procedures Manual for Guidance of Federal

A/@@2% title 7} ~ 8“4”B” The Contenfi of the report ‘e set forth in 7

GAO-PPM $8. 12.A, and include such things as a description of how

the irregularity occurred and a description of any known procedural

deficiencies and corrective action.

The agency’s next job is to attempt to resolve the irregularity, most

importantly by pursuing collection action against the improper payee

or recipient where possible. Recovery of the funds of course ends the

matter. If the funds cannot be recovered and the case is one in which

the agency may grant relief without GAO involvement, consideration of

relief is the next step. If the matter is resolved administratively in

either of these ways, the record should be further documented as

specified in 7 GAO-PPM $8. 12.B (required administrative

determinations, etc.). There is no need to report resolved

irregtdarities to GAO.

If the irregularity cannot be resolved administratively within two years

after the date the account is available for audit, and if the loss exceeds

the monetary limit established for administrative resolution, the

agency should then submit to GAO either a copy of the updated

irregularity report or a relief request if appropriate. 7 GAO-PPM

$ 8.4.C. This 2-year guideline is especially important for improper

payments in view of the 3-year statute of limitations of 31 U.S.C.

$ 3526(c). Thus, below-ceiling losses need not be reported to GAO at

Page 9-118 GAO/OGC-92-13 Appropriations Law-Vol. II
Cbapter 9

Liability and Relief of Accountable officers

G. Collection Action

1. Against Recipient A person who receives money from the government to which he or she

is not entitled, however innocently, has no right to keep it. The

recipient is indebted to the government, and the agency making the

improper or erroneous payment has a duty to attempt to recover the

funds, wholly independent of any question of liability or relief of an

accountable officer. The duty to aggressively pursue collection action

and the means of doing so are found primarily in the Federal Claims

Collection Act, 31 U.S.C. ch. 37, subch. II, and the Federal Ckdms

Collection Standards, 4 C.F.R. Parts 101 –105, the details of which are

covered elsewhere in this publication. Indeed, many of the statutes we

have previously discussed emphasize that the relief process does not

diminish this duty. ~, 31 U.S.C, 3$ 3333(b), 3343(e), 3526(c)(4),

3527(d)(2).

Recovery from the improper payee or recipient removes the

accountable officer’s liability regardless of whether relief has or has

not been sought because there is no longer any loss. However, merely

“flagging” the retirement account of an employee who has received

an overpayment, for possible collection at some unpredictable future

time, is not enough as it would delay indefinitely the final settlement

of the account. 31 Comp. Gen. 17 (1951).

In a sense, the recipient and the unrelieved accountable ofllcer share

an element of joint liability. The occasional decision has referred to

this as “joint and several” liability, but it has been pointed out that

this is incorrect. ~, B-228946, January 15, 1988. If two debtors are

“jointly and severally” liable, the creditor has the option of collecting

the full amount from either, with the debtor who pays then having a

right of contribution against the remaining debtor(s). Certainly no one

would suggest that someone who has defrauded the government and

repays the debt has any right of contribution against the accountable

officer. Also, under joint and several liability, the creditor may seek to

collect a portion from each debtor. The agency in an accountable

officer loss has no such option. B-212602, April 5, 1984. The agency’s

fwst obligation is to seek recovery from the recipient. The recipient of

an improper payment is liable for the full amount, with any amounts

collected used to reduce the accountable ofllcer’s liability. I@; 30

Comp. Gen. 298,300 (1951). See also 62 Comp. Gen. 476, 478–79

(1983); 54 Comp. Gen. 112,114 (1974).

,.

,;@,,

Page 9-121 GAO/OGC-92-13 Appropriations Law-VoI. 11
Chapter 9

Liability and Relief of Accountable ~cera

of any such payment wilf be considered conclusive on the Generaf Accounting OffIce

in its settlement of the accounts involved.”

The amount has since been raised to $100.7 GAO-PPM $8.3. This

does not preclude a certif~ng or disbursing officer from seeking a

decision if deemed necessary since the entitlement to advance

decisions is statutoxy, but it does provide a means for simplifying the

payment of very small amounts. An accountable officer is not liable

for a payment made under this authority even if the payment is

subsequently found to be improper or erroneous. The $100 threshold

applies equally to questions arising after payment has been made.

61 Comp. Gen. 646,648 (1982).

4. Relief vs. Grievance Federal employees have the right to organize and to bargain

Procedures collectively with respect to conditions of employment. 5 U.S.C. $7102.

Collective bargaining agreements may include negotiated grievance

procedures, which may in turn protide for dispute resolution by

binding arbitration. Id. $7122. The Federal Labor Relations Authority

decides questions ov=r an agency’s duty to bargain in good faith

under 5 U.S.C. $ 7105(a)(2)(E). Agencies have a duty to bargain in

good faith to the extent not inconsistent with federal law. Id. $7117.

The FLRA also decides appeals alleging that an arbitration~ward is

contrary to federal law. —M. $7122.

Since the authori~ to relieve accountable officers is provided by

statute, both GAO and the FLRA have determined that negotiated

grievance procedures may not be used as a substitute for making the

relief decision. B-213804, August 13, 1985; National Treasury

Employees Union and Internal Revenue Service, 14 F. L.R.A. 65 (No.

15, 1984). The same result applies to the State Department’s separate

statutory grievance procedures. 67 Comp. Gen. 457 (1988).

However, a grievance procedure may encompass an agency head’s

detepnination that an accountable oftlcer is negligent, as

distinguished from the actual relief decision. National Treasury

Employees Union and Internal Revenue Service, 33 F. L.R.A. 229 (No.

26, 1988), citing 59 Comp. Gen. 113 (1979) for the proposition that

GAO’S statutory role does not arise until after the agency head has

made the requisite determination.

Page 9-120 GAO/OGC-92-13 Appropriations Law-Vol. JI

,:;jt. . . ~w, ,, ,. %
Cbapter 9

LMdIItyand RelkfofAccountable Offleere

however diligent, does not by itself provide the basis for relieving the

accountable officer. B-141838, February 8, 1960; B-l 14042,

October 31, 1956.

2._Acco~tile If a loss cannot be recovered from the thief or other improper payee

Officer or recipient, and relief cannot be granted to the accountable officer,

the accountable offker becomes indebted to the government for the

amount involved. At that point, it is the agency’s responsibility to

initiate collection action against the accountable ofiicer in accordance

with the Federal Claims Collection Act and Standards. ~,

B-177430, October 30, 1973.

[f the accountable ofilcer is still employed by the government,

additional statutes come into play. Offset against salary is prescribed

by 5 U.S.C. $ 5512(a):

“The pay of an individual in arrears to the United States shall be withheld until he has

accounted for snd psid into the Treasury of the United States all sums for which he is

liable.”

This statute does not apply to ordinary debtcm but only to

accountable ofiicers. 37 Comp. Gen. 344 (1957); 23 Comp. Gen. 555

(1944); 26 Op. Att’y Gen. 77 (1906). It has also been held that the

provisions of 5 US.C. $ 5512(a) are mandatory and cannot be waived.

64 Comp. Gen. 606 (1985); 39 Comp. Gen. 203 (1959); 19 Comp.

Gem 312 (1939).

The application of 5 U.S.C. $ 5512(a) to certain military accountable

officers is limited by 37 US.C. ~ 1007(a), which prohibits withholding

the pay “of an oftlcer” under section 5512 unless the indebtedness is

“admitted by the officer or shown by the judgment of a court, or upon

a special order issued in the discretion of the Secretary concerned.”

Subsection 1007(a) applies to “officers,” meaning commissioned or

warrant ofllcers, and not to enlisted personnei or civilian accountable

officers. 37 Comp. Gen. 344,348 (1957). The admission maybe oral

or written but, if oral, should be clear and unequivocal and preferably

witnessed. 42 Comp. Gen. 83 (1962). The discretion to apply 5 U.S.C.

$ 5512(a) exists only in the absence of an admission or court

judgment. Id. —

The original version of 5 u.s.c. $ 5512(a), enacted in 1828 (4 Stat.

246), provided that “no money shall be paid” to the person in arrears

Page 9-123 GAO/OGO-92-llJ APprOptitkIle bW-Vd. ~
Chapter 9

LkMlity ad Relief of Accountable Officers

So strong is this duty to seek recovery from the improper payee or

recipient that the two primary relief statutes for improper payments

explicitly authorize GAO to deny relief if the agency has failed to

diligently pursue collection action against the recipient. 31 U.S.C.

!% 3527(c) (disbursing officers), 3528(b)(2) (certifying officem). GAO

is extremely reluctant to deny relief solely on the basis of inadequate

collection action because often the failure is attributable to the agency

rather than the accountable officer. However, it has been done. ~,

B-234815, October 3, 1989 (disbursing oftlcer failed to initiate

collection action despite repeated advice from agency counsel).

Adequate collection action means compliance with the Federal Claims

Collection Act and Standards. 62 Comp. Gen. 476, 478–79 (1983);

B-233870, May 30, 1989. A single demand letter is not enough. 62

Comp. Gen. 91,98 (1982). Resort to the Federal Claims Collection

Act and Standards includes those collection measures, as and to the

extent authorized, which resuit in collection of less than the full

amount, for example, compromise. A compromise, including one by

the Justice Department, not only resolves the claim against the

recipient but operates as well to relieve the accountable otllcer for

any amounts unrecovered because of the compromise. 31 U.S.C.

f+ 371 l(d); 65 Comp. Gen. 371 (1986). Whether or not the

accountable officer is entitled to relief does not affect the compromise

authority. B-154400-O. M., January 29, 1968; B-156846-O. M.,

October 25, 1967. However, 31 U.S.C. $371 l(d) does not apply to any

liabili~ which may fall upon one who is not an accountable oflicer.

B-235048, April 4, 1991. The authority to suspend or terminate

collection action is also available, but only in accordance with the

ckdms collection act and regulations. 67 Comp. Gen. 457, 464

(1988); B-212337, February 17, 1984; B-21 1660, December 15,

1983. Unlike compromise, the termination of collection action against

the recipient does not eliminate the accountable oftlcer’s liability for

any unrecovered balance. 67 Comp. Gen. at 464.

Adequate collection action also requires referral of the claim to the

appropriate collection office within the agency without undue delay.

GAO has advised the Army, for example, that a delay of more than

three months will generally not be regarded as diligent. 65 Comp.

Gen. 812 (1986).

While diligent collection action is a necessary element of the relief

equation, the fact that collection efforts have been unsuccessful,

Page 9-122 GAO/OGC-92-13 Approprlatiom Law-Vol. 11
Chapter9

LhMIItyand Relief of Accotmtsble Officers

H. Restitution,

Reimbursement, and

Restoration

1. Restitution and In the present context, restitution means the repayment of a loss by

Reimbursement an accountable officer from personal funds; reimbursement means the

refunding to an accountable officer of amounts previously paid in

restitution. Prior to 1955, there was no statutory authority to permit

the reimbursement of an accountable officer who had made

restitution to the government for a physical loss. Once an accountable

ofiicer made restitution (if, for example, the agency required it), the

decisions held that there was no longer a deficiency in the account for

which relief could be considered. 27 Comp. Gen. 404 (1948);

B-101301, J1.dy 19, 1951.

Legislation in 1955 (69 Stat. 626) amended what is now 31 U.S.C.

$ 3527(a) and 31 U.S.C. $ 3527(b) to expressly authorize

reimbursement of the accountable off~cer for any amounts paid in

restitution, if relief is granted. Accordingly, restitution by the

accountable officer in physical loss cases is no longer an impediment

to the granting of relief. ~, B-155149, October 21, 1964;

B-126362, February 21, 1956. The 1955 legislation amended ordythe

physical loss relief statutes. There is no comparable reimbursement

authority in the improper payment relief statutes, 31 U.S.C. $$ 3527(c)

and 3528. B-226393, April 29, 1988; B-223840, November 5, 1986;

B-128557, September 21,1956.

An obvious limitation on the reimbursement authority was illustrated

in B-187021, January 19, 1978. An imprest fund cashier sought

reimbursement, claiming that she had discovered money missing from

her cash box and replaced it from personal funds. However, by virtue

of her actions in initially concealing the loss, she was unable to show

that the loss had in fact ever occurred. Since the 10SS could not be

established, reimbursement was denied. Thus, an accountable officer

should always report a loss before making restitution.

GAO/OGC-92-13 APpmptitiOIU5 kw-VOl. ~
Chapter 9

Liability md Relief of Accountable Officers

until the debt is repaid. Thus, several early decisions exist for the

somewhat barbaric proposition that the statute requires complete

stoppage of pay. q, 9 Comp, Gen. 272 (1930); 7 Comp. Gen. 4

(1927). While these and similar early decisions have not been

explicitly overruled, the current view is that the statute will be

satisfied by withholding in reasonable installments. 64 Comp. Gen.

606 (1985); B-180957-0. M., September 25, 1979. Collection in

installments is also authorized when operating under 37 U.S.C.

$ 1007(a). 42 Comp. Gen. 83,85 (1962). For employees no longer on

the payroll, offset under 5 U.S.C. $ 5512(a) has been held to embrace

collection from retirement funds to the extent authorized. Parker v.

United States, 187 Ct. Cl. 553,559 (1969); 39 Comp. Gen. 203,206

(1959). GAO has also approved “flagging” the retirement account of

an accountable officer still on the payroll. B-217114, February 29,

1988.

When applying 5 U.S.C. $ 5512(a) or 37 US.C. $ 1007(a), the

procedures to be followed are those prescribed by 4 C.F.R. $$ 102.3

and 102.4 for administrative offsets under 31 U.S.C. $3716.64 Comp.

Gen. 142 (1984).

If pay is withheld under 5 U.S.C. $ 5512(a), the statute provides a

means to obtain judicial review of the indebtedness. Under 5 U.S.C.

$ 5512(b), GAO is required, upon the request of the individual or his or

her agent or attorney to immediately report the balance due to the

Attorney General, and the Attorney General is required within 60 days

to order suit to be commenced against the individual. This provision

was part of the original 1828 legislation, several decades prior to

either the Tucker Act or the establishment of the Court of Claims, at a

time when there was no other means available for the accountable

officer to initiate judicial proceedings. It now exists as one way among

several. Installment deductions are not required to stop during the

litigation; if the accountable offker prevails, amounts collected are

refunded. 64 Comp. Gen. 606, 608 (1985). Sample referrals under 5

U.S.C. $ 5512(b) are 64 Comp. Gen. 605 (1985); B-217114.7, May 6,

1991; and B-220492, December 10, 1985.

Page 9-124 GAO/OGC-92-19 Appropriations Law-Vol. II
Chapter 9

I&MUtyand Reliefof Aeconnt@Ie ~Ct%S

b. Other Situations

226. Such ac(justments could then be considered as part of the costs

of the disbursing function for purposes of determining charges

assessed against the user agencies and thus distributed to all user

agencies in the same manner as other costs. Id. ‘I%enty years later,

GAO reached the same result with respect to I=sses of United States

currency incident to the 1975 evacuation from Vietnam. 56 Comp.

Gen. 791, 796–97 (1977).

If a loss is due to fault or negligence by an accountable officer, and

the agency head determines that the loss is uncollectible, the amount

of the loss maybe restored by a charge to the appropriation or fund

available for the expenses of the accountable function. 31 U.S.C.

s 3530(a). Uncollectible includes uncollectible from the accountable

officer. ~, B-17791O, February 20, 1973. As with a~ustments

under 31 U.S.C. $ 3527(d), section 3530(a) requires the loss to be

charged to the appropriation available for the f~cal year in which the

a@stment is made (appropriation “currently available”). This

authority applies (1) where relief is denied, or (2) where the agency

does not seek relief, the uncollectibility determination being required

in either event. Representative cases are B-235405, March 19, 1990;

B-219246, September 9, 1985; B-188715, Janua~ 31, 1978; and

B-167827, February 4, 1975.

Assuming the statutory conditions are met, a~ustments under31

U.S.C. s 3530 are made directly by the agency with no need for specific

authorization or concurrence from GAO. 7 GAO-PPM $8. 14.D.

Restoration under section 3530 is merely an accounting a@stment

and does not affect the accountable officer’s personal liability. 31

U.S.C. $ 3530(b). Thus, although the adjustment is premised on a

determination of urwollectibility, collection efforts should resume if

warranted by future developments.

The statutes described above, 31 U.S.C. $$ 3527(d) and 3530, will

cover most situations in which restoration is needed in that relief is

mostly either granted or denied or not sought. There are, however,

situations in which neither statute applies. For example, a thief

fraudulently obtained over $10,000 from the patients trust account at

a VA hospital. He was convicted and ordered to make restitution. The

restitution order was lifted 3 years later, but the VA had by then

recovered only a small portion of the loss. The VA decided that

pursuing the thief any further would be fruitless, and it had previously

Page 9-127 GAO/OGC-92-13 Appropriations Law-Vol. II

%:
Chapter 9

Liability and Relief of Accountable Officera

2. Restoration Restoration of an account suffering a loss or deficiency-an

accounting adjustment to restore the shortage with funds from some

other source–is authorized under two provisions of law, 31 US.C.

$$ 3527(d) and 3530. The Comptroller General is required by 31

U.S.C. s 3530(c) to prescribe implementing regulations. These are

found in title 7 of GAO’s Policy and Procedures Manual for Guidance

of Federal Agencies, S 8.14.

a. A~ustment Incident to If relief is granted under either 31 U.S.C. $ 3527(a) or 31 U.S.C.

Granting of Relief $ 3527(c), GAO may authorize restoration of the account. Restoration

is accomplished by charging either an appropriation specifically

available for that purpose or, if there is no such appropriation, the

appropriation or fund available for the accountable function. The

charge is made to the fiscal year in which the a~ustment is made, and

not the fiscal year in which the loss occurred. 31 U.S.C. $ 3527(d).

Subsection (d) applies only to subsections (a) and (c), and not to

subsection (b) (military disbursing officers). However, the militafy

departments have separate authority in 10 U.S.C. $S 2777(b) and 2781.

There is no restoration provision in 31 U.S.C. $3528.

Whenever account adjustment is deemed necessary, the agency

should include in its relief request a citation (account symbol) to the

appropriation it proposes to charge. 7 GAO-PPM $8. 14.A. In cases

where agencies are authorized to grant relief without GAO

involvement, they may also exercise the restoration authority of31

U.S.C. # 3527(d) without GAO involvement. ~. $ 8.14.C.

A 1957 decision, 37 Comp. Gen. 224, considered the application of 31

U.S.C. $ 3527(d) where one agency is disbursing funds on behalf of

other agencies. State Department disbursing officers overseas, acting

under delegations from the Treasury Department, were authorized to

receive and disburse funds on behalf of other government agencies as

well as the State Department. If the services were sufficiently

extensive to warrant reimbursement, State charged the “user”

agencies. Construing 31 U.S.C. $ 3527(d], the Comptroller General

held that losses in such a situation for which relief was granted but

which could not be related to the functions of any particular agency or

agencies should be charged to State Department appropriations

because they were the appropriations available for the accountable

function. “This phraseology clearly is intended to mean the

appropriation of the department or agency to which the expenses of

carrying on the particular disbursing function are chargeable.” —Id. at

Page 9-126 GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter10

Federal Assistance: Grants and Cooperative

Agreements

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LiabilityforA*ofG~tees . . . . . . . . . . . . . . . . . . . .......

. . . . . . . . . . . . . . .........

a. Contrac~~LiabilitytiThird parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

10-31

b. TortiousConduct ................ ..............’..’............

. . . . . . . . . . 10-33

~esofGrants: Categoric~vs. BIock ..............”........... .......”....... ~~1~~

TheSingleAuditAct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........”...........

2.

3.

4.

5.

D.~titiH~tiOfGr~teetstifisndAPP~ati0n0fAppmp*ti0nti~0~ . . . . 1O-41

10-4 7

E.Grantw~Ef ................. ............’.... ..............”.. .....’.......

1.

2.

3.

4.

5.

Advances ofGr~tiAssis~ce M* ............... . “”. . . ”...””... .............

Cash ManagementConcerns a,ndl?equirements . . . . . . . . . . . . . ..............‘. . . . . .

InterestonG~tA~~ces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. InGenerd .............’............... . . . .”.””.... ‘. “ ...””......... ....

b. GN@to S@teGovernment9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Program Income . . . . . . . . . . . . . . . . . . . . . .“....-.........“............. “.......

Cost-Sharing ................ ........”...-..................’“..........:::

a. LocalorMatchingShme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) General p*ciPles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

cm\—, Hmdandsoftmatches –—. . . . . . . . . . . . . . . . . . . . . . .............”.”..”.. ..””..

10-47

10-48

10-50

10-50

10-53

10-56

10-58

10-59

10-59

10-61

&M3/oGc.92.19 Appropriatioluhw-vol.m
determined that there had been no fault or negligence by the

accountable officer.

The VA was faced with a dilemma. Clearly the loss had to be restored

since the trust account consisted of money belonging to patients, and

just as clearly VA’s operating appropriations were the only available

source. The problem was how to get there. Since the 3-year statute of

limitations on account settlement (31 U.S.C, $ 3526(c)) had expired,

relief could no longer be considered, so 31 U.S.C. $ 3527(d) could riot

be used. Equally unavailing was 31 U.S.C. $3530 since the loss did not

result from the accountable officer’s fault or negligence. However,

since the VA had an undisputed obligation as trustee to return the trust

funds to their rightful owners upon demand, the loss could be viewed

as an expense of managing the trust fund. The solution therefore was

to restore funds from the unobligated balance of VA’s operating

appropriation for the fiscal year in which the loss occurred. 68 Comp.

Gen. 600 (1989). The authority to make a@stments from the

unexpended balances of prior years’ appropriations is now found in

31 U.S.C. $ 1553(a). Once an account has been closed, generally 5

fwcal years after expiration, 31 U.S.C. S 1553(b) requires that the

a@Wrnent be charged, within certain limits, to current

appropriations. Thus, the authority now found in 31 U.S.C. s 1553 may

provide an alternative if neither 31 U.S.C. $ 3527(d) nor 31 U.S.C.

!j 3530 is available. Of course, if the account to be restored has itself

been closed pursuant to 31 U.S.C. 5$ 1552(a) or 1555, restoration is

no longer possible.

Page 9-128 GAON3GC-92-13 Appropriations Law-Vol. 11
Chapter 10

Federal Assistance: Grants and Cooperative

Agreements

A. Introduction The federal government provides assistance in many forms, financial

and otherwise. Assistance programs are designed to serve a variety of

purposes. Objectives may include fostering some element of national

policy, stimulating private sector involvement, or furnishing aid of a

type or to a class of beneficiaries the private market cannot or is

unwilling to otherwise accommodate. A broad definition of

“assistance” in this context is found in 31 US.C. $ 6101(3) (Federal

Program Information Act)– “the transfer of anything of value for a

public purpose of support or stimulation authorized by [law].” A

similar definition occurs in 31 U.S.C. $ 6501(1) (Intergovernmental

Cooperation Act of 1968).

A federal grant maybe defined as a form of assistance authorized by

statute in which a federal agency (the grantor) transfers something of

value to a party (the grantee) usually, but not always, outside of the

federal government, for a purpose, undertaking, or activity of the

grantee which the government has chosen to assist, to be carried out

without substantial involvement on the part of the federaI

government. The “thing of value” is usually money, but may,

depending on the program legislation, also include property or

services.1 The grantee, again depending on the program legislation,

may be a state or local government, a nonprofit organization, or a

private individual or business entity. Programs administered by state

governments comprise the largest category, involving federal outlays

of over $100 billion a year.z

The 1990 edition (24th cd.) of the Catalog of Federal Domestic

Assistance. uudated as of December 1990,s lists 1,183 assistance

programs a~inistered by 52 federal agencies. To be sure, a large

number of these are not grant programs since the catalog includes

loan and loan guarantee programs plus certain types of non-financial

assistance. Nevertheless, it is a safe statement that there are hundreds

‘The, eartiest grant programs were land grants. Monetary grants appear to have entered the stage

in 1879 afthough they are largely a 20th century development. Madden, The Constitutional and

LegaI Foundations of Federal Grants, in Federal Grant Law 9 (M. Mason ed. 1982).

ZH R Rep No. 696, lolst Cong., 2d SeSS. 5 (1990) (report ‘f Me ‘0= Cofittee ‘n

. . .

Government Operations on the Cash Management Improvement Act of 1990). For a summary

listing of federal assistance programs for state and local governments, cross-referenced to the

Catalog of Federaf Domestic Assistance, see Federrd Aid: Programs Available to State and Local

Governments, GAO/HRD-91-93FS (May 1991).

~The ca~og of Feder~ Domestic Assis-ce is published annually by the Gener~ Services

Administration and the Office of Management and Budget pursuant to 31 U.S.C. 56104 and

OMB Circufar No. A-89.

Page 10-3 GAO/OGC-92-13 Appropriations Law-Vol. II
F .

G .

H .

(3) Matching one grant with funds from another . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) Relocation tdlowances . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) Payments byotherthan grantor agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

b. MaintenanceofEffort . . . . . . . . . . . . . . . . . . . . . . . . ..........o-.o”s”-”””o””” ““”

ObligationofApproprhtions forGrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. RequirementforObligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Changesin@ants+Replacement Grantsvs. NewObligations . . . . . ! . . . . . . . . . . . . . . . . .

::

c.

The ReplacementGrantConcept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......o.”--

SubstitutionofGrantee . . . . . . . . . . . . . . . . . ......?............””. ““”-”””””.”.

OtherChanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......”..”.”””.”””” 00”.””0

GrantCosts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......”””””””.” ““””””””s”.””””” ““

1. Allowablevs.UnallowableCoWs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

a. TheConceptofAllowableCosts . . . . . . . . . . . . . . . . . . . . . .-..........”.”””” .“”””

b. GrantCostCases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. o. ~” ”. ”” ”O” ”O ”-”....

c. NoteonAccounting .,...,. . . . . . . . . . ,.,.... . . . . . . . . . . . . . . . . . . . . . . . . .......

2. Pre-AwardCosts(RetroactiveFunding) . . . . . .

R.ecoveryofGranteeI.ndebtedness . . . . . . . . . . . .

1. Government’s DutytoRecover . . . . . . . . . . . . .

2. OffsetandWWhoklingofClaims UnderGrants

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . .............*... . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . .......

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10-62

10-64

10-64

10-07

10-70

10-70

10-71

10-71

10-72

10-73

10-74

10-74

10-74

10-77

10-79

10-80

10-83

10”83

10-89

RIgelo-z
Chapter 10

Federal AaaIstance: Grants and Cooperative Agreements

McGee v. Mathis, 71 U.S. (4 Wall.) 143, 155 (1866). See also United

States v. Northern Pacific Railway Co., 256 U.S. 51,63-64 (1921).

Lower courts applied the contract theory in various contexts, often to

enforce grantee compliance with grant conditions,5 to determine

jurisdiction under the Tucker Act,ti or to analyze the nature of the

government’s obligations under a particular grant statute or

agreement.7

GAO followed suit. ~, 68 Comp. Gen. 609 (1989); 50 Comp. Gen.

470 (1970); 42 Comp. Gen. 289,294 (1962); 41 Comp. Gen. 134,

137 (1961); B-23201O, March 23, 1989; B-167790, January 15, 1973.

In 50 Comp. Gen. 470, for example, a medical teaching facility,

recipient of a reimbursement-type construction grant under the Public

Health Service Act, was caught in a cash flow crisis because

disbursement of grant funds was much less frequent than its

contractor’s need for progress payments. The question was whether

the grant could be regarded as a “contract or claim” so the recipient

could assign future grant proceeds to a bank in return for an interim

loan, pursuant to the Assignment of Claims Act. Noting that the

accepted grant constituted a “valid contract,” and that assignment

was not prohibited by the program legislation, regulations of the

grantor agency, or the terms of the grant agreement, GAO concluded

that assignment under the Assignment of Claims Act was permissible.

Thus, the researcher will find a body of case law standing for the

proposition that there are certain contractual aspects to a grant

relationship. What this does is provide a known body of law which,

together with the relevant progm.m legislation and regulations, is

5=, United States v. Frazer, 297 F, Supp. 319, 322–23 (M.D. Ala. 1968); United Statesv.

Sumter Counw School Diat. No. 2,232 F. SUPP. 945,950 (E. D.S.C. 1964); UNted Statesv.

County School Bd., 221 F. Supp. 93, 99–100 (E.D. Va. 1963).

‘%&, Mkwouri Health and Medicrd Or g., Inc. v. United States, 641 F.2d 870 (Ct. Cl. 1981);

Texr@ V. United States, 537 F.2d 466 (Ct. Cl. 1976); County of Suffolk v. United States, 19 Cl.

Ct. 295 (1990); Kentucky ex rel. Cabinet for Human Resources v. United States, 16 Cl. Ct. 755,

762 (1989); Rogers v. United States, 14 Cl. Ct. 39,44 (1987); Idaho Migrant Councif, Inc. v.

United States, 9 Cl. Ct. 85, 88–89 (1985). While most of these cases, Missouri Health for

example, use language carefully crafted to avoid confusion between a grant agreement and a

“traditional,” i.e., procurement, contract, the e.%ence of the jurisdictional finding is that the

claim is based on some form of “contract.”

7~, City of Manasaaa Parkv, United States, 633 F.2d 181 (Ct. Cl. 1980), cert. denied, 449

U.S. 1035 (claim found to be noncorrtractual, but agreement referred tQ as “grant contract” and

grantor-grantee relationship as “privity of contract”); Arizona v. United States, 494 F.2d 1285

(ct. cl. 1974).

Page 10-5 GAO/OGC-92-13 Appropriations Iaw -Vol. II
Ch8pt43r 10

Federel Ad@AIws: Grants end _rative Agreemente

of federal grant programs admhktered by dozens of agencies. Many

of the programs are governed by detailed legislation and even more

detailed regulations, and many of the cases, since they hinge on

specific statutory or regulatory provisions, are not amenable to

treatment in this chapter. Nevertheless, it is still possible to extract a

number of principles of “grant law” from the perspective of the

availability and use of appropriated funds.

B. Grants vs.

Procurement

Contracts

1. Nature of a Grant From the perspective of legal analysis, what precisely is a grant? Not

too long ago, it was commonplace to discuss the grant relationship in

contract terms with little further analysis. Under this approach, the

acceptance of a grant of federal funds subject to conditions which

must be met by the grantee creates a contract between the United

States and the grantee. The need to clearly distinguish grants from

procurement contracts, however, has given rise to an emerging body

of opinion which attempts to reject the analogy.4 Thus far, although

the contract analogy has not been abandoned, the courts have become

increasingly cautious in their characterizations, and elements of both

approaches will be found, depending on the precise issue involved.

The “grant as a type of contract” approach evolved from early

Supreme Court decisions. in what maybe the earliest case on the

issue, the government had made a-t of land to a s@te on the

condition that the state would use the land, or the proceeds from its

sale, for certain reclamation purposes. The Court stated:

“It is not doubted that the grant by the United States to the State upon conditions, and

the acceptance of the grant by the State, constituted a contract. AU the elements of a

contract met in the traaac%‘on,–competent parties, proper subject-matter, stilcient

consideration, and consent of minds.”

4-, Federal Grant Law (M. Mawr ed. 1982) at 2. For further discussion, see P. Dembling &

M. Mason, Essentials of Grant Law Practice, Chapter 1 (1991].

Page 10-4 GAO/OGC-92-13 Approprktiom Law-Vol. II
Chapter 10

Federal Assistance: Grants and Cooperative Agreementa

GAO concluded that the amendments were authorized, noting that the

“consideration” flowing to the government under these grants-in

sharp contrast with procurement contracts-consisted only of ‘the

benefits to accrue to the public and the United States” through use of

the funds to construct the desired facilities. Id. at 137. —

In recognition of the essential distinctions between a “grant contract”

and a “procurement contract,” the Supreme Court has stated:

“Although we agree. . . that. . . grant agreements had a contractual aspect, . . . the

program cannot be viewed in the same manner as a bilateral contract governing a

discrete tnnaaction. . . . Unlike normal contractual undertddnga, federal grant

programs originate in and remain governed by statutory provisions expressing the

judgment of Congress concerning desirable public Policy.”s

Bennett v. Kentucky Department of Education, 470 U.S. 656,669

(1985). The state in that case had argued that, since the grant was “in

the nature of a contract,”O the Court should apply the principle, drawn

from contract law, that ambiguities in the grant agreement should be

resolved against the government as the drafting party. Based on the

analysis summarized in the quoted passage, the Court declined to do

so, at least in that case.

Similarly, the contractual doctrine of “impossibility of performance”

has been held inapplicable to a grant. Maryland Department of

Human Resources v. Department of Health and Human 8eMCeS, 762

F.2d 406 (4th Cir. 1985). In that case, the government had imposed a

zero error standard on states under the Aid to Families with

Dependent Children program. The state argued that error-free

administration was impossible. While agreeing with that factual

proposition, the court nevertheless held that the zero tolerance level

was permissible under the governing statute and regulations. The

impossibility of performance doctrine “relates to commercial

contracts and not to grant in aid programs.” Id. at 409. —

%his passage is a good illustration of the dMcukies one can encounter trying to resolve the

“grant vs. contract” debate, at least pending further evolution of the case law. On the basis of

this passage, which side does the Supreme Court now support? Seth to some extent, it would

seem.

~~metiv ~ewJe~y, 470 U.S. 632, 638 (1985), quoting pennhurst S* school ‘d ‘rep. ‘“

Hakle~, 451 U.S. 1,17 (1981).

Psge 10-7 GAO/OGC-92-13 @pI’OpddOIU Lsw-VO1. ~

.@,,.
Ctupter 10

Fedeml Assi@ance: Granta and Cooperative Agreement

available to be applied in determinin g basic rights and obligations. It

does not have to follow, nor hss GAO or, to our knowledge, any court

suggested, that all of the trappings of a procurement contract

somehow attach.

The problem, perhaps, is not so much whether a grant relationship

can or cannot be said to contain certain “contractual” elements, but in

failing to recognize that the analogy is a limited one. Clearly,

proponents of the “grant contract” theory must tread cautiously to

avoid untenable positions. As we will see in our discussion of the

Federal Grant and Cooperative Agreement Act, going too far with the

analogy bred confusion which led the Commission on Government

Procurement to recommend, and the Congress to enact, legislation to

attempt to distinguish between the two types of relationship.

Where all of this will go will be determined in future litigation. For

now, in any event, it must be emphasized that whatever one’s views on

the contractual nature of a grant relationship, a grant and a

procurement contract are two vev different things.

Take, for example, the issue of consideration. While the typical grant

agreement may well include suftlcient legal consideration from the

standpoint of supporting a legal obligation, it maybe quite different

from the consideration found in procurement contracts. As we noted

in our introduction to this chapter, a grant is a form of assistance to a

designated class of recipients authorized by statute to meet

recognized needs. Grant needs, by definition, are not needs for goods

or services required by the federal government itself. The needs are

those of a nonfederal entity, whether public or private, which the

Congress has decided to assist as being in the public interest.

An illustration of where this distinction can lead is 41 Comp. Gen. 134

(1961). A provision of the Federal Water Pollution Control Act

authorized grants to states for the construction of sewage treatment

works, up to a stated percentage of estimated costs, with the grantee

to pay all remaining costs. Strong demand for limited funds meant

that grants were frequently awarded for amounts less than the

permissible ceiling. The question was whether these grants couJd be

amended in a subsequent fiscal year to increase the amount to, or at

least closer to, the statutory ceiling. If a straight “grant equals

contract” approach had been applied, the answer would have been no,

unless the government received additional consideration. However,

Page 10-6 GAOKMX-92-13 @prO@@iOM XAW-VOL ~
Chapter 10

Federal Assistance: GruI@ and Cooperative Agre@menta

Communi@ Relations-Social Development Commission v. United

States, 8 Cl. Ct. 723, 725 (1985). Thus, ifa grantee does what it has

committed itself to do and incurs allowable costs, the government is

obligated to pay. ~, B-181332, December 28, 1976.

Conversely, the government has a right to expect that the grantee will

use the grant funds only for authorized grant purposes and only in

accordance with the terms and conditions of the grant. 42 Comp. Gen.

289,294 (1962); 41 Comp. Gen. 134, 137 (1961). The right of a

grantor agency to oversee the expenditure of funds by the grantee to

ensure that the money is used only for authorized purposes, and the

grantee’s corresponding duty to account to the grantor for its use of

the funds, are implicit in the grant relationship and are not dependent

upon specific language in the authorizing legislation. 64 Comp. Gen.

582 (1985).

2. The Federal Grant and Along-standing confusion between grant relationships and

Cooperative Agreement Act Procurement relationships led the commission on Gove~ent

Procurement, in its 1972 report, to recommend the enactment of

legislation to distinguish assistance from procurement, and to further

refine the concept of assistance by clearly distinguishing grants from

cooperative agreements.l” While Congress did not enact all of the

Commission’s recommendations in this area, it did enact these two, in

the form of the Federal Grant and Cooperative Agreement Act of

1977,31 U.S.C. $S 6301–6308.

Prior to the enactment of this statute, most relationships between the

federal government and organimations that received direct federal

assistance funding were characterized simply as “grants” or

“grants-in-aid.”’J As is still the case, it had always been understood

that an agency could make grants only if it was authorized by statute

to do so. Prior to the Act, however, it was generally felt that the

IOReport of the Comrniasion on Government Procurement, Volume 3, Chapters 1-3 generally

(December 1972).

IIMtio@tie km~e o~n ~interchangeably, there is a technical *tinction. A

“grant-in-aid” is a grant to a state or local government. The term “grant” is broader and includes

nongovernmental recipients. See GAO, AGloaasry of Terms Wed in the Federal Budget

Process, PAD-81-27 (March 1981), at 61-62. The Federal Grant and Cooperative Agreement

Azintended to ehminate the term “grant-in-aid” in favor of the simpler “grant,” regardless

of the identity of the recipient. S. Rep. No. 449, 95th Cm&, 2d 8ess. 9 (1977), reprinted in

1978 U.S. Code Cong. & Admin. News 11, 18.

Page 10-9 GAO/OGC-92-13 &prO@lJtiOllS kw-vol. ~
Chapter 10

Federal hdstance: Grants =d CoOpemtlve Agreement

A 1971 decision, 51 Comp. Gen. 162, illustrates another distinction.

In that case, the Comptroller General concluded that an ineligible

grantee could not be reimbursed for expenditures under quantum

meruit principles. In the typical grant situation, the grantee’s activities

are not performed solely for the direct benefit of the government and

the government does not receive any measurable, tangible benefit in

the traditional contract sense.

Still another distinction is the reluctance of the courts to apply the

“contract implied in fact” concept in the grant context. ~,

Somerville Technical Services v. United States, 640 F.2d 1276 (Ct. Cl.

1981). The reasoning in part is that a grant is a sovereign act binding

the government only to the extent of its express undertakhgs.

In American Hospital Association v. Schweiker, 721 F.2d 170 (7th Cir.

1983), cert. denied, 466 US. 958, the court rejected the contention

that otherwise valid regulations of the Department of Health and

Human Services impaired contractual rights of grantees under the

Hill-Burton hospital assistance program.

“[T]he relationship between the government and the hospitals here cannot be wholly

captured by the term ‘contract’ and the analysis traditionally associated with that

term. . : . The contract analogy thus has only limited application.”

Id. at 182–83. Finally, the court in United States v. Kensington

~ospital, 760 F. Supp. 1120 (E.D. Pa. 1991), refused to apply the

Anti-Kickback Act to government claims for fraud under the Medicare

and Medicaid programs, finding that the government’s relationship

with its grantees under these programs could not be characterized as

“prime contracts” for purposes of the Act.

In sum, it seems clear that many of the rules and principles of contract

law will not be automatically applied to grants. Nevertheless, whether

one prefers to regard a grant as a @e of contract, or “in the nature

of” a contract, or as a generically different creature, it is equally clear

that the creation of a grant relationship results in certain legal

obligations flowing in both directions, enforceable by the application

of basic contract rules. As the Claims Court has stated:

“[A] notice of a federal grant award in return for the grantee’s performance of

services can create cognizable obligations to the extent of the government’s

undertakings therein.”

Page 10-8 GAO/OGC-92-13 @pmptitiOI19 Law-vol. ~
Chapter lo

Fsdeml~ce: @ant# and Chopemtive Agreements

must be used, using the statutory definitions for guidance as to which

instrument is appropriate. The Office of Management and Budget is

authorized to provide guidance on the implementation of the Act. 31

U.S,C. $6307. OMB published “final guidance” on August 18, 1978 (43

Fed. Reg. 36860).

It is important to note that the Federal Grant and Cooperative

Agreement Act does not expand an agency’s substantive authority.

While the Act provides the basis for examining whether an

arrangement should be a contract, grant, or cooperative agreement,

determinations of whether an agency has authority to enter into the

relationship as spelled out in the instrument, whatever its label, must

be based on the agency’s authorizing or program legislation, not the

Federal Grant and Cooperative Agreement Act. Unless legislatively

prohibited, every agency has inherent authority to enter into contracts

to procure goods or services for its own use, as long as the purpose of

the procurement is reasonably related to the agency’s mission.

However, there is no comparable inherent authority to give away the

government’s money or property, either directly or by the release of

vested rights, to benefit someone other than the government; this

must be authorized by Congress. ~, 51 Comp. Gen. 162, 165

(1971). Therefore, the agency’s basic legislation must be studied to

determine whether an assistance relationship is authorized at all, and

if so, under what circumstances and conditions.

Where an agency has authority to enter into both a procurement and

an assistance relationship to cany out the particular program, it has

authority to exercise discretion in choosing which relationship to

form in each particular case, but must use the instrument which suits

the relationship, as provided in the Act. In this sense, the analysis of

an agency’s program authori~ is not really a matter of discretion-the

statutory authority either is there or is not there, regardless of agency

preference. The significance of the Federal Grant and Cooperative

Agreement Act is that it emphasizes the substance of an agency’s

program authority rather than the particular labels used or not used.

In this connection, the Senate Committee on Governmental Affairs has

stated:

“[The Federal Grant and Coopemtive Agreement Act] was never intended to be an

independent grant of authority to agencies to enter into assistance or contractual

relationships where no such authority can be found in authorizing legislation. Rather,

it was and is intended to force agencies to use a legal instrument that, according to

.!;:;;, , ,,

,.., ,,$;,

Page 10-11 GAO/OGC-92-13 Appropriations kw-vol. II
Ch8pter 10

Federel Aedet8nce: GruIte and Cooperative Agreement

legislation pretty much had to mention “grants” explicitly in order to

confer that authority.

The Act established standards that agencies are to use in selecting the

most appropriate funding vehicle—a procurement contract, a grant,

or a cooperative agreement. The standards are contained in sections

4,5, and 6 of the Act, 31 U.S.C. $$ 6303–6305, summarized below:

● Procurement contracts An agency is to use a procurement contract

when “the principal purpose of the instrument is to acquire (by

purchase, lease, or barter) property or services for the direct benefit

or use of the United States Government.” 31 U.S.C. $6303.

c Grant agreements. An agency is to use agrant agreement when “the

principal purpose of the relationship is to transfer a thing of value

[money, property, services, etc.] to the. . . recipient to carry out a

public purpose of support or stimulation authorized by a law of the

United States instead of acquiring (by purchase, lease, or barter)

property or services for the direct benefit or use of the United States

Government,” and “substantial involvement is not expected” between

the agency and the recipient when carrying out the contemplated

activity. 31 U.S.C. $6304.

c Cooperative agreements. An agency is to use a cooperative agreement

when “the principal purpose of the relationship is to transfer a thing

of value to the. . . recipient to carry out a public purpose of support

or stimulation authorized by a law of the United States instead of

acquiring (by purchase, lease, or barter) property or services for the

direct benefit or use of the United States Government,” and

“substantial involvement is expected” between the agency and the

recipient when carrying out the contemplated activity. 31 U.S.C.

56305.

Under the Act, grants and cooperative agreements are more closely

related to one another than either is to a procurement contract. The

essential distinction between a grant and a cooperative agreement is

the degree of federal involvement.

Each agency’s program authority must be analyzed to identify the

type of relationships authorized, and the circumstances under which

each authorized relationship can be entered into without regard to the

presence of specific words such as “grant” in the program legislation.

Once authority is found, the legal instrument (contract, grant, or

cooperative agreement) that fits the arrangement as contemplated

GAo/oGc-92-13 Appropriation Lew-vol. II
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Fedemlbsbtuwe: Grant s-d Ooopemtlve Agreememti

k several more recent cases, GAO’s analysis of the relationship and of

relevant legislation and legislative history led it to conclude that a

contract, rather than a grantor cooperative agreement, was the

proper instrument. 67 Comp. Gen. 13 (1987), affirmed upon

reconsideration, B-227084.6, December 19, 1988 (operation of

research and training programs at government facility funded by

Maritime Administration); 65 Comp. Gen. 605 (1986) (proposed

study, sponsored by Council on Environmental Quality, of risks and

benefits of certain pesticides, intended for use by federal regulatory

agencies); B-222665, July 2, 1986 (awards to Indian tribes by Interior

Department under Indian Self-Determination and Education

Assistance Act, which contained an express exemption from the

Federal Grant and Cooperative Agreement Act); B-210655, April 14,

1983 (funding by Department of Energy of college campus forums on

nuclear energy). In 61 Comp. Gen. 428 (1982), however, GAO agreed

with the Department of Ener~’s use of a cooperative agreement to

design and construct a “proto@pe solar parabolic dish/sterling engine

system module,” finding that the proposal’s primary purpose was to

encourage development and early market entry rather than to acquire

the particular item for its own use, although it would eventually have

governmental applications.

These questions are important because procurement contracts are

subject to a variety of statutory and regulatory requirements which

may not be generally applicable to assistance transa ctions. If the type

of relationship is not determined properly, assistance arrangements

could be used to evade othemvise applicable legal requirements.

Conversely, legitimate assistance awards should not be burdened by

all of the formalities of procurement contracts.

The analysis required by the Federal Grant and Cooperative

Agreement Act may also be relevant in determining the applicability of

other laws. See, ~, Hammond v. Donovan, 538 F. Supp. 1106 (W.D.

Mo. 1982) holding that the relationship between the Labor

Department and a state employment office was a grant, and therefore

not subject to a statute which required that certAn procurement

contracts contain an affiiative action for veterans provision.

Another situation that has generated some controversy is the so-called

“third party” or “intermediary” situation-where a federal agency

provides assistance to speciiied recipients by using an intermediary.

Again, it is necessary to examin e the agency’s program authority to

~..

.,*”.

. . .

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Federal Adatanee: Grants and Cooperative Agreements

the criteria established by the Act, matches the intended and authorized

relationship-regardless of the terrninolo~ used in existing legislation to characterize

the instrument to be used in the tmnsaction.”lz

Further discussion may be found in B-196872 -0.M., March 12,1980

and a GAO report entitled Agencies Need Better Guidance for

Choosing Among Contracts, Grants, and Cooperative Agreementi,

GGD-81-88, September 4, 1981.13

The approach used in the Federal Grant and Cooperative Agreement

Act is illustrated in several decisions. In one case, the Interior

Department asked whether it could use its appropriation for expenses

of the American Samoan Judiciary for certain expenses, including

entertairtm ent and the purchase of motor vehicles. Using the

guidelines of the Federal Grant and Cooperative Agreement Act, the

Comptroller General reviewed the relationship between the Interior

Department and the American Samoan Judiciary and concluded that it

was essentially a grant relationship. (Congress conilrmed this

interpretation by inserting the word “grant” in the next year’s

appropriation.) Therefore, restrictions such as those relating to

entertainent and motor vehicles, which would apply to the direct

expenditure of appropriations by the federal government or through a

contractor did not apply to expenditures by the grant recipient, absent

some provision to the contrary in the appropriation, agency

regulations, or grant agreement. B-196690, March 14, 1980.

In 59 Comp. Gen. 424 (1980), the Environmental Protection Agency’s

public participation program of providing fmancizd assistance to

certain interveners was viewed as essentially a grant relationship

rather than a contractual one. Accordingly, 31 U.S.C. $3324 was held

not to preclude participants from receiving funds in advance of the

completion of participation, subject to the provision of adequate f~cal

controls.

12s. Rep. No. 180, 97th (lmg., 1st Sess. 4 (1981), rePriWed in 1982 U.S. we ~W& A*.

News 3,6. While this is not direct legislative Mstorywith respect to the 1977 statute, it is

nevertheless important as a clear statement from one of the relevsntjurisdictional committees.

13ControverW over whether the FederaJ Grant and mperative A@ement Act co~tuted m

independent source of authority stemmed from an ambiguous provision in the original

enactment. See Pub. L. No. 95-224, $ 7(a), 92 Stat. 5. When the statute was moved to Title 31 as

part of the 1982 recoditkation of that title, section 7(a) was omitted as duplicative. Thus, while

the proposition discussed in the text remains valid, many of the authorities cite to a provision

which is no longer found in the U.S. Code.

Page 10-12 GAOKX+C-92-13 Appropriation L8w-VOL II
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Federal &8istmwe: GrmIta md OooperUIVS Agreements

technical assistance to certain block grant recipients. While HUD’S

authority to provide technical assistance to the block grant recipients

was clear, there was no authority to provide assistance to the

intermediary organization. The essence of the intermediary

transaction was the acquisition of services for ukirnate delivery to

authorized recipients. Thus, GAO concluded that a procurement

contract should have been used. The decision largely repudiated

(although it did not expressly overrule) B-194229. 61 Comp. Gen. at

641.

The Senate Committee on Governmental Affairs, in its 1981 report

mentioned earlier in this discussion, also addressed the intermediary

issue and agreed with GAO’S interpretation:

“The choice of instrument for an intermediary relationship depends solely on the

principal federal purpose in the relationship with the intermediary. The fact that the

product or service produced by the intermediary may benefit another party is

irrelevant. What is important is whether the federal government’s principal purpose is

to acquire the intermediary’s services, which may happen to take the form of

producing a product or carrying out a service that is then delivered to an assistance

recipient, or if the government’s principal purpose is to assist the intermediary to do

the same thing. Where the recipient of an award is not receiving assistance from the

federal agency but is merely used to provide a service to another entity which is

eligible for assistance, the proper instrument is a procurement contract.”

S. Rep. No. 180 at 3; 1982 U.S. Code Cong. &Admin. News at 5.

Most of the cases discussed in the remainder of this chapter are

expressed in “grant” terms. However, the principles discussed in the

cases should generally apply to cooperative agreements as well.

3. Competition for Grant programs are either mandatory or discretionary. In a

Discretionary Grant mandatory grant program, Congress directs awards to one or more

Awards classes of prospective recipients who meet specillc criteria for

eligibility, in specit3ed amounts. These grants, sometimes called

“entitlement” grants, are often awarded on the basis of statutory

formulas. While the grantor agency may disagree on the application of

the formula, it has no basis to refuse to make the award altogether.

City of Los bgeles v. Coleman, 397 F. Supp. 547 (D.D.C. 1975).

Thus, questions of grantee selection, and hence of competition, do not

arise. The concept of competition can only apply when the grantor has

discretion to choose one applicant over another. Therefore, the

following discussion is limited to discretionary grants.

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Federal Assistance: Grants and Coopemtive Agreements

determine the authorized forms of assistance. The agency’s

relationship with the intermediary should normally be a procurement

contract if the intermediary is not itself a member of a class eligible to

receive assistance from the government. In other words, if an agency

program contemplates provision of technical advice or services to a

spectled group of recipients, the agency may provide the advice or

services itself or hire an intermediary to do it for the agency. In that

case, the proper vehicle to fund the intermediary is a procurement

contract. The agency is “buying” the services of the intermediary for

its own purposes, to relieve the agency of the need to provide the

advice or services with its own staff.

On the other hand, if the program purpose contemplates support to

certain types of intermediaries to provide consultation or other

spectiled services to third parties, GAO has approved the agency’s

choice of a grant rather than a contract as the preferred funding

vehicle. Thus, in 58 Comp. Gen. 785 (1979), GAO found that the

Department of Commerce’s Office of Minority Business Enterprise

(now the Minority Business Development Agency) could properly

award a noncompetitive grant to an intermediary organization to

provide management and technical assistance to minori~ business

fins. Although the point was not detailed in the decision, the agency

clearly had the requisite program authority to provide grant

assistance to the intermediary.

Sometimes the program legislation is much less clear about the status

of an intermedia~ as a grantee. GAO, applied 58 Comp. Gen. 785 in

another 1979 case, B-194229, September 20, 1979, upholding the

Department of Health, Education, and Welfare’s authority to provide

grant assistance to an intermediary to in turn provide technical

assistance to public schools. There, however, it was doubtful that

HEW had the requisite program authority to deal with the

intermediary by grant rather than procurement contract. The decision

appears to have interpreted the Federal Grant and Cooperative

Agreement Act as independently enlarging HEW’s program authority.

While GAO has not explicitly stated that B-194229 was wrongly

decided, subsequent items, starting with GAO’S analysis in GGD-81-88

and B-196872 -O. M., previously cited, have cast considerable doubt on

that decision’s validity. In a 1982 decision, 61 Comp. Gen. 637, the

Department of Housing and Urban Development awarded a

cooperative agreement to a nonprofit organization to provide

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Federal Asniatance: Granto and Cooperative Agreement

grant rather than the recipient to whom it was actually awarded.

B-203096, May 20, 1981; B-199247, August 21, 1980; B-199147,

June 24, 1980; B-190092, September 22, 1977. This does not affect

the Comptroller General’s jurisdiction to render decisions on the

legality of federal expenditures, however, so GAO can and will render

decisions on the legality of grant awards in terms of compliance with

applicable statutes and regulations.

GAO has adopted a similar position with respect to cooperative

agreements. GAO will not consider a “protest” against the award of a

cooperative agreement unless it appears that a conflict of interest

exists or that the agency is using the cooperative agreement to avoid

the competitive requirements of the procurement laws (i.e., in

violation of the Federal Grant and Cooperative Agreement Act) and

regulations. 64 Comp. Gen. 669 (1985); 61 Comp. Gent 428 (1982);

B-216587, October 22, 1984. Again, this refers to review under GAO’s

“bid protest” jurisdiction and does not affect review under GAO’S

other available authorities.

Insummary, assuming the proper instrument has been selected, GAO

will not question fimding decisions in discretionary federal assistance

programs. B-228675, August 31, 1987 (denial of application for

funding renewal held to be a policy matter within grantor agency’s

discretion where nothing in program legislation provided otherwise

and agency had complied with applicable procedural requirements).

See also City of Sarasota v. Environmental Protection Agency, 813

F.2d 1106 (llth Cir. 1987) (court declined jurisdiction overissue

which it characterized as a grant funding decision); Massac husetts

Department of Correction v. Law Enforcement Assistance

Administration, 605 F.2d 21 (lst Cir. 1979) (court upheld agency’s

refusal to award grant, finding that procedural deficiencies, even

though they amounted to “sloppiness,” were not sut%ciently grave as

to deprive applicant of fair consideration).

The-law in this area is still developing in terms of the kinds of issues

the courts will look at and the standards and remedies they will apply.

Trends and case law are discussed in detail in Richard B. Cappalli,

Federal Grants and Cooperative Agrcements-Law, Policy, and

Practice, Chapter 3 (1982). Cappalli sees an emerging “right to fair

process” at least to the extent of requiring agencies to follow

applicable procedures (~. at $ 3:26), although its precise scope and

parameters await further legislative or judicial definition.

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Federal Aaaiatance: Granta and Cooperative Agreements

The Federal Grant and Cooperative Agreement Act encourages

competition in assistance programs where appropriate, in order to

identify and fund the best possible projects to achieve program

objectives. 31 U.S.C. $ 6301(3). This, however, is merely a statement

of purpose, and there are few other legislative pronouncements

specifying how this objective is to be achieved, certainly nothing

approaching the detail and specificity of the legislation applicable to

procurement contracts, such as the Competition in Contracting Act of

1984. Statutory requirements for competition in grantee selection do

exist in certain contexts, but they tend to be very general and do not

spec~ actutd procedures. Examples are 10 U.S.C. 3 2361(a)

(competitive procedures required for Defense Department research

grants), and 10 U.S.C. $? 2196(i) (ditto for Defense Department

manufacturing engineering education grants).

At the request of the Senate Committee on Governmental Affairs, the

General Accounting Office surveyed the administrators of 355

discretionary grant programs listed in the Catalog of Federal

Domestic Assistance, and studied the award processes for 26 of those

programs, to determine the extent of competition. The 355 programs

represented about 98,000 awards in f~cal year 1984 to state and local

govemmenb and other organizations and individuals, amounting to

about $12 billion. GAO found that nearly 2/3 of the programs

attempted to solicit applications fr~m all eligible applicants; public

interest groups expressed overall satisfaction with agency solicitation

practices. Over 3/4 of the programs consistently used persons outside

the program office to provide an independent perspective in

reviewing applications. Nevertheless, GAO did note some departures

from the competitive process which did not appear to have been

subjected to internal review and justification. GAO recommended that

the President’s Council on Management Improvement (established by

Executive Order No. 12479, May 24, 1984) work with the agencies in

a govemmentwide effort to improve managerial accountability for

discretionary grant programs. GAO’s report is Discretionary

Grants-Opportunities to Improve Federal Discretionary Award

Practices, GAO/HRD-86-108 (September 1986].

In view of the essential differences between grants and procurement

contracts, GAO has declined to use its bid protest mechanism,

prescribed to assure the fairness of awards of contracts, to rule on the

propriety of individual grant awards–that is, GAO will not consider a

complaint by a rejected applicant that it should have received the

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Federal Adstsnce: Grants -d Ooopmdve Agreements

has declined to apply the Bradley presumption to grant law. In a 1985

decision, the Court held:

“[A]bsent a clear indication to the contrary in the relevant statuta or legislative

history, changes in the substantive standarda governing federal grant programs do

not alter obligationa and liabilities arising under earlier grants.”

Bennettv. New Jersey, 470 U.S. 632,641 (1985). Thus, for purposes

of grant law, “obligations generally should be determined by

reference to the law in effect when the grants were made.” Id. at 638. —

b. The Grant as an Exercise of when Congress enacts grant legislation and provides appropriations

Congressional Spending ,

Power

to fund the grants, it is exercising the spending power conferred upon

it by the Constitution. 14 AS such, it is clear that Congress ~the

power to attach terms and conditions to the availabili~ or receipt of

, ● grant funds, either in the grant legislation itselforin a separate

enactment. Oklahomav. Civil Service Coremission, 330 U.S. 127

(1947) (provision of HatchAct prohibiting political activity by

employees of state or local government agencies receiving federal

grant funds upheld as within congressional power).

In Fullilove v. IUutznick, 448 U.S. 448 (1980), the Court upheld a

provision of the Public Works Employment Act of 1977 imposing

minority set-aside requirements on purchases by state and local

grantees. The Court said:

“Congresa has frequently employed the Spending Power to further broad policy

objectives by conditioning receipt of fderal moneys upon compliance by the

recipient with federal atatutory and administrative directives. This hurt has

repeatedly upheld againat constitutional chalienge the use of thia technique to induce

governments and private parties to cooperate vohmtariiy with federal policy.”

Id. at 474. See also Pennhurst State School and Hospital v.

%.lderman, 451 U.S. 1, 15–17 (1981); Kingv. Smith, 392 U.S. 309,

333 n.34 (1968). It follows that, under the Supremacy Clause, valid

federal legislation will prevail over inconsistent state law. Townsend

v. Swank, 404 U.S. 282 (1971) (state statute inconsistent with

141t my & -under otheren~~ powers as we~. “tisis not -~ m ‘&n@’

the precise source of itqauthority when it enacta legislation.” Nevzdav. Skinner, 8S4 F.2d 445,

449 n.8 (9th Cir. 1989), cert. denied, 493 U.S. 1070.

Page 10-19 GAomGc-92-13 APPTOP*ti43M hW-VOL n
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Federal Assistance: Gran@ and Cooperative Agreements

C. Some Basic

Concepts

1. General Rules A number of principles have evolved that are unique to grant law.

These will be discussed in subsequent sections of this chapter. Many

cases, however, involve the application of principles of law which are

not unique to grants. As a general proposition, the fundamental

principles of appropriations law discussed in preceding chapters

apply to grants just as they apply to other expenditures. This section

is designed to highlight a few of these areas, each of which is covered

in detail elsewhere in this publication, and to show how they may

apply in assistance contexts.

a. Statutory Construction Established principles of statutory construction apply equally to grant

legislation. Examples are: 49 Comp. Gen. 411 (1970) (resolution of

conflicting elements of legislative history); 49 Comp. Gen. 104 (1969)

(principle that meaning should be given to every word in a statute

used to construe language in disaster relief assistance legislation); 46

Comp. Gen, 699 (1967) (use of legislative histmy to clarify

reapportionment of unused funds under a formula grant program);

B-133001, January 30, 1979 (construing the term “unexpected

urgent need” in the Migration and Refugee Assistance Act).

Sometimes they may not apply equally. Under traditional thinking,

statutes were viewed as applying prospectively only, urdess

retroactive application was indicated by the statutqy language or

legislative history. In most contexts, grant law followed this approach.

See, ~, 32 Comp. Gen. 141 (1952); 30 Comp. Gen. 86 (1950).

There were occasional exceptions. For example, in 50 Comp. Gen.

750 (1971), GAO held that an amendment to a program statute which

eased certain restrictions could be applied retroactively with respect

to funds previously awarded but not yet obligated by the grantees. In

1974, the Supreme Court ruled that a court should “apply the law in

effect at the time it renders its decision, unless doing so would result

in manifest @justice or there is statutory direction or legislative

history to the contrary.” Bradley v. Richmond School Board, 416 U.S.

696,711 (1974). Post-Bradley litigation has produced a fairly

complex pattern of analysis and, as discussed in Chapter 2, the

precise scope of Bradley is unsettled. In any event, the Supreme Court

GAO/OGC-92-13 Appmpl’i8t.iOIl@ Law-vol. ~
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Federd Auietsace: GruIts and Coopemt.ive Agreement

9

●

.

(1) Purpose

Appropriations may be used only for the purpose(s) for which they

were made. 31 U.S.C. $ 1301(a). One of the ways in which this

fundamental proposition manifests itself in the grant context is the

principle that grant funds may be obligated and expended only for

authorized grant purposes. What is an ‘authorized grant purpose” is

determined by exarnining the relevant program legislation, legislative

history, and appropriation acts.

Disaster relief assistance legislation, found at 42 U.S.C. Chapter 68,

authorizes, among other things, federal financial contributions to state

and local governments for the repair or replacement of public

facilities damaged by a n-@or disaster. Decisions under a prior version

of this legislation had construed public facilities as including

municipal airports (42 Comp. Gen. 6 (1962)), including airport

facilities which had been leased to private parties for the purpose of

generating income for airport maintenance (49 Comp. Gen. 104

(1969)). Assistance could also extend to a sewage treatment plant,

but not one which was not completed, and thus not in operation, at

the time of the damage. 45 Comp. Gen. 409 (1966). Unlike the earlier

legislation, the current statute defines “public facility,” 42 U.S.C.

$ 5122(8), and specifically includes airport and sewage treatment

facilities. Some other examples are:

Airport development grants under Federal Airport Act may include

runway sealing projects which are shown to be part of reconstruction

or repair rather than normal maintenance. 35 Comp. Gen. 588

(1956). See also B-60032, September 9,1946 (grants under same

legislation may be made for acquisition of land or existing privately

owned airports, to be used as public airports, regardless of whether

construction or repair work is immediately contemplated).

Mining Enforcement and Safety Administration is authorized to make

grants to a labor union to fund emergency medical technician training

program for coal miners since the proposal bears a sufficiently close

relationship to coal mine safety to come within the scope of the

governing program legislation. B-170686, November 8, 1977.

Public Health Service grants for support of research training were

found authorized under the Public Health Service Act. B-161769,

June 30, 1967.

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Chapter 10

Federd Assistance: Grants and Coopemtive Agreements

c. Availability of

Appropriations

eligibility criteria of Aid to Families with Dependent Children

legislation held invalid).’5

More recently, the Supreme Court has reaffirmed the power of

Congress to attach conditions to grant funds, provided that the

conditions are (1) in pursuit of the general welfare, (2) expressed

unambiguously, (3) reasonably related to the purpose of the

expenditure, and (4) not in violation of other constitutional

provisions. New York v. United States, _ U.S. _, 112 S. Ct. 2408,

2426 (1992); South Dakotav. Dole, 483 U.S. 203, 207–08 (1987).

Dole upheld legislation directing the Department of Transportation to

withhold a percentage of federal highway funds from states which do

not adopt a minimum drinking age of 21. Similarly, legislation

conditioning the receipt of federal highway funds on state adoption of

the national speed limit has been upheld. Nevadav. Skinner, 884 F.2d

445 (9th Cir. 1989), cert. denied, 493 U.S. 1070.

Where Congress has imposed an otherwise valid condition on the

receipt of grant funds by states, the condition is, in effect, a

“condition precedent” to a state’s participation in the program.

Unless permitted under the program legislation, the condition may

not be waived or omitted even though a given state may not be able to

participate because state law or the state constitution precludes

compliance. North Carolina ex rel. Morrow v. Califano, 445 F. Supp.

532 (E. D.N.C. 1977), affd mem., 435 U.S. 962; 43 Comp. Gen. 174

(1963).

Of course, it is also within the power of Congress to authorize the

making of unconditional grants. See B-80351, September 30, 1948.

As with obligations and expenditures in general, a federal agency may

provide financial assistance only to the extent authorized by law and

available appropriations. Thus, the three elements of legal

avail,ability-purpose, time, and amount-apply equally to assistance

funds.

151t h= ~50 been recognized that the regulations of a grantor agen~, if otherwise valid, lW3y

preempt state law. S.J. Groves& Sonsv. Fulton County, 920 F.2d 752, 763–64 (llth Cir.

1991).

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FederaIA@istmwe: Grants and Ciwpemt&e Agreementa

(2) Time

,*<.;’,:.

,.

Funds must be obligated by the grantor agency within their period of

obligational availability. This includes all actions necessary to

constitute a valid obligation. For example, an “offer of grant” made

by the Economic Development Administration to a Connecticut

municipality in 1983 was accepted by a town ofticial who did not have

authority to accept the grant; and the funds expired for obligational

purposes before the town was able to ratify the unauthorized

acceptance. Under these circumstances, GAO concluded that a valid

grant never came into existence. B-220527, December 16, 1985. The

town later submitted a ciaim for reimbursement of its expenses, based

on an “equitable estoppel” argument. Since the non-existence of the

grant was attributable to the town’s actions and not those of the EDA,

the claim could not be allowed, B-220527, August 11, 1987. See also

B-206244, June 8, 1982.

The” bona fide needs” rule applies to grants and cooperative

agreements just as it applies to other types of obligations or

expenditures. 64 Comp. Gen. 359 (1985); B-229873, November 29,

1988. In 64 Comp. Gen. 359, obligation of f~cal year appropriations

for 3-year biomedical research grants was found improper where not

authorized by statute and where the grants did not contemplate a

required outcome or end product.

(3) Amount

Restrictions on the availability of a lump-sum appropriation are not

legally binding unless incorporated expressly or by reference in the

appropriation act itseif. Thus, a plan to fund National Institutes of

Health biomedical research grants, funded under a lump-sum

appropriation, in a number less than that spectiled in committee

reports was not unlawful, as long as all funds were properly obligated

for authorized grant purposes. 64 Comp. Gen. 359 (1985). See also

B-157356, August 17, 1978.

Minimum earmarks (e.g., “not less than” or “shall be available only”)

in an authorization act were found controlling where a later-enacted

appropriation act provided a lump sum considerably less than the

amount authorized but nevertheless sufficient to meet the earmark

requirements. 64 Comp. Gen. 388 (1985). The grantor agency will

have more discretion where the earmark is a maximum (“not to

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Chapter 10

Federal Aaalatance: Granta and Cooperative Agreement

A grant for unspecified purposes would, unless expressly authorized

by Congress, be improper. 55 Comp. Gen. 1059, 1062 (1976).

A case from the 7th Circuit Court of Appeals illustrates the

proposition that an agency may reallocate discretionary funds within a

lump-sum appropriation as long as it uses those funds for other

authorized purposes of the appropriation and does not violate the

applicable program legislation. Under the Clean Air Act, the

Environmental Protection Agency may prescribe plans to implement

air quality standards for states which fail to submit adequate plans.

The Act also authorizes air pollution control grants to states, funded

under EPA’s lump-sum Abatement, Control, and Compliance

appropriation. Under its regulations, EPA divides available funds into

nonmandatory annual allotments for each state. The regulations also

authorize EPA to set aside a portion of the unawarded allotments to

support federal implementation programs where required because of

the absence of adequate state programs. One state argued that the

set-aside policy amounted to a diversion of funds from their intended

purpose and therefore violated 31 U.S.C. $ 1301(a). The court f~st

upheld the regulation as a permissible interpretation of EPA’s

authority under the Clean Air Act. The court then found that there was

no purpose violation because (a) the relevant appropriation act did

not earmark any spectilc amount for grants to states, and (b) EPA was

still using the set-aside funds for air pollution abatement programs,

which was their intended purpose. Illinois Environmental Protection

Agencyv. United States EPA, 947 F.2d 283 (7th Cir. 1991).

This is essentially the same reasoning the Comptroller General had

applied in B-157356, August 17, 1978. The (then) Department of

Health, Education, and Welfare received a lump-sum appropriation

for its Office of Human Development Services covering a number of

grant programs. The Department wanted to make what it termed

“cross-cutting” grants to fund research or demonstration projects

which would benefit more than one target population (e.g., aged,

children, Native Americans). To do this, each office receiving grant

funds under the lump-sum appropriation was asked to set aside a

portion of its grant funds. This pool would then be used for approved

cross-cutting grants. Since the lump-sum appropriation did not

restrict the Department’s internal allocation of funds for any given

program, GAO approved the concept, provided that the grants were

limited to projects within the scope or purpose of the appropriation, a

condition necessary to assure compliance with 31 U.S.C. $ 1301(a).

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Federal Assistance: Grants and Cooperative Agreement

These regulations, if properly promulgated and within the bounds of

the agency’s statutory authority, have the force and effect of law and

may not be waived on a retroactive or ad hoc basis. 57 Comp. Gen.

662 (1978) (eligibility standards); B-163922, February 10, 1978

(grantee’s liability for improper expenditures); B-130515, July 17,

1974; B-130515, July 20, 1973 (matching share requirements).

However, the prohibition against waiver does not necessarily apply to

regulations which are merely “internal administrative guidelines” as

long as the government’s interests are adequately protected. See 60

Comp. Gen. 208,210 (1981).

The operation of several of these principles is illustrated in B-203452,

December 31, 1981. The Federal Aviation Administration revised its

regulations to permit indirect costs to be charged to Airport

Development Aid Program grants. A grantee fded a claim for

reimbursement of indirect costs incurred prior to the change in the

FAA regulations, arguing that the charging of indirect costs was

required by a Federal Management Circular even before FA4

recognized it in its own regulations. GAO f~st pointed out that Federal

Management Circulars are internal management tools. They do not

have the binding effect of law so as to permit a third party to assert

them against a non-complying agency. This being the case, there was

no impediment to FAA’s revising its regulations without making the

revision retroactive, as long as both the old and the new regulations

were within the scope of FAA’s legal authority. See also Pueblo

Neighborhood Health Centers, Inc. v. Department of Health and

Human Services, 720 F.2d 622, 625–26 (lOth Cir. 1983) (HHS Grant

Application Manual was an internal agency publication rather than a

regulation with force and effect of law, such that deviation by

agency–in this case use of an ineligible member on a funding review

panel-did not require reversal of agency action).

Regulations of the grantor agency will generally be upheld, even if

they are not specifically addressed in the program legislation, as long

as they are within the agency’s statutory authority, issued in

compliance with applicable procedural requirements, and not

arbitrary or capricious. For example, courts have upheld the authority

of the Department of Agriculture to impose by regulation strict

liability on states for lost or stolen food stamp coupons. Gallegos v.

~, 891 F.2d 788 (lOth Cir. 1989); Louisiana. Bergland, 531 F.

SUpp. 118 (M.D. La. 1982), aff’d sub nom. Louisiana. Block, 694

F.2d 430 (5th Cir. 1982); Hettleman v. Bergland, 642 F.2d 63 (4th

‘%’

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Federd Asei8tance: Granta and Cooperative Agreement

d. Agency Regulations

exceed”), or where it is expressed only in legislative history.

B-171019, March 2, 1977.

Similar rules apply to expenditures by grantees. In the absence of an

earmark or other controlling provision in the applicable program

statute, regulations, or the grant agreement, there is no basis to object

to a grantee’s allocation of grant funds as long as the funds were spent

for eiigible grant activities. 69 Comp. Gen. 600 (1990).

The concept of augmentation of appropriations also applies to

assistance funds. One illustration is the rule that a federal institution is

generally not eligible to receive grant funds from another federal

institution unless the program legislation expressly so provides. The

reason is that the grant funds would improperly augment the

appropriations of the receiving institution. For example:

● Federal grant funds for nurse training programs could not be allotted

to St. Elizabeth Hospital since it was already receiving

appropriations to maintain and operate its nursing school. 23 Comp.

Gen. 694 (1944).

● Haskell Indian Junior College, fully funded by the Bureau of Indian

Affairs, was not eligible to receive grant funds from federal agencies

other than the Bureau of Indian Affairs, since Congress had already

provided for its needs by direct appropriations. B-114868, April 11,

1975,

● The OffIce of Education could not make a library support grant under

the Higher Education Act of 1965 to the National Commission on

Libraries and Information Science as it would bean improper

augmentation of the Commission’s appropriations. 57 Comp. Gen.

662,664 (1978).

The appropriations which would be augmented by the grant do not

have to be specific appropriations for the prohibition to apply.

B-69616, November 19, 1947. Of course, Congress may legislatively

authorize exceptions. ~, B-217093, January 9, 1985.

(1) General principles

Legislation establishing an assistance program frequently will define

the program objectives and leave it to the administering agency to fti

in the details by regulation. Thus, agency regulations are of

paramount importance in assessing the parameters of grant authority.

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thereby bound to follow the notice and comment procedures of the

APA. ~. at 1188. The court also rejected the government’s contention

that the guidelines were “procedural” and therefore exempt.

“Although an agency’s label is reIevant, it is not dispositive of the true

character of the agency statement.” Id. Accordingly, the court held

the guidelines “invalid unless and unfil they are promulgated in

compliance with the procedures required by the APA.” ~. at 1189.

(2) The “common rules”

The importance of agency regulations and management guidance

from the Office of Management and Budget is apparent throughout

this chapter. Since the structure of that material changed drastically in

the late 1980s, a summary of the new structure maybe helpful.

For a number of years, uniform administrative requirements from OMB

have been contained in two key circulars, A-102 (assistance to state,

local, and Indian tribal governments) and A-1 10 (institutions of higher

education, hospitals, and other nonprofit organizations). The

structure of each circular was similar-a brief introduction followed

by more than a dozen attachments with detailed guidance on specific

topics.

In 1987, a memorandum from the President directed OMB to revise

Circular A-102 to specify uniform, governmentwide terms and

conditions for grants to state and local governments, and directed

executive branch departments and agencies to propose and issue

common regulations adopting these terms and conditions verbatim,

modiiled where necessary to reflect inconsistent statutory

requirements. 23 Weekly Comp. Pres. Dec. 254 (March 12, 1987).

A proposed common rule was published on June 9, 1987 (52 Fed.

Reg. 21819), and the final common rule was published on March 11,

1988 (53 Fed. Reg. 8033), generally effective as of October 1, 1988.

TIw rule was adopted by over 20 agencies, including all of the major

grantor agencies. The title is identical for each agency: Uniform

Administrative Requirements for Grants and Cooperative Agreements

to State and Local Governments. The revised Circular A-102 was

issued on March 3, 1988. It is much simplilled from its predecessor,

much of the detail having been shifted to the individual agency

regulations.

GAO/OGC-92-13 Appropriations Law-Vol. II
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Cir. 1981). Similarly, it was within the discretion of the Environmental

Protection Agency under the Clean Water Act to prescribe regulations

making wastewater treatment grants available only for the

construction of new facilities and not for the acquisition of preexisting

facilities. Cole County Regional Sewer District v. United States, 22 Cl.

Ct. 551 (1991). The EPA, like all government agencies, is subject to

funding constraints and must effectuate policy objectives with

available resources. ” Id. at 557. Another illustration is American

Hospital Association v~Schweiker, 721 F.2d 170 (7th Cir. 1983),

cert. denied, 466 U.S. 958, upholding regulations imposing

community service and uncompensated care requirements on

recipients of Hill-Burton hospital construction grants.

Wholly apart from what the courts might or might not do, an agency’s

discretion in funding matters is subject to congressional oversight as

well. Congress, if it disfavors an agency’s actual or proposed exercise

of otherwise legitimate discretion, can statutorily restrict that

discretion, at least prospectively, either by amending the program

legislation or by inserting the desired restrictions in appropriation

acts. For an example of the latter, see B-238997.4, December 12,

1990.

The informal rulemaking requirements (notice and comment) of the

Administrative Procedure Act do not apply to grant regulations. 5

U.S.C. $ 553(a)(2). Several agencies, however, have published

statements committing themselves to compliance with the APA and

have thereby effectively waived the exemption. Where regulations are

required to be published in the Federal Register, failure to do so may

render them ineffective. The issue has been before the courts on

several occasions. See, ~, B-130515, July 17, 1974. (See Chapter 3

for further elaboration and case citations.)

A case not cited in Chapter 3 which applies several important

Administrative Procedure Act principles in the grant context is Abbs

v. Sullivan, 756 F. Supp. 1172 (W.D. Wk. 1990). A grantee university

and one of its professors challenged a set of scientific misconduct

investigation guidelines which the National Institutes of Health had

published in a grants adm.inistratiorr manual but not in the Federal

Register. The court f~st found that the guidelines met the APA’s

definition of a ‘rule.” Id. at 1187. The court then noted that the

Department of Healthfid Human Services had voluntarily waived the

exemption in 5 U.S.C. $553 for rules relating to grants, and was

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Federal Assistance: Grants and Cooperative Agreements

Suspension is a temporary exclusion, usually pending the completion

of an investigation involving one or more of the causes for debarment.

See generally Common Rule Subpart D, 53 Fed. Reg. 19208–09.

The General Services Administration is responsible for compiling and

distributing a list of debarred or suspended persons. ~d. $—.— .500,53

Fed. Reg. 19209. The list, entitled Lists of Parties Excluded from

Federal Procurement or Nonprocurement Programs, is issued

monthly by GSA’S OffIce of Acquisition Policy and is also available

electronically.

Another common rule, in the form of an “interim final rule” adopted

by 28 grantor agencies, was issued on February 26, 1990 (55 Fed.

Reg. 6736) to implement restrictions on grantee lobbying enacted in

late 1989 and described in our section on lobbying in Chapter 4.

Still another common rule was issued on May 25, 1990 (55 Fed. Reg.

21681) to implement the Drug-Free Workplace Act of 1988 (41 U.S.C.

$ 702), which requires that grant recipients, including individuals,

cert@ as a precondition of receiving federal funds that they have

taken certain anti-drug abuse measures. Violation of the statute or

regulations may result in suspension of grant payments, suspension

or termination of the grant, and/or suspension or debarment of the

grantee for a period of up to 5 years. 41 U.S,C. $ 702(b); Common

Rule $_. 620,55 Fed. Reg. at 21689.

2. Contracting by Grantees Grantees commonly enter into contracts with third parties in the

course of performing their grants. While the United States is not a

party to the contracts, the grantee must nevertheless comply with any

requirements imposed by statute, regulation, or the terms of the grant

agreement, in awarding federally assisted contracts. 54 Comp. Gen. 6

(1974). Violation of applicable procurement standards may result in

the loss of federal funding. ~, Town of Falisburg v. United States,

22 Cl. Ct. 633 (1991).

For a period of nearly 10 years, GAO undertook a limited review of the

propriety of contract awards made by a grantee in furtherance of

grant purposes, upon request of a prospective contractor. This limited

review role was announced in 40 Fed. Reg. 42406 (September 12,

1975). (GAO called these “complaints” rather than “protests.”) GAO

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Under the common rule, the pertinent Code of Federal Regulations

title and part number will, of course, vary with the agency. Section

numbers, however, are identical for each agency. For example, the

definition section is _.3 and the provision dealing with program

income is —.25.

The common rule itself is published at 53 Fed. Reg. 8087–8103.

Pages 8042–8087 give the preambles and variations of the adopting

agencies. References to the common rule in this chapter will cite the

rule itself and not the regulations of any particular agency. The reader

is therefore cautioned to check individual agency regulations for

possible variations,

The common rule is intended to supersede unmodified manuals and

handbooks unless required by statute or approved by the Office of

Management and Budget. Common Rule &_ .5,53 Fed. Reg. 8090.

Wkh respect to grants and grantees covered by the common rule,

additional administrative requirements are to be in the form of

codiiled regulations published in the Federal Register. Id. — $—. 6(a).

In addition to the A-102 implementation, the “common rule” format

has been used in several other grant-related contexts.

On February 18, 1986, as part of the government’s effort to combat

fraud, waste, and abuse, the President signed Executive Order No.

12549, which directed the establishment of a system for debarment

and suspension in the assistance context. OMB implemented the

executive order by publishing a common rule, this one entitled

“Govemmentwide Debarment and Suspension (Nonprocurement),”

adopted by over 25 grantor agencies and patterned generally on

comparable provisions for procurement contracts in the Federal

Acquisition Regulation. 53 Fed. Reg. 19160 (May 26, 1988). A person

(including business entities and units of government) who is debarred

is excluded from federal assistance and benefits, financial and

nonfinancial, under federal programs and activities for a period of up

to three years, possibly longer. Common Rule $~.100(a)

(purpose), —.105(n) (definition of person), _.320 (period of

debarment), 53 Fed. Reg. at 19204-05, 19208. Causes of debarment

are listed in $____ 305,53 Fed. Reg. at 19207. They include certain

criminal convictions, antitrust violations, a history of unsatisfactory

performance, and failure to pay a single substantial debtor a number

of outstanding debts owed to the federal government.

Pnge 10-28 GAO/OGC-92-13 Approp*tions Law-VoL II
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3. Liability for Acts of It is often said that the federal government is not liable for the

Grantees unauthorized acts of its agents, “agents” in this context referring to

the government’s own officers and employees. If this is true with

respect to those who clearly are agents of the government, it logically

must apply with even greater force with respect to those who are not

its agents. Grantees, for purposes of imposing legal liability on the

United States, are not “agents” of the government. While the

demarcation is not perfect, we divide our discussion into two broad

areas, contractual liability and tortious conduct.

a. Contractual Liability to In order for the United States to be contractually liable to some other

Third Parties party, there must be “privity of contract,” that is, a direct contractual

relationship, between the parties. When a grantee under a federal

grant enters into a contract with a third party (contractor), there is

privity between the United States and the grantee, and privity between

the grantee and the contractor, but no privity between the United

States and the contractor and hence, as a general proposition, no

liability.

Perhaps the leading case in this area is D.R. Smalley& Sons, Inc. v.

United States, 372 F.2d 505 (Ct. Cl. 1967), cert. denied, 389 U.S.

835. The plaintiff contractor had entered into a highway construction

contract with the state of Ohio. The project was ffided on a

cost-sharing basis, with 90 percent of total costs to come from

federal-aid highway funds. The contractor lost nearly $3 million on

the project, recovered part of its loss from the state of Ohio, and then

sued the United States to recover the unpaid balance. The contractor

argued that Ohio was really the agent of the United States for

purposes of the project because, among other things, the contract had

been drafted pursuant to federal regulations, the United States

approved the contract and all changes, and the United States was

funding 90 percent of the costs.

The court disagreed. Since there was no privity of contract between

the United States and the contractor, the government was not liable.

The involvement of the government in various aspects of the project

did not make the state the agent of the federal government for

purposes of creating contractual liability, express or implied. The

court stated:

“The National Government makes many hundreds of grants each year to the various

states, to municipalities, to schools and colleges and to other public organhations and

Pege 10-31 GAO/OGC-92-13 &pmptiiOlle Law-vol. ~
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Chapter 10

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applied the same limited review to contracts awarded under

cooperative agreements. 59 Comp. Gen. 758 (1980).

GAO’S review was designed primarily to ensure that the “basic

principles” of competitive bidding were applied. 55 Comp. Gen. 390,

393 (1975). Numerous decisions were rendered in this area. ~, 57

Comp. Gen. 85 (1977) (non-applicability of Buy American Act); 55

Comp. Gen. 1254 (1976) (state law applicable when indicated in

grant); 55 Comp. Gen. 413 (1975) (non-applicability of Federal

Procurement Regulations).

By 1985, many agencies had developed their own review procedures,

and the number of complaints filed with GAO steadily decreased.

Determining that its review of grantee contracting was no longer

needed, GAO discontinued its limited re~iew in January 1985.50 Fed.

Reg. 3978 (January 29, 1985); 64 Cornp. Gen. 243 (1985). The body

of decisions issued during the 1975–1985 period should nevertheless

remain useful as guidance in this area.

In a 1980 report, GAO reviewed the procurement procedures of

selected state and local government grantees and nonprofit

organizations in five states. The report concluded that the state and

local governments generally had and followed sound procurement

procedures (somewhat less so for the nonprofit), but also found a

number of weak spots, many of which are now addressed in OMB

directives. The report is Spending Grant Funds More Efficiently

Could Save MilIions, PSAO-80-58 (June 30, 1980).

With respect to state and local governments, standards for grantee

procurement are set forth in S—. 36 of the Common Rule, 53 Fed.

Reg. 8096. Grantor agencies are authorized, but not required, to

establish formal review procedures for grantee procurements. See @

59—. 36(b)(l 1), (12); Supplementary Information Statement, 53

Fed. Reg. 8034,8039 (March 11, 1988).

\

An agency which establishes a review procedure for grantee

procurement will be held to established precepts of administrative law

in applying those procedures. For example, in Niro Atomizer, Inc. v.

Environmental Protection Agency, 682 F. Supp. 1212 (S.D. Fla.

1988), the court instructed EPA to either follow its established

procedures or announce that it was changing them, giving the parties

notice and an opportunity to rebut.

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b. Tortious Conduct

and the grantee’s contractor had incurred expenses in reliance on the

approval. There clearly was no privity between the contractor and the

United States. However, GAO recognized a procedural device drawn

from the law of procurement contracts, and accepted a claim fded by

the grantee (with whom the United States did have privity) “for and

on behalf of” the contractor, in which the grantee acknowledged

liabili~ to the contractor only if and to the extent that the government

was liable to the grantee. In effect, the contractor was prosecuting the

claim in the name of the grantee. This device is potentially useful only

where the government’s liability to the grantee can be established.

See also 68 Comp. Gen. 494, 495–96 (1989); 9 Comp. Gen. 175

(1929).

A different type of contract, an employment contract, was the subject

of 66 Comp. Gen. 604 (1987), in which GAO concluded, applying

Smalley, that the United States was not liable to a former employee of

a grantee for unpaid salary, The grantor agency had funded all

allowable costs under the grant, and the grantee’s transgression was

not the liability of the United States,

As if to prove the adage that anything that can happen will happen, a

1983 case combined all of the elements noted above. The Agency for

International Development made a rural development planning grant

to Bolivia. Bolivia contracted with a private American company to

perform certain functions under the grant, and the company in turn

entered into employment contracts with various individuals. The

contract with the private company (but not the grant itself) was

terminated, the company terminated the employment contracts, and

the individuals then sought to recover benefits provided under

Bolivian law. Clearly, AID was not Iegally liable to the individual

claimants. However, some of the benefits to some of the claimants

could qualify as allowable costs under the grant and could be paid, if

approved by AID and the grantee, to the extent grant funds remained

available. B-209649, December 23, 1983.

A number of cases have invoIved attempts to impose liability on the

United States under the Federal Tort Claims Act or similar situations.

The Federal Tort Claims Act makes the United States liable, with

various exceptions, for the tortious conduct of its officers, employees,

or agents acting within the scope of their employment. As a general

proposition, a grantee is not an agent or agency of the government for

purposes of tort liability.

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agencies for many kinds of public works, including roads and highways. It requires

the projects to be completed in accordance with certain standards before the

proceeds of the grant will be paid. Otherwise the will of Congress would be thwarted

and taxpayers’ money would be wasted. . . . It would be farfetched indeed to impose

liability on the Government for the acts and omissions of the parties who contract to

build the projects, simply because it requires the work to meet certain standards and

upon approval thereof reimburses the public agency for a part of the costs.”

Id. at 507. Some later cases applying the Smalley concept are

Somerville Technical Services v. United States, 640 F.2d 1276 (Ct. Cl.

1981); Housing Corporation of America v. United States, 468 F.2d

922 (Ct. Cl. 1972); Cofan Associates, Inc. v. United States, 4 Cl. Ct.

85 (1983); 68 Comp. Gen. 494 (1989).

The Cofan case presented an interesting variation in that the claimant

was a disappointed bidder rather than a contractor, trying to recover

under the theory, well-established in the law of procurement

contracts, that there is an implied promise on the part of the

government to fairly consider all bids. This did not help the plaintiff,

however, since again there was no privity with the government.

“[I]t is now f- established that a person who enters into a contract with a

[grantee] to perform services on a project funded in part by loans or grants-in-aid

from the United States may not thereby be deemed to have entered into a contract

with the United States. Nor is the result any different because the United States has

imposed guidelines or restrictions on the use of the funds, including procurement

procedures.” 4 CL Ct. at 86.

Another variation occurred in 47 Comp. Gen. 756 (1968). A

contractor had succeeded in recovering increased costs from a state

grantee. Under Smalley, it was clear that the government could not be

held legally liable for a proportionate share of the recovery. However,

it was apparent that the increased costs were due to the fact that

erroneous soil profile information furnished by the state had

contributed to an unrealistically low bid by the contractor. Under

these circumstances, GAO advised that the grantor agency and the

state could enter into a voluntary modification of the grant agreement

to recognize the damage recovery as a project cost. See also

B-16731O, July 31, 1969.

In limited circumstances, there is a device that may be available to a

contractor to have its claim considered by the federal government,

illustrated by B-181332, December 28, 1976. In that case, an agency

had erroneously refused to fund a grant after it had been approved

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exception to Federal Tort Claims Act liability. MaMer v. United

States, 306 F.2d 713 (3d Cir. 1962), cert. denied, 371 U.S. 923,

followed in Daniel v. United States, 426 F.2d 281 (5th Cir. 1970), and

Rayfordv. United States, 410 F. Supp. 1051 (M.D. Term. 1976).

In areas not covered by the Federal Tort Claims Act, such as the

so-called constitutional tort, the potential for individual liability

cannot be disregarded. For example, an official of the Indian Health

Service, acting jointly with a state official, told a nonprofit

intermediary that further funding would be conditioned on the

dismissal of an employee whom they thought was performing

inadequately. The intermediary fired the employee, who then sued the

state official and the federal official in their individual capacities. The

suit against the federal defendant was based directly on the Fifth

Amendment, for deprivation of a property interest (the plaintiff’s job)

without due process. The court first found that there had been a due

process violation, and that the defendants were not entitled to

qualified immunity because their conduct exceeded the scope of their

authority. Merritt v. Mackey,.827 F.2d 1368 (9th Cir. 1987). The

court noted that there was no basis for imposing liability on the

United States. Id. at 1373-74. In the second published appellate

decision in the~ase, the court affirmed a monetary damage award and

an award of attorney’s fees against the individual ofticials. The federal

official was personally liable for the fee award under 42 U.S.C. ?J 1988

because he had acted in concert with a state official. Merrittv.

Mackey, 932 F.2d 1317 (9th Cir. 1991).

Finally, a case deserving brief mention, although not involving the

monetay liability of the United States, is Dixson v. United States, 465

US. 482 (1984), in which the Supreme Court held that two offkers of

a private, nonprofit corporation, who were assigned to administer two

federal community development block grants awarded by the

Department of Housing and Urban Development to the city of Peoria,

were “public officials” who could be prosecuted under the federal

bribery statute.

4. Types of Grants: A categorical grant is a grant to be used only for a specific program or

Categorical vs. Block for narrowly defined activities. A categorical grant maybe allocated

on the basis of a distribution formula prescribed by statute or

regulation (“formula grant”), or it may be made for a specific project

(“project grant”). A block grant is a grant given to agovernrnental

‘% “

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An important Supreme Court case is United States v. Orleans, 425

U.S. 807 (1976), holding that a community action agency funded

under the Economic Opportunity Act is not a “federal agency” for

purposes of Federal Tort Claims Act. The case arose from a motor

vehicle accident involving plaintiff Orleans and an individual acting on

behalf of a grantee. The Court fust noted that the Federal Tort Claims

Act “was never intended, and has not been construed by this Court, to

reach employees or agents of all federally funded programs that

confer benefits on people.” Id. at 813. The Court then stated, and

answered, the controlling tea:

“[T]he question here is not whether the [grantee] receives federal money and must

comply with federal standards and regulations, but whether its day-to-day operations

are supervised by the Federal Government.

,.. .

.

~DŠˆ . . The Federal Government in no sense controls ‘the detailed physical

performance’ of all the programs and projects it finances by gifts, grants, contracts,

or loans.” Id. — at 815–16.

Thus, the general rule is that the United States is not liable for torts

committed by its grantees. Neither the fact of federal funding nor the

degree of federal involvement encountered in the typical grant

(approwd, oversight, inspection, etc.) is suftlcient to make the grantee

an agent of the United States for purposes of tort liability. Liability

could result, however, if the federal involvement reached the level of

detailed supervision of day-to-day operations noted in Orleans. An

example is Martarano v. United States, 231 F. Supp. 805 (D. Nev.

1964) (state employee under cooperative agreement working under

direct control and supervision of federal agency).

The same rules apply for purposes of determining the liability of the

United States for a taking of private property under the Fifth

Amendment. ~, Hendlerv. United States, 11 Cl. Ct. 91, 98–99

(1986). For actions which may have taking implications, agencies

should also be familiar with the policies and requirements of

Executive Order No. 12630, March 15, 1988.

In another group of cases, attempts have been made to fmd the United

States liable under the Federal Tort Claims Act for the allegedly

negligent performance of its oversight role under a grant. The courts

have found these claims covered by the “discretionary function”

Page 10-34 GAO/OGC-92-13 ApprOptitiOlla Law-vol. ~
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Stat. 893, 42 U.S.C. Ch. 94, Subch. 11).17

Block grants do reduce federal involvement in that they transfer much

of the decision-making to the grantee and reduce the number of

separate grants that must be administered by the federal government.

However, it is a misconception to think that block grants are “free

money” in the sense of being totally free from federal “strings.”

Restrictions on the use of block grant funds may derive from the

organic legislation itself. For example, several of the OBRA programs

include such items as limitations on allowable administrative

expenses, prohibitions on the use of funds to purchase land or

construct buildings, “maintenance of effort” provisions, and

anti-discrimination provisions. Other OBRA provisions of general

applicability (Pub. L. No. 97-35, $$ 1741–1745, 95 Stat. 762–64)

impose reporting and auditing requirements, and require states to

conduct public hearings as a prerequisite to receiving funds in any

fiscal year.

Applicable restrictions are not limited to those contained in the

program statute itself. Other federal statutes applicable to the use of

grant funds must also be followed. See, e.g., Ely v. Velde, 451 F.2d

1130 (4th Cir. 1971), holding that the N~onal Historic Presemation

Act and the National Environmental Policy Act applied to a block

grant made by the Law Enforcement Assistance Administration to

Virginia under the Safe Streets Act. A later and related decision in the

same case is 497 F.2d 252 (4th Cir. 1974). See also Maryland

Department of Human Resources v. Department of Health and Human

Services, 854 F.2d 40 (4th Cir. 1988) (requirement for apportionment

by Office of Management and Budget applicable to funds under Social

Services Block Grant); 6 Op. Off. Legal Counsel 605 (1982) (Uniform

Relocation Assistance Act applicable to Community Development

block grant); 6 Op. Off. Legal Counsel 83 (1982) (various

17GA0 has issued a number of studies and reports on the OBRA block grants. Some of them are

Early Observations on Block Grant Implementation, GAO/GGD-82-79 (August 24, 1982);

Lessons Lamed From Past Block Grants: Implications for Congressional Oversight.,

GAO/TPE-82-8 (September 23, 1982); A Summary and Comparison of the Legislative Provisions

of the Block Grants Created by the 1981 Omnibus Budget Reconciliation Act, GAO/lPE-83-2

(December 30, 1982); Block Grants: Overview of Experiences to Date and Emerging Issues,

GAO/HRD-85-46 (April 3, 1985); and Community Development: Oversight of Block Grant

Needs Improvement, GAO/RCED-f31-23 (January 30, 1991). GAO has also pubfished a

comprehensive catalog of formula grants, intended for use as a resource document. It is: Grant

Formulas: A Catalog of Federat Aid to States and Localities, GAO/HRD-87-28 (March 1987).

,... Iii!

Page 10-37 GAO/OGC-92-13 Appropriations Law-Vol. 11
Chapter 10

Federal Assistance: Granto and Cooperative Agreemen@

.

unit, usually a state, to be used for a variety of activities within a broad

functional area.’” Block grants are usually formula grants. Under a

block grant, the state is responsible for further distribution of the

money. States naturally prefer block grants because they increase the

states’ spending flexibility and at least in theory reduce federal

control.

During the 1960s and 1970s, although some block grant programs

were in existence, the emphasis was largely on categorical grants. The

Omnibus Budget Reconciliation Act of 1981 (OBRA), Public Law

97-35, attempted to put a halt to this trend. The statute merged and

consolidated several dozen categorical grant programs into block

grants. The foilowing programs stem from, or were significantly

revised by, the 1981 OBRA (the OBRA title and page citation and U.S.

Code location are indicated parenthetically for each program):

Cornmuni~ Development Block Grant (Title III, 95 Stat. 384,42 U.S.C.

Ch. 69).

Elementary and Secondary Education Block Grant (Title V, 95 Stat.

463. The law was overhauled in 1988; the successor version is found

at 20 U.S.C. Ch. 47).

Community Services Block Grant (Title VI, 95 Stat.511, 42 U.S.C. Ch.

106).

Preventive Health and Health SeM”ces Block Grant (Title IX, 95 Stat.

535,42 U.S.C. Ch. 6A, Subch. XVII, Part A).

Alcohol and Drug Abuse and Mental Health Services Block Grant

(Title IX, 95 Stat. 543,42 U.S.C. Ch. 6A, Subch. XVII, Part B).

Maternal and Child Health Services Block Grant (Title XXI, 95 Stat.

818,42 U.S.C. Ch. 7, Subch. V).

Social Services Block Grant (Title XXIII, 95 Stat. 867,42 U.S.C. Ch. 7,

Subch. XX).

Low-Income Home Energy Assistance Block Grant (Title XXVI, 95

~6GA0, A G]osaary of Terms Uaed in the Federal Budget Prcwesa, PAO-81-27, at 61-62

(March 1981).

Page 10.36 GAO/OGC-92-19 Appropriations Lnw-vol. II

.::~ : , . . . g.

. .
Chapter 10

Federal Assistance: Grants and Cooperative Agreement

As a general proposition, a state or local government which receives

at least $100,000 in federal financial assistancel” in any fiscal year

must have an audit, of the type prescribed in the statute, performed

for that fwcd year by an independent auditor. The requirement differs

if federal financial assistance is less than $100,000.31 U.S.C.

$$ 7502(a)(l) and (c). Audits are to be conducted annually. However,

biennial audits are permissible if the grantee has, prior to January 1,

1987, so provided in its constitution or statutes. Id. $ 7502(b). The

audit is to be conducted “in accordance with gene~ally accepted

government auditing standards.” Id. $ 7502(c), These standards are

found in GAO’S publication Gove~ent Auditing Standards (1988),

informally known as GAO’S “yellow book,” The Oftlce of Management

and Budget, in consultation with GAO, is required to prescribe

“policies, procedures, and guidelines” to implement the Single Audit

Act. 31 U.S.C. $ 7505(a). These are found in OMB Circular No. A-128,

Audits of State and LocaJ Governments (1985).

The audit may be a single comprehensive audit covering the entire

state or local government or a series of audits of individual agencies,

and may be limited to those agencies which actwdly received or

administered federal financial assistance. 31 U.S.C. $$ 7502(d)(l),

(d)(6).

The audit required by the Single Audit Act is essentially a financial and

compliance audit and does not include “economy and efficiency

audits, program results audits, or program evaluations.” Id.

$ 7502(c) .20 The statute prescribes the m~or componenk–of the

audit:

● Determinations that the grantee’s financial statements fairly present

its financial position and the results of its financial operations, and

that it has complied with laws and regulations that may materially

affect its financial statements.

c Evaluation of the recipient’s internal control systems.

l-ewe~ve frmed our &C~ion ~ t,e~ Of grtUI@, “fedeI’d f~cid W*ce” ‘or

purposes of the Single Audit Act includes “grants, contracts, loans, loan guaranteea, property,

cooperative agreements, interest subsidies, insurance, or direct appropriations,” but excludes

direct federal cash assistance to individuals. 31 U.S.C. $ 7501(4).

‘“The different ~s of government audits are described in GAO’S GoveITM_Ient Au~w

Standards, Chapter 2.

Page 10-39 GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 10

Federal Assis@nce: Grant-sand Cooperative Agreements

anti-discrimination statutes applicable to Elementary and Secondary

Education and Social Services block grants).

Thus, the block grant mechanism does not totally remove federal

involvement nor does it permit the circumvention of federal laws

applicable to the use of grant funds. In this latter respect, a block

grant is legally no different from a categorical grant.

The common rule for uniform administrative requirements does not

apply to the OBRA block grants. Common Rule $__.4(a), 53 Fed.

Reg. 8089.

5. The Single Audit Act We noted in our Introduction to this chapter that federal grants to

state and local governments exceed $100 billion a year. Wkh

expenditures of this magnitude, it is essential that there be some way

to assure accountability on the part of the grantees. The traditional

means of assuring accountability has been the audit.

Prior to 1984, there were no statutory uniform audit requirements for

state and local government grantees. Audits were performed on a

grant or program basis and requirements varied with the program

legislation. Under this system, gaps in audit coverage resulted

because some entities were audited infrequently or not at all. Aho,

overlapping requirements produced duplication and inefilciency with

multiple audit teams visiting the same entity and reviewing the same

financial records. Congress addressed the problem by enacting the

Single Audit Act of 1984, Pub. L. No. 98-502, codified at 31 U.S.C.

$$ 7501–7507.18 An informative discussion of the need for the

legislation, with references to several reports by GAO and the Joint

Financial Management Improvement Program, may be found in the

report of the House Committee on Government Operations, H.R. Rep.

No. 708, 98th Cong., 2d Sess., reprinted in 1984 U.S. Code Cong. &

Admin. News 3955.

18For ~ ~ar~ ~e~ew of~e law’s implementation, we SW eAudit Act: Sir@eAudit Quality Has

Improved but Some Implementation Problems Remain, GAO/AFMD-89-72 (July 1989).

Page 10-38 GAO/OGC-92-13 Appropriations hw-VO1. II
Chapter 10

Federsl Assistance: Grants and Cooperative Agreements

A noted above, the Single Audit Act applies only to state and local

governments. The need for reliable and comprehensive auditing,

however, applies equally to all grantees. In recognition of this, the

Office of Management and Budget issued OMB Circular No. A-133,

Audits of Institutions of Higher Education and Other Nonprofit

Institutions (1990), which establishes auditing requirements for

nonprofits similar to those of the Single Audit Act. Regardless of the

identity of the grantee, whether a governmental organization or a

nonprofit institution, sound auditing practices of the type envisioned

by the Single Audit Act and the OMB Circulars are indispensable to

assuring the efficient use of audit resources and to improving the

financial management of federal assistance programs. See, ~, GAO

report Promoting Democracy: Nationai Endowment for Democracy’s

Management of Grants Needs Improvement, GAO/NSIAO-91-162

(March 1991).

D. Funds in Hands of Expenditures by grantees for grant purposes are not subject to all of

Grantee: Status and the same restrictions and limitations imposed on direct expenditures

by the federal government. For this reason, grant funds in the hands

Application of of a grantee have been said to largely lose their character and identity

Appropriation as federal funds. The Comptroller General has stated the principle as

follows:

Restrictions

“It consistently has been held with reference to Federal grant funds that, when such

funds are granted to and accepted by the grantee, the expenditure of such funds by

the grantee for the purposes and objects for which made [is] not subject to the

various restrictions and limitations imposed by Federal statute or our decisions with

respect to the expenditure, by Federal departments and establishments, of

appropriated moneys in the absence of a condition of the grant specifkxdly providing

to the contrary.” 43 Comp, Gen. 697,699 (1964).

Thus, except as otherwise provided in the program statute,

regulations, or the grant agreement, the expenditure of grant funds by

a state government grantee is subject to the applicable laws of that

state rather than federal laws applicable to direct expenditures by

federal agencies. 16 Comp. Gen. 948 (1937). The rule applies “with

equal if not greater force” when the grantee is another sovereign

nation. B-80351, September 30, 1948.

This does not mean that an agency can circumvent a statutory

restriction by making a grant to do something it could not do directly.

What it does mean is that when an agency makes a grant for a valid

Page 10-41 GAO/OGC-92-13 Appropriations Law-Vol. II
Clupter 10

Federal A8@istance: Grante and Cooperative Agreement

c Compliance With laws and regulations that may have a material effect

upon applicable mqjor federal assistance programs. This includes the

testing of a representative number of transactions from each major

program. (“Mqjor” programs are determined under criteria specified

in 31 U.S.C. $ 7501( 12).)

31 U.S.C. $ 7502(d)(2)–(d)(4); H.R. Rep. No. 708 at 10, reprinted in

1984 U.S. Code Cong. & Admin. News 3964. The state or local

government must submit to the appropriate federal officials a pkm for

corrective action to address any material noncompliance with

applicable laws and regulations or material weakness in internal

controls uncovered by the audit. 31 U.S.C. $ 7502(g).

The “single audit” replaces financial or financial and compliance

audits which state or local governments are required to conduct under

various program statutes. 31 U.S.C. 5 7503(a). Thus, for example,

absent a statutory exception to the Single Audit Act, the

Environmental Protection Agency is not authorized to require a state

to provide a separate financial or financial and compliance audit of its

water pollution revolving fund in addition to the “single audit.”

B-241096, January 30, 1991 (internal memorandum). However, the

Act does not limit the authority of any federal agency to conduct

additional audits or evaluations authorized by federal law or

regulation, including economy/efficiency and program audits. 31

U.S.C. $$ 7503(c), (e).

The cost of a single audit is to be shared by the state or local

government and the federal government, generally in the same

proportion that federal financial assistance bears to the recipient’s

total expenditures for the fiscal year(s) covered by the audit. 31 U.S.C.

$ 7505(b); OMB Circular No. A-128, $16. The federal government’s

share, determined under this formula, becomes an allowable cost to

the relevant programs. Federal agencies which conduct additional

audits or evaluations as authorized by 31 U.S.C. $ 7503(c) are

responsible for their funding. Id. — $ 7503(e).

The law aIso directs the Comptroller General to monitor provisions in

bills and resolutions reported by committees of the Senate and House

of Representatives that require financial or financial and compliance

audits, and to report to appropriate congressional committees any

such provisions which are inconsistent with the Single Audit Act. 31

U.S.C. $7506.

Page 10-40 GAOKKC-92-13 Appropriations Law-Vol. II
Cbapter 10

Federal Assistance: Grants and Cooperative Agreements

was funded by a federal grantee. Similarly, a state tax on the income

of a person paid from federal grant funds involves no question of

federal tax immunity. 14 Comp. Gen. 869 (1935).

The following is a sampling of other restrictions which have been

found inapplicable to grantee expenditures:

● Adequacy of Appropriations Act (41 U.S.C. $ 11) and prohibition on

entering into contracts for construction or repair of public buildings,

or other public improvements, in excess of amount specifkally

appropriated for that purpose (41 U.S.C. $ 12). B-173589,

September 30, 1971.

● Prohibition in 31 U.S.C. $1343 on purchasing aircraft without speciilc

statuto~ authority. 43 Comp. Gen. 697 (1964) (permissible for

grantee under National Science Foundation research grant). See also

B-196690, March 14, 1980 (purchase of motor vehicles). However,

an agency may not acquire excess aircraft or passenger vehicles by

transfer for use by its grantees. 55 Comp. Gen. 348 (1975).

● Prohibition in 31 U.S.C. $1345 on payment of nonfederal persons’

travel and lodging expenses to attend a meeting. 55 Comp. Gen. 750

(1976).

c Requirement for specitic authority in order to establish a revolving

fund. (Federal agency would need specific authority in view of 31

U.S.C. $ 3302(b)). 44 Comp. Gen. 87 (1964).

“ A grantee’s entertainment expenses maybe allowable if incurred in

furtherance of grant purposes and if not otherwise prohibited by

statute, regulation, or the grant agreement. 64 Comp. Gen. 582, 587

(1985); B-196690, March 14, 1980; B-187150, October 14,1976.

Having said this, however, it should be the rare occasion when

entertainment expenses are in fact allowable, assuming agencies

follow the Office of Management and Budget’s instructions to treat

them as unallowable. (See OMB Circulars A-21, A-87, A-122.)

Where assistance funds are provided to the District of Columbia under

a program of assistance to the states which defines “state” as

including the District of Columbia, statutory restrictions expressly

applicable to the District of Columbia remain applicable with respect

to the assistance funds evert though they would not necessarily apply

to the assistance funds in the hands of the other states. 34 Comp.

Gen. 593 (1955); 17 Comp. Gen. 424 (1937); A-90515, December 23,

1937.

Page 10-43 GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 10

Federal Assistance: Grants snd Cooperative Agreements

grant purpose, the grantee has a measure of discretion in choosing

the means to implement the grant, subject to applicable statutes,

regulations, and the terms of the grant agreement. In exercising that

discretion, restrictions that would apply to direct expenditures by the

grantor agency do not necessarily apply to the grantee. Of course, the

expenditure must be for an otherwise valid grant purpose and must

not be prohibited by the terms of the grant agreement.

One group of casesi’ involves restrictions on employee compensation

and related payments. Examples are:

“ Provision in Labor-Federal Security Appropriation Act, 1948,

prohibiting use of federal funds to pay salaries of persons engaging in

a strike against the United States Government, did not apply to funds

granted to states to assist in enforcing Fair Labor Standards Act and

Walsh-Healey Public Contracts Act. The funds were not “salaries” as

such; they were grant funds to reimburse states for services of state

employees, and therefore were state rather than federal funds. 28

Comp. Gen. 54 (1948). See also 39 Comp. Gen. 873 (1960).

● Requirement for specific authorizing legislation to use public funds to

pay employer contributions for federal employees’ health and life

insurance benefits does not apply to use of federal grant funds to

contribute to state group health and life insurance programs for state

employees. 36 Comp. Gen. 221 (1956).

Q Restrictions on retired pay not applicable to retired military officer

working on grant-funded state project. 14 Comp. Gen. 916 (1935),

motiled on other grounds by 36 Comp. Gen. 84 (1956).

● Federal restrictions on dual compensation for federal employees are

inapplicable to grantee employees. B-153417, February 17, 1964.

The rule has been applied in a variety of other contexts as well. One

example is the area of state and local taxes. Thus, federal immunity

from payment of certain sales taxes does not apply to a state grantee

since the grantee is not a federal agent. The grant funds lose their

federal character and become state funds. Therefore, the state grantee

may pay a state sales tax on purchases made with federal grant funds

if the tax applies equally to purchases made from all nonfederal funds.

37 Comp. Gen. 85 (1957). See also B-177215, November 30, 1972,

applying the same reasoning for purchases made by a contractor who

zl~me of the deCiSiom cited my irrvolve statutary restrictions on federd expenditures wMch

have been changed or repealed since the decisions were issued. The cases are cited solely to

illustrate the application of the grant rule and thus remain valid to that extent.

w

Page 10-42 GAO/OGC-92-13 Appropriations UW-VO1. II
Chapter lO

Federal Assistance: Granta and Coopemtive Agreements

Statements in some of the cases to the effect that grant funds upon

being paid over to the grantee are no longer federal funds should not

be taken out of context. The fact that grant funds in the hands of a

grantee are no longer viewed as federal fimds for certain purposes

does not mean that they lose their character as federal funds for all

purposes. It has been held that the government retains a “propew—

interest” in grant funds until they are actually spent by the grantee for

authorized purposes. This proper@ interest may take the form of an

“equitable lien,” stemming from the government’s right to ensure that

the funds are used only for authorized purposes, or a “reversionary

interest” (funds that can no longer be used for grant purposes revert

to the government). By virtue of this property interest, the funds-and

property purchased with those funds to the extent unrestricted title

has not vested in the grantee-are not subject to judicial process

without the government’s consent. ~, Henry v. F’irst National Bank

of Clarksdale, 595 F.2d 291, 308–09 (5th Cir. 1979), cert. denied,

444 us. 1074.

The concept is illustrated in two cases from the Court of Appeals for

the Seventh Circuit. In Palmiter v. Action, Inc., 733 F.2d 1244 (7th

Cir. 1984), the court rejected the argument that grant funds lose their

federal character when placed in the grantee’s bank account, and held

that federal grant funds in the hands of a grantee are not subject to

garnishment to satisfy a debt of the grantee. The holding would

presumably not apply where the grantee had actually spent its own

money and the federal funds were paid over as reimbursement. Q. at

1249. More recently, the court considered a similar issue in the

context of a bankruptcy petition filed by a grantee under Chapter 7 of

the Bankruptcy Code. The issue was whether grant funds in the hands

of the grantee, as well as personal property purchased with grant

money, were assets of the bankrupt and therefore subject to the

control of the trustee in bankruptcy. Directing the trustee to abandon

the assets, the court held that they remained the property of the

federal government. In the course of reaching this result, the court

noted that unpaid creditors of the bankrupt could, to the extent their

claims were within the scope of the grant, be paid by the grantor

agency out of the recovered funds. In re Joliet-Wti County

Community Action Agency,.847 F.2d 430 (7th Cir. 1988).

A case discussing both Palmiter and Joliet-Wti, and reaching a similar

result, is In re Southwest Citizens’ Organization for Poverty

Elimination, 91 Bankr. 278 (Bankr. D.N.J. 1988). A grantee, which

Page 10-45 GAO/OGC-92-13 Appropriations Law-Vol. 11
Chapter 10

Federaf Asaiatance: Grants and Cooperative Agreements

When applying the general proposition that grantee expenditures are

not subject to the same restrictions as direct federal expenditures, it is

important to keep in mind that grantees are obligated upon

acceptance of grant funds to spend them for the purposes and

objectives of the grant, subject to any statutory or special conditions

imposed on the use of assistance funds. See, ~, 42 Comp. Gen. 682

(1963); 2 Comp. Gen. 684 (1923). These conditions may include

implied requirements, such as the implied requirement of the “basic

principles” of open and competitive bidding in the case of grantee

contracts. 55 Comp. Gen. 390 (1975), They also include statutorily

authorized requirements, as in the case of the Office of Personnel

Management’s authority to establish merit standards for grantees

under 42 U.S.C. $ 4728(b) (Intergovernmental Personnel Act of 1970).

Statutou restrictions on lobbying with public funds may also apply to

grantee expenditures.

In addition, several federal statutes prohibit various types of

discrimination.” Title VI of the Civil Rights Act of 1964 (42 U.S.C.

$ 2000d) prohibits discrimination on the basis of race, color, or

national origin under any program or activity receiving federal

financial assistance. The Rehabilitation Act of 1973, as amended in

1978 (29 U.S.C. $ 794), similarly prohibits discrimination against

handicapped individuals. The Age Discrimination Act of 1975 extends

the prohibition to discrimination on the basis of age (42 US.C.

5 6102).

Title IX of the Education Amendments of 1972 (20 U.S.C. $ 1681)

prohibits sex discrimination under certain education programs, and

Title VII of the Civil Rights Act of 1964 (42 U.S.C. $ 2000e-2) would

prohibit employment discrimination by grantees on the basis of sex as

well as race, color, religion, or national origin. In addition, several

block grant statutes contain their own anti-discrimination provisions

and include sex discrimination. As of the date of this publication,

however, the editors have found no general statutory prohibition

against sex discrimin ation in the awarding of federal assistance funds.

(The extent to which the equal protection clause of the Constitution

might come into play is a question left to the courts.]

~~For ~ de@~ Justice ~p~ment opinion on the applicability of the Inaor ~ti-diSCrirrdMtiOn

statutes to federal assistance funds, with particular emphasis on block granta, see 6 Op. Off.

Legal Counsel 83 (1982).

Page 10-44 GAO/OGC-92-13 Appropriationa Law-VO1. II
Chapter 10

Federal Assistance: Grants and Caopemtive Agreements

In each of these cases, the court rejected the argument that the statute

did not apply because the funds or property were no longer federal

funds or property. It makes no difference whether the funds are paid

to the grantee in advance or by reimbursement @fontoya, 716 F.2d at

1344), or that the funds may have been comrningled with nonfederal

funds (Hayle, 815 F.2d at 882). The holdings are based on the

continuing responsibility of the federal government to oversee the use

of the fun~s. ~, Hayle~ 815 F.2d at 88>; Hamilton, 726 F.2d at 321.

The result would presumably be different in the case of grant funds

paid over outright with no continuing federal oversight or supervision.

~, Smith, 596 F,2d at 664.

E. Grant Funding

1. Advances of The statutory prohibition on the advance payment of public funds, 31

Grant/Assistance Funds U.S.C. $3324, does not apply to grants. Since assistance awards are

made to assist authorized recipients and are not primarily for the

purpose of obtaining goods or services for the government, the policy

behind the advance payment prohibition has much less force in the

case of assistance awards than in the case of procurement contracts.

Accordingly, it has been held that 31 U.S.C. $3324 does not preclude

advance funding in authorized grant relationships. Unless restricted

by the program legislation or the applicable appropriation, the

authority to make grants is sufficient to satis~ the requirements of 31

U.S.C. $3324.60 Comp. Gen. 208 (1981); 59 Comp. Gen. 424 (1980);

41 Comp. Gen. 394 (1961). As stated in 60 Comp. Gen. at 209, “[t]he

policy of payment upon receipt of goods or services is simply

inconsistent with assistance relationships where the Government does

not receive anything in the usual sense. ”

This does not mean that there can never bean advance payment

problem in a grant case. Two cases involving violations-56 Comp.

Gen. 567 (1977) and B-159715, August 18, 1972–are discussed in

Chapter 5. Also, since the authority to advance funds must, at least in

a general sense, be founded on the program legislation, advance

payments would probably not be authorized under an assistance

program that provided for payment by reimbursement.

GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 10

Federal Aaaiatance: Granta and Cooperative Agreements

had purchased a number of motor vehicles with Head Start grant

funds, fded a Chapter 11 bankruptcy petition. The Department of

Health and Human Services sought turnover of the property,

contending that the bankrupt’s title was subject to the government’s

right to require transfer to another grantee under the program

legislation and regulations. The trustee argued that the motor vehicles

were property of the bankruptcy estate, and that the trustee’s interest

superseded any interest of the government. After a detailed review of

precedent, the court directed turnover of the vehicles, concluding that

the government’s rights amounted to a reversionary interest.

Another theory occasionally encountered but which appears to have

received little in-depth discussion is the trust theory-that a grantee

holds grant funds, and property purchased with those funds, in the

capacity of a trustee. In Joliet-Will, for example, the court found that

the grantee was essentially “a trustee, custodian, or other

intermediary, who . . . is merely an agent for the disbursal of funds

belonging to another,” and that the grantee’s “ownership” was

nominal, like that of a trustee. 847 F.2d at 432. The trust concept

finds support in an early Supreme Court decision, Stearns v.

Minnesota, 179 U.S. 223 (1900), a land grant case in which the Court

discussed the grant in trust terms. Id. at 243,249. Some agencies

have incorporated the trust concepfin their program regulations.

Examples are cited in B-239907, July 10, 1991 (Economic

Development Administration), and United States v. Rowen, 594 F.2d

98, 100 (5th Cir. 1979) (former Department of Health, Education,

and Welfare). See also 64 Comp. Gen. 103, 106 (1984).

A final area in which grant funds in the hands of a grantee continue to

be treated as federal funds is the application of federal criminal

statutes dealing with theft of money or property belonging to the

United States. There are numerous cases in which the courts have

applied various provisions of the Criminal Code, such as 18 US.C.

S 641, to the theft or embezzlement of grant funds or grant property

in the hands of grantees. Examples involving a variety of grant

programs are Hayle v. United States, 815 F.2d 879 (2d Cir. 1987);

United States v. Harris, 729 F.2d 441 (7th Cir. 1984); United States

v. Hamilton, 726 F.2d 317 (7th Cir. 1984); United States v. Montoya,

716 F.2d 1340 (lOth Cir. 1983); United States v. Smith, 596 F.2d

662 (5th Cir. 1979); United Statesv. Rowen, 594 F.2d 98 (5th Cir.

1979).

Page 10-46

. ,?g

GAO/OGC-92-13 Appropriations Law-Vol. 11
Chapter 10

Federal Aesietance: Granta and Cooperative Agreements

receipts, 31 U.S.C, $$ 3335(b) and (c). The legislative history stresses

that this penalty authority is to be “restricted to cases of egregious or

repeated noncompliance, and [not to] be used in a routine manner to

finance interest costs incurred by the Federal Government.” H.R. Rep.

No. 696, IOlst Cong., 2d Sess. 7 (1990).

If an agency could pay its noncompliance penalty to the Treasury

simply by reducing awards under its assistance programs, the penal~

would effectively “cost” the agency nothing, the program

beneficiaries wouid suffer, Wd little would be accomplished. The

legislation addresses this by requiring that penalties be paid from

administrative rather than program appropriations, “to the maximum

extent practicable.” 31 U.S.C. $ 3335(d); H.R. Rep. No. 696 at 7.

Regulations applicable to all assistance recipients are found in

Treasury Department Circular No. 1075 (31 C.F,R. Part 205) and

pertinent Office of Management and Budget circulars. The essence of

the government’s policy is stated in 31 C.F.R. $! 205.4(a):

“Cash advances to a recipient organization shrd be limited to the minimum amounts

needed and shall be timed to be in accord only with the actuaI, immediate cash

requirements of the recipient organization in carrying out the purpose of the

approved program or project. The timing and amount of cash advances shall be as

close as is administratively feasible to the actual disbursements by the recipient

organization for direct program costs and the proportionate share of any allowable

indirect costs.”

Thus, it is within the discretion of the Social Security Administration

to determine that a period of 15 months between drawdown and

disbursement for state employee retirement contributions is

excessive, and to make an appropriate disallowance. B-244617,

December 24, 1991. The requirement to minimize the time elapsing

between transfer of funds to the recipient and disbursement by the

recipient is also stated in OMB Circulars A-102 (para. 7a) and A-1 10

(Attachment I, para. 1). It is also reflected in the Common Rule

55—. “ 20(b)(7) and —.21(b), 53 Fed. Reg. 8091.

Until the Cash Management Improvement Act is fully implemented,

current Treasury regulations provide that, if annual advances to a

grantee total less than $120,000, or there is no continuing

grantor-grantee relationship for at least one year, advances are made

by direct Treasury check scheduled to make funds available only

immediately prior to grantee disbursement. 31 C.F.R. $ 205.4(c).

Page 10-49 GAO/OGC-92-13 Appropriations Law -Vol. 11
Chapter 10

Federal Assistance: Grants and Cooperative Agreements

2. Cash Management One problem with the advance funding of assistance awards is that the

Concerns and recipient may draw down funds before they are actually needed. This

Requirements

is a matter of concern for several reasons. For one thing, advances

under an assistance program are intended to accomplish the program

purposes and not to profit the recipient other than in the manner and

to the extent specified in the program.

But there is artother reason. When money is drawn from the Treasury

before it is needed, or in excess of current needs, the government

loses the use of the money. The principle was expressed as follows in

B-146285, October 2, 1973:

“When Federal receipts are insufficient to meet expenditures, the difference is

obtained through borrowing; when receipts exceed expenditures, outstanding debt

can be reduced. Thus, advancing funds to organizations outside the Government

before they are needed either unnecessarily increases borrowings or decreases the

opportunity to reduce the debt level and thereby increases interest costs to the

Federal Government.”

Thus, premature drawdown not only profits the recipient, but does so

at the expense of the rest of the taxpayers. GAO has made the same

point in several reports, such as Improving Medicaid Cash

Management Will Reduce Federal Interest Costs, Him-81-94 (May 29,

1981), and Better Cash Management Cart Reduce the Cost of the

National Direct Student Loan Program, FGMst)-80-5 (November 27,

1979).23

Congress has recognized these concerns in several ways, one of whjch

was the October 1990 enactment of section 4 of the Cash

Management Improvement Act of 1990, Pub. L. No. 101-453, 104

Stat. 1058, 31 U.S.C. $3335. This legislation requires executive

agencies to provide for the “timely disbursement” of federal funds in

accordance with Treasury Department regulations.

If an agency’s failure to comply with Treasury disbursement

regulations results in increased cost to the General Fund of the

Treasury (for example, increased interest expenses resulting from

increased borrowing needs), the Secretary of the Treasury may collect

this amount from the offending agency for credit as miscellaneous

2:3This ~rinciple is not linlited to premature drawdown but applies eqUdlY to other tYPes of

premature or excess payments. ~, GAO report entitled Unnecessary Interest Costs Incurred

by the Government Because of Excess Progress Payments to Contractors (B-1 18662, March 22,

1965).

Page 10-48 GAO/OGC-92-13 Appropriations Law-Vol. II

,.*, . ,,.

.,. .“ *.
Chapter 10

Federal Assistance: Grants and Cooperative Agreements

August 30, 1973. See also Common Rule $__.21(i), 53 Fed. Reg.

8091. If the grantee is unable to document the actual amount of

interest earned on the grant advances, the grantor agency should use

the “Treasury tax and loan account” rate prescribed by 31 U.S.C.

$3717 for debts owed to the United States. 69 Comp. Gen. 660

(1990).

Except for states, discussed separately later, the rule applies whether

the grantee is a public or private agency. The rationale for the rule is

that unless expressly provided otherwise, funds are paid out to a

grantee to accomplish the grant purposes, not for the grantee to

invest the money and earn interest at the expense of the Treasury.

Thus, funds paid out to a grantee are not to be held, but are to be

applied promptly to the grant purposes. 1 Comp. Gen. 652 (1922).

In 40 Comp. Gen. 81 (1960), the Comptroller General held that

interest on foreign currencies advanced by the Department of

Agriculture under cooperative agreements, earned between the time

the funds were advanced and the time they were used, could not be

retained for program purposes but had to be returned to the Treasury

for deposit as miscellaneous receipts.

In 42 Comp. Gen. 289 (1962), the rule was applied with respect to

State Department grants to American-sponsored schools and libraries

overseas. The Comptroller General stated, “[t ]here can be no doubt

that only the Congress is legally empowered to give away the property

or money of the United States.” Id. at 293. The decision further

concluded that the enabling legi~ation did not provide sufficient

authority to use the grant funds to establish a permanent

interest-bearing endowment fund. In B-149441, February 17, 1987,

GAO found that since the National Endowment for the Humanities had

no authority in its program legislation to permit its grantees to

establish an endowment fund with grant moneys, it could not

authorize its grantees to accomplish the same purpose with matching

funds.

Citing both 42 Comp. Gen. 289 and B-149441, the Comptroller

General held in 70 Comp. Gen, 413 (1991) that legislative authority

would be required for a proposal whereby the United States

Information Agency would purchase discounted foreign debt from

commercial lenders and transfer the notes to grantees in the foreign

country, who would in turn exchange the notes for local currency or

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Federal Assistance: Granta and Cooperative Agreement

If annual advances aggregate $120,000 or more and the relationship

is expected to continue for at least one year, advances are made by

“letter of credit.” 31 C.F.R. $ 205.4(b). A letter of credit is an

instrument (Standard Form 1193A) executed by an authorized

certiij4ng offker of the grantor agency permitting a grantee to draw

funds needed for immediate disbursement. A letter of credit is

irrevocable and is the equivalent of cash “to the extent the recipient

organization has obligated funds in good faith thereunder in executing

the authorized Federal program in accordance with the grant,

contract, or other agreement.” 31 C.F.R. $205.5. The Treasury

Department’s letter of credit procedures are found in the Treasury

Financial ManuaJ, VOL I, Part 6, Chapters 2000 and 2500.

Disbursements under most letters of credit are made by electronic

fund transfer to a financial institution designated by the recipient

organization.

If a recipient is unwilling or unable to establish procedures to

minimize the gap between drawdown and disbursement, advance

funding may be terminated and payments made only on a

reimbursement basis. 31 C.F.R. $205.7.

In 

Health and Human Services, 854 

~f

F.2d 40 (4th Cir. 1988), the plaintiff

state argued that it should receive its entire annual Social Services

Block Grant allotment at once at the beginning of the fiscal year. The

court disagreed, upholding quarterly apportionment by the OffIce of

Management and Budget under 31 U.S.C. $1512.

3. Interest on Grant

Advances

a. In General The Comptroller General has consistently held that except as

otherwise provided bylaw, interest earned by a grantee on funds

advanced by the United States under an assistance agreement pending

their application to grant purposes, belongs to the United States

rather than to the grantee. All such interest is required to be

accounted for as funds of the United States, and must be deposited in

the Treasury as miscellaneous receipts under 31 U. SC. $ 3302(b). 71

Comp. Gem 387 (1992); 69 Comp. Gen. 660 (1990); 42 Comp. Gen.

289 (1962); 40 Comp. Gen. 81 (1960); B-203681, September 27,

1982; B-192459, July 1, 1980; B-149441, April 16, 1976; B-173240,

Page 10-60 GAO/OGC-92-13 Appropriations Law-Vol. II
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Federal Assistance: Granta and Oooperatlve Agreements

b. Grants to State

Governments

need. 64 Comp. Gen. 96 (1984). Both decisions follow’ed the

approach set forth in B-192459, summarized above.

In evaluating the disposition of interest income, an important

determinant is whether the interest was earned before or after the

grant funds were applied to authorized grant purposes. The keyword

here is “authorized.” For example, under the Community

Development Block Grant program, grantees may use the funds to

make loans for certain community projects. Grantees may retain

interest earned on those loans as a type of “program income.”

However, if a loan is later found to be ineligible under the program,

the funds were never used for an authorized grant purpose, and

interest earned by the grantee must be paid over to the United States

for deposit as miscellaneous receipts, 71 Comp. Gen. 387 (1992).

Congress can, of course, legislatively make exceptions to the rule, by

providing assistance in the form of an unconditional gift or by other

appropriate statutory provisions. See, ~, 44 Comp. Gen. 179

(1964) (provision in appropriation act exempting educational

institutions from liability for interest under certain Public Health

Service Act grants); B-175155, June 11, 1975 (interest rule not

applicable with respect to “grants” to Amtrak); B-202116-O. M.,

February 12, 1985 (Legal Services Corporation grantees).z’

Prior to 1968, the prohibition on retention of interest income applied

to states as well as to other grantees. 20 Comp. Gen. 610 (1941); 3

Comp. Gen. 956 (1924); 26 Comp. Dec. 505 (1919); 24 Comp. Dec.

403 (1918); A-46031, January 16, 1933. There was no reason to draw

a distinction. This, of course, was premised on the absence of any

statutory guidance.

The treatment of interest on grant advances to state governments is

now governed by the so-called Intergovernmental Cooperation Act of

1968 (IGCA), as amended, 31 tJS.C. Chapter 65. The law evolved in

two stages. The original IGCA created what was to be, for 22 years,

the major exception to the rule that interest on grant advances

belongs to the United States. The law first codified the requirement

for agencies to schedule the transfer of grant funds so as to minimize

Z4A ~onceptu~y related ~me is 71 cornp, Gen. 310 (1992), uphokhg a SW ‘Usiness

Administration regulation providing for a reasonable profit to grantees under the Smafl Business

Innovation Development Act.

P8ge 10-53 GAO/OGC-92-13 Appropriations Law -Vol. II
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Federal Assistance: Grants and Cooperative Agreements

local currency denominated bonds and use the income for program

activities. However, since USIA has statutory authority to accept

conditional gifts, it could accept a donation of foreign debt and use

the principal and income for authorized activities in accordance with

the conditions specified.

Once grant funds are applied by the grantee to the accomplishment of

the purpose of the grant, the rule no longer applies. Thus, in

B-230735, July 20, 1988, where use of grant funds to establish an

endowment trust was authorized bylaw, GAO concluded that the

grantee could use income from the endowment as nonfederal

matching funds on other grants, as long as such use was consistent

with the terms and conditions of the grant agreement.

In B-192459, July 1, 1980, a grantee transferred grant funds to a

trustee under a complex construction financing arrangement. The

trustee was independent rather than an agent of the grantee and the

grantee could not get the funds back upon demand. GAO determined

that the transfer to the trustee was in the nature of a disbursement for

grant purposes. Therefore, interest earned by the trustee after the

transfer could be treated as grant income and retained under the

terms of the grant agreement. However, interest on grant funds

placed in bank accounts and certificates of deposit by the grantee

prior to transfer had to be returned to the Treasury. The grantor

agency lacked the authority to permit the grantee to retain interest

earned on grant funds prior to their application to grant purposes.

In 64 Comp. Gen. 103 (1984), the Agency for International

Development advanced grant funds to the government of Egypt,

which in turn advanced them to certain local and provincial elements

of that government. Since the purpose of the grant was to assist Egypt

in its efforts to decentralize certain governmental functions by

developing experience at the local level in managing and financing

selected projects, GAO concluded that the advances of funds by the

government of Egypt to the local and provincial entities could

legitimately be viewed as disbursements for grant purposes. Thus, the

subgrantees could retain interest earned on those advances. However,

in another 1984 case also involving the Agency for International

Development, GAO found that subgrantees could not retain interest on

funds advanced to them by the recipient under a cooperative

agreement whose purpose was to help develop certain technologies,

where the funds had been advanced prior to any legitimate program

Page 10-52 GAO/OGC-92-19 Appropriations Law-Vol. II
Chapter 10

Federal Assistance: Grants and Cooperative Agreements

of the Treasury for this purpose. Id. S 6503(d). Interest in both

directions is to be paid annually, a~a rate based on the yield of

13-week Treasury bills, using offset to the extent provided in Treasury

regulations. ~. $$ 6503(c), (d), and (i). The interest provisions of the

CMIAtake effect during the second half of 1993. Pub. L. No. 101-453,

$ 5(e), as amended by Pub. L. No. 102-589,$2 (1992).

The original IGCA applied only to states and their agencies or

“instrumentalities.” It did not extend to governments of “political

subdivisions” of states such as cities, towns, counties, or special

districts created by state law. The CMIA revision applies to “an

agency, instrumentality, or fiscal agent” of a state, including

territories and the District of Columbia, but retains the exclusion for

“a local government of a State.” 31 U.S.C. $ 6501(9), amended by

CMIA $ 5(a), 104 Stat. at 10.59. Thus, decisions under the 1968 law

should remain relevant in determining which entities and situations

are now covered by the CMIA and which remain subject to the

decisional rules.

In 56 Comp. Gen. 353 (1977), the Comptroller General considered

the basis for determining which state entities were covered by the

IGCA, concluding as follows:

“[A] Federal grantor agency is not required by the Intergovernmental Cooperation

Act of 1968 and its legislative history to accept the Bureau of the Census’

classification of an entity . . . in determining whether that entity is a State agency or

instrumentality or a political subdivision of the State. It is bound by the clsssikation

of the entity in State law. Only in the absence of a clear indication of the status of the

entity in State law may it make its own determination based on reasonable standards,

including resort to the Bureau of the Census’ classi!lcations,” ~. at 357.

If the classification under state law is not clear and unambiguous, the

grantee may be required to obtain a legal opinion from the state

Attorney General in order to assist in making the determination. ~.

The ”exception for states in the 1968 IGCA was held to apply to

pass-through situations where states are the primary recipients of

grant funds which are then passed onto subgrantees. In B-171019,

October 16, 1973, the Comptroller General concluded that the

exception applied to political subdivisions which were subgrantees of

states. The Justice Department reached the same conclusion in 6 Op.

Off. Legal Counsel 127 (1982). Subsequent decisions applied the

exception to nongovernmental subgrantees as well, recognizing that

Page 10-56 GAO/OGC-92-13 Appropriations Law-Vol. II
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Federal Awiatance: Grants and Cooperative Agreements

the time elapsing between transfer and grantee disbursement.zs It then

provided: “A State is not accountable for interest earned on grant

money pending its disbursement for program purposes.” 31 U.S.C.

5 6503(a) (1988).

The theory behind the Intergovernmental Cooperation Act was to

control the release of grant funds ahd thereby preclude situations

from arising in which state grantees would be in a position to earn

excessive interest on grant advances. If funds were properly released,

interest the state might earn would be too small to be a matter of

concern. The statutory exception was not intended to create a windfall

for state grantees. The situation did not prove satisfactory, however.

Grantor agencies complained of premature drawdown of grant

advances; states complained of slow federal payment in

reimbursement situations. Congress responded by amending the

IGCA by section 5 of the Cash Management Improvement Act of 1990

(CMIA), Pub. L. No. 101-453,104 Stat. 1058,1059.

The revised 31 U.S.C. $6503 retains the general requirement to

minimize the time elapsing between transfer of funds from the

Treasury and grantee disbursement for program purposes. Id.

# 6503(a). It then requires the Secretay of the Treasury to e~ter into

an agreement with each state which receives federal grant funds

prescribing fund transfer methods and procedures, as chosen by the

state and approved by the Secretary. Id. $ 6503(b). If an agreement

cannot be reached with a particular s~te, the Secretary is authorized

to establish procedures for that state by regulation, Id. — $ 6503(b)(3).

For advance payment programs, unless inconsistent with program

purposes, the state must pay interest to the United States from the

time the funds are transferred to the state’s account to the time they

are paid out by the state for program purposes. Interest payments are

to be deposited in the Treasury as miscellaneous receipts. Id.

3 6503(c). For reimbursement situations, the United States-must pay

interest to the state from the time of payout by the state to the time

the federai funds are deposited in the state’s bank account. The law

includes a permanent, indefinite appropriation from the general fund

251n 5146285, Apfl 10, 1978, GAO concluded that this provision did not repeal by impIi@on a

statute which prescribed both the timing schedule and the amount of payments under a

particular assistance program, but rather was geared primarily to programs without statutory

payment schedules.

Page 10-54 GAO/OGC-92-13 Appropriations Law-Vol. II
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Federal Assistance: Granta and Cooperative Agreements

(1962); B-192459, July 1, 1980; B-191420, August 24,1978. In 44

Comp. Gen. 87, the Comptroller General concluded that a grantee

could establish a revolving fund with grant income in the absence of a

contrary provision in the grant agreement. However the initial amount

of a revolving fund established from either the principal of a grant or

the income generated under the. grant, when returned to the grantor

agency upon completion of the grant, may not be considered a return

of grant funds for further use by the grantor but must be deposited in

the Treasury as miscellaneous receipts. B-154996, November 5, 1969.

There are three generally recognized methods for the treatment of

program income:

(1) Deduction. Deduct program income from total allowable costs to

determine net costs on which grantor and grantee shares will be

based. This approach results in savings to the federal government

because the income is used to reduce contributions rather than to

increase program size.

(2) Addition. Add income to the funds committed to the project, to be

used for program purposes. This approach increases program size.

(3) Cost-sharing. Use income to meet any applicable matching

requirements. l...lnder this approach, the federal contribution and

program size remain the same.

Both OMB and GAO have expressed preference for the deduction

method since it results in savings to the federal government and to

grantees, and it is the preferred method under OMB Circular A-102,

although grantor agencies have a measure of discretion. See OMB

Circular A-102, para. 7.e; Supplementary Information Statement on

revised circular, 53 Fed. Reg. at 8029; Common Rule $._-.25(g), 53

Fed. Reg. at 8093; Supplementary Information Statement on common

rule, 53 Fed. Reg. at 8038. See also GAO report entitled Improved

Standards Needed for Managing and Reporting Income Generated

Under Federal Assistance Programs, GAO/GGD-83-55 (July 22, 1983).

(This report was issued several years prior to the revision of OMB

Circular A-102 and issuance of the Common Rule).

Some types of program income are subject to special rules:

GAOIOGC-92-13 Appropriations Law-Vol. II
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Federal Aasistanee: Granta and Cooperative Agreements

there was no basis to distinguish between governmental and

nongovernmental subgrantees. 59 .Comp. Gen. 218 (1980), aff’d,

B-196794, February 24, 1981.

The authority of a state to require its own grantees to account to it for

funds it makes available to them is a matter within the discretion of

the state. See B-196794, January 28,1983 (non-decision letter).

Other cases under the pre-CMIA version of the IGCA may remain

relevant as well. For example, the statute does not necessarily apply

to funds in contexts other than those specified. Thus, in 62 Comp.

Gen. 701 (1983), the Comptroller General concluded that a

subgrantee under a Labor Department grant to a state was not entitled

to retain interest it had earned by investing funds received from the

Internal Revenue Service as a refund of Federal Insurance

Contributions Act (social security) taxes. In North Carolinav.

Heckler, 584 F. Supp. 179 (E. D.N.C. 1984), the court found the

statute inapplicable in a situation where the state had wrongfully

obtained federal funds and earned interest on them pending

repayment to the government.

4. Program Income Once grant funds have been applied to their grant purposes, they still

can generate income, directly or indirectly, in various ways. This-as

distinguished from interest on grant advances-is called “program

income. ”

Program income may be defined as “gross income received by the

grantee or subgrantee directly generated by a grant supported

activity, or earned only as a result of the grant agreement during the

grant period.” Common Rule $ — .25(b), 53 Fed. Reg. 8093. h may

include such things as income from the sale of commodities, fees for

services performed, and usage or rental fees. Id. $_. 25(a); OMB

Circular No. A-1 10, Attachment D. Grant gene~ated income may also

include investment income, although this will be uncommon. See

B-192459, JUIY 1, 1980.

In contrast with income earned on grant advances, program income

does not automatically acquire a federal character and is not required

to be deposited in the Treasury as miscellaneous receipts. It may,

unless the grant provides otherwise, be retained by the grantee for

grant-related use. 44 Comp. Gen. 87 (1964); 41 Comp. Gen. 653

GAO/OGC-92-13 Appropriations Law-Vol. II
Clupter10

Federdhsistance: GruIts and Cooperative Agreements

a. Local or Matching Share (1) General principles

A matching share provision is one under which the grantee is required

to contribute a portion of the total project cost. The “match” maybe

50-50, or any other mix specified in the governing legislation. A

matching share provision typically prescribes the percentages of

required federal and nonfederal shares. However, the legislation need

not provide explicitly for a nonfederal share. A statute authorizing

assistance not in excess of a specified percentage of project costs wili

normally be interpreted as requiring a local share of nonfederal funds

to makeup the difference. (The rest of the money has to come from

someplace.) B-214278, January 25, 1985 (construing a provision of

the Consolidated Farm and Rural Development Act authorizing water

and waste disposal grants).

When a federal agency enters into an assistance agreement with an

eligibIe recipient, an entire project or program is approved. Where a

local share is required, this agreement includes an estimate of the

total costs, that is, a total which will exceed the amount to be borne by

the federal government. The additional contribution which is needed

to supply full support for the anticipated costs is the local or

nonfederal matching share. Once the agreement is accepted, the

assistance recipient is committed to provide the nonfederal share if it

wishes to continue with the grant. ~, B-130515, July 20, 1973.

Failure to meet this commitment may result in the disallowance of all

or part of otherwise allowable federal share costs.

Matching share requirements are often intended to “assure local

interest and involvement through financial participation.” 59 Comp.

Gen. 668,669 (1980). They may also serve to hold down federal

costs. The theory behind the typical matching share requirement may

be summarized as follows:

“In theory, the fiscal lure of Federal grants entices State and local governments into

allocating new resources to satisfy the non-Federal match for program they

otherwise would not have funded on their own. While State and local jurisdictions

may not be willing or able to fully fund a program from their own resources, they

would most likely agree to spend new resources on the same project if most of the

project costs were paid by the Federal Government.”

GGD-81-7 at 9. This approach has been termed “cooperative

federalism.” ~, King v. Smith, 392 U.S. 309,316 (1968). It is also

Page 10-59 GAO/OGC-92-19 APpl’OPl’illtiOllS Law-vol. II
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Federal Asaiatance: Grrmta and Cooperative Agreement

● Rules relating to proceeds from the sale of real and personal prope~

provided by the federal government or purchased in whole or in part

with federal funds are set forth in the Common Rule $3_..25(f9,

—.31, and —.32, 53 Fed. Reg. 8093–95. See also OMB Circular

A-1 10, Attachment N.

● Royalties received as a result of copyrights or patents produced under

a grant maybe treated as other program income if spec~led in

applicable agency regulations or the grant agreement. Common Rule

$—.25(e), 53 Fed. Reg. 8093. See also B-186284, June 23, 1977;

GAO report entitled Administration of the Science Education Project

“Man: A Course of Study”(MACOS), MWD-76-26 (October 14, 1975).

5. Cost-Sharing When the federal government chooses to provide financial assistance

to some activity, it may also choose to fund the entire cost, but it is

not required to do so. City of New York v. Richardson, 473 F.2d 923,

928 (2d Cir. 1973), cert. denied, 412 U.S. 950. “[T]he judgment

whether to [provide assistance], and to what degree, rests with

[Congress].” Id. Thus, a program statute may provide for full funding,

or it may prow=de for “cost-sharing,” that is, financing by a mix of

federal and nonfederal funds. Reasons for cost-sharing range from

budgetary considerations to a desire to stimulate increased activity on

the part of the recipient. The two primary cost-sharing devices are

“matching share” provisions and “maintenance of effort” provisions.

For a detailed analysis and critique of both devices, see GAO’S report

Proposed Changes in Federal Matching and Maintenance of Effort

Requirements for State and Local Governments, GGD-81-7

(December 23, 1980) (hereafter cited as “GGD-81-7”).

Federal grant funds constitute a signitlcant portion of the total

expenditures of state and local governments. Thus, cost-sharing

clearly has an impact on the relationship between the federal

government and the states, and on the executive-legislative

relationship at the state level. This gives rise to many interesting

pr@lems,2G discussed in detail in GAO’s report Federal ASs~tice

System Should Be Changed to Permit Greater Involvement by State

Legislatures, GGD-81-3 (December 15, 1980).

~6For ~xample, ~a ~ S~~ 1e@5]ature appropriate federal grant funds? S@@ cou~ have sP~t on

the issue. See GGD-81-3 at 27-30.

Page 10-58 GAO/OGC-92-13 Appropriationa Law-Vol. II
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Federal Aaalatance: Grants and Cooperative Agreement

contractual commitments) that the local share will be forthcoming. 60

Comp. Gen. 208 (1981). See also 23 Comp. Gen. 652 (1944)

(payment by federal agency of local share under cooperative

agreement, subject to contractual agreement to reimburse).

Where the statute authorizing federal assistance specifies the federal

share of an approved program as a specific percentage of the total

cost, the grantor agency is required to make awards to the extent

specified and has no discretion to provide a lesser (or greater)

amount. Manatee Countyv. Train, 583 F.2d 179, 183 (5th Cir. 1978);

53 Comp. Gen. 547 (1974); B-197256, November 19, 1980. However,

where the federal share is defined by statutory language which

specitles a maximum federal contribution but no minimum, the

agency can provide a lesser amount. 50 Comp. Gen. 553 (1971).

Although most cost-sharing programs are in terms of a f~ed federal

share, some programs may provide for a declining federal share.

Under a declining share program in the Regional Rail Reorganization

Act, GAO concluded that the federal share could be determined in the

year the grant was made, notwithstanding the fact that the grantee

would not actually incur the costs until the following fiscal year.

B-1 75155, July 29, 1977. Another cost-sharing variation is the

“aggregate match, ” in which the nonfederal share is determined by

cumulating the grantee’s contributions from prior time periods. An

example is discussed in 58 Comp. Gen. 524 (1979).

(2) Hard and soft matches

The program statute may define or limit the types of assets which may

be applied to the nonfederal share. A provision limiting the nonfederal

share to cash contributions is called a “hard match.” In 31 Comp.

Gen. 459 (1952), the matching share was described in the

appropriation act that required it as an “amount available.” In the

absence of legislative history to support a broader meaning, GAO

concluded that the matching share must be in the form of money and

that the value of other non-monetary contributions could not be

considered. A more explicit “hard match” requirement is discussed in

52 Comp. Gen. 558 (1973), in which GAO concluded that the matching

share, while it must be in the form of money, could include donated

funds as well as grantee funds. While the program discussed in 52

Comp. Gen. 558 no longer exists, the case remains useful for this

Page 10-61 GAO/OGC-92-13 Appropriations Law -Vol. 11
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Federal Aasistsnce: Grants and Cooperative Agreements

known as the “federal carrot.” See City of New York v. Richardson,

473 F.2d at 928.

Matching requirements are most commonly found in the applicable

program legislation. However, they may also be found in

appropriation acts. ~, 58 Comp. Gen. 524 (1979); 31 Comp. Gen.

459 (1952). A matching provision in an appropriation act, like any

other provision in an appropriation act, will apply only to the fiscal

year(s) covered by the actor the appropriation to which it applies,

unless otherwise specified. 58 Comp. Gen. at 527.

If a program statute authorizes grants but neither provides for nor

prohibits cost-sharing, the grantor agency may in some cases be able

to impose a matching requirement administratively by regulation. The

test is the underlying congressional intent. If legislative history

indicates an intent for full federal funding, then the statute will

generally be construed as requiring a 100 percent federal share.

B-226572, June 25, 1987; B-169491, June 16, 1980. However,

cost-sharing regulations have been regarded as valid where the statute

was silent and it could reasonably be concluded that Congress left the

matter to the judgment of the administering agency. B-130515,

July 17, 1974; B-130515, July 20, 1973. Such regulations may be

waived uniformly and prospectively, but may not be waived on a

retroactive and ad hoc basis. Id. —— —

Matching funds, as with the federal assistance funds themselves, can

be used only for authorized grant purposes. B-230735, July 20, 1988;

B-149441, February 17, 1987. In the latter case, GAO concluded that

the National Endowment for the Humanities could not divert state

matching funds to establish private endowments which, under

existing authorities, could not have been created by a direct award of

NEH funds. See also 42 Comp. Gen. 289,295 (1962).

Unless otherwise specified in the governing legislation, a grantee may

match only a portion of the funds potentially available to it, and

thereby receive a correspondingly smaller grant. 16 Comp. Gen. 512

(1936).

Under a cost-sharing assistance program funded by advance

payments of the federal contribution, the Comptroller General has

held that the advances may be made prior to the disbursement of the

nonfederal share as long as adequate assurances exist (e.g., by

Page 10-60 GAO/OGC-92-13

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Appropriations Law-Vol. II
Obapter10

Federal hsbtance:Granto and Cooperative Agreemen@

which authorizes community development block grant funds to be

used as the nonfederal share under any other grant undertaken as part

of a community development program. See 59 Comp. Gen. 668

(1980); 56 Comp. Gen. 645 (1977); B-239907, July 10,1991. The

latter opinion concluded that community development block grant

regulations no longer apply once the funds have been applied as a

match under another grant program, at least where applying the

regulations would substantially interfere with use of the funds under

the receiving grant. For other exampIes, see 52 Comp. Gen. 558,564

(1973) and 32 Comp. Gen. 184 (1952).

In 59 Comp. Gen. 668, GAQ considered a conflict between two

statutes-the Housing and Community Development Act which, as

noted, permits federal grant funds to fdl a nonfederal matching

requirement, and the Coastal Zone Management Act, which provides

for cost-sharing grants but expressly prohibits the use of federal

funds received from other sources to pay a grantee’s matching share.

Finding that the statuto~ language could not be reconciled, and

noting further that there was no helpful legislative history under either

statute, the Comptroller General concluded, as the most reasonable

result consistent with the purposes of both statutes, that community

development block grant funds were available to pay the nonfederal

share of Coastal Zone Management Act grants for projects properly

incorporated as part of a grantee’s community development program.

See also B-229004-0. M., February 18, 1988, which essentially

followed 59 Comp. Gen. 668 and concluded that community

development block grant funds could be used for the matching share

of certain grants under the Stewart B, McKinney Homeless Assistance

Act of 1987.

A somewhat less explicit exception is discussed in 57 Comp. Gen. 710

(1978), holding that funds distributed to states under Title II of the

Public Works Employment Act of 1976,42 U.S.C. $$6721-6736

(called the “countercyclical revenue sharing program”), maybe

applied to the states’ matching share under the Medicaid program.

GAO agreed with the Treasury Department that Title II payments

amounted to “general budget support as opposed to categorical or

block grants or contracts” (57 Comp. Gen.at711)–a form of

revenue sharing–and thus should be construed in the context of the

(since repealed) General Revenue Sharing Program. General Revenue

Sharing was characterized by a “no strings on local expenditures”

policy, evidenced by the fact that a provision in the original legislation

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Federal A8aiatance: Granta and Cooperative Agreements

point and for the detailed review of legislative history illuminating the

purpose and intent of the ‘hard match” provision.

The program legislation may expressly authorize the inclusion of

assets other than cash in the nonfederal contribution. See 56 Comp.

Gen. 645 (1977). If the legislation is silent with respec~o the types of

assets which may be counted, the statute will generally be construed

as permitting an “in-kind” or “soft” match, that is, the matching share

may include the reasonable vaiue of property or services as well as

cash. 52 Comp. Gen. 558, 560 (1973); B-81321, November 19, 1948.

The valuation of in-kind contributions can get complicated. An

example is 31 Comp. Gen. 672 (1952) (value of land could not

include the cost or value of otherwise unallowable improvements to

the land previously added by the grantee). Current valuation

standards for state and Iocal governments are found in the Common

Rule, $—. 24,53 Fed. Reg. 8092.

(3) Matching one grant with funds from another

An important and logical principle is that neither the federal nor the

nonfederal share of a particular grant program maybe used by a

grantee to match funds provided under another federal grant

program, unless specifically authorized by law. In other words, a

grantee may not (1) use funds received under one federal grant as the

matching share under a separate grant, nor may it (2) use the same

grantee dollars to meet two separate matching requirements. 56

Comp. Gen. 645 (1977); 47 Comp. Gen. 81 (1967); 32 Comp. Gen.

561 (1953); 32 Comp. Gen. 141 (1952); B-214278, January 25,

1985; B-212177, May 10, 1984; B-130515, July 20, 1973;

B-229004 -0. M., February 18, 1988; B-162001 -O. M., August 17,

1967. See also Common Rule $ .24(b), 53 Fed. Reg. 8092. A

contrary rule would largely mdli~ the cost-sharing objective of

stimulating new grantee expenditures.27

Normaily, exceptions to the rule are in the form of express statutory

authority. A prominent example is section 105(a)(9) of the Housing

and Community Development Act of 1974, 42 U.S.C. $ 5305(a)(9),

Z7BY way ~fcontr=t, the rule that funds received under one federal g~t maY not, absent

congressional authorization, be used to finance the iocaf match under another federal grant,

does not apply to federal loans. The resson is that loans, uniike grants, are expected to be repaid

and the recipient is thus, at Ieast ultimately, using its own funds. Of course, the proposed use of

the funds must be authorized under the loan program legislation. B-20721 I-O. M., July 9, 1982.

See also B-214278, January 25, 1985.

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Federal Assistance: Granta and Cooperative Agreements

grantee or grant beneficiary under some other agency’s program. The

cases fall into two groups.

The fwst situation involves semices performed by an assistance

beneficiary to an agency other than the grantor agency. Under the

College Work-Study Program, not to exceed 70 percent of the

student’s salary is paid by the college under a Department of

Education grant, with the remainder paid by the employer. 42 U.S.C.

$ 2753(b)(5). The “employer” maybe another federal agency. 46

Comp. Gem 115 (1966). In addition to the salary contribution, the

employing agency may pay ”unreimbursed administrative costs such as

social security taxes and compensation insurance. 50 Comp. Gen. 553

(1971); 46 Comp. Gen. 115. However, an agency may not, without

statutory authority, participate in a work-study program authorized by

state law and not coordinated with the federal program. B-159715,

December 18, 1978.

The authority to pay administrative costs under the work-study

program is based on the cost-sharing nature of that program. Absent

cost-sharing, there is no comparable authority. 61 Comp. Gen. 242

(1982) (agency to which employee had been assigned under former

Comprehensive Employment and Training Act lacked authori~ to

reimburse grantee for retirement contributions).

The second group of cases involves projects which benefit other

federal facilities. Under program legislation which does not give the

grantor agency discretion to reduce the federal share, the grantor

agency is not authorized to exclude from total cost a portion of an

otherwise eligible project solely because that portion would provide

service to another federal facility. 59 Comp. Gen. 1 (1979). Where the

grantor agency has reduced its contribution because a portion of the

project would serve another federal facility, the “benefited agency”

normally would not be authorized to make up the shortfall without

receiving additional consideration above and beyond the improved

service it would have received anyway. B-189395, April 27, 1978.

However, if Congress chooses to appropriate funds to the benefited

agency to make up the shortfall, the benefited agency may make

otherwise proper contributions without requiring additional legal

consideration as long as its contribution, when added to the amount

contributed by the grantor agency, does not exceed the statutorily

specified federal share. 59 Comp. Gen. 1; B-198450, October 2, 1980;

B-199534/B-200086, October 2, 1980.

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Federal Assistance: Grante and Cooperative Agreements

barring the use of funds as the nonfederal share in other federal

programs had been repealed. Stressing the strong analogy between

Title II and General Revenue Sharing, the decision concluded that

implicit in the “no strings” policy was the authority to apply Title II

funds to a state’s matching share under Medicaid.

It should also be noted that where any federal assistance funds are

used as nonfederal matching funds for another grant, such use must

be consistent with the grant under which they were originally awarded

as well as the grant they are intended to implement. 59 Comp. Gen.

668 (1980); 57 Comp. Gen. at 715; B-230735, July 20, 1988.

Funds received by a property owner from a federal agency as just

compensation for property taken by eminent domain belong to the

owner outright and do not constitute a “grant.” Therefore, they may

be used as the nonfederal share of a grant from another federal

agency, even where the taking and the grant relate to the same

project. B-197256, November 19, 1980.

(4) Relocation allowances

Federally assisted programs which result in the displacement of

individuals and business entities may, apart from eminent domain

payments, result in the payment of relocation allowances under the

Uniform Relocation Assistance and Real Property Acquisition Policies

Act of 1970. Under the statute, authorized relocation payments

provided by a state incident to a federally assisted project which

results in relocations are to be treated in the same manner as other

project costs. Thus, under a program statute which provides for a 90

percent federal contribution, 90 percent of authorized relocation

payments will be reimbursable as an allowable program cost. In other

words, any applicable matching share requirement will apply equally

to the relocation payments. B-215646, August 7, 1984.

(5) Payments by other than grantor agency

Of course there is nothing wrong with grantees receiving funds under

more than one grant for which they are eligible. If the grants are

administered by different agencies, each agency is making payments

under its own program. Occasionally, an agency is asked to make

payments not associated with any of its own assistance programs, to a

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Federal Asei@mce: Grants and Cooperative Agreements

b. Maintenance of Effort Suppose the state of New Euphoria spends around a million dollars a

year for the control of noxious pests. After several years, the

continued proliferation of noxious pests leads Congress to conclude

that the program is not going as well as everyone might like, and that

federal financial assistance is in order. Congress therefore enacts

legislation and appropriates funds to provide annual pest-control

grants of half a million dollars to each affected state.

New Euphoria applies for and receives its grant. Like most other

states, however, New Euphoria is strapped for money and faced with

various forms of taxpayer revolt. While the state government certainly

believes that noxious pests merit control, it would, if it had free choice

in the matter, rather use the money on what it regards as higher

priority programs. The state uses the $500,000 federal grant for its

pest control program–it has no choice because it has contractually

committed itself with the federal government to do so as a condition

of receiving the grant. However, it then takes $500,000 of its own

money away from pest control and applies it to other programs. If the

purpose of the federal grant legislation is simply to provide general

financial support to New Euphoria, that purpose has been

accomplished and the state has clearly benefited. But if the federal

purpose is to fund an increased level of pest control activity, the

objective has just as clearly been frustrated.

When Congress wants to avoid this result, a device it commonly uses

is the “maintenance of effort” requirement. Under a maintenance of

effort provision, the grantee is required, as a condition of eligibility

for federal funding, to maintain its financial contribution to the

program at not less than a stated percentage (which maybe 100

percent or less) of its contribution for a prior time period, usually the

previous fiscal year. The purpose of maintenance of effort is to ensure

that the federal assistance results in an increased level of program

activity, and that the grantee, as did New Euphoria, does not simply

replace grantee dollars with federal dollars. GAO has observed that

maintenance of effort, since it requires a specified level of grantee

spending, “effectively serves as a matching requirement.” GGD-81-7 at

2.

GAO has also observed that a grant for something the grantee is

already spending its own money on is, without maintenance of effort,

little more than another form of revenue sharing.

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Federai Assistance: Grants and Cooperative Agreements

“When Federai grant money is used to substitute for ongoing or planned State and

Iocai expenditures, the ultimate effect of the Federal program funda ia to provide

f~cai relief for recipient States and localities rather than to increase service levela in

the program area. When fiicai substitution occurs, narrow-purpose categorical

Federai programs enacted to augment service levels are transformed, in effect, into

broad purpose f~cai aaaiatance like revenue sharing Maintenance of effort

provisions, if effective, can prevent substitution and ensure that the Federai grant is

used by the grantee for the specitlc purpose intended by the Congress.” GGD-81-7 at

48–49.

One type of maintenance of effort requirement is illustrated by the

following provision from the Clean Air Act:

“No [air poilution control] agency shall receive any grant under this section during

any f~cal year when its expenditures of non-Federal funds for recurrent expenditures

for air pollution controi programs wiii be leas than its expenditures were for such

programs during the preceding f~cai year. . . .“

42 U.S.C. $ 7405(c), amended by Pub. L. No. 101-549, $ 802(e), 104

Stat. 2399,2688 (1990).

A variation is found in 20 U.S,C. $2971, applicable to certain education

grants, which we chose because it includes most of the points we will

note in this discussion. The basic requirement is subsection (a)(l):

“[A] State is entitied to receive its fuli allocation of funds. . . for any f~cai year if the

Secretary finds that either the combined f~cai effort per student or the aggregate

expenditures within the State with respect to the provision of free pubiic education

for the preceding f~cai year was not less than 90 percent of such combined f~cal

effort or aggregate expenditures for the second preceding fiscal year.”

Maintenance of effort statutes will invariably provide fiscal sanctions

if the grantee does not meet its commitment. Sanction provisions are

of two types. Under one version, the grantee’s allocation of federal

funds is reduced in the same proportion as its contribution fell below

the required level. For example, 20 U.S.C. $ 2971(a)(2) provides:

“The Secretary shaii reduce the amount of the allocation of funds under this division

in any fiscai year in the exact proportion to which the State fails to meet the

requirements of paragraph (1) by faliing beiow 90 percent of both the f~cai effort per

student and aggregate expenditures . . . .“

The second and more draconian version is illustrated by the Clean Air

Act provision quoted above and discussed in B-209872 -0. M.,

March 23, 1984, an internal GAO memorandum. Under this version,

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Federal Assistance: Grants and Cooperative Agreement

the grantee falling short of its maintenance of effort commitment

loses all grant funds under the program for that fiscal year. GAO has

endorsed the enactment of legislation making proportionate reduction

the standard rather than total withdrawal. GGD-81-7 at 71.

Some maintenance of effort statutes authorize the administering

agency to waive the requirement for a specified time period if some

natural disaster or other unforeseen event caused the funding

shortfall. An illustration is 20 U.S.C. $ 2971(a)(3):

The Secretary may waive, for 1 f~cal year only, the requirements of this subsection

if the Secretary determines that such a waiver would be equitable due to exceptional

or uncontrollable circumstances such as a natural disaster or a precipitous and

unforeseen decline in the financial resources of the State.”

If a grantee faiIs to meet its commitment and the noncompliance

cannot be waived, any disbursement of federal funds in excess of the

amount permitted by the program statute must generally be

recovered. 51 Comp. Gen. 162 (1971). Failure to require repayment

of such funds “would, in effect, constitute the giving away of United

States funds without authority of law.” Id. at 165. —

A variation of the maintenance of effort provision is the so-called

“nonsupplant” provision, which requires that federal funds be used to

supplement, and not supplant, nonfederal funds which would

otherwise have been made available. Nonsupplant is sometimes used

in cor@nction with maintenance of effort, an example again being the

education statute, 20 U.S.C. $ 2971(b):

“A State or locaJ educational agency may use and allocate funds received under this

division only so as to supplement and, to the extent practical, increase the level of

funds that would, in the absence of Federal funds made available under this division,

be made availabie from non-Federal sources, and in no case may such funds be used

so as to supplant funds from non-Federal sources.”

GAO/OGC-92-13 Appropriations Lsw-VOI. II
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Federal Assistance: Grants and Coopemtive Agreement

The Clean Air Act provision, quoted in part above, also includes a

nonsupplant clause. GAO’S 1980 study concluded that nonsupplant

provisions were largely unenforceable, and recommended against

their use. GGD-81-7 at 71.2g

F. Obligation of

Appropriations for

Grants

1. Requirement for As with any other type of expenditure, the expenditure of federal

Obligation assistance program funds requires an obligation that is proper in

terms of purpose, time, and amount, and the obligation must be

properly recorded. The purpose, time, and amount requirements are

essentially the same for grants as for other expenditures. With respect

to recording of the obligation, 31 U.S.C. $ 1501(a)(5) requires that the

obligation be supported by documentary evidence of a grant payable–

“(A) from appropriations made for payment of, or contributions to, amounts required

to be paid in specflc amounts f~ed 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.”

What constitutes an obligation in the grant context, and what will or

will not satisfi 31 U.S.C. $ 1501(a)(5), are discussed in more detail in

Chapter 7.

~%Mo~t Feder~ ~rogrm offici~s We contacted agreed that nonsupplant is difflc~t!‘not

impossible, to enforce because it calls for an extemaljudgment on what grantees would have

done if Federal funds were not available. Basically, this calls for a Federrd agency to assess the

motives behind particular changes in State and local plans or budgets and to judge whether the

presence of Federal grant funds drove the particular State or local action.” GGD-81-7 at 54.

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Federal Assistance: Granta and Cooperative Agreement

2. Changes in

Grats-Replacement

Grants vs. New Obligations

a. The Replacement Grant Changes in grants may come about for a variety of reasons-the

Concept original grantee may be unable to perform, the grant amount maybe

increased, there may be a redeftition of objectives, etc. If the change

occurs in the same fiscal year (or longer period if a multiple-year

appropriation is involved) in which the original grant was made, there

is no obligation problem as long as the amount of the appropriation is

not exceeded. If, however, the change occurs in a later f~cal year, the

question becomes whether the amended grant remains chargeable to

the appropriation initially obligated or whether it constitutes a new

obligation chargeable to appropriations current at the time the change

is made.

As a general proposition, a grant amendment which changes the

scope of the grantor which makes the award to an entirely different

grantee (not a successor to the original grantee), and which is

executed after the appropriation under which the original grant was

made has ceased to be available for obligation, may not be charged to

the original appropriation. ~, 58 Comp. Gen. 676 (1979). If the

amendment amounts to a substitute grant, it extinguishes the old

obligation and creates a new one. The new obligation is chargeable to

the appropriation available at the time the new obligation is created.

There are also situations where a grant amendment creates a new

obligation chargeable to the later appropriation without extinguishing

the original obligation. In either event, if the grantor agency does not

recognize that the change creates a new obligation when the change is

made, there is a potential Antideficiency Act violation. OrI the other

hand, a change which qualifies as a “replacement grant” remains

chargeable to the original appropriation. Of course, an agency with

the requisite program authority can change the scope of a grant if

current appropriations are used. 60 Comp. Gen. 540 (1981).

The clearest example of a change that creates a new obligation is

where the amount of the award is increased. If the grantee has no

legal right stemming from the original grant agreement to compel

execution of the amendment, the increase in amount is anew

obligation chargeable to appropriations current when the change is

made. 41 Comp. Gen. 134 (1961); 39 Comp. Gen. 296 (1959); 37

Comp. Gent 861 (1958). However, an upward a@ustment in a

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Federal Aasiatance: Grants and Coopemtive Agreements

“provisional indirect cost rate” contained in a grant award, which

contemplated a possible increase in the indirect cost rate at a later

date, does not constitute an additional or new award. Payments

resulting from such an a~ustment are chargeable to the appropriation

originally obligated by the grant. 48 Comp. Gen. 186 (1968).

Where a change involves some other aspect of the grant, it is

necessary to determine whether the change, viewed as a whole, w-ill

create a new and separate undertaking or will enlarge the scope of the

grant, thereby creating anew obligation. As pointed out in 58 Comp.

Gen. 676,680 (1979), the cases have identified three closely related

areas of concern that must be satisfied before a change maybe viewed

as a “replacement grant” and not as creating anew obligation:

(1) The bona fide need for the grant project must continue; — .

(2) The purpose of the grant from the government’s standpoint must

remain the same: and

(3) The revised grant must have the same scope,

The “scope” of a grant, as stated in 58 Comp. Gen. at 681:

“grows out of the grant purposes. These purposes must be referred to in order to

identify those aspects of a grant that make up the substantial and material features of

a particular grant which in turn f~ the scope of the Government’s obligation. ”

b. Substitution of Grantee As a general rule, when a recipient of a grant is unable to implement

the grant as originally contemplated, and an alternative grantee is

designated subsequent to the expiration of the period of availability

for obligation of the grant funds, the award to the alternative grantee

must be treated as a new obligation and is not properly chargeable to

the appropriation current at the time the original grant was made.

B-164031(5), June 25, 1976; B-1 14876/A-44014, January 21, 1960.

However, it is possible in certain situations to make an award to an

alternative grantee after expiration of the period of availability for

obligation where the alternative award amounts to a “replacement

grant” and is substantially identical in scope and purpose to the

original grant. 57 Comp. Gen. 205 (1978); B-157179, September 30,

1970. In the latter decision, the Comptroller General did not object to

the use of unexpended grant funds originally awarded to the

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Federsl Assistance: Grants and Cooperative Agreements

c. Other Changes

University of Wisconsin to engage Northwestern University in a new

fiscal year to complete the unfinished project. Approval was granted

because the project director had transferred from the University of

Wisconsin to Northwestern, University and he was viewed by all the

parties as the only person capable of completing the work. The

decision also noted that the original grant was made in response to a

bona fide need then existing, and that the need for completing the

project continued to exist.

GAO has also indicated that it might be possible in certain situations to

develop procedures to designate an alternate grantee at the time an

award is made to the principal grantee, provided that all of the criteria

for selection of the principal and required administrative action are

also met concerning the alternate, with the sole exception that the

award to the alternate is not maiIed to it pending a determination as to

whether the principal actually complies with the terms of the award.

The validity of any such procedure would have to be assessed on a

case-by-case basis. B-1 14876, July 29, 1960; B-1 14876, March 15,

1960.

A shift in the community to be served by the grant has been held to

constitute a new obligation. Thus, in B-164031(5), June 25, 1976, the

original grantee ran into financial difficulties and was unable to utilize

a hospital modernization award under the Hill-Burton program. The

Comptroller General found that a proposal to shift the award to

another hospital would constitute a new undertaking rather than a

replacement grant since the hospitals were over 100 miles apart and

served essentially different communities.

An enlargement of the community to be seined will not necessarily

constitute a new obligation. The grant in 58 Comp. Gen. 676 (1979)

was to set up a demonstration community service volunteer program.

The grant defined the number of participants deemed necessary to

generate the desired test results. The geographic site for which the

grant was awarded was expected to produce the necessary number of

vohmteers, but did not. It was held that the geographical area could

be expanded to produce the desired number of volunteers. The

modification in these circumstances would not constitute a new and

separate undertaking and could be funded from the appropriation

originally obligated.

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A change in the research objectives of a grant will constitute a new

obligation notwithstanding that some aspects of the original grant and

the modification may be related. 57 Comp. Gen. 459 (19’78). See also

39 Comp. Gen. 296 (1959).

A 1969 decision involved amendments by the National Institute of

Mental Health which would change the use of grant funds from

construction to renovation and vice-versa beyond the period of

obligational availability. Since the amendments met the statutory

eligibility criteria, since they would still accomplish the original grant

objectives, and since they involved neither a change in grantees nor an

increase in amount, they were held permissible under the original

obligations. B-74254, September 3, 1969.

G. Grant Costs

1. Allowable vs.

Unallowable Costs

a. The Concept of Allowable Recipients of assistance awards are expected to use the assistance

costs funds for the purposes for which they were awarded, subject to any

conditions that may attach to the award. Expenditures or costs that

meet the grant purposes and conditions are termed “allowable costs.”

An expenditure which is not for grant purposes or is contrary to a

condition of the grant is not an alIowable cost and may not be

properly charged to the grant.

Where a cost is not allowable, as far as the government is concerned

the recipient still has the funds. If the grant funds have already been

paid over to the grantee and no allowable costs of an equal amount

are subsequently incurred, the recipient is required to return the

amount of the improper charge to the government. ~, Utah State

Board for Vocational Education v. United States, 287 F.2d 713 (lOth

Cir. 1961). The United States “has a reversionary interest in the

unencumbered balances of such grants, including any funds

improperly applied.” 42 Comp. Gen. 289, 294 (1962). See also

B-198493, July 7, 1980. This requirement cannot be waived.

B-171019, June 3, 1975. Thus, the Comptroller General has held that

an agency cannot waive its statutory regulations to relieve a grantee of

its liability for improper expenditures. B-163922, February 10, 1978.

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Federai Assistance: Grants and Cooperative Agreements

Similarly, an agency may not amend its regulations to relieve a

grantee’s liability for expenditures for administrative costs in excess

of a statutory limitation. B-178564, July 19, 1977, reaffirmed in 57

Comp. Gen. 163 (1977).

Guidance from the Office of Management and Budget on cost

principles is found in a series Of OMB Circulars: A-21 (Cost Principles

for Educational Institutions); A-87 (Cost Principles for State and

Local Governments); A-1 22 (Cost Principles for Nonprofit

Organizations). These circulars are expressly incorporated in the

common rule adopted under OMB Circular No. A-102. Common Rule

5—.22, 53 Fed. Reg. 8092.

Costs are of two types, direct and indirect. Direct costs are items that

are specifically identifiable and attributable to a particular cost

objective.~n In other words, direct costs are obligations or

expenditures of a recipient which can be tied to a particular award.

For example, if a recipient purchases an item of equipment necessary

to carry out a particular award, the purchase price is a direct cost

under that award. Indirect costs are costs incurred for common

objectives which cannot be directly charged to any single cost

objective.31 A common example is depreciation. The concept of

indirect costs is essentially an accounting device to permit the

allocation of overhead in proportion to benefit. See B-203681,

September 27, 1982. Indirect cost rates are usually negotiated by the

grantor and grantee.

The overallocation of indirect costs is unauthorized and therefore

unallowable. The reason is that 31 US.C. $ 1301(a) restricts the use of

appropriated funds to the purposes for which they were appropriated,

and payment of the overallocation would not serve the purposes of the

appropriation. B-203681, September 27, 1982.

A grantee may generally substitute other allowable costs for costs

which have been disallowed, subject to any applicable cost ceiling. If

additional funds become available as the result of a cost disallowance,

those funds should be used to pay any “excess” allowable costs which

could not be paid previously because of the ceiling. B-208871.2,

February 9, 1989.

30~, OMB circular No. A-87, p~. E. 1.

31GA0, A Glossary of Terms Used in the Federai Budget Process, PAD-81-27, at 87 (1981).

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Allowable costs are determined on the basis of the relevant program

legislation, regulations, including OMB directives, and the terms of the

grant agreement. First and foremost, of course, is the program

statute. Thus, where the legislation and legislative history of a

program clearly limited the purposes for which grant funds could be

used, grantees could not use grant funds for non-specified purposes,

including one for which Congress had provided funds under a

separate appropriation. 35 Comp. Gen. 198 (1955). In 55 Comp. Gen.

652 (1976), however, a statute prohibiting certain costs was held to

apply only to direct costs and, absent legislative histon to the

contraxy, did not preclude use of standard indirect cost rates even

though technically a percentage of the indirect cost rates could be

attributed to the prohibited items.

The role of agency regulations is illustrated by California. United

States, 547 F.2d 1388 (9th Cir. 1977), cert. denied, 434 U.S. 824.

Under the Federal-Aid Highway Act, the United States pays 90 percent

of the “total cost” of certain highway construction, with “cost” being

defined to include the cost of right-of-way acquisition. The Federal

Highway Administration had issued a policy memorandum stating that

program funds would not be used to pay interest on any portion of a

condemnation award or settlement for more than 30 days after the

money is deposited with the court. California challenged the

restriction. The court said:

“Certainly, Congress must have intended that the statutory obligation to pay 90

percent of the total cost must include some corresponding right to impose reasonable

limitations upon such costs, rather than to leave the Federaf Treasury at the mercy of

unfettered discretion by the State as to what expenditures may be made and charged

accordingly.”

Id. at 1390. The court saw no need to decide whether the policy

fiemorandum rose to the level of a “regulation.” Either way, it was a

reasonable exercise of the agency’s authority to administer the

program. See also Louisiana Department of Highways v. United

States, 604 F.2d 1339 (Ct. Cl. 1979) (Federal Highway Administration

regulation disallowing costs of grantee settlements of worthless

claims).

Several GAO decisions illustrate the significance of the grant

agreement. For example, where a grant application specified that

certain costs would be incurred and the program legislation was

ambiguous as to whether those costs should be allowed, the grantor

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agency was held bound by the grant agreement, i.e., by its acceptance

of the application. B-1 18638.101, October 29, 1979.

The familiar cost overrun is not the exclusive province of the

government contractor. Assistance recipients may also incur

overruns. A claim resulting from an overrun under a cooperative

agreement was denied in B-206272.5, March 26, 1985, because,

under the agreement, the agency was not obligated to fund overruns

unless it chose to amend the agreement and, in its discretion, it had

declined to do so. Cf. B-209649, December 23, 1983 (labor benefits

awarded by court t=employees of grantee’s contractor could be

regarded as indirect costs under grant terms, as long as applicable

ceiling on indirect costs was not exceeded).

GAO is occasionally asked to review allowable cost determinations.

Two examples are-Nuclear Waste: DOE Needs to Ensure Nevada’s

Conformance With Grant Requirements, GAO/RCED-90-l 73 (July

1990), and Job Training Partnership Act: Review of Audit Findings

Related to the Downriver Community Conference Program,

GAO/HRD-90-105 (May 1990). The analytical framework employed is

b. Grant Cost Cases

that outlined above.

Grant cost cases are extremely difficult to categorize because what is

alIowab~e under one assistance program may not be allowable under

another. Accordingly, summaries of a number of cases are given

below with no further attempt to generalize.

Recovexy of antitrust damages by a state grantee stemming from a

grant-financed project serves to reduce the actual costs of the grantee

and must be accounted for to the government. This is true even where

the United States has declined to participate in the cost of the

antitrust action. 57 Comp. Gen. 577 (1978). However, the

government is not entitled to share in treble damages. 47 Comp. Gen.

309 (1967). Out-of-pocket expenses incurred by the state in effecting

the recovery should be shared by the federal government in the same

proportion as the recovered damages. B-162539, October 11, 1967.

Where a grantee paid a nondiscriminatory sales tax on otherwise

proper expenditures with grant funds, the taxes are not taxes imposed

on the United States and are allowable. 37 Comp. Gen. 85 (1957).

However, property taxes were held not allowable under a construction

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grant because they represent operating costs rather than construction

costs, B-166506, February 14, 1973.

The payment of expert witness fees was found unrelated to the

purposes of a research grant. 42 Comp. Gen. 682 (1963).

Construction of a bridge could not be paid for out of federal aid

highway funds where the construction was necessitated by a flood

control project and not as a highway project. 41 Comp. Gen. 606

(1962).

Buses acquired by a city under a “mass transportation” grant could be

used for charter service, an unauthorized grant purpose, where such

use was merely incidental to the primary use of the buses for

authorized mass transit purposes. B-160204, December 7, 1966.

The salary of an individual hired to evaluate the Upward Bound

Program at a grantee college was disallowed as a grant cost, because

the grant document contained no provision for such an expenditure

and the applicable program guidelines specified that evaluation was

not an allowable expense. B-161980, November 23, 1971.

The cost of a luncheon for top officials of the Department of Human

Resources, District of Columbia Government, was disallowed as an

improper administrative expense under a social services program

grant under Title XX of the Social Security Act. B-187150,

October 14, 1976.

Ordinarily, increased project costs resulting from grantee negligence

giving rise to justified claims for damages would not be allowable.

However, a damage award was viewed as a recognizable cost element

where the grantee’s error had contributed to an unrealistically low

initial cost, but an amendment to the grant was required before the

increased costs could be allowed. 47 Comp. Gen. 756 (1968).

Under a Federal Airport Act program providing for federal payment of

a specified percentage of allowable project costs, the fair value of land

and equipment donated to the grantee could be treated as an

allowable cost because failure to do so would, in effect, penalize the

grantee for the contributions of “public spirited citizens.” B-81321,

November 19, 1948.

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c. Note on Accounting

Litigation costs incurred by grantees in suing the United States were

found unallowable under the Nuclear Waste Policy Act of 1982.

Nevadav. Herrington, 827 F.2d 1394 (9th Cir. 1987).

Cost principles on which a grant award is conditioned are binding on

the grantee. B-203681, September 27, 1982. It is the grantee’s

responsibility to maintain adequate fiscal records to support the

allowable costs claimed. With respect to state and local governments,

see generally Common Rule $—.20,53 Fed. Reg. 8090. Where a

grantee has not kept adequate records, evidence of satisfactory

progress on the grant may nevertheless justify a limited “presumption

of regularity” since by inference the grantee must have incurred some

allowable expenses. However, it does not follow that all expenses

claimed should be allowed. Where a particular accounted-for time

period includes disallowed costs, similar disallowable costs must be

projected as present during prior unaccounted-for periods unless

there is proof to the contrary, the presumption being that similar

errors occurred during the prior periods. B-186166, August 26, 1976.

Although the agency has discretion to determine the precise method

of calculation, one approach is to disallow the same proportion of

funds for the unaccounted-for periods as were disallowed for the

period for which accounts were available. Id. —

GAO has questioned the assessment of fiscal sanctions by a grantor

agency against a grantee on the basis of error rate statistical data,

such as errors imputed from a quality control system. See B-194548,

July 10, 1979. In Georgiav. Califano, 446 F. Supp. 404, 409–10

(N.D. Ga. 1977), however, the court upheld the determination of

overpayments under the Medicaid program on the basis of statistical

sampling, in view of the “practical impossibility” of individual

claim-by-claim audit. The court also noted that, under the pertinent

federal regulations, the state was given the opportunity to present

evidence before the disallowance became final.

In Maryland v. Mathews, 415 F. Supp. 1206 (D.D.C. 1976), a case

involving the Aid to Families with Dependent Children program, the

court held that an agency can establish by regulation a withholding of

federal financial participation in a specified amount set by a tolerance

level, as long as the tolerance level is reasonable and supported by an

adequate factual basis. The regulation involved in the specific case,

however, did not meet the test and was found to be arbitrary and

therefore invalid. It has also been held that, if setting a tolerance level

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is discretionary, the agency can set it at zero. Maryland Department

of Human Resources v. Department of Health and Human Services,

762 F.2d 406 (4th Cir. 1985); California. Settle, 708 F.2d 1380 (9th

Cir. 1983).

2. Pre-Award Costs “Retroactive funding” means the funding of costs incurred by a

(Retroactive Funding) grantee before the grant was awarded. Three separate situations arise:

(1) costs incurred prior to award but after the program authority has

been enacted and the appropriation became available; (2) costs

incurred prior to award and after program authority was enacted but

before the appropriation became available; and (3) costs incurred

prior to both program authority and appropriation availability.

Situation (l): In this situation, the grantee seeks to charge costs

incurred before the grant was awarded (in some cases even before the

grantee submitted its application) but after both the program

legislation and the implementing appropriation were enacted.

There is no rule or policy that generally restricts allowable costs to

those incurred after the award of a grant. However, agencies may

adopt such a policy by regulation. B-197699, June 3, 1980.

Thus, in a number of cases, grant-related costs incurred prior to

award, but after the program was authorized and appropriated funds

were available for obligation, have been allowed where (a) there was

no contrary indication in the language or legislative history of the

program statute or the appropriation, (b) allowance was not

prohibited by the regulations of the grantor agency, and (c) the

agency determined that allowance would be in the best interest of

carrying out the statuto~ purpose. 32 Comp. Gen. 141 (1952); 31

Comp. Gen. 308 (1952); B-197699, June 3, 1980; B-133001,

March 9, 1979; B-75414, May 7, 1948. (The above criteria are not

specified as such in any of the cases cited but are derived from

viewipg all of the cases as a whole.)

Situation (2): In this situation, pre-award costs are incurred after

program legislation has been enacted, but before an appropriation

becomes available.

Prior to the Comptroller General’s decision in 56 Comp. Gen. 31

(1976), a “general rule” was commoniy stated to the effect that

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absent some indication of contra~ intent, an appropriation could not

be used to pay grant costs where the grantee’s obligation arose before

the appropriation implementing the enabling legislation became

available. 45 Comp. Gen. 515 (1966); 40 Comp. Gen. 615 (1961); 31

Comp. Gen. 308 (1952); A-71315, February 28, 1936.

In 56 Comp. Gen. 31, the Comptroller General reviewed the earlier

decisions and concluded that there was no legal requirement for a

general rule prohibiting the use of grant funds to pay for costs

incurred prior to the availability of the applicable appropriation.

Rather, the determination should be made on a case-by-case basis.

Thus, the decision announced:

“We would prefer to base each decision from now on on the statutory language,

legislative history, and particular factors operative in the particular case in question,

rather than on a generaI rule.” ~. at 35.

In reviewing the earlier decisions, the Comptroller General found that

each had been correctly decided on its own facts. Thus, retroactive

funding was prohibited in 40 Comp. Gen. 615 (1961), 31 Comp. Gen.

308 (1952), and A-71315, February 28, 1936. However, in each of

those cases, there was some manifestation of an affkmative intent that

funds be used only for costs incurred subsequent to the

appropriation. For example, 31 Comp. Gen. 308 concerned grants to

states under the Federal Civil Defense Act. The committee reports and

debates on a supplemental appropriation to fund the program

contained strong indications that Congress did not intend that the

money be used to retroactively fund expenses incurred by states prior

to the appropriation. By way of contrast, there were no such

indications in the situation considered in 56 Comp. Gen. 31 (matching

funds provided to states under the Land and Water Conservation Fund

Act of 1965). Accordingly, 56 Comp. Gen. 31 did not overrule the

earlier decisions, but merely modified them to the extent that GAO

would no longer purport to apply a “general rule” in this area.

In determining whether retroactive funding is authorized, relevant

factors are evidence and clarity of congressional intent, the degree of

discretion given the grantor agency, and the proximi~ in time of the

cost being incurred to the grant award. As in Situation (l), sigrdilcant

factors also include the agency’s own regulations and the agency’s

determination that funding the particular costs in question will further

the statutory purpose. Accordingly, the authority will be easier to fmd

where an agency has broad discretion and favorable legislative

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histo~. Using this approach, retroactive funding authority maybe

found to exist (as in 56 Comp. Gen. 31), or not to exist (as in 40

Comp. Gen. 615).

If an agency wishes to recognize retroactive funding in limited

situations in its regulations, it must, in order to avoid potential

Antideficiency Act problems, make it clear that no obligation on the

part of the government can arise prior to the availability of an

appropriation. Of course, the grant itself cannot be made until the

appropriation becomes available. 56 Comp. Gen. 31, 36 (1976).

Situation (3): In this situation, the grantee seeks to charge costs

incurred not only before the appropriation became available, but also

before the program authority was enacted.

Costs incurred prior to both the program authorization and the

availability of the appropriation may generally not be funded

retroactively. See 56 Comp. Gen. 31 (1976); 32 Comp. Gen. 141

(1952); B-11393, July 25, 1940. GAO recognizes that there may

possibly be exceptions even to this rule (56 Comp. Gen. at 35), but

thus far there are no decisions identi~ng any.

One final situation deserves mention. In each of the retroactive

funding cases cited above, the grant was in fact subsequently

awarded. In B-206244, June 8, 1982, a state had applied for an

Interior Department grant under the Youth Conservation Corps Act

and later withdrew its application due to funding uncertainties. The

state then filed a claim for various expenses it had incurred in

anticipation of the grant. GAO held that payment would violate both

the program legislation and the purpose statute, 31 U.S.C. $ 1301(a).

Interior’s appropriation was intended to accomplish grant purposes,

but the state’s expenses did not accomplish any grant purposes since

the grant was never made.

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H. Recovery of

Grantee Indebtedness

1. Government’s Duty to This section is intended to summarize the application of “debt

Recover

collection law” (covered in detail in Chapter 13) in the context of

assistance programs, and to highlight a few issues in which the fact

that a grant is involved maybe of special relevance. This brief

discussion is intended to supplement the detailed coverage in Chapter

13; it is not a substitute.

Claims in favor of the United States against an assistance recipient

may arise for a variety of reasons. As a general proposition, it has

been the view of both GAO and the executive branch that the United

States has not only a right but a duty to recover amounts owed to it,

and that this duty exists without the need for specit3c statutory

authority. This applies to assistance recipients just as it would apply

to other debtors. The Federal Claims Collection Standards require

each agency to “take aggressive action. . . to collect all clairns of the

United States for money or property arising out of the activities of, or

referred to, that agency.” 4 C.F.R. $102. l(a). See also Common Rule

s—.52,53 Fed. Reg. 8102.

For example, grant funds erroneously awarded to an ineligible

grantee must be recovered by the agency responsible for the error,

including expenditures the grantee incurred before receiving notice

that the agency’s initial determination had been made in error. 51

Comp. Gen. 162 (1971); B-146285/B-164031(1), April 19, 1972. The

cited decisions recognize that there might be exceptional

circumstances in which full recovery might not be required, but

exceptions would have to be considered on an individual basis.

Similarly, where an agency misapportions formula grant funds so that

some states receive excess funds, the excess must be recovered. If the

misapportionment resulted in other states receiving less than their

formula amount, the apportionments of all of the states involved must

be appropriately a~usted. 41 Comp. Gen. 16 (1961).

Where, under an assistance program, the government is authorized or

required to recover funds for whatever reason, the Federal Claims

Collection Act of 1966, as amended by the Debt Collection Act of

1982 (31 U.S.C. Chapter 37, Subchapter II), and the joint GAOJustice

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Department implementing regulations (Federal Claims Collection

Standards, 4 C.F.R. Parts 101– 105) apply unless the program

legislation under which the claim arises or some other statute

provides otherwise. See 4 C.F.R. S 101.4; B-163922, February 10,

1978; B-182423, November 25, 1974.

Indebtedness to the United States may also result from the misuse of

grant funds. ~, Utah State Board for Vocational Education v.

United States, 287 F.2d 713 (lOth Cir. 1961); Mass Transit Grants:

Noncompliance and Misspent Funds by Two Grantees in UMTA’S New

York Region, GAo/RCED-92-38 (January 1992). The cases usually arise

when the grantor agency disallows certain costs. Here again the

government’s position has been that the right to recover exists

independent of statute, supplemented or circumscribed by any

statutory provisions that may apply. See, ~, B-198493, July 7, 1980;

B-163922, February 10, 1978. In this area, however, the

government’s right to recover has come under increasing attack by

recipients, particularly during the 1980s.

What we present here is by no means an exhaustive cataloging of the

cases. Our selection is designed to serve three purposes:

(1) summarize what the law appears to be as of the date of this

publication; (2) reflect any discernible trends; and (3) point out some

issues that may be of more general relevance. As a general

proposition, the courts have looked fwst to the program legislation

and, with some exceptions, have declined to rule on the government’s

common-law right of recovery where adequate authority could be

found in, or deduced from, the enabling statute.

The cases we selected for purposes of illustration are drawn largely

from two programs–Title I of the Elementa~ and Secondary

Education Act (ESEA), and the Comprehensive Employment and

Training Act (CETA). ESEA was extensively revised by the

Hawkins-Stafford Elementary and Secondary School Improvement

Amendments of 1988 (Pub. L. No. 100-297, 102 Stat. 130); CETA was

replaced in 1982 by the Job Training Partnership Act. Nevertheless,

we chose these programs because they both generated a large volume

of litigation on a variety of relevant topics. Apart from whatever value

specific cases may have by analogy to other programs, the material

illustrates the kinds of issues that have arisen and the approach the

courts, including the Supreme Court, have taken in resolving them.

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ESEA included a provision, very common in grant program

legislation, requiring the states to provide adequate assurances to the

Department of Education that grant funds would be used only on

qualifying programs. In addition, the law was amended in 1978 to give

the Secretary of Education explicit authority to direct the repayment

of misspent grant funds from non-ESEA sources. 20 U.S.C. $ 2835(b)

(1982). Prior to this amendment, the statute had provided simply that

payments under TitIe I shalI take into account the extent to which any

previous payment to the same state was greater or less than it should

have been.

Two states argued that the 1978 amendments did not apply to

misspent funds prior to 1978, and that the government’s sole remedy

with respect to pre-1978 funds was to withhold future grant funds, in

which event the state would simply undertake a smaller Title I

program. The government ar~ed that the right to recover existed

both under the pre-1978 law and under the common law. The

Supreme Court held that the pre-1 978 version of the law clearly gave

the government the right to recover misspent funds. Bell v. New

Jersey, 461 U.S. 773 (1983). Apart from the holding itself and its

significance with respect to any program statutes with similar

Ianguage, several other points from this decision are noteworthy:

● The existence and amount of the state’s debt are to be determined

administratively by the agency in the first instance, subject to judicial

review. Id. at 791–92. (This is the same approach used in the Federal

Claims ~ollection Standards for debt collection generally.)

~ The Court rejected the argument that the government had a remedy

by withholding future funds, with the state correspondingly reducing

its program level.

● Because the Court found adequate authority in the statute, it declined

to rule on the existence of a common-law right. Id. at 782 — n.7.

In a 1981 case, a lower court had found a common-law right of

recovery along with the ESEA statutory right. West Virginia v.

Secretary of Education, 667 F.2d 417 (4th Cir. 1981). A 1987 case

also upheld the government’s common-law right of recovery, at least

to the extent of overdlocations or other erroneous payments.

California Department of Education v. Bennett, 829 F.2d 795,798

(9th Cir. 1987).

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No years after Bell v. New Jersey, the Supreme Court considered

another issue arising from the same litigation and held that the 1978

amendments to ESEA were not retroactive for purposes of

determining whether funds had been misspent. Bennett v. New

Jersey, 470 U.S. 632 (1985). What is important here is the more

general rule the Court announced, namely, that substantive rights and

obligations under federal grant programs are to be determined by

reference to the law in effect when the grants were made. Id. at

638–41.

—

The Court also rejected an argument that recovery would be

inequitable because the state acted in good faith. The role of the

reviewing court is to determine if the proper legal standards are

applied. If they are, a court has “no independent authority to excuse

repayment based on its view of what would be the most equitable

outcome.” Id. at 646. In any event, said the Court, “we fmd no

inequity in fiquiring repayment of funds that were spent contrary to

assurances provided by the State in obtaining the grants.” Id. at 645. —

In Bennett v. Kentucky Department of Education, 470 U.S. 656

(1985), decided on the same day as Bennett v. New Jersey, the Court

reaffmed the government’s right of recovery under ESEA Title I:

“The State gave certain assurances as a condition for receiving the federal funds, and

if those assurances were not complied with, the Federal Government is entitled to

recover amounts spent contrary to the terfi of the grant agreement.” 470 U.S. at

663.

The Court further-concluded that neither “substantial compliance” by

the state nor the absence of bad faith would absolve the state from its

liability. Id. at 663–65. See also B-229068-O. M., December 23, 1987,

applying-Kentucky to grants under Title V of the Surface Mining

Control and Reclamation Act.

One point in Bell v. New Jersey seems to have generated some

uncei-tainty. The Court noted that the Secretary “has not asked us to

decide what means of collection are available to him, but only whether

he is a creditor. Since the case does not present the issue of available

remedies, we do not address it.” Bell, 461 U.S. at 779 n.4. Thus, the

Court did not approve or disappr- of arty particular remedy. This

led one court to conclude that the Bell amdysis requires two separate

questions: whether the federal government has a right of recovery

and, if so, what remedies are available to it. Maryland Department of

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Human Resources v. Department of Health and Human Services, 763

F.2d 1441, 1455 (D.C. Cir. 1985) (holding that government has

statutory right of recovery under Title XX of Social Securi~ Act).

However, another court expressed doubt over the existence of such a

dichotomy, construing the Supreme Court’s silence in Bennettv.

Kentucky Department of Education as approval of the means of

recovery employed in that case, a direct repayment order. St. Regis

Mohawk Tribe v. Brock, 769 F.2d 37,49 (2d Cir. 1985), cert. denied,

476 US. 1140 (right of recovery under Comprehensive Employment

and Training Act)~The St, Re@ court went on to conclude that

“Congress left it to the Secreta~ to establish additional remedial

procedures, consistent with the purposes of the legislation, to insure

compliance by prime sponsors.” 769 F.2d at 50. Where this issue may

lead in the future is unclear, although as noted briefly later in this

chapter and discussed more fully in Chapter 13, the availability of a

particular remedy sometimes is a very different question from the

existence of the underlying right to recover.

Another group of cases involves the former CETA program There is a

strong parallel to the ESEA cases in that the original CETA included

general authority to ac@st payments to reflect prior overpayments or

underpayments, and was amended in 1978 to explicitly authorize the

Secretary of Labor to recover misspent funds by ordering repayment

from non-CETA funds. Essentially following Bell v. New Jersey, a

rather long line of cases upheld the Labor Department’s right, under

the pre-1978 CETA, to recover misspent funds and to do so by

directing repayment from non-CETA funds. City of Gary v. United

States Department of Labor, 793 F.2d 873 (7th Cir. 1986); St. Regis

Mohawk Tribe v. Brock, 769 F.2d 37 (2d Cir. 1985), cert. denied,

476 U.S. 1140; Mobile Consortium. United States Department of

Labor, 745 F.2d 1416(1 lth Cir. 1984); California Tribal Chairman’s

Association v. United States Department of Labor, 730 F,2d 1289 (9th

Cir. 1984); North Carolina Commission of Indian Affairs v. United

States Department of Labor, 725 F.2d 238 (4th Cir. 1984), cert.

denied, 469 U.S. 828; Texarcana Metropolitan Area Manpower

Consortium v. Donovan, 721 F.2d 1162 (8th Cir. 1983); Lehigh

Valley Manpower Programv. Donovan, 718 F.2d 99 (3d Cir. 1983);

Atlantic County v. United States Department of Labor, 715 F.2d 834

(3d Cir. 1983).

The St. Regis (769 F.2d at 47), Cahfornia Tribal (730 F.2d at 1292),

and North Carolina (725 F.2d at 240) courts, as had the Supreme

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Court in Bell v. New Jersey, declined to comment on the existence of a

common-law right of recovery. The Texa.mana court noted that its

decision was consistent with prior decisions recognizing the

common-law right. 721 F.2d at 1164. None of the cases purported to

deny that right.

Another group of CETA cases concerned a provision which required

the Secreta~ of Labor to investigate any complaint alleging

improprieties and to issue a final determination not later than 120

days after receiving the complaint. The consequences of failing to

meet the 120-day deadline became a hotly litigated issue. The lower

courts split, some holding that failure to meet the deadline barred the

Labor Department from attempting to recover misused funds, while

others held that the failure did not bar further action. Using an

anaiysis which should be useful in a variety of situations, the Supreme

Court resolved the conflict in Brock v. Pierce County, 476 U.S. 253

(1986), holding that the mere use of the word “shall” in the statute

did not remove the power to act after 120 days.

One additional CETA case deserves mention. In Board of County

Commissioners v. United States Department of Labor, 805 F.2d 366

(lOth Cir. 1986), the court held that funds embezzled by an empioyee

of a CETA grantee are “misspent” for purposes of the government’s

right of recovery. The grantee had argued that the funds were not

“misspent” because it had never spent them. “No CETA regulation

lists embezzlement as an allowable cost,” rejoined the court. Id. at

368.

—

Where does all this leave us? Certainly the government’s right to

recover under programs with statutory provisions similar to the

former ESEA Title I and CETA programs would seem to be settled. In

more general terms, several lower courts have recognized the

government’s basic right to recover under the common-law,”

although as we shall see, the means of recovew has become

controversial. While the Supreme Court declined to address the

common law issue in Bell v. New Jersey, its later decision in West

Virginia v. United States, 479 U.S. 305 (1987) seems instructive.

W%e ~ addition t. the criws cited in the tefi,~eases v. Dole, 749 F.2d 331, 336 (6th Cir.

1984;, cert. denied, 472 U.S. 1018 (Federal-Aid Highway Act); Woodsv. UNted States, 724

F.2d 1444 (9th Cir. 1984) (Food Stamp Act); Mount Sinai Hosp. v. Weinberger, 517 F.2d 329

(5th Cir. 1975), cert. denied, 425 U.S. 935 (Medicare); Pennsylvania Dep’t of l’ranap. v. UNted

States, 643 F.2d 758,764 (Ct. Cl. 1981), cert. denied, 454 U.S. 826 (Federal-Aid Highway Act).

Page 10-88 GAO/OGC-92-13 Appropriations Law-Vol. 11
Chapter10

Federal Asaietance: Granta and Cooperative Agreements

The issue in West Virginia was whether the United States could

recover “prejudgment interest on a debt arising from a contractual

obligation to reimburse the United States for services rendered by the

Army Corps of Engineers.” 479 U.S. at 306. Applying federal common

law, a unanimous Court held that it could.ao While this was not a grant

case nor was the government’s right to collect the underlying debt in

dispute, it would not seem to require a huge leap in logic to infer a

recognition of art inherent right in the government to recover amounts

owed to it.

In sum, the government’s assertion of an inherent (i.e., common law)

right to recover sums owed to it under assistance programs thus far

seems to have withstood assault. However, it is safe to say that the

question is by no means as simple as it once might have seemed.

2. Offset and Withholding Offset and withhoMing are two closely related remedies. While the

of Claims Under Grants terms are sometimes used interchangeably, they are not the same.

Offset, in the context of grantee indebtedness, refers to a reduction in

grant payments to a grantee who is indebted to the United States

where the debt arises under a separate assistance program or is owed

to an agency other than the grantor agency. Withholding is the act of

holding back funds from the same grant or program in which the

violation or other basis for creating the government’s ckdrn occurred.

In a sense, withholding maybe viewed as a type of offset.

GAO has adopted a “policy rule” that offset or withholding should not

be used where it would have the effect of defeating or frustrating the

purposes of the grant. ~, B-171019, December 14, 1976;

B-186166, August 26, 1976. The application of this rule depends

upon the nature and purpose of the assistance program. “Individual

consideration must be given to each instance.” B-182423,

November 25, 1974. Naturally, this consideration must include any

relevant provisions of the program legislation, agency regulations, or

the grant agreement.

In 43 Comp. Gen. 183 (1963), for example, a farmer who was

receiving payments under the Soil Bank Act, administered by the

,$& “ “

~~comphcatiom resulting from the Debt Collection Act of 1982, dkcu=d ~ C~P~r 13, ~d

not apply in this case because the transaction predated the effective date of that statute. West

Vir@% 479 U.S. at 312 n.6.

Page 10-S9 GAO/OGC-92-13 Appropriations Law -Vol. II
Chapter 10

Federal Assistance: Granta and COopenttive Agreements

Department of Agriculture, was indebted to the United States for

unpaid taxes. Since the basic purpose of the Soil Bank Act was to

protect and increase farm income, GAO decided that whether those

payments should be applied to the recovery of an independently

arising debt was a matter within Agriculture’s discretion, based on

Agriculture’s determination “as to the extent to which such

withholding would tend to effectuate or defeat the purposes of the

[Soil Bank Act].” ~. at 185. Similarly, relying heavily on the Treasury

Department’s interpretation of the State and Local Fiscal Assistance

Act of 1972 (general revenue sharing, since repealed), GAO concluded

in B-176781 -O. M., December 6, 1974, that offset against revenue

sharing funds payable to a city was inappropriate to recover an

overpayment to that city under a Federal Aviation Administration

grant. Thus, agencies have some discretion in the matter.

It has been somewhat easier to conclude that offset will frustrate grant

objectives where grant payments are made in advance of grantee

performance. ~, 55 Comp. Gen. 1329 (1976); B-171019,

December 14, 1976. This is true to the extent the grantee is able to

reduce its level of performance. Take, for example, a grant to

construct a hospital. If a debt is offset against grant advances and the

grantee can simply forgo the project and not build the hospital, there

is no meaningful recovery. The federal government ends up keeping

its own money, the grantee pays nothing, and the losers are the

intended beneficiaries of the assistance, the patients who would have

used the hospital. To this extent, an offset would accomplish nothing.

This was the explicit grounds for rejecting offset, for example, in

B-171019, December 14, 1976.

The problem was highlighted in a 1982 GAO report, Federal Agencies

Ne@gent in Collecting Debts Arising From Audits, AFMD-82-32

(January 22, 1982). The report first noted GAO’S policy and its

rationale:

“[I]t is normafly inappropriate for the Government to offset debts against an advance

of funds to a grantee unless there is assurance that the same Ievel of grant

performance wilI be maintained.

“

. . . When the offset is not replaced with non-Federaf funds, there has, in effect, been

no repayment. The scope of the program haa simply been reduced and the intended

recipient of the benefits loses by the amount of the audit disallowance.”

GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 10

Federai Aaaiatance: Granta and Cooperative Agreement.a

Id. at 26. The report then recommended that grantor agencies

%equire grantee debtors to certify that their payment of audit-related

debts has not reduced the level of performance of any Federal

program,” and monitor those assurances through grant management

and audit follow-up. Id. at 28. —

The concept also appeared in B-186166, August 26, 1976, in which

the Department of Agriculture was exploring options to recover

misapplied and unaccounted-for funds advanced to a university under

research grants. Agriculture proposed crediting the indebtedness

against allowable indirect grant costs. This would be done by

requiring the university to document that it was expending the

amount of earned indirect costs on approved program grants, thus

maintaining the agreed-upon performance level. GAO concurred

cautiously, on the condition that the grantee voluntarily agree to this

approach. Should this method fail to satisfy the indebtedness, GAO

further noted that the grantee was a state university and advised

Agriculture to seek offset against other amounts owed to the state by

the federd government.

A solution to the problem would be a rule that offset or withholding

implicitly carries with it an obligation that the grantee not reduce its

level of performance. As demonstrated by GAO’S caution in B-186166,

however, GAO has been reluctant to state such a rule in the absence of

solid judicial precedent. As discussed later, this precedent may now

exist, at least to some extent.

Whatever impediments may exist in the case of grant advances, offset

will be more readily available under reimbursement-type grants. ~,

55 Comp. Gen. 1329, 1332 (1976). Nevertheless, the general policy

rule still applies. Thus, in B-163922.53, April 30, 1979, the

Comptroller General advised the Departments of Labor and

Transportation that disallowed costs under a Labor Department grant

could be offset against reimbursements due under a Federal Highway

Administration grant, but that Transportation still “must make the

determination on a case-by-case basis as to whether offset will impair

the program objectives.”

When the GAO decisions cited in the preceding paragraphs were

issued, the offset referred to was essentially nonstatutory.

Administrative offset received a statutory basis with the enactment of

section 10 of the Debt Collection Act of 1982, 31 U.S.C. $3716. The

Page 10-91 GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 10

Federal Aaaiatance: Grants and Cooperative Agreements

corresponding portion of the Federal Claims Collection Standards,

revised to reflect the 1982 legislation, is 4 C.F.R. $102.3.

The administrative offset provided by 31 U.S.C. $3716 does not apply

to debts owed by state and local governments. 31 US.C. $ 3701(c).

Whether common-law offset remains against state and local

governments has become a highly controversial issue. The position of

GAO and the executive branch is that the government’s common-law

right of offset has not been abrogated with respect to state and local

governments. See 4 C.F.R. $ 102.3(b)(4); Common Rule

5—.52(a)(l), 53 Fed. Reg. 8103. The issue is explored more fully in

Chapter 13.

A noted above, offset and withholding are technically different. Many

program statutes include withholding provisions. ~, Perales v.

Heckler, 762 F.2d 226 (2d Cir. 1985) (withholding provision in

Medicaid legislation may be used to recoup overpayments from state

even though state has not yet recovered from provider).

The theory behind withholding is that where a grantee has misapplied

grant funds, or in other words, where a grantee’s costs are disallowed,

the grantee has, in effect, spent its own money and not funds from the

grant. Since the issue frequently comes to light in a subsequent

budget period, withholding may be viewed as the determination that

an amount equal to the disallowed cost remains available for

expenditure by the grantee and is therefore carried over into the new

budget period. Accordingly, the amount of new money that must be

awarded to the grantee to carry on the grant program is reduced by

the amount of the disallowance. This may not be strictly applicable

where the statutory program authority establishes an entitlement to

the funds on the part of the grantee or provides other specific

limitations on the use of withholding.

Under the Federal Claims Collection Standards, an agency to whom a

debt.is owed is required in all cases to explore the possibility of

collecting by offset from other sources. 4 C.F.R. $ 102.3(a). If offset is

not available, a withholding provision may provide the basis to

accomplish a similar result, at least in part. In 55 Comp. Gen. 1329

(1976), for example, the former Community Services Administration

was statutorily authorized to suspend (withhold) grant payments to

satisfy certain grantee tax delinquencies. Under this authority, the

CSA could pay the suspended amounts over to the Internal Revenue

Page 10-92 GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 10

Federal An&dance: Grantn and Oooperdve Agreements

Service to satisfi a grantee’s tax liability to the extent that it was

incurred by the grantee in carrying out CSA grants. Since funds

previously advanced under the grant should have been used to pay the

required taxes in the f~st place, transfer of the suspended funds to the

IRS amounted to payment of an authorized grant purpose. See also

B-171019, December 14, 1976 (withholding authority of former Law

Enforcement Assistance Administration).

In any event, withholding under a limited statutory withholding

provision does not satisfy the requirement for the agency to seek

offset from other sources to the extent of any remaining liability for

which withholding is not available. B-163922, February 10, 1978.

Statutory withholding provisions may include procedural safeguards,

most typically notice and opportuni~ for hearing. Any such

procedural requirements must, of course, be satisfied. See B-226544,

March 24, 1987; Common Rule $ —,43(b), 53 Fed. Reg. 8102. The

Common Rule authorizes withholding against advances, but cautions

agencies to use sound judgment in exercising that authority. Common

Rule 8 —.52(a)(2), 53 Fed. Reg. 8103; Supplementary Information

statement, ~. at 8042.

As with offset, it should be kept in mind that nothing is accomplished

by withholding unless the grantee carries out its program at the same

Ievel as would otherwise have been the case. The Supreme Court

considered this issue in Bell v. New Jersey, 461 U.S. 773 (1983),

upholding the statutory authority of the Department of Education to

recover misspent grant funds. The Court rejected the state’s

suggestion that the federal government was free to reduce future

grant advances, with the state then undertaking a smaller program.

The Court recognized that, under this approach, the government

wouId recover nothing and the states would effectively have no

liability for misspent funds. Congress, said the Court, must have

contemplated that the government would receive a net recovery by

paying less for the same program level. Id. at 781 — n.5 and 783 n.8.

A 1985 decision of the Court of Appeals for the District of Columbia

Circuit took the analysis one step further. The case is Mar@and

Department of Human Resources v. Department of Health and Human

Services, 763 F.2d 1441 (D.C. Cir. 1985). After discussing the Bell

analysis, the court went on to conclude:

Page 10-93 GAO/OGC-92-13 Appropriations Law-Vol. II

%?.. ‘:. ““ ;.’ ~~• ‘“” ““ . “ ~ g:
Chapter10

Federsl Asehtsnce: Grants snd Cooperative Agreements

“[W]here a statute gives the federal government a right of recovery and also

authoriaea prospective withholding [withholding funds for seMcee not yet rendered]

as a remedy, the state remains obligated to provide all the services that it promised to

supply in return for the funda that were then prospectively withheld in satisfaction of

the state’s debt to the federal government. If a state then proceeds to reduce the size

of its federally funded program, the state has committed a new and independent

breach of the funding conditions, which givea rise to a new debt to the federal

government.” 763 F.2d at 1455-56.

Under this approach, the remedy is clearly a meaningful one. How far

the courts will go in applying it remains to be seen. Issues still to be

resolved are the extent to which the principle may apply to an offset

as opposed to a withholding, or to a nonstatutory offset or

withholding.

In Housing Authority of the County of King v. Pierce, 701 F. Supp.

844 (D.D.C. 1988), modiiled on other grounds, 711 F. Supp. 19

(D.D.C. 1989), the court considered the recoupment of overpayments

under advance-funded Department of Housing and Urban

Development housing subsidies. HUD regulations (but not the

program statute) authorized recoupment by reducing future subsidy

payments. The court upheld HUD’S common-law right to recover in the

manner specified in the regulations. The court further commented

that the teachings of Bell and Maryland Department of Human

Resources “might and perhaps should guide HUD in the course of the

recovery here,” but found those cases not dispositive because they

dealt with statutory rather than common-law remedies. 701 F. Supp.

at 850 n. 11.

Thus, there is a direct relationship between the appropriateness of

offset or withhoMing against grant advances and the grantee’s

obligation to maintain the agreed-upon program level. Future

litigation or legislation will determine the details of this relationship.

Page 10-94 GAO/OGC-92-13 Appropriations Law-Vol. II

+8” “’ :: . “ . .’ :*
Chapter 11

Federal Assistance: Guaranteed and Insured

Loans

11-3

A. Introdutiion .. .. s. ”” s”””..”””-””-”””” ““””””””””””””’””’””””””” ““”””””””””””””

11-3

~. Gener~De~~ripti~n ,., O . . . . . . . . . . . . . . . . . . .. .. .. .. .-o. .” ”-”-oo” ““”””””--”0”:

2> Souce~ofG~~~teeA~thoti@ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 

O

”

-

””””””””” 11-7

11-9 B. Budge~mdob~gatio~~ Trea~ent . . . . . . . . . . . . . . . . .. .s. as--””””””” “’””””’”’”

11-10

1. pfiortoFeder~Cre~tRefOrmACt . . . . . . . . . . . . . . . . . . . . . . , .....-””””””””’””’””- ~1-12

20 Feder~Cr~dfiRefO~ACtOflggO . . . . . . . . . . . . . . . . . . . . . . . . .o--”’” ”” ”” ”” ”””””o” ~1-1~

a. po~t-1991 Gu~~tee Commitments . . . . . . . . . . . . . . . . . . . . . . .. ....””” “- ““” “ “ - “-

11-18

b. Pre-1992 Commitmen@ ““” ”” .” s””------”””””” ““””””””””””””””””’”””” ““”””” 11.19

c. EntitlementPrograms ................... .................”. ............’.

d. Cefi~In~uran~eprogramS . . . . . . . . . . . . . . . . . . . . . . .. .. .. . . $ . . . . . . . . . . . . ‘“.. 11-20

11-20

C, EfiensionofGu~antees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........’

1. Coverage offenders (lnitidand Subsequent) . . . . . . . . . . . . . . . . .....”.......... ....

~. Eli@bility ofLender/Debt Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . “ .

b. SubstitutionofLender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............’”...“.

C. Existence ofV~dGu~~tee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . “ ‘ o ‘ ‘ . . . . . . . . . . . .

d. SmWBus~essInvestmentCOmp~ies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........

e. The Federal~ancingB* ..........”.....”.”. .................... .......

2. Coverage ofBorrowers ............... “.............. . . . . . . . . . . . . . . . . . . . . . . . .

a. EligibfliwofBorrowers .“.”’............. .......”.........................

b. SubstitutionofBorrowers ..................”....................... ..”...”

C. Lo~purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................

d. ChangeinLo~purPose ...................... . . . . . . ’ . . . ” ’ ’ . . . . . . . . . . . . . . .

3. Tems~dcon&tions OfGUarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........”....

a. Introduction .................. ‘.’” ...”.......:...... ..........

. . . . . . . . . .

b. property InsuranCeprofYams Under the NationalHousmgAct . . . . . . . . . . . . . . . . . . . .

(l) Maximum~o@oflo~ ................. . . . . . . . . . . . . . . . . . .“..........

(2) Maximum loan maturi@ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) her/lesseerequirement ................. . . . . . . . . .’.”.’.”. . . . . . . . . . . .

(4) Executionofthenote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............

(5) Reportingrequirement”. .........Q...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) PaymentofPremiums .“..””........... ................. ..............”

c. Sm~Busmess Administration Business Loanprogr~ . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Payment ofguaranteefee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .”.....’”..

(2) Notice of defa~t . . . . . . . . . . . . ~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . “ o . . . . . . . . .

11-20

11-20

11-22

11-23

11-26

11-28

11-32

11-32

11-33

11-34

11-36

11-37

11-37

11-38

11-38

11-40

11-42

11-44

11-45

11-45

11-47

11-47

11-50

GAO/OGC-92-1~ Approp*tions~w-vOL1l

w.

Page n-1

&;.
Chapter 11

Federal Ad8tance: Guumn teed and Immrwl K.amM

D. XU@ts and Obl@tions of Government Upon Defanlt

1. Nature of the Government’s Obligation . . . . . . . . . . .

2. Scope of the Government’s Guarantee . . . . . . . . . . . .

3. Amount of Government’s Liability . . . . . . . . . . . . . . .

4. Liability of the Borrower . . . . . . . . . . . . . . . . . . . . . . .

a.

b.

Veterans’ Home Loan Guarantee Program . . . . . .

(1) Loans closed prior to 1990 . . . . . . . . . . . . . . .

(2) Loans closed afterJanuary 1,1990 . . . . . . . .

Debt Collection Procedures . . . . . . . . . . . . . . . . . .

5. Collateral Protection . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11-51

11-51

11-53

11-55

11-57

11-57

11-58

11-63

11-63

11-65

GAOKKXJ-92-13 APProP*tiolu$ ~w-VOL ~
Federal Assistance: Guaranteed and Insured

Loans

A. Introduction

1. General Description The preceding chapter dealt with one of the @or forms of federal

financial assistance, the grant. Another major form is credit

assistance, which includes direct loans and, the subject of this

chapter, guaranteed and insured loans. In essence, a guaranteed loan

is a loan or other advance of credit made to a borrower by a

participating lending institution, where the United States Government,

acting through the particular federd agency involved, “guarantees”

payment of all or part of the principal amount of the loan, PIUS

interest, in the event the borrower defaults. A statutory deftition

along these lines is found in 2 U.S.C. $ 661a(3) (Supp. III 1991).1

Depending on the particular program, the borrower maybe a private

individual, business entity, educational institution, or a state, local, or

foreign government. In some cases, the guarantee maybe created

when a loan originally made by a government agency is subsequently

sold by the agency to a third party with the government’s assurance of

repayment,

Strictly speaking, an insured loan and a guaranteed loan are two

different things. An insured loan is one made initially by the federal

agency and then sold, while a guaranteed loan is a loan made by a

private lender. Occasionally, the agency’s program legislation may

draw the distinction. For example, the Rural Electrifkation

Administration has authority both to make insured loans and to

guarantee loans made by other lenders. Under 7 U.S.C. # 935, REA can

make insured loans, defined in subsection 935(c) as loans that are

“made, held, and serviced by the Administrator, and sold and insured

by the Administrator hereunder.” Under 7 U.S.C. $936, REA cart

guarantee loans which are “initially made, held, and serviced by a

legally organized lending agency.”z Another example is the business

and industrial loan program of the Farmers Home Administration

established by 7 U.S.C. $1932, again authorizing both insured and

guaranteed loans. For purposes of this chapter, we use the term

ls~w definitions are found in GAO’S G1OSWUY of Terms Used in the Federrd Budget Process,

PAD-81-27 (3d ed. 1981), and in OMB Circular No. A-34, Part VI (1991). Summary information

on individual programs maybe found in the Catalog of Federaf Domestic Assistance, published

annually by the General Services Adminktration and OffIce of Mrmagement and Budget.

2For ~ de~ed discussion of Rw Credit rISSiS@nCe PrOgr_, see ‘AO ‘epOn ‘ntitid

ing Rurrd Electric Generating Facilities: A ~gearrd Growirrg Activi@, CED-81-14

(%~ber 28, 1980).

Page 11-3 GAOIOGC-92-13

g,. .@;,

Appropriatiolul fA8w-vol. II
Chapter 11

Fedeml Asd6tance: Gumanteed ud Inmued LIMIN

“_*e” to refer to both guaranteed and insured loans unless

otherwise indicated.

The objective of this chapter is to illustrate the kinds of issues and

problems that arise in this area and the approaches used in resolving

them. We have for the most part emphasized several of the

better-known guarantee programs. Naturally, the extent to which any

given case will have more general applicability will depend on the

agency’s organic legislation, program regulations, and the particular

circumstances. Since program statutes and regulations are subject to

change, the reader should view the discussion as merely illustrative of

the particukwissue involved. “

The primary purpose of loan guarantees is to induce private lenders to

extend financial assistance to borrowers who otherwise would not be

able to obtain the needed capital on reasonable terms, if at all. Or, as a

congressional subcommittee put it, loan guarantee programs are

designed to redirect capital resources by intervening in the private

market decision process, in order to further objectives deemed by

Congress to be in the national interests These objectives may be

social (veterans’ home loan guarantees), economic (small business

programs), or technological (guarantees designed to foster emerging

energy technologies).4

When the federid government guarantees a loan, the guarantee is

extended to the original lender supplying the funds, generally either a

private lender or the Federal Financing Bank, as well as to any

subsequent assignees or purchasers of the guaranteed portion of the

loan. The subsequent purchase of a guaranteed loan from the original

lender is called the “secondary market.” See, for example, 51 Comp.

Gen. 474 (1972). Secondary market purchasers are frequently large

investment entities such as mutual funds or pension funds.

Secondary market purchasers are not ahvays waiting in the wings,

checkbooks in hand. Congress has on several occasions taken action

to help create, stimulate, or facilitate second~ markets by

‘;*:;’”” ,“ .

35uMom. on Economic Stabilization, House Comm. on Banking, -cead Ur~Aff*~

95th Cong., 1st 8ees., Catalog of Federal Iman GUarantee Programs x (con-ml. Print 1977).

qln the ~c~ologi~ ~ea, GAO has suggested that the loan gu~~~ device ~ ~Wi@ @

situations in which the technology has been known to work and is marginally economical, with

the primary investment constraint being financial. EMD-77-39, B-178726, May 9, 1977

(comments on proposed legislation).

Page 11-4 GAO/OGC-92-19 Appropriations l.+aw-VoL II
CiMpterll

Federd A8eietmee: Ga8mrI teed and Inmlred L08xKJ

establishing privately owned but federally chartered corporations

known as “government-sponsored enterprises” (GSE). Since a GSE is

a creature of Congress, the actions it may take are those authorized in

its enabling legislation. 71 Comp, Gen. 49 (1991) (Federal

Agricultural Mortgage Corporation, or “Farmer Mac”). For a

discussion from the progr aromatic perspective, see Federal

Agricultural Mortgage Corporation: Issues Facing the Secondary

Market for FmHA Guaranteed Loans, GAO/RCED-91-138 (June 1991 ).6

Under a loan guarantee, the risk against which the guarantee is made

is, for the most part, default by the borrower. In some cases, however,

other risks may be covered as well, and a few examples will be noted

later in this chapter.

In the typical loan guarantee program, the lender is charged a fee by

the agency, prescribed in the program legislation. However, there are

statuto~ exceptions. For example, 7 U.S.C. $936 provides that no fee

shall be charged for Rural Elect~lcation Administration loan

guarantees. Where a fee is charged, its disposition, discussed later, is

governed by (1) the Federal Credit Reform Act of 1990, or (2) where

the Credit Reform Act does not apply, the applicable program

legislation, or (3) in the absence of any guidance in the program

legislation, the miscellaneous receipts statute (31 U.S,C. $ 3302(b)).

A guarantee may extend to 100 percent of the amount of the

underlying loan, or some lesser percentage as specified in the

program legislation. ~, 7 U.S.C. s 936 (REA, 100 percent); 42 U.S.C.

S 3142(a) (Economic Development Administration business loan

guarantees, 90 percent of outstanding unpaid balance). Unless

otherwise provided, a maximum guarantee percentage applies only to

restrict the amohnt the administering agency is authorized to

guarantee. ~, B-137514, November 3, 1958 (no objection to

proposal for borrower to “guarantee” portion of loan not covered by

government guarantee by making “irrevocable deposit” financed by

separate loan, thereby providing lender with 100 percent guarantee).

5s~ce GSE~ we ewn~y primly owned corporations, we do not address them further M ~

publication. Readers needing more may consult several GAO reports such as

Government-Sponsored Enterprises: A Framework for Limiting the Government’s EXLWSUre W

Risks, GAO/GGD-91-90 (May 1991); Budget Issues: Profties of Government-Sponsored

Enterprises, GAOAFMD-91-17 (February 1991); and Government-Sponsored Enterprisea: The

Government’s Exposure to Risks, GAO/GGD-90-97 (August 1990].

Page 11-5 GAO/OGC-92-13 @pl’OptitiOXIS Law-vol. ~
Chapter 11

Federal Aasiatance: Guaranteed and Insured Loans

Banks do not loan money without interest, and the Iypical loan

guarantee therefore covers accrued but unpaid interest as well as

unpaid principal. The program statute may set a maximum acceptable

rate of interest, or may authorize the administering agency to do so by

regulation. Assuming there is nothing to the contrary in the enabling

legislation, an agency may, within its discretion, extend its guarantees

to loans with variable interest rates (rates which rise or fall with

changes in prevailing rates) as well as loans with f~ed interest rates.

B-184857, June 11, 1976.

Credit assistance legislation frequeritly vests considerable discretion

in the administering agency. ~, B-202568, September 11, 1981

(imposition of “no credit elsewhere” eligibility test to meet funding

shortfall within SBA’S broad discretion under section 7(b) of Small

Business Act); B-134628, January 15, 1958 (Civil Aeronautics Board

authorized within its discretion to make payments to lender

immediately upon debtor’s default rather than after completion of

foreclosure proceedings).

For non-entitlement programs, just as in the case of grants and

cooperative agreements, GAO will not, at the request of a rejected

applicant, review the exercise of an agency’s discretion in rejecting an

application for a loan guarantee. B-178460, June 6, 1973

(non-decision letter). Nevertheless, GAO may become involved under

its other authorities (decision, account settlement, claims settlement),

and may review an agency’s conduct of a program under its general

audit authority. For example, the Emergency Loan Guarantee Act, 15

U.S.C. $$ 1841–1852, specifically authorized GAO to audit any

borrower applying for a loan guarantee, but made no mention of

auditing the Emergency Loan Guarantee Board which administered

the program. The issue arose in connection with the Lockheed

Aircraft Corporation assistance program, carried out under this

statute. GAO took the position that it had the authority to audit the

Board’s conduct of the program to evaluate whether the Board and

borrower were complying with the statutory provisions and whether

the government’s interests were being adequately protected. This

authori~ derives from GAO’S basic audit statutes and does not have to

be repeated in every piece of legislation. B-169300, September 6,

1972; B-169300, September 21, 1971.

Page 11-6

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GAO/OGC-92-13 Appropriation Law-Vol. II
Chapter 11

Federal Ansiatance: Gumanteed and lnrmred Loans

2. Sources of Guarantee The authority to guarmtee the repayment of indebtedness must be

Authori@ derived from some statutory basis. In most cases, this takes the form

of express statutory authorization. ~itxtlly, the statute will authorize

the administering agency to establish the terms and conditions under

which the guarantee will be extended, but may also impose various

limitations. An example is section 202(a)(l) of the Public Works and

Economic Development Act of 1965, as amended, 42 U.S.C.

S 3142(a)(l), which authorizes the Economic Development

Administration to provide financial assistance to eligible borrowers

through direct business loans and loan guarantees:

“The Secretary is authorized to aid in financing, within a redevelopment area, the

purchase or development of land and facilities (including machinery and equipment)

for industrial or commercial usage. . . by (A) purchasing evidences of indebtedness,

(B) making loans (which for purposes of this section shall include participation in

loans), (C) guaranteeing loans made to private borrowers by private lending

institutions, for any of the purposes referred to in this paragraph upon application of

such institution and upon such terms and conditions as the Secretary may prescribe,

except that no such guarantee shall at any time exceed 90 per centum of the amount

of the outstanding unpaid ba4ance of such loarI.”

Program authority, as in the example cited, is most commonly in the

form of permanent legislation authorizing an ongoing program. In

addition, guarantee programs are occasionally enacted to deal with a

specific crisis of limited duration, and are either not codified or

removed from the United States Code when the program is

completed. An example of this latter type is the Chrysler Corporation

Loan Guarantee Act of 1979, Pub. L. No. 96-185,93 Stat. 1324

(1980), dropped from the 1988 edition of the U.S. Code because the

authority to issue commitments and guarantees expired at the end of

1983 and all loans guaranteed were repaid in full. Guarantee

programs may also be enacted as part of appropriation acts. An

example is discussed in GAO’S report Israel: U.S. Loan Guaranties for

Immigrant Absorption, GAOI’NSIAD-92-119 (February 1992).

It is also possible for loan guarantee authority to be derived by

necessary implication from a statuto~ program of financial

assistance, that is, under program legislation which does not explicitly

use the term “guarantee” or “insure. ” For example, the current

version of section 7(a) of the Small Business Act, 15 U.S.C. $ 636(a),

authorizes the Small Business Administration to make loans to small

business concerns as follows:

Page 11-7 GAO/OGC-92-13 Appropriations Law -Vol. 11

“; :“$%$:.+:>,. f :- : ; ~, :-,.. .,:.. : ~~• . . . . . . . , .. . , ,., j ., ’!. ,: ‘-’ .. . . . .,,.

‘““ ‘“’%:
Cbapter 11

Federd AMktance: Guaran teed and Inemred LoaM

‘The Admhktmtion is empowered to the extent and in such amounts as provided h

advance in appropriation Acts to make loans for plant acquisition, construction,

conversion, or expansion, including the acquisition of land, material, supplies,

equipment, and working capital, and to make loans to any qualitled small business

concern. . . for purposes of this chapter. Such fmcings may be made either directly

or in cooperation with banks or other Mancial institutions through agreements to

participate on an immediate or deferred (guaranteed) basis.”

The statute then goes onto list a number of limitations. A 1981

amendment (95 Stat. 357, 767) added the word ‘guaranteed.” men

before the amendment, GAO had concluded that a loan guaran~

program was within the SBA’S discretion under section 7. S1 Comp.

Gen. 474 (1972). An earlier decision, B-140673, October 12,1959,

had upheld a “deferred participation” program under section 7(a),

under which SBA would purchase the agreed portion of the deferred

participation loan immediately upon demand and reseme the right to

recover from the lender if SBA subsequently determined that the

lender had not substantially complied with the participation

agreement. In view of the broad discretion granted SBA under the

statute, SBA wss not required to make the “substantial compliance”

determination before making payment to the Iencier.c

The evolution of SBA’S authority to conduct its disaster loan program,

15 U.S.C. $ 636(b), followed a similar pattern. In B-121589,

October 19, 1954, the Comptroller General tentatively approved a

deferred participation program, strongly urging that the statute be

amended to include “immediate or deferred participation” language

patterned after the pre-1981 version of section 636(a). This was done

and, based on 51 Comp. Gen. 474, was found stilcient to authorize

SBA to guarantee disaster loans to eligible borrowers by participating

lending institutions. 58 Comp. Gen. 138, 145 (1978). To remove arty

doubt, the same amendment which added the word “guaranteed” to

section 636(a) added it as well to section 636(b) (95 Stat. at 778).

In connection with credit assistance under the Small Business

Investment Act of 1958, GAO recognized the SBA’S implied authority to

establish a program in which SBA would guarantee loans made by

private lending institutions to small business investment companies,

%he primary difference between a loan guarantee program and a deferred participation loan

program ia that the lending institution can demand that SBA pay the outstanding balance of a

deferred participation loan at anytime, but can demand MIA’s purchase of the outstanding

balance of a guaranteed loan only under the conditions prescribed in the regufationa-generally

only upon defauft of the borrower.

Page 11-8 GAO/OGC.92-13 APProP~tioIU LSW-VO1. ~

!+t ‘,.”. ‘ ‘ %?
Chapter 11

Federal Aeeintance: Gunmnteed -d Inenred bane

even though the statute authorized only a direct loan program. 42

Comp. Gen. 146 (1962). The decision pointed out that the legislative

history of a 1961 amendment to the act clearly demonstrated that

Congress intended to continue the nonstatutory “standby” guaranteed

loan program that had existed for several years, and concluded

therefore that the absence of specific language authorizing the

program was due to the apparent belief by both Congress and SBA that

such language was unnecessary and did not reflect an intent to deny

SBA the authority. See also B-149685, March 20, 1968. The guarantee

program is now expressly authorized in 15 U.S.C. S 683.

Authority by necessary implication cannot be derived solely from a

purpose clause, but must be supported by the operative provisions of

the statute. 71 Comp. Gen. 49 (1991).

Regardless of whether a loan guarantee program is established under

an express statutory provision or by necessary implication, the basic

responsibility for administering the program clearly rests with the

agency involved. This includes the authority to determine whether or

not to extend a guarantee in a particular case, and the manner in

which the guarantees are to be handled. The agency has considerable

discretion, subject of course to any applicable statutory requirements

or restrictions.

B. Budgetay ~n~ When a federal agency guarantees a loan, there is no immediate cash

Obligational

Treatment

-o- utlay. The need for an actual cash disbursement, apart from

administrative expenses, does not arise unless and until the borrower

defaults on the loan and the government is called upon to honor the

guarantee. Depending on the terms of the loan, this may not happen

until many years after the guarantee is made. It is thus apparent that

loan guarantees require budgetary treatment different from ordinary

government obligations and expenditures. This treatment is

prescribed generally by the Federal Credit Reform Act of 1990 (FCRA).

Before describing the FCRA, it is important to first describe the

pre-credit reform situation because it illustrates the objectives of

credit reform and because FCRA does not cover all programs.

Page 11-9

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GAO/OGC-92-13 Appropriation LIZW-VO1. ~
Chapter 11

Federd Adstence: Gtwmnteed and Insured Lo8na

1. Prior to Federal Credit Prior to credit reform, the authority to guarantee or insure loans

Reform Act generally was not regarded as budget authority. Indeed, the original

enactment of the Congressional Budget Act of 1974 expressly

excluded loan guarantees from the statutory definition of budget

authority. Pub. L. No. 93-344, $ 3(a)(2), 88 Stat. 297,299 (1974).

Under this treatment, the extension of a loan guarantee was an

off-budget transaction and was, at the extension stage, largely not

addressed by the budget and appropriations process. If and when the

government had to pay on the guarantee, i.e., upon default, the

administering agency would seek liquidating appropriations, and

these liquidating appropriations counted as budget authority. Of

course, by the time a liquidating appropriation became necessary, the

United States was contractually committed to honor the guarantee,

and Congress had little choice but to appropriate the funds. This is an

example of so-called “backdoor spending.” By the time the budget

and appropriations process became involved, there was no

meaningful role for it to play.

When a loan guarantee is committed or issued, it cannot be known

with absolute certainty when or to what extent the government might

be called upon to honor it. Accordingly, and since budget authority

was not provided in advance, the making of a loan guarantee, however

binding on the government the commitment may have been, was

treated only as a contingent liabili~ and did not result in a recordable

obligation for purposes of 31 U.S.C. $ 1501(a). A recordable obligation

did not arise until the contingency occurred (default by the borrower

or other event as authorized in the program legislation), at which time

it was recorded against the appropriation or fund available for

liquidation. 65 Comp. Gen. 4 (1985); 60 Comp. Gen. 700,703

(1981).

Under this approach, the obligation was viewed as “authorized by

law” for purposes of the Antideficiency Act, and there was no

violation if obligations resulting from authorized guarantees exceeded

available budgetary resources. 65 Comp. Gen. 4 (1985); B-226718.2,

August 19, 1987.

In a limited sense, there was a certain logic to this approach. Many

loans are repaid in whole or in part, with the result that the

government is never called upon to pay under the guarantee, the only

disbursements being the administrative expenses of running the

program. To require budget authority in the full amount being

Page 11-10 GAO/OGC-92-13 AppmPI’i8tiOM kW-VOL ~

:3!’;: ,. “ !:: “, -’ :“ ‘“, ‘

~~Šˆ ,;~: ~~•
Chapter 11

Federal Assistance: Guaranteed and Insured bans

guaranteed would artificially inflate the budget. The problem was that

the pre-credit reform approach went to the opposite extreme, by

reflecting the cost to the government in the year the guarantee was

made as zero. Since there was no longer any room for discretion by

the time liquidating appropriations became necessary, loan guarantee

programs were not forced to compete with other programs for

increasingly scarce budgetary resources. No one involved in the

budget process–Congress, OMB, GAO–partiCtdSrly liked this system,

and reform became inevitable.

At an absolute minimum, GAO strongly encouraged the imposition of

limits, either in the enabling legislation or in appropriation acts, on

the total amount of loans to be guaranteed. ~, Legislation Needed

to Establish Specific Loan Guarantee Limits for the Economic

Development Administration, FOMSD-78-62 (January 5, 1979).

Ceilings of this type may limit the amount of guarantees that can be

issued-in a given %cal year, or the total amount of guarantees that

can be outstanding at any one time. An example of the former is

discussed in 60 Comp. Gen. 700 (1981).

A device that became common in the 1980s was the granting of loan

guarantee authority only to the extent provided in advance in

appropriation acts. The device was reinforced in 1985 when Congress

(1) added to the Congressional Budget Act a definition of “credit

authority” (“authority to incur direct loan obligations or to incur

primary loan guarantee commitments”), and (2) subjected to a point

of order any bill providing new credit authority unless it also limited

that authority to the extent or amounts provided in appropriation

acts. 2 U.S.C. $$ 622(10), 652(a).

While this device provided a measure of congressional control, it still

did not require the advance provision of actual budget authority. For

example, the Chrysler Corporation Loan Guarantee Act, which

predated the 1985 legislation noted above, limited the authori~ to

gutuantee loans to the amounts provided in advance in appropriation

acts. The Comptroller General and the Attorney General both

concluded that this provision did not require advance budget

authority, but was satisfied by an appropriation act provision placing

a ceiling on the total amount of loans that could be guaranteed, i.e.,

on contingent liability. B-197380, April 10, 1980; Loan

Guarantees-Authority of Chrysler Corporation Loan Guarantee

Board to issue Guarantees, 43 Op. Att’y Gent No. 27 (April 23, 1980).

Page 11-11 GAO/OGC-92-13 Appropriations Law-Vol. II
Chapter 11

Federal~ce: Gnaranteed and Insured Loans

Both opinions also concluded that the appropriation act ceiling

related only to outstanding loan principal, with contingent liability for

loan interest being in addition to the stated amount.

Where loan guarantee authority is limited to amounts provided in

appropriation acts-and we emphasize that we are addressing

situations not governed by the Federal Credit Reform Act—those

“amounts,” as noted, are not actual budget authority but ceilings on

contingent liability. Therefore, while exceeding the ceiling may be

illegal for other reasons,7 it does not violate the Antideficiency Act. 64

Comp. Gen. 282, 288–90 (1985). Analogous to budget authority,

loan guarantee authority must generally be used (i.e., commitments

made) in the fiscal year or years for which it is provided unless the

appropriation act provides otherwise. B-212857, November 8, 1983.

Also, where advance authority in appropriation acts is statutorily

required and Congress does not provide it, the agency’s authority to

carry out the program may be effectively suspended for the fiscal year

in question. B-230951, March 10, 1989.*

Congress may set a minimum program level as well as a ceiling. Again

for programs not governed by the Credit Reform Act, failure to

achieve the minimum commitment level would not constitute an

impoundment since the commitment amount is not budget authority.

B-195437.2, September 17, 1986. However, under a loan insurance

program where the loan itself is made by the agency, failure to

achieve a mandated minimum program level would be an

impoundment unless the failure results from programmatic factors.

I@; B-195437.3, February 5, 1988.

2. Federal Credit Reform Consideration of various reform proposals during the 1980s centered

Act of 1990 on the recognition that there is a “subsidy element” to a government

loan guarantee program. If all loans were repaid, there would be no

cost to the government apart from administrative expenses. Were this

the case, however, there would probably have been no need for the

program to begin with. Since the objective of a loan guarantee

7h .Wu~ud. ~=e where ~xceed~ a cei~ WaS not illegal, because of mther exPhclt

legislative history, is 53 Comp. Gen. 560 (1974).

sstitig~one, z U. S.C. s 652(a) is not a statutory requirement for adv~ce appropri~ion

authority. A point of order may not be raised or maybe defeated, in which event the validity of

any ensuing legislation is not affected. As in the situation discussed in B-230951, many program

statutes independently impose the requirement.

Page 11-12 GAO/OGC-92-13 Appropriations Law-Vol. II

M: %+
Chapterll

Federal Assistance: Guaranteed and Inoured Loans

program is to enhance the availability of credit which the private

lending market alone cannot or will not provide, it is reasonable to

expect that there will be defaults, most likely at a higher rate than the

private lending market experiences. It became apparent that credit

reform had to do two things. First, it had to devise a meartingfd way

of measuring the true cost to the government; and second, it had to

bring those costs fully within the budget and appropriations process.

See, ~, Budget Issues: Budgetary Treatment of Federal Credit

%grams, GAO/AFMD-89-42 (April 1989).

The culmination of these reform efforts was the Federal Credit

Reform Act of 1990, enacted by section 13201(a) of the Omnibus

Budget Reconciliation Act of 1990, Pub. L. No. 101-508, 104 Stat.

1388, 1388-609, and codified at2U.S.C.S5661-661f (Supp. III

1991). The approach of the FCRA is to require the advance provision

of budget authority to cover the subsidy portion of a loan guarantee

program, with the non-subsidy portion (i.e., the portion expected to

be repaid) financed through borrowings from the Treasury. The OffIce

of Management and Budget has issued detailed implementing

instructions in OMB Circular No. A-34, Part VI, transmitted by OMB

Bulletin No. 92-01, October 1, 1991. The FCRA applies to loan

guarantee commitments made on or after October 1, 1991, with

exceptions to be noted later.

a. Post-1991 Guarantee One of the mqjor purposes of the FCaA is to “measure more accurately

Commitments the costs [the subsidy element, in essence] of Federal credit

programs.” 2 U.S.C. $ 661(1). Before the budgetary and

appropriations aspects of IWWI can come into play, the administering

agency, working with OMB, must determine the cost of its programs.

The law defines “cost” as the “estimated long-term cost to the

Government. . . calculated on a net present value basis, excluding

administrative costs.” Id. $ 661a(5)(A). More specifkally for

purposes of this chapt~, the cost of a loan guarimtee is the–

“net present value when a guaranteed loan is disbursed of the cash flow from-

“(i) estimated payments by the Government to cover defaults and delinquencies,

interest subsidies, or other payments, and

“(ii) the estimated payments to the Government including origination and other fees,

penalties and recoveries.” ~. $ 661a(5)(C).

Page 11-13 GAO/OGC-92-13 Appropriations Law-Vol. II
Clupterll

Federd AeeMance: G~teedmd hewed LMM

Historical experience is obviously a relevant factor in determining

cost. Risk assessment is also very important, and OMB requires

agencies to develop risk categories for their credit programs. OMB

Circular No. A-34, Q 62.3. Agencies should not blindly rely on

historical experience when the risk factor has changed. See Loan

Guarantees: Export Credit Guarantee Programs‘ Long-R~C= Are

~, GAO/NSIAD-91-180 (APti 1991) at 3. For example, it is not

unreasonable to expect the default rate under a guaranteed student

loan program to increase during a recession, resulting in a higher

cost. Established secondary market experience is also relevant in

assessing risk. NSIAD-91-180 at 15. ~ The second major purpose of FCRA is to “place the cost of credit

programs on a budgetary basis equivalent to other Federal spending.”

2 U.S.C. $ 661(2). To accomplish this, 2 U.S.C. 5661c(b), perhaps the

key provision of FCRA, provides:

“Notwithstanding any other provision of law, . . . new loan guarantee commitments

may be made for f~cal year 1992 and thereafter only to the extent that–

“(l) appropriations of budget authority to cover their costs are made in advance;

“(2) a limitation on the use of funds otherwise available for the cost of a. . . loan

guarantee program is enacted; or

“(3) authority is otherwise provided in appropriation Acta.”

Thus, unless Congress specifkally provides otherwise, loan

guarantees may be made only if budget authority to cover their cost

has been provided in advance. The cost of a loan guarantee is

regarded as new budget authority for the fiscal year “in which definite

authority becomes available or indefinite authority is used.” 2 U.S.C.

$ 661c(d)(l).

To implement these new concepts, the law defines two new accounts

for credit programs, a “credit program account” and a “financing

account.” The program account is the budget account into which

appropriations of budget authority are made. The financing account is

a revolving, non-budget account from which the guarantees are

actually administered. It receives cost payments from the program

account and includes all other cash flows resulting from the guarantee

commitment. 2 U.S.C. $$ 661a(6) zmd (7). Administrative expenses are

GAO/OGC-92-13 Appropriation Law-vol. II
Chapter 11

Federal Assistance: Guuanteed and Insured Loans

shown as a separate and distinct line item within the program

account. Id. — $ 661e(g).

A review of 1992 appropriation acts disclosed several variations in the

way Congress made the appropriations contemplated by 2 U.S.C.

$ 661C.

s The Federal Housing Administration General and Special Risk

Program Account received an appropriation of costs and a ceiling on

the total loan principal to be guaranteed ($55 million to support a

program level of $8.6 billion).9

“ The program account for Economic Development Administration

guaranteed loans received an appropriation of costs with no program

ceiling specified. *0

“ The Small Business Administration Business Loans Program Account

received separate cost appropriations for direct and guaranteed loans

with a total loan ceiling for direct, but not guaranteed, loans.1’

Each of these appropriations also includes a separate specflc

appropriation for administrative expenses.lz

From a chronological perspective, the first step is to determine the

cost of a guaranteed loan program in accordance with 2 U.S.C.

$ 661a(5). The President’s annual budget is to reflect these costs and

~De-en@~fvewrm ~~~d Housing and Urban Development, ad ~Pendent

Agencies Appropriations Act, 1992, Pub. L. No. 102-139,105 Stat. 736,749 (1991).

IODep@men@ of ~~erce, Justice, and State, the Judiciary, ~d~~Agen~@

AppropnationaAct, 1992, Pub. L. No. 102-140, 105 Stat. 782,806 (1991).

ll~b L No. 102.140, ~~ n.lo, 105 at 815.

. .

]ZA “e~ genera deftition of “a

dministrative expenses” maybe found in S-24341, March 12,

1942, at 5:

“The term ‘adnums “ ‘ trative expenses’ would appear to refate, generaffy, to those expenses

necessarily incurred in adminktering, executing, or camying out the primary purposes of

legislative enactments. Whether a particular expense should be ciawdfied as an ‘dmhMmtW

expense’ would appear to be goverrwd by the particular program involved, the provislom of the

act in which the term appears or to which it relates, and the intention of the legislative body in

using the expression, and what might be regarded as an item ofve expense’ within

the meaning of one statute might not be so regarded under another statute enacted for entiely

different purposes.”

For FCRA purposes, see also OMB Circular No. A-34, S 62.5.

Page 11-1S GAO/OGC-92-13 Appropriation Lsw-VO1. X
Chapter 11

Federal Assistance: Guaranteed and Insured Loans

the planned level of new guarantee commitments. 2 U.S.C. $ 661c(a).

Congress then makes the appropriation of costs and administrative

expenses to the program account.

The appropriation of costs “shall constitute an obligation of the credit

program account to pay to the financing account.” Id. $ 661c(d)(l).

When a loan for which a guarantee commitment hm—been made is

disbursed by the lender, the cost of the guarantee is obligated against

the program account and paid into the financing account. Id.

$ 661c(d)(2). If the loan is disbursed in a single payment, t%e cost is

paid into the financing account in a single payment. If the loan is

disbursed in more than one payment, costs are paid into the financing

account in the same proportion. OMB Circular No. A-34, $ 62.7(e). The

cost payments are carried in the financing account as unobligated

balances until obligations are incurred to make payments under the

terms of the guarantee, at which time they become obligated balances

until disbursed. Id. —

The law recognizes that estimating costs is not an exact science and

that cost estimates are subject to change over time. Accordingly, costs

are to be reestimated annually as long as the loans are outstanding.

OMB Circular No. A-34, $62.8. If a reestimation results in an increase

to the cost estimate, the iaw provides permanent indefinite budget

authority for the program account. 2 U.S.C. !j 661c(i3. The agency

requests an apportionment of this indefinite authority from OMB, and

then immediately records an obligation against the program account

and pays the funds into the financing account. OMB Circular No. A-34,

562.8.

The law also provides for the treatment of “modifications.” For

purposes of FCRA, a modification is any government action that alters

the cost of an outstanding loan guarantee from the most recent

estimate or reestimated, except actions permitted under the terms of

existing contracts. 2 U.S.C. $ 661a(5)(D); OMB Circular No. A-34,

$ 62.9(a). The law prohibits the modification of a loan guarantee

commitment “in a manner that increases its cost unless budget

authority for the additional cost is appropriated, or is available out of

existing appropriations or from other budgetary resources.” 2 U.S.C.

$ 661c(e). Modifications include such things as forgiveness,

forbearance, reductions in interest rate, prepayments without penalty,

and extensions of maturity, except where permitted under an existing

contract. OMB Circular No. A-34, $ 62.9(a). They also include the sale

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Chapter 11

Federal Assistance: Guaranteed and Insured Loans

of loan assets and actions resulting from new legislation, such as a

statutoqy restriction on debt collection. Id. As with reestimates, at the

time a modification is made, the agency ficords an obligation of the

estimated cost increase against the program account and pays the

amount into the financing account. Id. — $ 62.9(c).

If an agency’s original cost estimates, reestimates, and modification

estimates have been accurate, the balances of financing accounts for

loan guarantees should always be sufficient to make any required

payments. However, if a balance is not sufficient, the “Secretary of

the Treasury shall. . . lend to, or pay to the financing accounts such

amounts as maybe appropriate.” 2 U.S.C, $ 661d(c). The Secreta~ is

also authorized to borrow or receive amounts from the financing

accounts. ~. All of these transactions between the Treasury and

financing accounts are subject to the apportionment requirements of

the Antideficiency Act. Id. —

Under the FCRA structure as outlined above, there are two separate

sets of “obligations”—obligations against the program account when

budget authority is paid over to the financing account, and obligations

against the financing account when claims are made for payment

under a guarantee.

OMB Circular A-34, $63.2, identifies four actions that will result in

Antideficiency Act violations:

(1) Overobligation or overexpenditure of the amounts appropriated

for costs. This includes a modification resulting in an overobligation.

(2) Overobligation or overexpenditure of the credit level supported by

the enacted cost appropriation.

(3) Overobligation or overexpenditure of the amount appropriated for

administrative expenses.

(4) Obligation or expenditure of the lapsed unobligated balance of the

cost appropriation, except to correct mathematical or data input

errors in calculating subsidy amounts. However, error correction will

be considered a violation if it exceeds the amount of the lapsed

unobligated balance.

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Finally, the law emphasizes that the provisions of the FCRA are not to

be construed as changing or overriding the administering agency’s

authority to determine the terms and conditions of eligibility for, or

amount of, a loan or loan guarantee. 2 US.C. $ 661d(g).

As a result of FCRA, guarantee programs should no longer be

unrestricted. Even if the applicable appropriation act does not

explicitly set a maximum program level, the program level that can be

supported by the enacted cost appropriation, reinforced by the

Antideficiency Act, constitutes an effective ceiling. Programs not

governed by FCRA may have their own ceilings. Although a loan or

guarantee may not. exceed a statutory ceiling, it may nevertheless be

possible to extend assistance if the borrower qualifies under another

program. For example, in 35 Comp. Gen. 219 (1955), the Small

Business Administration could not make a disaster loan to a small

business concern which had suffered damage in a flood because SBA

had already used up the applicable ceiling on disaster loans. However,

it could make a business loan to the same borrower if the transaction

otherwise met the criteria under SBA’S business loan program.

b. Pre-1992 Commitments The treatment described above applies to loan guarantee

commitments made on or after October 1, 1991. Commitments made

, prior to fiscal year 1992 were made under the rules summarized in

Section B. 1. Given the varying maturities under different credit

programs, pre-1992 guarantees are likely to be around for many

years, Since pre-1992 guarantees were not subject to any requirement

to determine subsidy costs or to obtain advance appropriations of

budget authority, they require different treatment and are addressed

in separate provisions of the FCRA.

Three provisions are particularly relevant. First, the law establishes

“liquidating accounts,” defined as budget accounts which include all

cash flows to and from the government resulting from pre- 1992

cornrpitments. 2 U.S.C. $ 661a(8). Second, all collections resulting

from pre-1992 guarantee commitments are to be credited to the

liquidating account and are available to liquidate obligations to the

same extent they were under the applicable program legislation prior

to enactment of FCRA. Id. $ 661 f(b). At least once a year, unobligated

balances in the liquidating account which are in excess of current

needs are to be transferred to the general fund of the Treasury. —Id.

Third, 2 U.S.C. $ 661d(d) provides:

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Federal Asaietance: Guaran teed and Inaured LoaxM

“If funds in liquidating accounts are insufficient to satisfy the obligations and

commitments of said accounts, there is hereby provided permanent, indeftite

authority to make any payments required to be made on such obligations and

commitments.”

Thus, for pre-1992 guarantees which are liquidated in accordance

with the terms of the original commitment, payment will still be made

from liquidating appropriations. The main change under iWRA is the

provision of these liquidating appropriations on a permanent,

indefinite basis.

A “mociitlcation” to a pre-1992 loan guarantee-the term having the

same meaning as described in Section B.2.a for post-1991

guarantees-is treated differently. See OMB Circular No. A-34,

$$62. l(c) and 62.9 for applicable procedures.

c. Entitlement Programs A partial exemption from IWRA is found in 2 U.S.C. $ 661c(c), which

provides that the requirement for the advance appropriation of budget

authority to cover estimated costs does not apply to (1) a loan

guarantee program which constitutes an entitlement, or (2) programs

of the Commodity Credit Corporation existing on IWRA’S date of

enactment (November 5, 1990). An entitlement program is one in

which the provision of assistance is mandatory with respect to

borrowers and lenders who meet applicable statutory and regulatory

eligibility requirements. The statute gives two examples-the

guaranteed student loan program and the veterans’ home loan

guarantee program. Since the exemption is from the appropriation

requirement of 2 U.S.C. 5 661c(b) and not the entire act, other

provisions of IWRA and OMB Circular A-34 presumably apply to the

extent not inconsistent with the exemption.

The pre-FCRA rules summarized in Section B.1 form the starting point

with respect to obligational treatment and the application of the

Antideficiency Act. A 1985 decision, 65 Comp. Gen. 4, reiterated

these n.des in the context of the Guaranteed Student Loan Program.

GAO advised the Department of Education that (1) a guarantee itself is

ordy a contingent liability and is not recordable as an obligation;

(2) an obligation must be recorded upon occurrence of one of the

contingencies specified in the program legislation which will require

the government to honor the guarantee (in this case, loan default or

the death, disability or bankruptcy of the borrower); and (3) the

Antideficiency Act does not require that sufficient budget authori~ be

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Federal Assistance: Guaranteed and Insured Loans

available at the time the obligation is recorded because, by virtue of

the requirements of the program legislation, incurring the obligation

is “authorized by law” for Arttideficiency Act purposes.

For f~cal year 1992, Cortgress appropriated to the program accounts

for both the guaranteed student loan and the veterans’ home loan

programs, for costs as defined in FCRA, “such sums as may be

necessary to carry out the purposes of the program,” together with a

definite (specific dollar amount) appropriation for administrative

expenses. ]s

d. Certain hsurance Programs Artother provision Of FCRA, 2 U.S.C. $ 661e(a)(l), exempts from the

entire act—

“the credit or insurance activities of the Federal Deposit Insurance Corporation,

National Credit LJnion Administration, Resolution Trust Corporation, Pension Benefit

Guaranty Corporation, National Flood Insurance, National Insurance Development

Fund, Crop Insurance, or Tennessee Valley Authority.”

Thus, to the extent the rules in Section B.1 would apply to any of the

programs conducted by these entities to begin with, they continue to

apply unaffected by IWRA.

C. Extension of

Guamntees

1. Coverage of Lenders

(Initial and Subsequent)

a. Eligibility of Lender/Debt Program legislation may prescribe eligibility criteria for lending

Instrument institutions, or may otherwise limit the types of lending institutions to

which guarantees may be extended, either as the initial lender or as a

subsequent transferee, or may address the manner in which the debt

instrument covered by the guarantee maybe treated. The safest

generalization in this area, and the common strain throughout the

13Dep~~e~~ of ~bor, Health and Humn Services, and Education, and Relawd Agencies

Appropriations Act, 1992, Pub. L. No. 102-170,105 Stat. 1107,1132 (1991) (guaranteed

student loans); Pub. L. No. 102-139, ~a n.9, 105 Stat. at 737 (veterans’ home loans).

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Federd Ads@nce: Goaran teed and Insured LONM

cases, is that any proposed action must be consistent with the terms

and intent of the agency’s statutory authority.

For example, in B-194153, September 6, 1979, GAO considered a

proposed pilot program in which the Economic Development

Administration, an agency within the Department of Commerce,

would guarantee loans made to private borrowers by participating

lending institutions, with the guaranteed portion of the loan to be

subsequently assigned to the city of Chicago and financed through the

issuance of bonds. The statutory basis for the proposal, 42 U.S.C.

$3142, authorizes the Secretary of Commerce to guarantee up to 90

percent of the outstanding balance of loans for certain specified

purposes “made to private borrowers by private lending institutions.”

GAO concluded that allowing the guarantee to be assigned to an entity

that was neither private nor a lending institution and could not have

qtiled for a guarantee initially, would exceed EDA’S statutoIY

authority since EDA would be doing something

indirectly-guaranteeing a loan by a non-private lender-that the

statute would not permit it to do directly.

GAO revisited the issue a few years later, and reaffiied the

ineligibility of public lenders to participate as secondary market

purchasers under the “private lending institution” requirement of 42

U.S.C. 53142. Since a secondary market purchaser effectively

becomes the lender, it makes no difference whether sale to the public

lender is contemplated from the loan’s inception or merely occurs in

the ordinary course of secondary market operations. 61 Comp. Gen.

517 (1982).

Another issue in B-194153 was whether EDA could legally allow a

guaranteed loan to be evidenced by two notes, one to be fully

guaranteed and the second with no guarantee. The Comptroller

General found the proposed arrangement within EDA’s achmrm% “ “ rative

discretion under the statute since the two-note arrangement would

still conform to the statutory requirement that no more than 90

percent of a loan be guaranteed, and furthermore was apparently

intended to effectuate the basic legislative purpose. The decision

pointed out, however, that since the two notes represented one loan,

their substantive terms such as maturity dates and interest rates must

be the same, and the two-note mechanism must not increase the

government’s potential liability. This portion of the decision was later

modit3ed in 60 Comp. Gen. 464 (1981), to the extent that GAO

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Federal Assistance: Guamn teed and Immred Loans

approved use of a “split interest rate” in which the interest on the

EDA-guaranteed note was lower than the interest rate on the

unguaranteed note. The split-interest scheme was consistent with

programs by other agencies under similar legislation and would be

more favorable to the government.

A related type of question arose under the now defunct New

Community Development Program authorized by the Urban Growth

and New Community Development Act of 1970. The legislation

authorized various forms of financial assistance to stimulate the

development of new communities, including the guarantee of

obligations of private new community developers and state

development agencies. A question arose as to whether the Department

of Housing and Urban Development was authorized or required to

guarantee the indebtedness of a private developer to contractors and

subcontractors who had supplied goods and services to the developer.

Finding that the intent of the program legislation was that HUD

guarantee only obligations issued to private investors, the

Comptroller General concluded that HUD was neither required nor

authorized to issue guarantees that would run to a developer’s

contractors and subcorttractors. B-170971, August 22, 1975;

B-170971, July 22, 1975.

b. Substitution of Lender As a general proposition, substituticm of lenders is permissible as long

as it is not prohibited by the program legislation or regulations and

the “replacement lender” meets any applicable eligibility

requirements.

In 60 Comp. Gen. 700 (1981), GAO considered the effect of a change

in lenders in the Farmers Home Administration’s rural development

loan guarantee program. The program operated under an annual

ceiling, and the specific question was whether a guarantee could

continue to be charged against the ceiling for the fiscal year in which

it was initially approved, when a change in lenders took place in a

subsequent fiscal year. As to the programmatic significance of the

change, the decision stated:

“[T]he basic purpose of the FmHA rural development loan guarantee program is to

provide assistance to eligible borrowers to enable them to accomplish one or more of

the statutory objectives. In other words, although the guarantee is extended to the

lender, it is clear that the purpose of doing so is not to provide a Federal benefit to the

lending institution but to induce the lender to make the loan to the borrower. In this

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Federsl Assistance: Guaranteed and Insured Loans

c. Existence of Valid

Guarantee

sense, the lender is just a conduit or funding mechanism through which FrnHA

provides assistance to an eligible borrower so that the statutory objectives can be

realized. Thus, the particular lender involved is of relatively little consequence.”

Id. at 708–09. Therefore, the decision held that where a guarantee is

~harged against the ceiling for a particular fiscal year, it can continue

to be charged against the same ceiling notwithstanding a substitution

of lenders in a subsequent fiscal year, provided that the other relevant

terms of the agreement (borrower, loan purpose, loan terms) remain

substantially the same. Id. at 709. The statement that the particular

lender is of little conseq~ence presumes, as was in fact the case, that

the program legislation does not contain any specific eligibility

requirements for lenders. Any such requirements (for example, the

“private lender” requirement in the EDA cases discussed above) would

of course have to be followed.

In order for a loan guarantee commitment to be valid and hence

binding on the government, the government official making the

commitment must be authorized to do so, and the guarantee must be

made to an eligible lender extending credit to an eligible borrower for

an authorized purpose. Questions as to whether a valid guarantee was

ever created often do not arise until the lender calls upon the

government to pay under the guarantee. The answer depends on the

program statute and regulations, the terms of the guarantee

instrument, and the conduct of the parties.

In 54 Comp. Gen. 219 (1974), GAO considered the authority of the

Small Business Administration to reimburse three different lenders. In

each case, the borrower had applied to SBA for financial assistance,

the lender (at the request or with the approval of an SBA off~cial) had

provided interim funds to the borrower, but, for various reasons, the

financial assistance was ultimately not extended.

Iq the first case, an SBA official who was authorized to approve loan

guarantees advised the bank in writing that the guarantee had been

approved. SBA subsequently issued a formal loan authorization, but

later canceled it because the bank did not comply with all of the terms

and conditions of the guarantee agreement, one of which was that the

bank disburse the loan within 3 months. Although the initial written

approval created a valid guarantee, the bank’s noncompliance caused

it to lapse, and SBA was therefore not obligated to purchase the

interim note, i.e., to reimburse the bank for the advance.

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Federdhdstume: Guuanteed -d Insured Lou18

In the second case, an authorized SBA official had similarly advised the

bank in writing that the guarantee had been approved. Here, however,

SBA subsequently determined that the borrower was not eligible for

the guarantee, and therefore never issued a formal loan authorization.

Since the bank relied on the prior approval and was not legally

required to comply with the conditions of the guarantee agreement

(such as payment of the guarantee fee) until SBA issued the formal

authorization, the bank was entitled to reimbursement for the interim

loan.

In the third case, SBA had formally approved a direct loan to a

borrower and had issued a written loan authorization. Because of its

inability to immediately disburse the funds, SBA requested a private

lender to disburse the funds on an interim basis, with SBA’S assurance

of repayment. SBA later refused to disburse the loan funds because the

borrower had disappeared and his business had become defunct.

Under the circumstances, SBA’S written commitment to reimburse the

lender did constitute SBA’S ‘guarantee” of any advances the lender

made in reasonable and just~led reliance on it. Therefore, even

though the direct loan by SBA was never disbursed, SBA was authorized

to reimburse the lender.

The decision discussed two earlier cases-B-178250, August 6,1973,

and B-164162, September 20, 1968’–involving direct rather than

guaranteed loans. GAO had concluded in these cases that, under the

spectiic circumstances involved, SBA could not reimburse a lender for

losses suffered on interim disbursements made after SBA had

authorized loans to the borrower. In both cases, the claimant bank

was unable to adequately establish that any SBA otilchd had made a

promise or commitment on which the bank could just~lably rely.

Essentially, the primary theory of recovery in all of these cases,

although not specifically identified as such, is estoppel-conduct by

the government sufllcient to later preclude it from denying the

existence of a valid guarantee. Several similar cases have specifically

raised the estoppel theory.14 For example, the issue in B-187445,

January 27, 1977, was whether SBA wss legally obligated for a

$10,000 loss suffered by a bank on a loan made to a small business

14E~pwl ~lx-me gwement can mre& succeed, ad ~en the* cases in which

GAO haa sanctioned them would, in light of the Supreme Court’s decision in OfIke of Personnel

Management v. Richmond, 496 U.S. 414 (1990), have ta be massewd before being used as

precedent. Est.oppel claims arise in many contexts and are dkwwed further in Chapter 12.

Page 11-24 GAOK)GC-92-M Appropriations kw-vol. ~
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Federal Asdstance: Guamnteed and Insured Loam

contractor under section 8(a) of the Small Business Act. The bank

alleged that the loan was made on the basis of assurances from an SBA

official that the loan would be guaranteed. GAO found, however, that

the loan was not in fact guaranteed since it was never approved in

writing as required by the applicable provision in the guarantee

agreement between SBA and the bank. Also, SBA had no liability to the

bank under an estoppel theory since the bank was aware that the SBA

oftlcial involved lacked authority to approve a loan guarantee or

otherwise assure the bank of repayment. Further, the bank could not

demonstrate that it had made the loan primarily in reliance on the

alleged misrepresentations.

In another 1977 case, a bank argued that SBA WaS liable under an

estoppel theory to reimburse the bank for a loss suffered as a result of

SBA’S approval of a direct disaster loan to the borrower. However, the

facts did not support an estoppel since SBA made no

misrepresentations to the bank, and the bank did not make the loan in

reliance on the representations that SBA did make. B-181432,

February 4, 1977. A somewhat similar case involving the Farmers

Home Administration denied the claim of a creditor who aileged that

he had advanced supplies and services to a borrower on the basis of

assurances from a Farmers Home employee that the borrower’s

obligation would be guaranteed by the government. Since FrnHA

regulations then expressly prohibited employees from guaranteeing

repayment of non-FmHA loans, either personally or on behalf of the

government, the creditor was necessarily on notice of the employee’s

lack of authority to make such assurances. B-168300, December 4,

1969; B-168300, December 3, 1969.

Another estoppel case is B-19831O, April 23, 1981. SBA had sent a

letter to a borrower confmg approval of a direct handicapped

assistance loan. Allegedly in reliance on this letter, the claimant bank

advanced funds to the borrower. SBA then issued its formal loan

authorization, but canceled it shortly thereafter based on the

borrower’s failure to disclose all pertinent information on its loan

application. The bank sought reimbursement on a theory of

“promissory estoppel.” The Comptroller General held that SBA was

under no obligation to reimburse the bank for two reasons. First,

SBA’S letter had been to the borrower, not the bank. Thus, SBA had

made no representations to the bank. Second, the bank’s reliance on

the letter was not reasonable because the letter contained no mention

of the possibility that the loan might be used to obtain interim

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Chapter 11

Federal Aaaiatance: Guaran teed and Inaured Loana

financing, nor did the bank attempt to obtain any assurance from SBA

that the borrower would be required to use the proceeds of the SBA

loan to repay the interim loan.

The existence of a valid guarantee also was an issue in 60 Comp. Gen.

700 (1981) in a different context. Farmers Home Administration

regulations required written notification to the lender of the approval

or disapproval of a guarantee application. Based on these regulations,

and citing B-187445, January 27, 1977, discussed above, GAO

concluded that oral notification of a loan guarantee approval was not

sufficient to create a valid guarantee for purposes of charging that

guarantee against the FmHA’s annual ceiIing. 60 Comp. Gen. at

709–10.

d. Small Business Investment A “small business investment company” (SBIC) is a private company

Companies organized under the Small Business Investment Act of 1958, as

amended (15 U.S.C. $$ 661-697 c), and licensed by the Small Business

Administration. Its purpose is to provide financial assistance to small

business concerns.

A series of decisions in the 1960s upheld SBA’S authority to provide

various forms of financial assistance to SBICS. FirSt, SBA may

guarantee loans made to SBICS by private financial institutions. 42

Comp. Gen. 146 (1962). While the guarantee authority was not

explicit at the time of the 1962 decision, it was later added and is now

found at 15 U.S.C. 3683. SBA also has “secondary guarantee”

authority, authority to sell to private investors, with recourse (SBA’S

guarantee), debt instruments representing loans SBA had made to

SBICS. 44 Comp. Gen. 549 (1965). The proposal considered in 44

Comp. Gen. 549 involved loans with a maturity of 5 or 6 years. Later

that same year, SBA proposed extending its program to loans with

15-year maturities. GAO again approved, noting that the difference in

maturity did not affect the basic authority. 45 Comp. Gen. 253

(1965). The 15-year period also is now specifiedin15U.S.C.5683.

See also 45 Comp. Gen. 370 (1965) (same holding for similar

program under different provision of Small Business Investment Act).

The Comptroller General concluded further in 45 Comp. Gen. 253

that SBA could make the sales through an agent or broker with

reasonable compensation if administratively determined to be

necessary or more economical. However, the broker’s compensation

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Federal kudatance: Guaranteed and Insured Loans

may not be paid from the proceeds of the loan sales but must be

charged to SBA’S appropriation for administrative expenses.

A small business investment company maybe either a corporation or

a limited partnership. 15 U.S.C. $ 681(a). The scope of authorized SBA

assistance includes non-recourse loans to a limited partnership SBIC

(by purchasing or guaranteeing its debentures). B-149685,

January 12, 1978. Non-recourse in this context means that SBA wodd

“waive” its right to recover, provided under the laws of most states,

against the separate assets of the general partner.

In B-149685, March 25, 1971, GAO considered SBA’S authority to sell

guaranteed SBIC debentures to a group of underwriters for resale to

private investors. Under this program, SBA would fwst purchase $30

million of newly issued debentures from SBICS and then immediately

sell them to private investors, with SBA’S guarantee of payment of

principal and interest according to the terms of the instrument. SBA

would act as servicing agent for the holders, receiving payment on the

debentures from the SBICS and then paying the holders in accordance

with the terms of the debentures. The Comptroller General concluded

that the proposed sale and guarantee of debentures in this manner

was within the scope of SBA’S statutory authority, provided SBA did not

exceed any existing statutory program level limitations. See also

B-149685, June 3, 1969.

Another issue is whether a small business investment company is

eligible to participate, as a lending institution, in a government

guaranteed loan program. In 49 Comp. Gem 32 (1969), the

Comptroller General held that SBICS were not eligible lenders for

purposes of SBA’S guaranteed loan program under section 7(a) of the

Small Business Act, 15 U.S.C. s 636(a). The decision relied heavily on

the legislative history of the Small Business Investment Act.

Some years later, GAO again considered the eligibility of SBICS to be

guaranteed lenders in SBA’S section 7(a) guaranteed loan program as

well as the Farmers Home Administration’s business and industrial

loan program (7 U.S.C. $ 1932). SBA’S new proposal was somewhat

different from the arrangement considered in 49 Comp. Gen. 32,

because after originating the loan, the SBIC would then immediately

sell the guaranteed portion to another lending institution and remain

the servicing agent. GAO’S conclusion remained the same, again based

on the legislative history of the Small Business Investment Act which

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“’:$?li%
Chapter 11

Federal Assistance: Gua.mnteed snd Insured Losns

indicated that Congress intended SBICS to operate independently of

other federal loan programs. With respect to the Farmers Home

Administration program, nothing in either the Small Business

Investment Act or the Consolidated Farm and Rural Development Act

or their legislative histories supported a different conclusion. 56

Comp. Gen. 323 (1977).

One type of small business investment company is the “minority

enterprise smrdl business investment company,” or “MESBIC.” As the

name implies, a MESBIC is a small business investment company

formed to aid minority-owned small businesses. In 59 Comp. Gen.

635 (1980), affd on reconsideration, B-197439, November 26, 1980,

GAO considered SBA’S authority to “leverage” against federal funds

invested in MESBICS. “Leveraging” means investing on a partial

matching basis through the purchase or guarantee of debentures or

the purchase of preferred securities. The specific issue was whether

SBA could leverage against Federal Railroad Administration

investments in MESBICS. Since the Small Business Investment Act

authorizes SBA to leverage only against private money, the decision

concluded that, absent specific statutory authority, SBA could not

leverage against federal funds invested in MESBICS. The MESBICS

took the case to court, arguing that “private” meant simply

“non-SBA.” Based on the plain meaning of the statutory language, the

court agreed with GAO. Inner City Broadcasting Corp. v. Sanders, 733

F.2d 154 (D.C. Cir. 1984). “[P]rivate means private and not

governmental.” Id. — at 157.]5

GAO and the court had both recognized that leveraging against other

federal funds would be permissible if authorized by the statute under

which those other funds were provided. One such example is

community development block grant funds provided under the

Housing and Community Development Act of 1974.60 Comp. Gent

210 (1981).

e. The Federal Financing Bank The Federal Financing Bank was created by the Federal Financing

Bank Act of 1973, 12 U.S.C. M 2281–2296. Its purpose is to

15A lgsg ~endment tided 15 U.S.C. S 683(e), providing that feder~, ~~te, or loc~

government funds received by a small business investment company from non-SBA sources shall

be included in determining private capital “solely for regulatory purposes, and not for the

purpose of obtaining financial assistance from or licensing by [SBA], providing such funda were

invested prior to November 21, 1989.”

Psge 11-28 GAO/OGC-92-13 Appropriations Law-Vol. fI
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Federal Andst8nce: Gwiranteed and Inmred Loans

coordinate federal credit programs with overall government economic

and fiscal policies. It is a corporate instrurnentali~ of the United

States Government, subject to the generai direction and supervision

of the Secretary of the Treawuy. Id. $2283. The Bank acts essentially

as an intermediary. Its powers in~ude purchasing agency debt

securities and federally guaranteed borrowings. Specifically, it is

authorized by 12 U.S.C. $2285 to-

“purchase and sell on terms and conditions determined by the Bank, any obligation

which is issued, sold, or guaranteed by a Federal agency. Any Federal agency which is

authorized to issue, sell, or guarantee any obligation is authorized to issue or sell such

obligations directly to the Bank.”

The Bank obtains funds by issuing its own securities, almost entirely

to the Treasury. Id. $5 2288(b), (c). The decisions summarized below

illustrate the varj%tg roles the Bank plays in the credit fmartcing

arena.

In 58 Comp. Gen. 138 (1978), GAO considered the SBA’S authority to

issue certificates to the Federal Financing Bank evidencing transfer of

title of a number of individual loans and setting forth SBA’S guaranteed

assurance of payment, either in cash or by loan substitution. Even

though this arrangement contemplated the sale of certificates

evidencing ownership of a group of SBA loans rather than individual

loans, it was sufficiently similar to the arrangement upheld in

B-1 49685, March 25, 1971, discussed above in connection with SBICS,

and was therefore permissible. Since the certificate did refer to

specific loans and, when transferred to the Bank, would represent a

transfer of ownership of the loans to the Bank, the plan would not

constitute borrowing by SBA, which would have required specific

statutory authority .16

The same decision, while noting that SBA’S authority to sell loans to

the Federal Financing Bank with its guarantee was “neither greater

nor less” than its authority to sell loans to other purchasers (58

Comp. Gen. at 139), nevertheless concluded that SBA lacked the

authority to seli direct disaster loans (15 U.S.C. $ 636(b)) to the

Federal Financing Bank on a guaranteed basis. Although SBA does

have authority to guarantee disaster loans made to eligible borrowers

by participating lending institutions, it is not authorized, in the

16sBA ~Ow h= such ~mOW@ imthrity h 15 U. SC. $ 633(C)(5).

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Federal Assistance: Guaranteed and Insured Loans

absence of specific statutory authority or a clear expression of

congressional intent, to sell and guarantee disaster loans that it had

originally made directly. Since there was at the time no statutory

ceiling on the type of loans in question, the proposal would enable SBA

to “replenish its disaster loan revolving fund so as to enable it to make

new disaster loans and repeat the process indefinitely,” potentially

resulting in an unlimited contingent liability against the United States

with no congressional restraint. Id. at 146. In addition, the proposal

contemplated a 100 percent gua~mtee which would have violated the

statutory 90 percent maximum guarantee of disaster loans.

Another case involving the Bank as ‘guaranteed lender” is

B-162373-O. M., July 31, 1979, finding that an agreement between the

Rural Electrification Administration and the Bank by which the Bank

made loans to borrowers that REA guaranteed under the authority of

section 306 of the Rural Electrification Act of 1936 (7 U.S.C. $ 936),

was within the statutory authority of both agencies. The legality of the

arrangement was considered from the perspectives both of REA’s

authority to guarantee loans made by a non-private entity such as the

Bank and of the Bank’s authority to act as the initial lender, making

loans directly to a private nongovernmental borrower with REA’s

guarantee. Since REA has authority to guarantee loans made by “any

legally organized lending agency,” it could guarantee ioans made by

the Federal Financing Bank. At the same time, the Bank was acting

within its statutory authority to purchase obligations guaranteed by a

federal agency, since the transaction was in the form of its purchasing

the borrower’s note from the borrower with payment being

guaranteed by REA. Although the arrangement was legal, GAO was

critical because it did not involve the private credit sector in the REA

program as contemplated by the Rural Electrification Act. See GAO

report, Financing Rural Electric Generating Facilities: A Large and

Growing Activity, CED-81-14 (November 28, 1980), pages 16–17.

Congress subsequently confirmed the REA-FTB arrangement by

amending 7 U.S.C. $936 to provide that the loans, upon request of the

borrower, “shall be made by the Federal Financing Bank.” Under the

statute, loan servicing is the responsibility of the lender. Thus, REA’s

funds are available to perform the loan servicing function as the

Bank’s agent only on a reimbursable basis. 62 Comp, Gen. 309

(1983).

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Federal Assistance: Guaranteed snd Insured Losns

Two 1987 opinions discussed the Federal Financing Bank’s role in the

foreign military sales program. The Bank finances credit sales under

the Arms Export Control Act, with the loans being guaranteed by the

Defense Security Assistance Agency. If the debtor nation defaults,

DSAA pays the Bank. One opinion concluded that the Bank is not

authorized to deliberately delay making demand on DSAA for payment

upon default. B-226718.2, August 19, 1987. The second advised that

two refinancing options under consideration, one involving

prepayment without penalty and one involving the partial

capitalization of interest, would result in a financial loss to the United

States or the substantial risk of one, and should not be implemented

without clear evidence of congressional approval. 66 Comp. Gen. 577

(1987). Congress subsequently approved a prepayment option. See

Security Assistance: Foreign Military Sales Debt Refinancing,

GAo/NSIAD-89-175 (August 1989); Federal Financing Bank: The

Government Incurred a Cost of $2 Billion on Loan Prepayments,

GAo/AFMD-89-59 (August 1989).

A 1985 transaction illustrates a very different role for the Bank. In

October 1985, the Treasury Department had reached its statutory

public debt ceiling and was in danger of defaulting on its obligations

pending congressional action to raise the ceiling. The Bank effectively

borrowed $5 billion from the Civil Service Retirement and Disability

Fund by issuing securities to the Fund and accepting Treasury

obligations in payment. The Bank then used these securities to prepay

part of its outxtartding debt to Treasury. This in turn reduced

Treasury’s outstanding debt, enabling it to borrow an additional $5

billion from the public to meet its obligations. Based on the Bank’s

statutory authority and the conclusion that its obligations do not

count against the public debt limit set by 31 U.S.C. $ 3101(73), the

Comptroller General found the transaction legally unobjectionable.

B-138524, October 30, 1985.

When the Federal Financing Bank was first created, its transactions

were entirely off-budget. 12 U.S.C. $ 2290(c) (“receipts and

disbursements of the Bank. . . shall not be included in the totals of the

budget of the United States Government”). With the budget reforms

of the Congressional Budget Act and subsequent legislation, this

treatment came under increasing criticism and GAO, among others,

recommended that Bank transactions involving other government

entities be reflected in the budget. ~, Government Agency

Transactions With the Federal Financing Bank Should Be Included on

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the Budget, PAD-77-70 (August 3, 1977) (detailed analysis); 58 Comp.

Gen. 138, 142–44 (1978); B-178726, September 16, 1976 (pointing

out that purchase by the Bank of a loan guaranteed by another agency

amounts to a direct loan).

While the Federal Financing Bank Act itself has not been amended,

Congress in 1985 added 2 U.S,C. $ 655(b) to the Congressional Budget

Act:

“AU receipts and disbursements of the Federal Financing Bank with respect to any

obligations which are issued, sold, or guaranteed by a Federal agency shall be treated

as a means of financing such agency for purposes of section 1105 of Title 31

[submission of President’s budget] and for purposes of [the Congressional Budget]

Act.”

Under this provision, direct loans of the Bank are accounted for as

loans of the guaranteeing agency. See B-226718.2, August 19, 1987.

2. Coverage of Borrowers

a. Eligibility of Borrowers Loan guarantee program legislation may or may not establish criteria

for lender eligibility; it will almost invariably address borrower

eligibility. This is because the primary purpose of a guarantee

program is to enhance credit availability to a particular class of

borrowers (farmers, veterans, small businesses, etc.). The

significance of any such eligibility requirements is that an agency is

not authorized to issue a guarantee or reimburse a lender on behalf of

an ineligible borrower.

For example, one portion of the National Housing Act, 12 U.S.C.

$1703, authorizes the insurance of loans made to finance repairs or

improvements to real property by owners or lessees. Under this

statute, it is the lending institution’s responsibility to determine

borrower eligibility. Thus, a lending institution making a loan to

someone who is neither the owner nor the lessee of the property

involved is not entitled to be reimbursed for losses resulting from

borrower default. B-180015, November 28, 1973; B-174739,

January 19, 1972.

While most eligibility requirements are found in the program statute

itself, they may appear in other legislation. For example, the Military

Selective Service Act provides that any person who is required to

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FederaI Assistance: Guaranteed and Inanred hUIS

register for the draft and knowingly and willfully fails to do so shall be

ineligible for guaranteed student loan assistance. 50 U.S.C. App.

$ 462(O. The Department of Education is authorized to issue

implementing regulations, discussed in B-210733, February 25, 1983.

b. Substitution of Borrowers Generally, the substitution of borrowers within the same fiscal year

will not present problems. However, as with contracts and grants, the

substitution may or may not be proper when made in a subsequent

f~cal year. Loan guarantee authority-whether it is an advance

appropriation of budget authority under the Federal Credit Reform

Act or a program level ceiling in a situation not governed by the Credit

Reform Act–is granted on an annual, multiple-year, or no-year basis.

It thus has a period of availability analogous to a regular

appropriation. Where the period of availability is a freed time period,

the authority ceases to be availabie when that period expires.

The issue in B-164031(5), June 25, 1976, was the transferability of a

loan guarantee and interest subsidy originally approved under a

program of federal assistance for the construction and modernization

of hospitak. The question was whether the guarantee could be

transferred from one hospital to another in the following fiscal year,

when the original hospital became unable to take advantage of the

guarantee due to apparent financial difficulties. The Comptroller

General found that, since the period of availability of the guarantee

authority had expired, the transfer would be authorized only if it could

be viewed as a “replacement.” Since the second hospital did not serve

the same community as the first, the transfer of the loan guarantee to

the new “borrower” was not merely a “replacement” and therefore

could not be approved.

A few years later, the Farmers Home Administration asked whether it

could continue to charge a guarantee to the annual ceiling for the

fiscal year in which it was originally approved when a new borrower

was substituted in a later fiscal year. As a general rule, the answer is

no, and the substitution would have to be treated as a new

undertaking. This is different from the substitution of lenders

discussed previously in this chapter because the approval of a

guaranteed loan to a particular borrower requires a specific eligibility

determination. Thus, while the identity of the particular lender maybe

of relatively little consequence, the identity and eligibility of the

borrower are essential to the transaction. However, the substitution

may be treated as a continuation of the original guarantee where the

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.,-; . . .

.+
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Federal Assistance: Guaranteed and Insured Loana

substituted borrower bears a “close and genuine relationship” to the

originally approved borrower (for example, a corporation and

partnership controlled by the same individuals), provided of course

that the loan purpose remains substantially unchanged. 60 Comp,

Gen. 700 (1981).’7

c. Loan Purpose The authority to make a loan guarantee commitment depends not only

on the eligibility of the particular borrower, but also on whether the

purpose for which the guaranteed loan is to be made is consistent

with the applicable program statute and regulations. The analysis is

essentially an application of the “necessary expense” doctrine used in

other purpose availability contexts.

A number of illustrative cases have arisen under section 301 of the

Defense Production Act of 1950,50 U.S.C. App. $ 2091, which

authorizes loan guarantees to finance the performance of contracts

where deemed “necessary to expedite production and deliveries or

services under Government contracts for the procurement of

materials or the performance of services for the national defense.” Id.

$ 2091(a)(l). For example, B-115791 -0.M., September 3, 1953, –

concluded that section 301, ordinarily used to provide short-term

working capital, could also be used to guarantee loans for the

expansion of plant facilities if determined necessary to expedite

production and deliveries or services under defense contracts.

Contracts to purchase equipment for civil defense stockpiling

purposes may be regarded as contracts for the national defense and

therefore eligible for loan guarantees under section 301.37 Comp.

Gen.417 (1957). The issue in that case was whether a 1953

amendment to the act, which narrowed the definition of “national

defense,” had the effect of excluding civil defense which clearly would

have been covered before the amendment. GAO found no evidence of

congressional intent to exclude civil defense, and concluded therefore

that the loans could be guaranteed.

While section 301 was intended primarily to assist small and

medium-size defense contractors, its language is not so limited and is

ITBoth 60 (=Omp, Gen, 700 ~d B.164031(5) appfieci the basic principles of deckions ‘n the

substitution of grantees discussed in Chapter 10.

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Federal Aeeietance: Gnaranteed and Inoured Loenn

sufficiently broad to permit guarantees to large-size defense

contractors as well. B-1701O9, July 21, 1970 (large railroad carrier).

GAO considered a different loan guarantee program in 38 Comp. Gen.

640 (1959). The question in that case was whether the Civil

Aeronautics Board, under a statute authorizing the guarantee of

aircraft purchase loans, could guarantee the indebtedness of an air

carrier for the conversion of an existing aircraft. The case involved the

conversion of piston engine aircraft to turbo-powered aircraft. GAO

found that the conversion was such an extensive modification as to

amount to a new type of aircraft for all practical purposes. Also, it was

clear that if the manufacturer had performed the conversion and then

sold the converted aircraft to the carrier, the purchase would have

been eligible for the guarantee. The conversion was therefore within

the statutory purpose and the guarantee was authorized.

An analogous situation occurred in 34 Comp. Gen. 392 (1955),

involving the Maritime Administration’s ship mortgage insurance

authority under the Merchant Marine Act. Noting that purchase plus

reconstruction was the equivalent of new construction for purposes of

the program, the Comptroller General held that the insurance could

extend to the purchase money mortgage and reconstruction costs for

a vessel acquired by purchase (in this case from the government)

instead of under a construction contract. This decision was amplified

in 35 Comp. Gen. 18 (1955), which held that the Maritime

Administration could insure a second-lien reconstruction mortgage to

a private lending institution where the first-lien (purchase money)

mortgage was held by the United States. There was nothing in the

statute limiting the insurance authori~ to f~st-lien mortgages.

The Rural Electrification Administration’s financial assistance

programs have generated a number of purpose-related cases.

Generally, REA may make direct loans and loan guarantees to finance

rural electrification facilities for persons not already receiving central

station service.

Several cases have established the proposition that REA can include

elements in a project that are arguably beyond a literal reading of the

statutov language, where those elements are merely incidental to

accomplishing the statutory purpose. Thus, early cases on REA’s direct

loan program held that MM cannot make a loan where the oniy

persons to be benefitted are already receiving central service, but it

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Federal hsistance: Guaranteed and Insured h

can finance the acquisition of existing facilities which are to be

incorporated into a larger system, where the acquisition is necessary

for the effective operation of the overall system. B-48590, April 3,

1945; B-32920, March 12, 1943; B-29463, December 1, 1942. This

principle applies whether the acquisition is by direct purchase or the

purchase of securities to be exchanged for the physical property.

B-42486, Jdy 25, 1944.

REA loans are not intended to parallel existing facilities, Thus, where

Plant A and Plant B are located less than 200 feet apart, and Plant A is

receiving central service from a power supplier who has offered to

provide adequate service to Plant B, Plant B cannot properly be

considered a person not receiving central service for purposes of

qual@ng for REAfmancial assistance. B-134138, October 15, 1958.

In B-195437, February 15, 1980, GAO applied the principles of the

above direct loan cases to m’s loan guarantee program. The issue

was REA’s authority to approve a loan guarantee to finance certain

expenditures associated with the construction of a coal-freed eleetric

generating plant, including cancellation charges if two contracts for

components of the plant were terminated. The decision held that,

since the contractors would not begin to build the components

without a commitment that the cancellation costs would be paid,

approval of a loan guarantee to assure funding to pay such charges

was consistent with the basic statutory purpose of providing

electricity to persons in rural areas and therefore authorized.

Finally, loans and loan guarantees to provide housing for the elderly

may include the purchase of related necessary equipment such as

refrigerators and laundry equipment. 42 Comp. Gen. 528 (1963).

& QMnj?i? In Liw’t Purmw A d=ciaiurl ~rcwkma~ c:itral hl th~ dhuidun d ~hang~~ In kndsm and

borrowem, do ~omp. Gpn. Too (j$ij~j, ~qq ~~~~q~ g~~g~ ~

Nmnpurkmst! Wider th~ F~6M HOmft AdRihIiStRMOrt ~~

d~vdf)pment loan guarantee program. &n, the iimue was when

changes could be deemed a continuation of the original transaction,

so that the guarantee would remain chargeable to the annual ceiling

for the fiscal year in which it was originally approved.

Similar questions had arisen frequently in the grant context, and the

Comptroller General applied the grant principles to loan guarantees,

stating:
Chapter 11

Federal hidetance: G~teed snd Inenred Loane

“APPM these grant decisions to the area of loan guarantees, when a @or change

to the ‘character’ of the project supported by the guarantee is made, the revised loan

guarantee must be charged against the ceiling in effect when the revision is made, We

believe that just as a signMcant change in the terms and conditions under which a

grant was made would be viewed as creating anew grant, a signifbnt change in the

terms and conditions under which a loan guarantee was approved would create a new

loan.”

Id. at 707. Thus, m~or changes will result in the treatment of the

Fransaction as a new guarantee. However, less substantial changes

where the purpose and scope of the revised agreement are consistent

with the purpose and scope of the original agreement maybe treated

as a continuation as long as the need for the project continues to

exist. This test must be applied on a case-by-case basis.

3. Terms and Conditions of

Guarantees

a. Introduction Just as with any other contractual obligation, a loan guarantee has

terms and conditions which the parties must follow. If a valid

guarantee has been created, the borrower defaults, and the lender has

complied with all applicable terms and conditions, the government is

obligated to pay on the guarantee. Conversely, if the lender does not

comply with applicable requirements, it may fmd that it has lost the

benefit of the guarantee. The applicable terms and conditions are

found in the program statute, agency regulations, and the guarantee

agreement.

This section will discuss the effect of noncompliance, especially by the

lender. The cases fall into two broad categories. In one group, the

loan may not have been eligible for the guarantee from its inception

based on a failure to satisfy applicable requirements such as a

statutory limitation on the maximum amount or maturity of the loan.

The result will usually be that the guarantee itself was never valid. In

the second group, the loan to be guaranteed complies with all

pertinent statutory or regulatory requirements, but the guarantee

never takes effect or is nullifkd as a result of the lender’s failure to

comply with one or more of the terms and conditions upon which the

government’s guarantee is contingent.

To illustrate these concepts, we have selected two areas-property

insurance programs under the National Housing Act and loan

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Federal Aaaistance: Guaran teed and Inaured Loans

guarantee programs of the Small Business Administration. The

specific requirements discussed are the more common ones and apply

of course only to the particular program. Nevertheless, our selection

is intended to illustrate types of issues, approaches to

problem-solving, and the crucial role of agency regulations, and from

this perspective is of more general relevance. Also, program details

such as maximum loan amount, whether prescribed by statute or

regulation, are subject to change from time to time. Accordingly,

individual cases do not necessarily reflect current program

requirements, but are intended to illustrate or support propositions of

continuing validity with respect to requirements of that type.

b. Property Insurance The National Housing Act, 12 U.S.C. ch. 13, authorizes a number of

Programs Under the National housing assistance programs. Several of the programs were formerly

Housing Act administered by the Federal Housing Administration (m) and were

transferred to the Department of Housing and Urban Development

(HUD) upon its creation in 1965. Although the programs are now

administered by HUD’S Office of Housing, they are still popularly

known as “FHA programs.”

(1) Maximum amount of loan

Under 12 U.S.C. 51703, the Secretary of HUD k authorized to insure

lenders against losses sustained in extending loans to borrowers for

various purposes, including home construction, repair, and

improvement, and the purchase of manufactured (mobile) homes. The

statute establishes the maximum amount of loans that maybe insured

for the various authorized purposes, for example, $25,000 for repairs

and improvements to an existing single-family structure. ~.

$ 1703(b)(l) (1988 and Supp. III 1991). While the speciiic dollar

amounts have changed several times, the basic maximum loan amount

requirement has existed in one form or another since the program

was established in 1934.

Where a single loan is involved, its face amount cannot exceed the

statutory limitation. If a loan which is reported by the lender to HUD

for insurance exceeds the statutory limitation in effect when the loan

was made, the lender cannot be reimbursed for any of its losses since

the loan was ineligible for insurance from its inception. ~,

B-127167, July 15, 1970; B-127243, May 21, 1956.

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Federal Aseletance: GwrwI teed and Insured LOU

In applying this limitation where more than one loan is involved, the

approach of HUD’S program regulations is to consider whether the

total amount of all outstanding insured loans made to a borrower

under Title I of the Housing Act with respect to the same property or

structure exceeds the maximum permissible amount. In this situation,

the ceiling applies to the outstanding aggregate loan balance rather

than the sum of the face amounts. 24 C.F.R. $201.10 (1991). Thus, for

a second loan, the ceiling is compared with the face amount of the

second loan (which represents the outstanding balance of that loan at

the time the determination is made) plus the outstanding balance of

the f~st loan. B-148894, June 29, 1962; B-137493, November 20,

1958. The method used to compute the outstanding balance is within

HUD’S discretion. In considering claims, GAO will apply the method

prescribed in the regulations. The fact that other reasonable methods

may exist is irrelevant. B-162961, January 19, 1968.

The ceiling applies only to loans for the same property. In B-148804,

June 7, 1962, the Comptroller General advised that a lender cotid be

reimbursed for a loss it suffered when the borrower defaulted, even

though the original loan of $4,000 exceeded the then-existing $3,500

limitation. Although only one application for a $4,000 loan had been

made, the record revealed that two separate properties were involved,

with $3,000 of the loan funds intended for the improvement of one

property, and $1,000 for the other. Therefore, the limitation which

applied only to loans for the same property was not violated.

This decision points out another important provision of 12 U.S.C.

$1703. The secretary Of HUD is authorized to waive a requirement in

the regulations if in the Secretary’s judgment enforcement would

impose an iqjustice on an insured lender, provided that the lender has

substantially complied with the regulations in good faith and waiver

would not increase the government’s obligation beyond what it would

have been under full compliance. Id. $ 1703(e). Thus, in B-148804,

the regulations required separate applications for separate properties,

but GAO advised that FHA could waive the requirement. Prior to

enactment of the waiver authority, GAO had applied the general rule

that agencies have no authority to waive statutory regulations. 15

Comp. Gen. 869 (1936). The waiver provision was enacted three

weeks after the decision. The authority has been applied in a variety of

contexts. E.g., B-127026, March 27, 1956 (bank disbursed loan after

a change fi~gulations under which loan would have been ineligible,

but had approved loan in good faith before receiving notice of the

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Federal Assistance: Guaranteed and Krmured Imane

change). The Secret.wy of HUD may delegate the wtiver authority to a

“substantial compliance committee.” B-127167, December 17, 1968.

Several decisions have emphasized that the waiver authority applies

only to regulations. It does not apply to a requirement imposed by

statute, such as the maximum loan amount. A purported waiver of a

statutory requirement is ineffective. ~, B-127243, May 21, 1956. A

waiver inconsistent with the statutory authority, for example, lack of

good faith by the lender, is also unauthorized, B-127167, December 5,

1957.

Exercise of the waiver authority is up to I-XUD, not GAO. While GAO

may, in settling a claim or rendering a decision, fmd a waiver invalid if

it violates one of the above principles, GAO cannot positively exercise

the authority where HUD has chosen not to do so. As in B-148804,

June 7, 1962, GAO can only advise HUD that in its opinion waiver is

authorized.

(2) Maximum loan maturity

The Housing Act also prescribes, by category, the maximurn maturity

term of loans which maybe insured under 12 U.S.C. $1703. For

example, the maturity of a loan for repairs and improvements to an

existing single-family structure may not exceed 20 years and 32 days.

Id, $ 1703(b)(3), As with the maximum loan amount, maturity

~tations have existed since the program’s inception.

The maturity date is computed based on the payment due date

indicated on the note. If the period exceeds the statuto~ maximum,

the loan is not insurable. It is the responsibility of the lender rather

than the government to make certain that notes do not have maturities

in excess of the statutory maximum. 55 Comp. Gen. 126 (1975);

B-172121, April 12, 1971. Thus, in 55 Comp. Gen. 126, a bank’s

claim for reimbursement was denied where a note submitted and

accepted for insurance had a projected maturity date 17 days in

excess of the maximum in effect when the loan was made.

The decision at 55 Comp. Gen. 126 also held that, since the statutory

limitation applies to the maturity of the obligation or note underlying

the loan, the date on the note is controlling, and not the date on which

the note was assigned or the funds disbursed. However, this is not an

absolute and there are certain circumstances in which the date on the

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Fedaal Aesietance: Guaranteed and Insured Loam

note has been found not controlling. For example, in B-162542,

October 24, 1967, GAO approved a lender’s claim even though the

note stated a final payment due date after the existing statutory

limitation. The holding was based on a letter from the lender to the

borrower which agreed to move up the date of the first payment and,

by implication, all of the others as well, incltding the f~ payment.

As a result, the maturity date fell within the statutory period.

Somewhat similarly, B-166521, April 25, 1969, involved a 60-month

note which, as written, would have exceeded the statutory maximum.

The note was dated June 20, 1963, but provided that the first payment

was not due until July 1, 1968. Based on the borrower’s actual

payment record, it was obvious that the maturity date had been

inadvertently entered on the.note as the fnt payment due date. Thus,

the maturity date was within the then-existing statutoqy maximum and

the lender could be paid.

Again in B-191660, March 5, 1979, GAO upheld a bank’s claim where

the note had a projected maturity date two days in excess of the

then-existing statutory limitation. The borrower’s payment record and

other evidence supported the bank’s allegation that, due to

inadvertence, the note as written did not reflect the intention of the

parties at the time the loan was made. The decision emphasized that,

where extraneous evidence is to be used to correct an alleged error on

a note, merely changing the due date after default and after HUD has

refused insurance is legally irrelevant. The extraneous evidence must

establish that the allegedly correct due date is what the parties

intended at the time the note was executed.

Problems may also arise when the term of the initial insured loan is

within the statutory maximum but a subsequent extension agreement

results in exceeding the maximum maturity period. For example, in

B-131963, July 17, 1957, FHA could not reimburse a bank for a loss

suffered on a defaulted loan where the bank had agreed in writing to

extend the maturity date of the note beyond the statutom maximum.

As pointed out in that decision, 12 us.c. $ 1703(b)(6) permits a loan

to be refinanced, but the authority does not include a mere extension

of payment. Thus, a lender may extend the time for paying a note

beyond the maximum time limitation and still retain insurability only

by actually refinancing the loan, that is, by executing anew note.

Short of an actual refinancing, a mere extension of payment beyond

GAOK)GC-92-13 &uWOpd8tiOML8W-VOl. ~
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Federal Assistance: Guaranteed and Insured Loana

the maximum will result in the loss of insurability. See also B-1641 18,

November 19, 1969; B-149800, September 28, 1962; B-148816,

May 21, 1962. Several cases have rejected arguments by the lender

either that it had not intended to extend the final maturity date beyond

the permissible maximum, or that it should have been allowed to

subsequently rescind or reform the extension agreement to conform

with the statutory limitation. ~, B-188240, August 10, 1977;

B-164118, December 30, 1969; B-164118, August 14, 1968.

Insurability may be retained if the extension is merely a temporary

deferral of certain payments, with the deferred payments to be made

up prior to the original maturity date. However, if this is the case, it

must be spelled out in the extension agreement. B-1641 18,

December 30, 1969.

In 51 Comp. Gen, 222 (1971), the extension agreement was not

merely an extension of time but also changed other terms such as the

period of payment and the amount of the monthly installment. In

these circumstances, the Comptroller General found that the terms of

the extension agreement differed so substantially from those of the

original note that it was “tantamount to a new note” and could be

considered as a refinancing. Although the “refinancing” had not been

accomplished in accordance with applicable regulations, GAO advised

HUD that it could consider waiving those particular re@atory

requirements under 12 U.S.C. ~ 1703(e).

(3) Owner/lessee requirement

Another requirement of the Housing Act is that property improvement

loans can be made only to borrowers who are owners of the property,

or who are lessees under a lease expiring not less than six months

after the maturity of the loan or other advance of credit. 12 U.S.C.

S 1703(a). A loan made to a borrower who is neither the owner nor

the lessee of the property involved is not insurable. For example,

where the property was owned by a corporation and the loan

application and note were signed by two individuals who were officers

of the corporation, but with no indication that they were signing as

representatives of the corporation, the loan was not made to the

owner of the property and was ineligible for insurance, B-180015,

November 28, 1973. Similarly, where the same person was president

of two different corporations and signed the note as president of

corporation “A” but had signed the lease on the property involved as

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Federal ~ce: Guaranteed and Inmued bans

president of corporation “B”, the loan was not made to the lessee and

was not insurable. B-174739, January 19, 1972.

The lease must expire “not less than six months after the maturity of

the loan.” A loan to a lessee is not insurable where the lease expires

before the maturity date (B-194145, December 12, 1980), or on the

maturity date (B-172965, July 16, 1971). Time “after” an event is

traditionally computed by excluding the date of the happening. Thus,

a ioan with a maturi~ date of July 1, 1956, to a lessee whose lease

was due to expire on December 31, 1956, was not insurable. “Not less

than six months after” the maturity date would have been on or after

January 1, 1957. B-129898, December 28, 1956.

In B-194145, December 12, 1980, a loan was refinanced after the

borrower, under a lease with option to purchase, had exercised the

option. The bank argued that the loan should be insurable since the

refinancing note had been executed to the owner. However, the

Comptroller GeneraI held that a refinancing loan is insurable only

where the prior loan being refinanced was itself validly insured. Since

the original loans in that case were ineligible, the refinancing loan was

equally ineligible. Also, the refinancing loan could not be considered

an entirely new loan for purposes of insurability, since the statute

authorizes insurance to finance improvements, not to repay

outstanding uninsured loans.

In B-12441O, July 25, 1955, GAO allowed abank’s claim on a loan to a

borrower who was not the owner of the property. The decision was

based on FHA regulations which provided that a lender, acting in good

faith, may in the absence of any information to the contrary, rely on

statements of fact in a credit application, and the credit application in

that case had been misleading. Compare, however, 17 Comp. Gen.

604 (1937), in which a claim was denied for a loss suffered when a

lender advanced funds to an individual other than the borrower upon

a forged authorization, where a simple comparison with the signature

on the note would have disclosed the forgery.

While a bank is generally entitled to rely on statements of fact in a

credit application, it is nevertheless required to exercise good credit

judgment. Thus, payment was denied in A-88143, August 21, 1937,

where the borrower had previously defaulted on a different loan with

the same bank The result applies equally to a bank with several

branches where the contract of insurance is with the home office.

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FederaJAsslstance: Guaranteed and Insured Losns

19 Comp. Gen. 92 (1939). An apparent exception occurred in

B-124438, July 26, 1955, where a borrower listed on his credit

application a prior loan with a branch of the same bank located 110

miles away, but failed to note that it was in default. The bank checked

several local credit references and received favorable reports, but did

not check with its branch. Since the bank had diligently checked the

local references, the borrower cured the default on the prior loan, and

FHA waived the bank’s violation of regulations which prohibited

accepting a loan when a prior loan was in default, GAO concluded that

the bank could be reimbursed for its losses on the second note.ls For

cases on the requirement to approve the credit statement, see 16

Comp. Gen. 958 (1937); A-71945, June 16,1937.

(4) Execution of the note

Another requirement of the regulations is that the note evidencing the

indebtedness bear the genuine signature of the borrower, be valid and

enforceable against the borrower, and be complete and regular on its

face. 24 C.F.IL f 201,12 (1991). In a number of cases where either

signatures were forged or terms of the note were altered-potentially

making the note ineligible for insurance under the ref@ations-GAO

has allowed claims by a lender for reimbursement based on the

lender’s apparent good faith and the previously discussed authority to

waive regulatory requirements. B-127167, December 17, 1968

(forged signature); B-127167, December 5,1957 (false

representation as to age); B-130955, May 2, 1957 (alteration of

amount); B-127167, April 10, 1956 (forged signature). Where HUD

declines to exercise its waiver authority, it may treat the note as

ineligible for insurance. United States v. deVallet, 152 F, Supp. 313

(D. Mass. 1957). “The government had the right to make such

limitations on its insurance undertaking as it saw fit,” —Id. at 315.

One court has held that the validity/reguki.rily requirement applies

“not at the point at which a bank submits its claim, but at the point at

which the loan itself is being arranged.” Guardian Federal Savings and

Loan Association v. Harris, 441 F. Supp. 789,791 (D.D.C. 1977).

While this seems clear enough with respect to items such as the

validity of the signature and the “regularity” of the note, subsequent

events may affect the enforceability of a note, a situation implicitly

%’he same facts in today’s computerized environment coufd well produce a different result.

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Federal Aaeistance: Goaraa teed and Insnred Loarw

recognized in the Harris case. In B-127483, April 26, 1956, it was held

that the enforceability requirement was not affected by a mistrial in a

suit brought by the lender resulting in a dismissal without prqjudice.

In 37 Comp. Gen. 857 (1958), GAO held that a lender could be

reimbursed where the note had become unenforceable due to the

passage of time notwithstanding the lender’s diligent collection

efforts. The result wouid at least arguably be different if a note

became unenforceable through the fauh or neglect of the lender.

(5) Reporting requirement

The four requirements discussed thus far relate to the eligibility of a

loan for insurance from its inception. This one is different because the

loan itself is eligible but the lender’s failure to comply may result in

the loss of insurability. Program regulations require lenders to report

loans to HUD on a prescribed form within 31 days from the date of the

note or the date the note was purchased. 24 C.F.R. S 201.30(a) (1991).

HUD then accepts the loan for insurance or rqjects it. The reporting

requirement also applies to refinancing loans. ~.

Under present regulations, HUD has discretion to accept a late report

as kmg as the loan is not in default. Id. S 201.30(b). Once the loan

has gone into default, that discretion-no longer exists and it is too late

to establish coverage. An illustrative case is B-194822, September 24,

1980. A bank inadvertently failed to report a property improvement

loan to HUD. More tha a year later, after the loan was in default, the

bank submitted its report along with its claim for indemnillcation.

Concluding that the loan was never insured, HUD denied the claim, and

GAO agreed. The fact that HUD had inadvertently bilied the bank for the

required premiums, which the bank paid, was not enough to establish

coverage. Of course, refund of the premiums was appropriate.

Prior to 1968, the regulations did not limit HUD’S discretion, and a late

report could be accepted even after defatdt. Cases addressing the

exercise of discretion under this version of the regulations are

B-165239, October 4, 1968, and B-153971, June 17, 1964.

(6) Payment of premiums

The statute requires that HUD charge the financial institution a

premium for the insurance. 12 U.S.C. s 1703(f). The premium is a

prerequisite to insurabiliw. Id. — $ 1703(b)(5). This is closely related to

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Federal Awistance: Guaran teed and Ineured LoarIo

the reporting requirement discussed above in that it is the report that

triggers HUD’S billing of the bank. The sequence is: (1) bank reports

loan to HUD on manifest form; (2) HUD includes the loan on its

monthly statement to the bank; (3) upon receipt of monthly

statement, bank pays premium to HUD; (4) when HUD receives the

premium, loan achieves insured status,

Subsection 1703(f) further requires that the premium charge “shall

be payable in advance by the financial institution.” Thus, advance

payment of the premium is necessary for the loan to be eligible for

insurance, at least where nonpayment is solely the fault of the bank.

B-172965, July 16, 1971 (loan not covered where bank failed to

report the loan and was thus never billed by HUD). See also B-194822,

September 24, 1980 (no authority to accept premiums after default).

For loans with a maturity in excess of 25 months, the insurance

charge is payable in annual installments. 24 C.F.R. $ 201.31(b)(2)

(1991).

In 55 Comp. Gen. 891 (1976), the bank claimed that it had reported

the loan to HUD. HUD, however, had no record of the report and

consequently had neither requested nor received any premium

payments from the bank prior to default. Apart from the fact that the

advance payment requirement appears in a federal statute, the bank

had actual notice that a loan is not insured until it appears on the

monthly statement and the premium is paid. Adequate review of the

monthly statements would have revealed that the particular loan was

not listed and that therefore either HUD never received the report or

failed to acknowledge it, Since it is the bank’s responsibili~ to assure

payment of premiums in advance, its claim was denied. The decision

once again reiterated that HUD’S waiver authority does not apply to

statuto~ requirements.

A related case, 55 Comp. Gen. 658 (1976), reaffirmed the proposition

that timely payment of the insurance premiums is a prerequisite to

contrnued insurance coverage. The decision also held that claims by a

lending institution which is currently delinquent in its premium

payments may be allowed if the borrower’s default occurred prior to

the delinquency. However, if the lending institution was delinquent

before the default occurred or became imminent, its claim may not be

allowed.

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Federdhdst.ance:Ga&ruI&d and Inerued Loans

The decision in 55 Comp. Gen. 658 was expanded (and modified with

respect to matters not relevant here) in 56 Comp. Gen. 279 (1977),

hoMing that timely payment of insurance premiums under 12 U.S.C.

$1703 is a continuing obligation of the lender and cannot be

voluntarily terminated by the lender before the end of the term of the

underlying loan. Unpaid insurance premiums constitute a debt

presently due and payable by the lender to the United States.

Therefore, I-n.JD may offset delinquent premiums against insurance

claims otherwise payable to the lender. However, estimated future

premiums may not be offset against currently payable claims because

they are not certain in amount. (Under the program regulations, the

premium may be abated after an insurance claim has been fded or if

the loan is paid in full prior to maturity. 24 C.F.R. $201 .31(e).)

c. Small Business (1) Payment of guarantee fee

Admirdstmtion Business Loan

Program Like the National Housing Act insurance programs, a loan guarantee

under section 7(a) of the Small Business Act is not free to the lender.

The Small Business Administration is required to charge a guarantee

fee, based on a percentage of the amount guaranteed, on most loans

guaranteed under 15 u.s.c. $ 636(a). Id. $ 636(a) (18). The fee is

payable by the participating lending ti=titution, but maybe passed

through to the borrower. Id. SBA’S implementing regulations are found

at 13 C.F.R. !? 120.104-1 (~91).

For many years prior to the enactment of 15 U.S.C. $ 636(a)(18) in

1986 (Pub. L. No. 99-272, $18007, 100 Stat. 82, 366), SBA charged a

guarantee fee under the authority of its program regulations and

guarantee agreement. Thus, pre-1986 GAO decisions dealing with

section 7(a) fees must be regarded as modified to the extent they were

addressing a nonstatutory requirement. They, however, along with

elements of the program regulations which pre-date the 1986

legislation, establish the proposition that an agency may charge a

guarantee fee without specific statutory authority as long as it is not

prohibited, and outline the general parameters of a nonstatutory fee

requirement.

As with the Housing Act fees, a fundamental issue is the effect of

nonpayment or late payment. Unlike the Housing Act, the SBA

provision does not require that the fees be paid in advance. Thus, by

itself, 15 U.S.C. $ 636(a)(18) neither makes payment of the fee an

essential condition of guarantee eligibility, nor does it prohibit such

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Federal Awistance: Gnaranti and Insured Loana

treatment. Under SBA’S regulations, the fee is payable when the lender

applies for a guarantee for loans with maturities of 12 months or less,

and within 90 days after SBA’S approval for loans with maturities

greater than 12 months. 13 C.F.R. $ 120.104-l(b). Absent statutory

direction one way or the other, the effect of missing these deadlines is

a matter within SEA’S discretion to establish by regulation or terms of

the guarantee agreement.

At onetime, SEM’S guarantee agreement expressly provided that a Ioan

is not guaranteed until the fee has been paid. Under this provision,

payment of the fee was a condition precedent to coverage. SBA had the

discretion to accept late payment provided the loan was not in default,

but the loan was not protected by the guarantee until the fee was paid.

B-181432, November 12, 1975; B-181432, March 13, 1975. In cases

where the fee remained unpaid at the time the borrower defaulted,

claims by lenders were consistently denied in the face of arguments

such as estoppel (B-181432, May 21, 1979, and B-181432, October

20, 1978), “constructive payment” (B-181432, July 7, 1978), or

inexperience on the part of bank personnel (B-181432, August 15,

1977). Since the requirement was explicitly stated in the guarantee

agreement, virtually all of these cases reiterated the proposition that

no government offkial may give away the government’s contractual

rights without either statutory authority or adequate legal

consideration. The courts reached the same result. See Union Nat’1

Bank of Chicago v. Weaver, 604 F.2d 543 (7th Cir. 1979); Union

State Bankv. Weaver, 526 F, Supp. 29 (S. D.N.Y. 1981).

Under SBA’S current regulations, if the fee is not paid within the

specified time period, SBA will send the lender a written notice. “The

guarantee shall be subject to termination if SBA does not receive the

fee within the time period stated in the notice.” 13 C.F.R.

$ 120.104-l(b). Implicit in this language is the premise that the

guarantee wilI be regarded as in effect until SBA terminates it.

A 19$3 decision considered similar issues under a different SBA

program, the Surety Bond Guarantee Program established by 15 U.S.C.

$ 694a. Since nothing in the legislation or implementing regulations

made payment of the guarantee fee a condition precedent to the

existence of the guarantee, and since the surety bond guarantee

agreement contained no provision comparable to the provision then

being used in the business loan guarantee agreement, the decision

concluded that nonpayment of the fee prior to default would not void
Chapter 11

Fedetd&oistance: Gnaranteed and Insured Loans

SBA’S obligation to honor the guarantee, although SBA should deduct

the unpaid fee from the surety’s claim. B-206893, March 18, 1983.

SBA has the discretion to reinstate a guarantee which has been

terminated for nonpayment of the fee. However, SBA will not reinstate

a guarantee once the loan goes into default unless the borrower

“cures” the default-by bringing the loan into a My paid and current

status-within 60 days. 13 C.F.R. $ 120.104-l(d); B-181432, April 5,

1979.

A 1979 case considered the effect of another provision in the

-tee agreement. A bank, conceding that it had not paid the

@UUZ@EW fee prior to default on the loan as originally written, argued

that it had effectively modified the agreement by granting the

borrower additional time to begin repayment. However, the guarantee

agreement explicitly required SBA’S prior written approval of any

change in the terms of the loan, which the bank had neither requested

nor received. The modification was therefore not legally effective as

against SBA. B-193134, July 27, 1979.

The issue in 58 Comp. Gen. 693 (1979) was the effect of a refinancing

loan. In view of SBA’S discretion to accept refinancing, GAO concluded

that the effect of a bank’s failure to timely pay the fee on the original

loan was terminated when the original loan was repaid by the

refinancing loan. Thus, the fact that the guarantee on the original loan

may have been extinguished will not necessarily defeat an otherwise

valid guarantee on a subsequent refinancing loan.

Cases involving late payment or nonpayment of the guarantee fee may

be useful in arudyzing the treatment and consequences of other terms

and conditions of the guarantee agreement, but should not be blindly

applied. For example,-tie court ir-Eastem Illinois Trust& Savings

Bank v. Sanders, 826 F.2d 615 (?th Cir. 1987), drew a distinction

between provisions expressly declared to be conditions precedent to

SBA’S obligation, such as the fee provision, and those which are not so

declared. If a lender violates a provision in the latter category, the

issue becomes “whether the violation was a material breach of the

agreement, or rather whether [the lender] substantially complied with

the agreement.” Id. at 616. The lender’s violation in the cited case,

making “side loa~s” to a borrower, was found not to constitute a

material breach and therefore did not justi~ repudiation of SBA’S

guarantee. Byway of contrast, a lender who violates a provision in the

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Federal Assistance: Guarsn teed and Insured LoMs

“condition precedent” category cannot enforce the guarantee, and

you never get to the material breach vs. substantial compliance

analysis. See, ~, First Nat’1 Bank of Louisa, Kentucky v. United

States, 6 C~Ct. 241 (1984).

(2) Notice of default

Another type of provision an agency may include in its program

regulations is a requirement that the lender notify the agency in

writing within a specified time period after a default occurs. SBA’S

regulations included such a requirement for many years. See 13 C,F,R.

$ 122.10(a) (1980). The provision was dropped in a 1985 revision of

the regulations. Under current regulations, SBA’S obligation under a

guarantee is extinguished if the lender fails to demand purchase of the

unpaid guaranteed portion within one year after maturity of the note.

13 C.F.R. $ 120.202-5(e) (1991).

Pre-1985 decisions on the notice requirement are no longer

applicable to SBA under the current regulations. Nevertheless, we

briefly note a few of them because they illustrate the scope of an

agency’s authority to implement a guarantee program by regulation

and may have relevance by analogy to similar requirements in other

programs, Since the requirement itself is a creature of agency

regulations, the agency has discretion to determine the consequences

of noncompliance, ranging from an interest penalty (B-181432,

September 4, 1979) to termination of the guarantee commitment

(B-201388, September 23, 1981). The agency may also make the

consequences contingent upon the extent to which noncompliance

prejudices the interests of the government. See B-187945, March 22,

1977. While the basic requirement may not be waived except to the

extent permissible under the regulations (see B-18 1432, February 19,

1976), the particular form of notice, a matter of procedure, is subject

to waiver. B-188741, January 25, 1978 (oral notice accepted and

acknowledged by agency held to be substantial compliance). See also

B-181432 -O. M., Februa~ 19, 1976 (agency may waive requirement in

guarantee agreement that lender provide it with a copy of the

executed note and settlement sheet).lg

lgFor ~ de~ed discussion of waiver of agency regdations in the Context Of commoti~ Credit

Corporation export assistance guarantees, see B-208610, September 1, 1983.

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Fedeml Awistance: Guaran teed and Insured Loam

D. Rights and

Obligations of

Government Upon

Default

1. Nature of the When a government agency guarantees a loan, it is promising to

Government’s Obligation indemnify someone in case of default. The “someone” includes both

the lending institution that originated the loan and subsequent

purchasers of the guaranteed portion of the loan The default restits

from the borrower’s failure to make payment when due or other

breach of a material covenant of the loan. In the simple situation, a

borrower borrows money from a lender. The government guarantees

the loart, with the commitments of the lender and the government

usually reduced to writing in the form of a guarantee agreement. If the

borrower defaults on his or her payments, the lender looks to the

government to pay on the guarantee.

In some instances, Congress has explicitly provided in the program

legislation that the guarantee will be backed by the “full faith and

credit” of the United States. Examples are 12 U.S.C, S 635k

(guarantees and insurance issued by the Export-Import Bank), 15

U.S.C. S 683(c) (Small Business Investment Act of 1958), and 20 U.S.C.

3 1075(b)(4) (Robert T. Stafford Student Loan Program) .20 Language

of this type has been held to be “the highest assurance the

Government can give, its plighted faith.” Perry v. United States, 294

Us. 330,351 (1935).

There is a long line of opinions of the Attorney General addressing the

effect of statutory language pledging the “faith” or “credit” of the

United States, or the absence of such language. While the opinions are

not limited to loan guarantee commitments, almost all of the cases

arose under loan guarantee programs. This is understandable because

(1) lenders are being asked to extend credit to a somewhat riskier

universe of borrowers which they most likely would not accommodate

without the guarantee; and (2) at least prior to the Federal Credit

z~k andSfiwlmaage~,ad is intended to have, connotations of constitutioti

significance, although the words “full faith and credit” appear in the Constitution only once, in

the requirement that each state recognize the laws, records, and judicial proceedings of other

states (Art. IV, sec. 1). In addition, Art. I, sec. 8, cl. 2 empowers the Congress to borrow money

“on the credit of the United States.”

GAO/OGC-92-13 Appropriations Law -Vol. II
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Fedeml Awist.ance: Guaranteed and Insured Loana

Reform Act, the government’s commitment was not backed by

enacted budget authority. To encourage lender participation in a

varie~ of programs, the Attorney General was asked, in effect, “Does

the government really mean it?”

Perhaps the Ieading case is 41 Op. Att’y Gen. 363 (1958), dealing with

ship mortgage and loan insurance under the Merchant Marine Act of

1936. The opinion makes severtd important points. First, what does

the language mean? It means that the government’s obligation is to be

considered on the same footing as the interest-bearing obligations of

the United States such as Treasury bills, notes, and bonds. ~. at 366

(citing 41 Op. Att’y Gen. 138 (1953)).

Second and more important, what is the language’s practical

significance? None, answered the Attorney General. Although

recognizing that Congress can establish such distinctions, the

Attorney General stated that, in the absence of such congressional

action, there is no “order of solemnity of valid general obligations of

the United States,” nor does an obligation with the statutory faith

and/or credit language have any legal priority over a valid general

obligation of the United States without the language. 41 Op. Att’y

Gen. at 369.

Pinally, the Attorney General addressed the lack of advance budget

authority:

‘If ., . the exiatence of an appropriation ia not a condition of or limitation on the

authori~ of an oftlcer to contract on behalf of the United Statea, the need for

appropriationa to meet an obligation incurred under the contract doea not affect the

existence or validi@ of the obligation.”

Id. at 370. The following year, the Attorney General made the same

~oints with respect to Interstate Commerce Commission loan

guarantees to rail carriers. 41 Op. Att’y Gen. 403 (1959). After

emphasizing that the validity of the guarantee “is not affected by the

absence from the act of any language expressly pledging the faith or

credit of the United States,” the opinion states that “It is enough to

create an obligation of the United States if an agency or officer is

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Chapter 11

Federal Assistance: Guaranteed and Insured Loam

.

validly authorized to incur such an obligation on its behalf and validly

exercises that power. ” Id. at — 405.21

Thus, reading all of the opinions together, we may state that a loan

guarantee is a valid obligation of the United States the same as anY

other valid obligation, regardless of the presence or absence of full

faith and credit language and regardless of the presence or absence of

advance budget authority, provided (1) the program statute is

constitutional; (2) Congress has not disclaimed liabili~ at the time or

before the commitment is made; (3) the guarantee is made by a

federal agency or official with the legal authority to do so; and (4) the

guarantee complies with applicable statutory and regulatory

requirements.

In an opinion concerning guarantees issued by the former FederaI

Savings and Loan Insurance Corporation incident to its resolution of

failed or failing savings and loan institutions, the Comptroller General

expressly adopted the criteria and analysis of the Attorney General

opinions. 68 Comp. Gen. 14 (1988).

2. Scope of the I% noted earlier, a loan guarantee statute will typically specify the

Government’s Guarantee permissible purpose(s) of the loans to be guaranteed, establish

eligibility requirements, and give the administering agency

considerable discretion to determine the terms and conditions of the

guarantee. Subject to the terms of the program legislation, there is

also an element of discretion in determining the perrnissible scope of

a guarantee, that is, the types and degree of risk to which the agency

may expose itse~f. This section presents a few issues GAO has

considered regarding the limits of that discretion.

As with any other payment situation, the government is not expected

to close its eyes to indications of fraud or misrepresentation. For

example, an agency should not make payment to a lender where it has

knowledge of the possibility of fraud, negligence, or

misrepresentation on the part of the lender. Making payment in the

ZIoLher ~piniom ~ t~~ fmity me 42 Op. Att’y Gen. 327 (1966); 42 OP. M’Y Gen. 323 (1966);

42 OP. Att’y Gen. 21 (1961); 41 Op. Att’y Gen. 424 (1959); 6 Op. Off. Legal Counsel 262

(1982). Since the opinions all said basica.fly the same thing and seemed to arise under every

program in sight, the Attorney GeneraJ stopped issuing forrnaf opirdons on routine fuff faith and

credit questions in this context in 1973.6 Op. Off. Legaf Counsel 262, 262 n.2.

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Federed Assistance: Gua.ran teed and Insured Loans

face of such knowledge exposes the certifying officer to potential

liability. 51 Comp. Gen. 474 (1972); B-174861, February 23, 1972. In

these two cases, however, GAO advised that the Small Business

Administration could, upon default of the borrower, purchase the

guaranteed portion of the loan from an innocent holder who had

purchased it in the secondary market and who had no knowledge of

the possible misconduct by the originating lender. Payment to the

innocent holder in these circumstances would not waive any of SBA’S

rights against the original lender, and, as a practicaI matter, would

avoid a result adverse to the holder that cotid seriously jeopardize the

secondary market. Thus, paying the innocent holder is an acceptable

level of risk whereas paying the suspected wrongdoer is not.

It follows that there is no objection to honoring the claim of an

innocent lender who is the victim of fraud by the borrower. B-167329,

October 6, 1969.

Similarly, GAO held in 17 Comp. Gen. 604 (1938) that the Federal

Housing Administration was not liable to reimburse a lender bank for

a loss sustained as a result of a payment made, on the basis of a

forged authorization, to an individual other than a bona fide

borrower. This situation was distinguished from a case where a lender

bank, in the exercise of due care, suffered a loss as a result of a forged

note. A-9471 7-O. M., August 12, 1938. The bank in 17 Comp. Gen.

604 already possessed a validly signed note but suffered the loss by

accepting a forged authorization for payment. Comparison of the

authorization with the note would have disclosed the forgery.

A 1974 decision expanded somewhat on 51 Comp. Gen. 474. GAO

determined in B-140673, December 3, 1974, that the SBA has

sufficiently broad statutory authority to repurchase the guaranteed

portion of a loan from an innocent secondary-market holder where

the borrower is not in default but the primary lender negligently or

unlawfully withholds payments. (Under the arrangement in question,

the primary lender was to continue servicing the loan and remit

payments, minus a servicing fee, to the holder.) This decision clearly

enlarged the scope of SBA’S guarantee since the “triggering event”

could be something other than a default by the borrower in repaying

the loan. However, the holding in that case was for the relatively

limited purpose of allowing SBA to avoid the security registration

requirements of the Securities Act of 1933. The Securities and

Exchange Commission had determined that these requirements would

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Federal Aaaistance: Guaranteed and hawed Loans

apply to SBA-guaranteed loans that were resold in the seconday

market, unless SBA’S guarantee was absolute and fully protected the

purchaser of the guaranteed portion in all circumstances, including

instances where the lender did not forward all payments received

from the borrower.

A few years later, B-181432, August 11, 1978, explored what are

perhaps the outer limits of the “risk discretion” recognized in

B-140673. SBA proposed to contract with a private entity to serve as

the centralized fiscal agent in the secondary market for SBA

guaranteed loans. The fiscal agent would have responsibility for

receiving payments from borrowers, remitting these payments to the

holders, and certifying the amount of the outstanding balance each

time a guaranteed loan was transferred. SBA further proposed to

unconditionally guarantee au such actions and representations of the

fiscal agent to the holder of the guaranteed portion of a loan. GAO

agreed that SBA could contract with a fiscal agent and, consistent with

B-1 40673, guarantee a holder against the agent’s failure to properly

forward the borrower’s loan payments. However, to unconditionally

guarantee holders against certification errors by the fiscal agent

would significantly enlarge SBA’S existing guarantee responsibility,

would subject SBA to subst+tially new risks, and would therefore

require additional legislative authority. The increased risk would

include new types of events that could trigger SBA’S obligation to

purchase a guaranteed loan, as well as the maximum amount of SBA’S

liability (should the fiscal agent erroneously certify the outstanding

balance of a loan to be larger than it actually was).

3. Amount of A program statute mayor may not provide guidance on determining

Government’s Liability the amount the government is obligated to pay under a guarantee or

the manner in which a loss is to be computed. If it does not, the

agency’s discretion again comes into play. As long as they are

consistent with whatever statutory guidance does exist, the agency’s

regulations will generally be controlling.

For example, the computation of claims under Title I of the National

Housing Act is prescribed by regulation. See 24 C.F.R. $201.55

(1991). In very simplified form, the claim is a specified percentage of

the sum of several elements: the unpaid amount of the loan (subject to

certain reductions), plus accrued interest, plus uncollected court

costs, plus attorney’s fees actually paid, plus certain recording

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Chapter 11

Federal Aasiatance: Guaranteed and Inaured Loam

expenses. Claims by lenders using unauthorized computations have

been disallowed. ~,B-133924, December 4, 1957,

In another case involving the Title I loan program, a lender claimed an

amount representing partial reimbursement of attorney’s fees

incurred in collecting on a defaulted note. Although the borrower’s

obligation on the note was discharged and the note did not contain a

stipulation for attorney’s fees in the event of default (which would

have been ineffective under state law), payment of the claim was

proper since it was specifically provided for in the regulations.

B-163029, February 16, 1968.

Validly issued program regulations are controlling even though

applying them in a particular case may produce an anomalous result

to the lender’s advantage, at least where the lender has fully complied.

For example, regulations governing defaulted Title I mobile home

loans provide that reimbursement is computed by deducting from the

unpaid amount of the loan either the actual sales price upon

repossession or the appraised value of the mobile home, whichever is

greater. GAO has found this formula to be within HUD’S statutory

authority. 71 Comp. Gen. — (B-245138, July 7, 1992). At one time,

the regulations also prohibited the ftig of a claim until after default,

repossession, and sale of the mobile home. These regulations

occasionally produced a situation in which a particular model could

not be found in current rating publications (such as the so-called

“blue book”) and the mobile home was no longer available for

appraisal by HUD because, in compliance with the regulations, it had

already been sold. Since the impossibility of appraisal was due to the

regulations and was through no fault of the lender, the Comptroller

General held that the actual sales price could be used in computing

the reimbursement, as long as it was administratively determined to

be reasonable. 55 Comp. Gen. 151 (1975); B-184016, September 16,

1975. The solution, of course, was to amend the regulations.

Several early decisions involved the language in 12 U.S.C. $ 1703(a)

which authorizes HUD to insure lending institutions against “losses

which they may sustain” in making Title I home improvement loans or

other advances of credit, If the loan does not either provide for the

automatic acceleration of maturity upon defauIt or give the lender the

option to accelerate which the lender in fact exercises, the

government cannot pay the lender the full unpaid balance of an

unmatured loan because payments not yet due do not represent a loss

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Federaf Assbtmce: Guaranteed and fmmred Loans

actually sustained by the lending institution. A-74701, May 22, 1936.

While this result was consistent with the statutory language, it was not

practical from an administrative standpoint. It meant that HUD was

limited to paying the lender the monthly installments as they became

due, with what was termed “a corresponding annoyance and

dissatisfaction to the insured institution with the program.” Two later

decisions effectively modified A-74701 and established that, if there is

no acceleration provision (an event which would be unlikely today), or

if exercising an acceleration option would be undesirable because of

state law, HUD can nevertheless reimburse a lending institution for the

entire unpaid balance of the loan if it is clear that the entire unpaid

balance will be a claim of the lending institution against the

government and if the lender assigns the note or other evidence of

indebtedness to the government. 16 Comp. Gen. 723 (1937); 16

Comp. Gen. 336 (1936).

4. Liability of the Borrower When the government guar~tees a loan and the borrower defaults,

the lender is not required to make special efforts toward collection.

Rather, the lender may fall back on the government’s guarantee and

leave the entire responsibility for collection to the government. See,

~, 16 Comp. Gen. 336 (1936); B-134628, J~uw 15,1958.

Naturally, it is invariably to the lender’s advantage to do just that.

Payment by the government, however, does not mean that the

borrower is off the hook. Unless the program legislation provides

otherwise, the government becomes subrogated to the rights of the

lender, and the borrower is indebted to the government for the

amount it has paid out. The government is not required to collect

more than the amount it has actually paid out to the lender, plus

interest and collection costs to the extent authorized. See 15 Comp.

Gen. 256 (1935). A variety of issues relating to borrower liability can

be illustrated by an examination of the Veterans’ Home Loan

Guarantee Program.

a. Veterans’ Home Loan Title 111 of the Servicemen’s Readjustment Act of 1944, as amended

Guarantee Program and codified, 38 U.S.C. 35 3701—3751 (Supp. 111 1991),2Z authorizes

the Department of Veterans AfTairs (the former Veterans

Administration) to guarantee loans to enable veterans to purchase or

ZzSection ~Wber~ for 38 U.S.C. ch. 37 were redesignated by fib. L. No. 102-83>$ 6! 105 ‘w.

378,406 (1991).

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Federsl Assistance: Guaranteed and Insured Loans

construct homes and for other specified purposes. This is the

well-known ‘G.I. loan, ” The guarantee is an entitlement in the sense

that a loan meeting the statutory requirements and made for one of

the statutory purposes is “automaticallyg uaranteed.” Id. $ 3710(a).

For certain loans closed after January 1, 1990, the liab~ity of the

veteran-borrower to the government was considerably restricted by

the Veterans Home Loan Indemnity and Restructuring Act of 1989,

Pub. L. No. 101-237, Title III, 103 Stat. 2062,2069 (1989). A

description of the “old” rules is nevertheless useful to understand

what has and has not been changed, and because loans under the old

and new programs VW exist side-by-side for many years into the

future.23

(1) Loans closed prior to 1990

Upon proper payment of a guarantee, the VA acquires both the right of

subrogation and an independent right of indemnity against the

defaulting veteran. United States v. Shimer, 367 U.S. 374 (1961); Vail

v. Derwinski, 946 F.2d 589 (8th Cir. 1991); McKnight v. United

States, 259 F.2d 540 (9th Cir. 1958). As the Supreme Court noted in

Shimer, a contrary result would convert the guarantee into a grant.

367 U.S. at 387. The right of indemnity is reinforced by the guarantee

agreement and by a regulation in effect since the early days of the

program which provides that any amount paid out by the VA under a

guarantee by reason of default “shall constitute a debt owing to the

United States by such veteran.” 38 C.F.R. !j 36.4323(e) (1991).

In the simple situation, the veteran defaults, the bank forecloses, the

VA pays the bank under the guarantee and then proceeds to attempt

recovery from the defaulting veteran. ~, McKnight; B-104273,

August 20, 1951.

Sale of the property by the veteran does not automatically exonerate

the veteran from liability. Where a veteran who bought a home under

a VA-guaranteed loan sells the properQ to a purchaser who assumes

the mortgage and subsequently defaults, the veteran may still be liable

to the government for the amount VA is required to pay under the

guarantee. B-155317, October 21, 1964; B-131 120, July 26, 1957;

B-13121O, April 9, 1957. This result applies unless the transaction

~~For ~ ~omprehen~ive &scussion of the progr~, see Ingold, The Dep@ment of Veterans’

Affairs Home Loan Guaranty Program: Friend or Foe?, 132 MiL L. Rev. 231 (1991).

Page 11-58

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Federal Assistance: Guaranteed and Insured Loans

amounts to a novation, that is, unless the mortgagee releases the

original mortgagor and extinguishes the old debt. B-108528,

December 3, 1952. Breach by the lender of an agreement to noti~ the

veteran (original borrower) if the subsequent purchaser defaults does

not affect the veteran’s liability to the United States. B-154496, July 9,

1964.

The potential harshness of the result in many of these cases is largely

mitigated through statutory release and waiver provisions. When a

veteran disposes of residential property securing a guaranteed loan,

the veteran may be released at the time of the sale from all further

liability to the VA resulting from the loan, including default by the

transferee or subsequent purchaser, if (1) the loan is current, (2) the

purchaser is obligated by contract to assume the full liability and

responsibility of the veteran under the loan, and (3) the purchaser

qualifies from a credit standpoint, that is, if the purchaser would

qualify for a guarantee if he or she were an eligible veteran. For loan

commitments made before March 1, 1988, the veteran must appIy to

the VA for the release, but issuance of the release is mandatory if the

statutory conditions are met. 38 U.S.C. $ 3713(a). If the veteran fails to

obtain a release at the time of the sale and a default subsequently

occurs, the VA may issue the release retroactively upon determining

that it would have issued the release had it been timely requested. Id.

$ 3713(b). For loan commitments on or after March 1,1988, the –

release is issued by the holder of the loan upon receipt of written

notification by the veteran, subject to the same conditions and subject

to the veteran’s right to appeal an adverse determination to the VA.

Sale of the property without notifying the holder may result in

acceleration of the loan. Id. $3714. —

In addition, the VA is required to waive a veteran’s indebtedness upon

determining that collection would be against equity and good

conscience, and that there is no indication of fraud,

misrepresentation, or bad faith on the part of any interested person.

Waiver must be requested within one year from receipt of the

notification of indebtedness. 38 U.S.C. $ 5302(b) and (c), as amended

by Pub. L, No. 102-54, $5, 105 Stat. 267, 268 (1991).24 This is a

“mandatory” waiver statute, imposing upon the VA a duty to actually

exercise its discretion once waiver has been requested. See

~qsection numben for 3S u.S.C. ch. 53 were redesignated by Pub. L. No. 102-40, $ 402(b)~ 105

Stat. 187,238 (1991).

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Chapter 11

Fedeml Assistance: Guaran teed and Insured Loans

Beauchesne v. Nirnmo, 562 F. Supp. 250 (D. Corm. 1983) (discussing

mandatory nature of 38 U.S.C. $ 5302(a) dealing with waiver of benefit

overpayments).

As with many waiver statutes, 38 U.S.C. $5302 eliminates the potential

liability of certifying and disbursing officers with respect to any

amounts waived. “Certi~ng officer” in this context means the

authorized certi~ng officer of the VA who certified the payment in

question, and has no reference to any official of any private institution

involved in the transaction. Colorado v. Veterans Administration, 430

F. Supp. 551,561 (D. Colo. 1977), aff’d, 602 F.2d 926 (lOth Cir.

1979), cert. denied, 444 U.S. 1014.

Adverse waiver determinations may be appealed to the Board of

Veterans Appeals established by 38 US.C. $7101.38 C.F.R. $19.2. If

waiver is granted, amounts previously paid maybe refunded. 1d.

$1.967. GAO reviewed these regulations when they were first i~sued

and agreed that they were within the VA’s authority. B-1 58337,

March 11, 1966.

Absent either release or waiver, the VA may pursue recovem against

the veteran. See, ~, Davis v. National Homes Acceptance-Co-w., 523

F. Supp. 477 (N.D. Ala. 1981); B-188814, March 8, 1978; B-172672,

June 22, 1971. In B-188814, for example, the veteran had failed to

obtain a release, would not have been eligible for it anyway, and VA

refused to waive the indebtedness. Therefore, the veteran was held

liable even though the purchaser who subsequently defaulted had

assured him that he would no longer be liable to VA.

Most of the cases cited thus far concern the liability of the original

borrower where a subsequent purchaser defaults. The purchaser of

property for which VA has guaranteed a loan, whether or not the

purchaser is a veteran, may also become liable to VA for amounts VA is

required to pay out upon default. For example, in B-141888, July 21,

1960, a veteran purchased a home, obtained a VA guarantee, and later

sold the home to a non-veteran who assumed the mortgage. The

non-veteran purchaser defaulted. The lender foreclosed and obtained

a deficiency judgment against both the veteran and the non-veteran,

which VA paid. VA waived the veteran’s indebtedness, but was still

entitled to collect from the defaulting purchaser. See also B-155932,

February 23, 1971; B-155932, October 13, 1970 (same case).

GAO/OGC-92-13 Appropriations Law-Vol. II
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Federal Aasiatance: Guaranteed and Insured Loaus

One of the most contested issues under the program has been the

availability of state law as a defense to a VA claim. For example, it is

not uncommon for states to prohibit, or impose various restrictions

on, lenders’ obtaining deficiency judgments against defaulting

purchasers after a foreclostire sale. Since VA’s rights under

subrogation are limited to the rights of lenders, these statutes would

limit VA’S right to obtain deficiency judgments under a subrogation

theory. However, VA’S regulations have been held to “create a uniform

system” for administering the guarantee program, a system which

displaces state law. United States v. Shimer, 367 U.S. at 377. These

regulations, as noted earlier, include a provision giving the VA an

independent right of indemnity. Thus, to avoid the possibili~ of being

hampered by state law, VA has generally proceeded under its

independent right of indemni~ rather than under a subrogation

theory. ~,B-126500, February 3, 1956; B-124724, December 21,

1955.

In one group of cases, the right of indemnity was held to prevail over

state laws which flatly prohibited VA from obtaining deficiency

judgments through subrogation. Jones v. Turnage, 699 F. Supp. 795

(N.D. Cal. 1988), aff’d mem., 914 F.2d 1496 (9th Cir. 1990); cert.

denied, 111 S. Ct. 1309; United Statesv. Rossi, 342 F.2d 505 (9th

Cir. 1965); B-174343, November 17, 1971; B-143844, November 15,

1960; B-124724, October 3, 1955. Other cases applied the same

approach to dismiss other aspects of state deficiency laws. ~,

B-173007, June 29, 1971; B-162193, September 1, 1967; B-122929,

June 24, 1955.

Several more recent cases have dealt with state statutes that do not

flatly prohibit VA from obtaining a deficiency judgment through

subrogation, and have reached differing results. In Whitehead v.

Derwinski, 904 F.2d 1362 (9th Cir. 1990), a Washington state statute

would have allowed the lender to obtain a deficiency judgment if

judicial foreclosure procedures were used. However, VA had

instructed the lender to use a faster and less expensive noq@iicial

foreclosure procedure. The statute authorizing the nonjudicial

procedure prohibited obtaining a deficiency judgment against the

borrower. Id, at 1363. The court acknowledged that cases like

-t!~l(which the ‘ame court affirmed 3 months fier it

decided Whitehead), and Rossi correctly held that VA has an

independent right of indemnity when state law flatly prohibits

deficiency judgments. Id. at 1368–69. —

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Federal Assistance: Guaranteed and Insured Loans

However, the court distinguished the Washington statute because it

did not flatly prohibit deficiency judgments; they were prohibited only

when the nonjudicial foreclosure procedures were used. The court

quoted language from Shimer to the effect that the VA regulatory

scheme did not displace all state law but only inconsistent state law.

~. at 1367. The court then held that since the Washington statute

allowed VA a means to obtain a deficiency judgment, it was not

inconsistent with the regulatory scheme and therefore not displaced.

Q. at 1369. Thus, according to the court, the state law in question

could prohibit VA from seeking a deficiency judgment through its

indemnity rights, and did so in this case because VA’s inability to

obtain a deficiency judgment resulted from its own choice of remedy

under that state law. A case following Whitehead is Carter v.

Derwinski, 758 F. Supp. 603 (D. Idaho 1991).

The analysis inwhitehead was criticized in Vail v. Derwinski, 946

F.2d 589 (8th Cir. 1991), involving similar facts under a similar

Minnesota statute. Disagreeing withwhitehead, the court held that VA

did not forfeit its independent right of indemnity merely ”because it

declined to exercise a means to obtain a deficiency judgment through

subrogation. The VA’s right of indemnity, said the court, derives from

its direct relationship with the borrower of a guaranteed loan. Id. at

592. As such, it is not defeated by a state statute which limits t~e

lender’s ability to pursue the borrower. A case that also disagrees with

some of the reasoning inwhitehead, but which reached the same

result, is United States v. Davis, 756 F. Supp. 1162 (E.D. Wis. 1991).

The defense of minority has also been raised on occasion. State law

generally provides that a contract entered into by a minor is voidable

at the minor’s option. Several states have statutes which expressly

make the defense of infancy inapplicable to contracts under the

Servicemen’s Rea@ustment Actj and the few cases GAO has considered

have involved statutes of this type. See B-126500, February 3, 1956;

B-124750, October 3, 1955; B-105429, December 11, 1951. In

addition, the United States has sovereign immunity from defenses

arisin’g under state statutes of limitations unless expressly waived.

United States v. Summerlin, 310 U.S. 414 (1940) (FHA claim under

National Housing Act); B-134523, March 19, 1958 (Summerlin

applied to VA claim).

Another provision of the program legislation makes the “financial

transactions” of the VA “incident to, or arising out of” the guarantee

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Federal Assistance: Guaranteed and Insured Loans

program “final and conclusive upon all officers of the Government.”

38 U.S.C. $ 3720(c). Thus, GAO will not review the amount of

indebtedness determined by the VA. B-105655, October 10, 1951;

B-105551, September 25, 1951. Similarly, apart from advising

persons that the options exist, GAO will not review the VA’S exercise of

its waiver and release authorities. B-216270, September 25, 1984;

B-108528, October 6, 1952.

(2) Loans closed after January 1,1990

Under 38 U.S.C. 33729, the VA will charge the veteran a loan fee based

on a percentage of the loan amount. The fee maybe included in the

loan and paid from its proceeds. Payment of the loan fee is a

prerequisite to the guarantee. Disabled veterans receiving

compensation or their surviving spouses are exempt. Subsequent

transferees assuming a loan are also charged a loan fee.

A veteran who pays the loan fee or is exempt from paying it–

“shall have no liability to the Secretary with respect to the loan for any loss resulting

from any default of such individual except in the case of fraud, misrepresentation, or

bad faith by such individual in obtaining the loan or in connection with the loan

default.”

Id. $ 3703(e)(l). This provision was added by the Veterans Home

roan Indemnity and Restructuring Act of 1989. An explanatory

statement on the final House-Senate compromise (there was no

conference report) emphasizes that “bad faith” is intended to include

abandonment of a mortgage by one with the financial ability to make

the payments. 135 Cong. Rec.H9113 (daily ed. November 20, 1989).

The limited liability of 38 U.S.C. $ 3703(e)(l) does not apply to

persons assuming a loan, or to veterans who receive mobile home

loans. ~. $ 3703(e)(2). Apart from the limited liability of 38 U.S.C.

$ 3703(e), the VA’S right of subrogation is presemed. ~.

$ 3732(a)(l).

b. Debt Collection Procedures Debt collection is governed by the Federal Claims Collection Act of

1966, the Debt Collection Act of 1982, and the Federal Claims

Collection Standards. Authorities available to federal agencies in

varying degrees include assessment of interest and penalties, offset,

collection in installments, compromise, use of commercial collection

agencies, and, if none of this works, referral to the Department of

Page 11-63 GAO/OGC-92-13 Appropriations Law-Vol. II
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Justice for suit. These authorities are all explored in detail in Chapter

13 and, as a general proposition, are the same for a debt arising from

a loan guarantee as for any other debt. We note the topic here to

emphasize one point–the governmentwide authorities do not apply to

the extent an agency has its own debt collection authority, either

agency-specific or program-specific. This maybe in the form of

positive authority or restrictions. We turn again to the Departmertt of

Veterans Affairs for several illustrations.

The VA has the authority to compromise any claim arising from its

guarantee or insurance programs, independent of the

govemmentwide compromise authority under the Federal Claims

Collection Act. 38 U.S.C. $$ 3720(a)(3), (a)(4). Exercise of this

authority is entirely up to the VA. See B-153726, May 4, 1964. See

also 71 Comp. Gen. _ (B-245138, July 7, 1992] (HLJD); B-228857,

February 22, 1988 (SBA). The HUD decision, B-245138, upheld HUD’S

policy of charging interest at the lower of the note rate or the

Treasury “current value of funds” rate as an authorized exercise of

HUD’S compromise authority.

Subject to its own implementing regulations and procedures specified

in the statute, the VA may offset debts arising from veterans’ benefit

programs against future payments under any law administered by the

VA. 38 u.S.C. $5314. However, offset against a veteran or his or her

surviving spouse by any other agency to collect a debt owed to the VA

under a guarantee program is prohibited except with the written

consent of the debtor or under a judicial determination. Id. S 3726.

Under this legislation, for example, the Defense Department may not

deduct the amount of indebtedness to VA from the pay of active duty

or retired military personnel absent either consent or a court

determination. (The statutory definition of veteran includes certain

active duty personnel.) B-167880, January 28, 1970. This protection

against setoff applies only where the veteran (debtor) has incurred the

debt through use of his or her VA loan entitlement. Thus, setoff is not

prohibited where a veteran, upon purchasing a home, assumes a VA

loan h the ordinary course of the real estate transaction without

involving his or her own loan entitlement. B-167880, December 2,

1969.

The VA also has independent statutory authority to assess interest and

reasonable administrative costs on debts arising from its benefit

programs, including debts arising from guarantee programs to the

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Federal Asdatance: Guaran teed and lnaured LoaM

extent not precluded by the terms of the loan instrument. 38 U.S.C.

$5315. For debts within the scope of the statute, 38 U.S.C. S 5315,

rather than 31 U.S.C. $3717 (Federal Claims Collection Act), is the

controlling provision. 66 Comp. Gen. 512 (1987).

If reasonable administrative collection efforts fail, the VA may use its

own attorneys to sue the debtor, subject to the direction and

supervision of the Attorney General. 38 U.S.C. $5316.

The VA legislation cited above deals with specific debt collection tiols.

An example of more general authority is 7 U.S.C. s 1981(b)(4) (Supp.

111 1991), which authorizes the Farmers Home Administration to

“compromise, ac@st, reduce, or charge-off debts or claims,” and,

within certain limits, to release debtors, other than Housing Act

debtors, “from personal liability with or without payment of any

consideration at the time of the compromise, a@Wment, reduction,

or charge-off.” Under this law, for example, the Farmers Home

Administration is authorized to terminate the accrual of interest on the

guaranteed portion of defaulted loans. 67 Comp. Gen. 471 (1988)

(noting, however, that the agency had restricted its statutory

discretion by its own regulations).

5. Collateral Protection In administering a loan guarantee program, it may become desirable

for an agency to make expenditures other than merely paying out on

the guarantee. From a program or even economical standpoint, it may

be desirable, for example, to make expenditures to protect and

preserve the government’s interest in the collateral, such as custodial

care, insurance costs, or the purchase of prior liens. For purposes of

this discussion, we use the term “collaterzd protection” to cover two

types of expenditure–preservation of the collateral itself and

protection of the government’s interest in the collateral.

Whether or not such expenditures are proper is essentially a question

of “purpose availability.” The fmt step is to analyze the terms and

intent of the agency’s program authority to determine whether the

agency’s funds are available for the contemplated expenditure either

expressly or by necessary implication. If this does not provide the

answer, the next step is to apply the “necessary expense” doctrine.

An example of specific authority is 38 U.S.C. 53727, which authorizes

the Department of Veterans Affairs to make expenditures to correct

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Federal Assistance: Guaranteed and Insured Loans

structural defects in certain homes encumbered by a VA-guaranteed

mortgage. The Department of Housing and Urban Development has

similar authority to use funds available under Title I of the National

Housing Act to correct structural defects in FHA-insured housing. 12

U.S.C. $ 1735b; B-114860-O. M., January 15, 1974. An example of

somewhat less specific authority is another provision of the Housing

Act, 12 U.S.C. $ 1713(k), which authorizes Hut) “to take such action

and advance such sums as may be necessary to preserve or protect

the lien of such mortgage.” In 54 Comp. Gen. 1061 (1975), GAO

agreed that this provision authorizes HUI) to advance money from its

insurance fund to make repairs to multifamily projects covered by

insured mortgages assigned to HUD upon default., until either the

default is cured or HUD acquires title to the property.

Absent specific authority, collateral protection expenditures may still

be permissible under a “necessary expense” theory. As a general

proposition, the authority to require collateral implies the authority to

make reasonable expenditures to care for and preserve the collateral

where administratively determined, to be necessary. 54 Comp. Gen.

1093 (1975).

The limits of the necessary expense approach are illustrated by

B-1 70971, January 22, 1976, a case involving the now-defunct New

Community Development Program. The Department of Housing and

Urban Development questioned whether it could use the revolving

fund established by the Urban Growth and New Community

Development Act of 1970 to make two types of collateral protection

expenditures: (1] expenditures to repair, maintain, and operate the

security and (2) payments to senior lienholders. The expenditures

were intended to advance program objectives by preventing

deterioration of the security pending possible acquisition by HUL), or

perhaps in some cases enable a developer to regain financial health

and successfully continue with the project.

The Comptroller General reviewed the program legislation and

legislative history and concluded that the proposed expenditures

would constitute a new and major type of financial assistance entirely

beyond the intended scope of the statute, and were not authorized

except in cases where HUD had made a bona fide determination to

acquire the security. A later decision, B-170971, July 9, 1976,

discussed H U D’S specific authority under the program legislation to

GAO/OGC-92-13 Appropriations Law -Vol. 11
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Federal Assistance: Guaranteed and Insured Loans

make collateral protection expenditures after it had acquired the

security.

Where an agency acquires property through a loan or loan guarantee

program it administers, it may not transfer the management and

disposition of that property to another federal agency without specific

statutory authority, nor may it effect such a transfer under the

Economy Act, 31 U.S.C. $1535. B-15601 O-O.M., March 16, 1965

(concluding that VA could not transfer the management and

disposition of acquired property to HUD without specitlc authority).

A similar type of payment is one designed to protect the government’s

interest in the transaction as opposed to maintaining the particular

piece of property. Again, the question is one of purpose availability in

light of the agency’s statutory authority. Thus, where ~ had

acquired a second mortgage on real property through payment of a

loss to an insured financial institution under Title I of the National

Housing Act, it could use Title I funds to redeem the property to

protect its junior lien, under a right of redemption conferred by state

law, if it determined that redemption was in the best interests of the

government and necessary to carry out the provisions of Title I. 36

Comp. Gen. 697 (1957). See also 34 Comp. Gen. 47 (1954).

Collateral protection may take forms other than direct expenditures.

For example, the Small Business Administration could subordinate a

senior lien to enable a borrower to obtain necessary surety bonds

upon an administrative determination that the action would be

consistent with the statutory purposes and would improve the

prospects for repayment of the loan. 42 Comp. Gen. 451 (1963).

(Under the governing legislation, SBA had the discretion not to require

security at all on loans suftlciently sound as to reasonably assure

repayment.) Another 1963 case held that a statute authorizing the

Maritime Administration to take necessary steps to protect or

preserve collateral securing indebtedness authorized it to agree to

reschedule payments under an insured ship mortgage to avert

impending default. 43 Comp. Gen. 98 (1963).

In 63 Comp. Gen. 465 (1984), a borrower defaulted on a loan

guaranteed by the SBA. SBA purchased the guaranteed portion of the

loan from the lending bank and proceeded to place the loan in

liquidation. However, a prior Iienholder scheduled a foreclosure sale.

SBA was unable to get a Treasury check in time to submit a protective

w’. ,.

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Federal Aaaiatance: Guaranteed and Inaured Jmana

bid, and asked the lending bank to advance funds to purchase the

property at the foreclosure sale, promising to reimbme the bank with

interest. Obviously, a government agency does not normally have the

authority to borrow money from a commercial bank to carry out its

programs. Under the particular circumstances involved, however, GAO

found that the transaction, including the commitment to pay interest,

could be justified under SBA’S broad authorityzb in 15 U.S.C.

# 634(b)(7) to “take any and all actions” deemed necessary in

liquidating or otherwise dealing with authorized loans or guarantees.

The decision emphasized that it was nothing more than an

interpretation of SBA’S legaI authority under the “unique

circumstances of this case,” and should not be regarded as

establishing a “broad legal precedent.” Id. at 469. —

z~he supreme COIM has noted in another context that Wngrm ~ E@en the SW

“extraordinarily broad powers” to accomplish the objectives of the Small BusinessAct. SBAV.

McClellan, 364 U.S. 446,447 (1960).

*u.S. G.P.0. : 1993-339-838 Page 11-68 GAO/OGC-92-13 Appropriations kW-VO1. 11


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