The distinction was first drawn in a Department of the Interior Solicitor's opinion that concluded that the only rules that could apply to Compact funds were found in the Fiscal Procedures Agreement, the Compact Act, and the laws of the freely associated states. This conclusion precluded application of normal Federal rules to Title Two funding. For example, the Compact Fiscal Procedures Agreement requires the quarterly transfer of money to the FAS into interest-bearing accounts. Grant funds, on the other hand, are transferred only when needed for immediate payments. Grant funds may not be invested.
Grants are subject to conditions and performance expectation.
Allowable costs are defined. Grant funds, of course, are not similarly guaranteed. The ultimate leverage a Federal agency has on grant funds is its ability to withhold or delay payments when compliance problems are discovered, and to require repayment when performance conditions are not met or funds are misspent. These tools are essentially absent from the guaranteed Compact funding with a few notable exceptions. The United States may also suspend its obligations to the FAS if they take actions incompatible with United States security and defense responsibilities, a provision that has not been tested.