Municipalities in Fiscal Crisis: Federal Agencies Monitored Grants and Assisted Grantees, but More Could Be Done to Share Lessons Learned
Published: 2015-03-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Similar to the federal and state sectors, local governments are facing long-term fiscal pressures. In cases of fiscal crisis, municipalities may be required to make significant cuts to personnel that may impact their oversight of federal grants. GAO was asked to review the oversight of federal grants received by municipalities in fiscal crisis. This report (1) identifies challenges that selected municipalities in fiscal crisis experienced when managing federal grants and steps taken by those municipalities; (2) reviews the monitoring processes that federal agencies used to oversee selected grants to selected municipalities; and (3) examines actions the White House Working Group on Detroit and selected federal agencies took to assist municipalities in fiscal crisis.
For this review, GAO conducted site visits to four municipalities in fiscal crisis: Detroit, Michigan; Flint, Michigan; Camden, New Jersey; and Stockton, California. GAO focused on eight grant programs administered by DHS, HUD, Justice, and DOT. The basis for selecting these grant programs included dollar amount and grant type. GAO reviewed grant oversight policies and actions for fiscal years 2009-2013 and interviewed local, state, and federal officials, including those at Treasury and OMB.
section_title: What GAO Found
paragraphs: Grant management challenges experienced by municipalities in fiscal crisis. The diminished capacity of selected municipalities in fiscal crisis hindered their ability to manage federal grants in several ways. First, reductions in human capital capacity through the loss of staff greatly reduced the ability of some cities to carry out grant compliance and oversight responsibilities. Second, the loss of human capital capacity also led to grant management skills gaps. For example, in Detroit, Michigan, loss and turnover of staff with the skills to properly draw down funds caused some grant funds to remain unspent. Third, decreased financial capacity reduced some municipalities' ability to obtain federal grants. For example, both Flint, Michigan, and Stockton, California, did not apply for competitive federal grants with maintenance of effort requirements because their city governments were unable to ensure that they would maintain non-federal funding at current levels. Fourth, outdated information technology (IT) systems hampered municipalities' ability to oversee and report on federal grants. For example, Detroit's 2011 and 2012 single audits identified IT deficiencies in every federal grant program reviewed, which led to the city having to pay back some federal grant funds. In response to these challenges, the four municipalities GAO reviewed have taken a number of actions to improve their management of federal grants including centralizing their grant management processes and partnering with local nonprofits to apply for grants.
Federal grant monitoring and oversight processes. The eight grant programs GAO reviewed used, or had recently implemented, a risk-based approach to grant monitoring and oversight. These approaches applied to all grantees not just those in fiscal crisis. The grant programs administered by the Department of Housing and Urban Development (HUD) and the Department of Justice (Justice) consistently assessed grantees against a variety of risk factors to help program officials determine the need for more in-depth monitoring actions such as onsite monitoring visits. When program officials at HUD, Justice, the Department of Transportation (DOT), and the Department of Homeland Security (DHS) found deficiencies through monitoring actions, they required corrective actions from their grantees. However, in some cases, local grantees did not implement these corrective actions, resulting in continued grant management problems. In such cases, federal program officials took actions such as increasing the level of financial oversight or withholding grant funds until the grantee improved its grant management processes.
Actions taken to assist municipalities in fiscal crisis. The White House Working Group on Detroit—an interagency group assembled by the White House to assist Detroit—as well as selected agencies took a variety of actions to aid municipalities in fiscal crisis. These actions included improving collaboration between selected municipalities and federal agencies, providing flexibilities to help grantees meet grant requirements, and offering direct technical assistance. However, neither individual agencies nor the Office of Management and Budget (OMB), which was involved in the working group and has an interagency leadership role in achieving administration policy, have formal plans to document and share lessons learned from the efforts to assist Detroit with other federal agencies and local governments.
section_title: What GAO Recommends
paragraphs: GAO recommends that OMB direct federal agencies involved in the White House Working Group on Detroit to document and share lessons learned from federal efforts to assist Detroit. OMB neither agreed nor disagreed with this recommendation.

section_title: Letter
paragraphs: In July 2013, facing its inability to repay a debt estimated at approximately  $18 billion the city of Detroit filed for Chapter 9 municipal bankruptcy. The  most populous city in U.S. history to file for bankruptcy, Detroit is one of a  number of municipalities confronting a serious fiscal crisis in recent years.  In fact, fiscal sustainability presents a national challenge shared by all  levels of government. Our long-term model tracking the fiscal condition of  the state and local sector has shown that—similar to the federal  government—state and local governments also face long-term fiscal  pressures. In extreme cases, some local governments have been unable  to raise enough revenue to meet their obligations, leading them to file for  Chapter 9 bankruptcy or to be enrolled in state-level programs for fiscally  distressed municipalities. In such cases, local governments often make  significant cuts to personnel and services, and these actions may have  impacts on the ability of these local governments to oversee and  administer federal grant funds.
The federal government has a substantial interest in local government  fiscal health as a result of the grant funds it sends to state and local  governments. In fiscal year 2014, the federal government provided state  and local governments nearly $577 billion in federal grants, funding a  wide range of public policy areas, such as health care, transportation,  income security, education, job training, social services, community  development, and environmental protection.
Given that municipalities in fiscal crisis must continue to meet federal  grant requirements while facing severe fiscal pressures and potential loss  of capacity, you asked us to examine the oversight of federal grants to  municipalities in fiscal crisis. This report (1) identifies challenges that  selected municipalities in fiscal crisis have experienced when managing  federal grants and steps those municipalities took to address the  challenges; (2) reviews the internal controls, monitoring, and oversight  processes that federal agencies used to oversee selected grant programs  to several municipalities in fiscal crisis; and (3) examines actions the  White House Working Group on Detroit and selected federal agencies  took to assist selected municipalities in fiscal crisis. In conducting this  work we focused on four municipalities in fiscal crisis as case examples:  Detroit, Michigan; Flint, Michigan; Camden, New Jersey; and Stockton,  California. Criteria for selecting these municipalities included whether they  were in fiscal crisis (defined as having filed for Chapter 9 bankruptcy or  being designated in fiscal crisis by their state government); amount of  federal grant obligations; population; and state intervention type (e.g.,  assignment of an emergency fiscal manager). We selected eight federal  grant programs that these municipalities received using the following  criteria: dollar amount, grant type (e.g., direct or pass-through), and  incidence across multiple municipalities. We focused our analysis on  federal grants received by these municipalities in the 5 year period from  2009 to 2013. Findings from these cases are not generalizable to all  municipalities in fiscal crisis.
To identify challenges selected municipalities in fiscal crisis experience  when managing federal grants, to describe the steps the affected  municipalities took to address those challenges, and to review the actions  the White House Working Group on Detroit and selected federal agencies  have taken, we conducted interviews with local, state, and federal  officials. We conducted site visits to the four municipalities and  interviewed senior elected and appointed leadership as well as  departmental staff in charge of managing the selected grants. We  interviewed senior headquarters and regional staff where applicable at  the federal agencies responsible for the grants we selected. In the case of  the one pass-through grant included in our sample, we interviewed state  officials responsible for overseeing the distribution of that grant to our  selected cities. To obtain a government-wide perspective we interviewed  members of the White House Working Group on Detroit, described by  agency officials as an interagency collaborative effort to help coordinate  the federal response to Detroit’s fiscal crisis, as well as officials at the  Office of Management and Budget and at the Department of the  Treasury’s Office of State and Local Finance. We reviewed and analyzed  our interviews with these officials to identify grant management  challenges facing our selected municipalities and the actions taken by  those municipalities and federal agencies to address those challenges.
To review the internal controls, monitoring, and oversight processes that  federal agencies use to oversee the selected grants made to our four  case example municipalities, we reviewed the applicable grant programs’  authorizing statutes and regulations as well as government-wide grant  requirements. We also reviewed relevant oversight policies in effect for  fiscal years 2009 to 2013. This was the most recent 5-year period for  which monitoring data was available for our selected grant programs at  the time we began our review. We interviewed cognizant local, state, and  federal officials about grant monitoring and follow up actions.
We conducted our work from February 2014 to March 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. For a full description of our  objectives, scope, and methodology, see appendix I.
subsections: section_title: Background
subsections: section_title: Municipal Fiscal Crisis
paragraphs: While there is no single definition of municipal fiscal crisis, both academic  research and state policy documents distinguish between municipalities in  distress, crisis, and in extreme cases, bankruptcy. In managing revenue  and expenses, local governments occasionally confront deficits and  periods when they lack enough cash to cover expenses. Most of the  time, they find ways to get through the temporary trouble by, for example,  borrowing money over the short term. But when budget gaps widen and a  city cannot pay its bills, meet its payroll, balance its budget, or carry out  essential services, the local government is viewed as distressed.  Municipal officials usually respond with some combination of service cuts,  worker layoffs, tax and fee increases, reserve spending, and borrowing. If  those measures do not work and the city no longer has the money to  meet its obligations, the distress can escalate into a crisis or financial  emergency, which may include defaulting on a bond payment or, in rare  instances, filing for protection under Chapter 9 of the U.S. Bankruptcy  Code (Chapter 9).
Chapter 9 provides a municipality with protection from creditors while the  municipality develops and negotiates a plan for adjusting its debts.  Among other requirements, a municipality may seek such bankruptcy  protection in a federal bankruptcy court if it is authorized to do so under  state law, and the municipality can prove to the bankruptcy court that it is  insolvent. Twenty-seven states authorize municipalities to file for Chapter  9 bankruptcy, but 15 of those states have conditions or limitations on the  authorization. Of the remaining 23 states, 21 do not have specific  authorizations, and 2 specifically prohibit their municipalities from filing for  Chapter 9. Chapter 9 filings are rare for general purpose municipalities  (e.g., cities, towns, and counties). From January 1980 to June 2014, 43 of  approximately 39,000 general purpose municipalities filed for Chapter 9.  These municipalities tended to be small in population: only 8 of the 43  municipalities had a population over 50,000. Three of the four  municipalities in our review have filed for Chapter 9: Detroit, Michigan;  Camden, New Jersey; and Stockton, California (see figure 1).
section_title: Federal and State Actions to Address Municipal Fiscal Crises
paragraphs: Congress has provided assistance to municipalities in fiscal crisis by  using a variety of approaches on a case-by-case basis. For example, in  1975 New York City faced a serious fiscal crisis. New York City had  accumulated $14 billion in debt, and was unable to pay for normal  operating expenses. That year Congress passed legislation to provide  short-term loans to New York City to assist with its fiscal crisis. As a  condition of receiving these loans, the city had to agree to develop more  stringent financial procedures including a new accounting system that  would allow an auditor to perform an audit and render an opinion on the  city’s financial statements. In a prior report on New York City’s financial  plan, we concluded that the federal government’s intervention, along with  other factors, helped to stabilize the city’s fiscal crisis.
Congress also took steps to assist the District of Columbia during its fiscal  crisis in 1995. In 1994, the District was running a $335 million budget  deficit and could no longer pay its bills. In response, Congress passed the  District of Columbia Financial Responsibility and Management Assistance   This act established the District of Columbia Financial  Act in April 1995. Responsibility and Management Assistance Authority—a financial control  board—to assist the District in restoring financial solvency and improving  management effectiveness during a control period. By 2001, the District  had balanced its budget for 4 consecutive fiscal years in accordance with  generally accepted accounting principles, obtained access to both short- term and long-term credit markets, and repaid outstanding debt it owed to  the U.S. Treasury. As a result, the control period ended and the District  returned to self-governance. In 2001, we testified that Congress’ creation  of a control board contributed to the improvement in the fiscal health of  the District.
In prior work, we identified several guidelines for Congress to consider  when evaluating the need for a federal response to a large failing firm or  municipality. Those guidelines included considering whether the  problem was localized or widespread and whether the costs of a  municipal collapse would outweigh the costs of providing aid. We also  provided guidelines for structuring a federal intervention, such as  developing clear goals and objectives and protecting the financial interest  of the federal government.
In addition to these federal efforts, 19 states have passed laws  establishing mechanisms to assist municipalities in fiscal crisis, in part to  avoid the need for these entities to file for Chapter 9 protection in federal  court. designate a receiver, emergency fiscal manager, state agency head, or  financial control board to administer the intervention. Depending on the  state, this entity may take a number of actions, including restructuring  debt and labor contracts, raising taxes and fees, offering state-backed  loans and grants, providing technical assistance, and even dissolving the  local government. Three of the four municipalities in our review were  subject to state interventions to assist with the fiscal crisis. Camden, New  Jersey, had a state-assigned fiscal monitor that provided oversight. Both  Detroit, Michigan, and Flint, Michigan, had state-appointed emergency  fiscal managers with broad authority to oversee all operations of  government in lieu of elected officials. There was no state intervention in  Stockton, California (see figure 1 above).
section_title: Federal Grant Accountability Requirements and Selected Grant Programs
paragraphs: The 19 states with laws allowing intervention in municipal fiscal crisis are: Connecticut,  Florida, Indiana, Illinois, Maine, Massachusetts, Michigan, Nevada, New Hampshire, New  Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode  Island, Tennessee, and Texas. See Pew Charitable Trusts, The State Role in Local  Government Financial Distress (Washington, D.C.: July 2013). throughout this report. Grants represent one form of federal assistance  consisting of payments in cash or in kind to a state or local government or  a nongovernmental recipient for a specified purpose. Grant programs are  typically subject to a wide range of accountability requirements under  their authorizing legislation or appropriation and implementing regulations  so that funding is spent for its intended purpose. For example, the  Department of Housing and Urban Development (HUD) administers  Community Development Block Grants (CDBG) to aid states and  localities in providing housing, economic development, and other  community development activities. Congress mandated that HUD  administer these grant programs in a manner that principally benefits low- and moderate-income persons, aids in the prevention or elimination of  slums or blight, or meets urgent community development needs. HUD  regulations direct grant recipients to prepare planning documents and  maintain certain records proving the legislation’s requirements as a  condition to receiving funds.
In addition, grant programs are also subject to crosscutting requirements  applicable to most assistance programs. For example, recipients of grant  funds are prohibited from using those funds to lobby members and  employees of Congress and executive agency employees. The Office of  Management and Budget (OMB) is responsible for developing  government-wide policies to ensure that grants are managed properly  and that grant funds are spent in accordance with applicable laws and  regulations. Until recently, OMB published guidance in various circulars to  aid grant-making agencies with such subjects as audit and record  keeping and the allowability of costs. In December 2013, OMB  consolidated its grants management circulars into a single document,  Uniform Administrative Requirements, Cost Principles, and Audit  Requirements for Federal Awards, to streamline its guidance, promote  consistency among grantees, and reduce administrative burden on  nonfederal entities.
For this review, we selected the grant programs listed below. For a brief  description of these programs as well as the award amounts for our  selected cities, see appendix II.
Community Development Block Grant Entitlement Program (CDBG)  administered by the Department of Housing and Urban Development  (HUD).
HOME Investment Partnerships Program (HOME) administered by  HUD.
Federal Transit Formula Grant Program, administered by the U.S.
Department of Transportation’s (DOT) Federal Transit Administration  (FTA).
Highway Planning and Construction Grant Program administered by  DOT’s Federal Highway Administration (FHWA).
Edward Byrne Memorial Justice Assistance Grant Program (JAG)  administered by the Department of Justice (Justice).
Community Oriented Policing Services (COPS) Hiring Program  administered by Justice.
Assistance to Firefighters Grant Program (AFG) administered by  Department of Homeland Security’s (DHS) Federal Emergency  Management Agency (FEMA).
Staffing for Adequate Fire and Emergency Response (SAFER) grant  program administered by FEMA.
section_title: Reduced Capacity Hindered Selected Municipalities’ Ability to Manage Federal Grants
paragraphs: The capacity of grant recipients is a key factor in grants management  which can have a significant impact on a program’s success. Capacity  involves both the maintenance of appropriate resources and the ability to  effectively manage and utilize those resources. In prior work, we have   Human capital capacity  identified several different types of capacity.describes the extent to which an organization has sufficient staff with the  knowledge and technical skills needed to effectively meet its goals and  objectives. Financial capacity is the ability of an organization to meet  financial responsibilities related to federal grants, such as matching  requirements. Organizational capacity refers to the degree to which an  organization is institutionally prepared for grant management and  implementation, including its ability to employ technology for grant  oversight and reporting. A lack of capacity in any of these three  dimensions can adversely impact a recipient’s ability to effectively  manage and implement federal grants. We found challenges related to  each of these three types of capacity at the four municipalities we  reviewed.
subsections: section_title: Reductions in Human Capital Capacity Affected the Ability of Municipalities to Manage Federal Grants, but the Impact Varied
paragraphs: All four municipalities experienced reductions in their human capital  capacity due to fiscal crisis, but the effect of those reductions on the  management of selected grants varied. From 2009 to 2013, these  municipalities experienced workforce declines ranging from 18 to 44  percent (see table 1). In an effort to cut costs, these municipalities laid off  city employees, imposed furloughs, and cut wages (which according to  officials in Stockton, in turn led to higher staff attrition rates).
In three municipalities—Detroit, Flint, and Stockton— this downsizing  directly impacted city staff responsible for the management and oversight  of federal grants. For example, Detroit’s Planning and Development  Department, which administers HUD’s CDBG and HOME grants received  by the city, lost more than a third of its workforce between 2009 and  2013—falling from 173 to 110 FTEs. According to Detroit officials, it was  difficult for the staff that remained to carry out all of the department’s  grant compliance and oversight responsibilities. They said the loss  ultimately contributed to adverse single audit findings, monitoring findings  and special grant conditions from HUD. For example, in a 2013  monitoring report for the CDBG program, HUD found seven deficiencies,  such as incorrect grant charges for staff time and failure to demonstrate  adequate controls to prevent charging CDBG for unallowable costs. HUD  officials also noted that Detroit had failed to close its single audit findings  from fiscal years 2010 through 2012 in part due to a lack in human capital  capacity. According to HUD’s monitoring report, Detroit did not “have the  capacity to improve its capacity.”
For additional information on the issue of grant administrative costs, see GAO, Grants  Management: Programs at HHS and HUD Collect Administrative Cost Information but  Differences in Cost Caps and Definitions Create Challenges, GAO-15-118 (Washington,  D.C.: Dec. 12, 2014). received by the city can also influence how severely grant management  staff are impacted.
section_title: Decreased Human Capital Capacity Affected Knowledge Management, Contributing to a Grant Management Skills Gap at Selected Municipalities
paragraphs: In addition to having a sufficient number of staff, municipalities also need  to have personnel with the right knowledge, skills, and abilities to manage  their grants effectively. Local officials in Detroit, Flint, and Stockton told us  that reductions in staff due to fiscal crisis led to grant management skills  gaps in their workforce. With overall lower staff numbers, remaining staff  were left to cover a larger set of responsibilities, including managing grant  programs that they had not been familiar with prior to the staff reductions.  Officials representing Detroit and Flint told us that when they lost grant  management staff, the resulting skill shortage sometimes contributed to  violations of grant agreements or grant funds remaining unspent in city  accounts.
For example, Flint’s Department of Community and Economic  Development, which administers HUD’s CDBG and HOME grant  programs, lost a number of key staff during its fiscal crisis through layoffs  and attrition, including an experienced employee who reviewed and  approved grant expenditures. Flint officials as well as HUD’s technical  assistance providers for the CDBG and HOME programs told us that  losing staff with critical grant management knowledge contributed to  compliance problems, resulting in a series of critical audits of Flint’s  HOME program by HUD’s Inspector General from 2009 to 2013.According to staff from HUD’s Office of the Inspector General, staff  turnover in Flint contributed to grant management knowledge gaps and  subsequent audit findings. These findings had serious monetary  consequences for the city of Flint. Flint officials told us that the city owed  HUD approximately $1.1 million in 2014 because Flint could not ensure  that its indirect costs had been appropriately calculated and allocated  across HUD’s grant programs. In addition to increasing the risk of  violations of grant agreements, losing grant management skills made it  more difficult for officials in Detroit, Flint, and Stockton to draw down grant  funds. For example, staffing levels in Detroit’s Department of  Transportation, which administers FTA’s Federal Transit Formula Grant  program, fell from 1,514 FTEs in 2009 to 809 in 2013. In addition, over  the span of 3 years, the department had 4 directors. According to Detroit  officials, this change in management caused a lack of direction and  consistency in priorities, which particularly affected the departments’  procurement staff. Federal Transit Formula grantees—including Detroit— use these grant funds to finance the procurement and maintenance of  transit equipment and facilities, such as buses and bus terminals. A lack  of employees with the skills to process procurement requests and  administer grants caused some grant funds from FTA to remain unspent  in accounts.
Officials in two municipalities—Detroit and Stockton—told us that turnover  in senior- and mid-level management contributed to federal grant  management challenges. According to city officials, this happened for two  reasons. First, because some cities in fiscal crisis must furlough  employees, lower salaries, or reduce retirement benefits, senior staff  members chose to leave their positions while they could still vest their  retirement benefits based on their highest salary levels. Second, more  experienced staff members had more marketable skills and were able to  find other jobs more easily than the junior staff members. Officials in  these two municipalities explained that losing senior staff created gaps in  institutional knowledge and made it more difficult for remaining staff to  meet existing grant requirements.
These gaps in institutional knowledge were exacerbated by a lack of  robust knowledge transfer practices, which heightened the risk to federal  fund management as a city government lost staff because there was no  mechanism in place for staff to pass down knowledge to their successors  before they left. Knowledge management had been a long-standing  challenge for the city of Detroit. Detroit had few written grant policies to  help transfer knowledge about grants management. According to a city  of Detroit report and Detroit officials, grant management policies and  procedures in Detroit varied among grant-recipient departments. Some  departments had policies and procedures while others did not. This  resulted in ad hoc procedures, passed on from one employee to the next.  When an employee who was knowledgeable in one area of grants  management retired, his or her knowledge also left.
Detroit officials said they believed that limitations in the city’s ability to  effectively manage and preserve existing knowledge and expertise  regarding grant management contributed to the city’s history of poor audit  findings. Detroit had 90 compliance findings on its single audit in 2011  and 98 findings in 2012.2011 and $14.8 million in 2012. A cost becomes questioned when the  auditors review grant expenditures and cannot find sufficient  documentation to prove that the expenditure was eligible under the terms  of the related grant program. In some cases, Detroit had to return part or  all of these questioned costs to relevant federal departments or had   The questioned costs totaled $31.6 million in  funding withheld. As of February 2015 Detroit officials were working to  implement written grant management policies and procedures as a part of  the city’s response to its fiscal crisis and bankruptcy.
section_title: Decreased Financial Capacity Reduced Some Municipalities’ Ability to Obtain Federal Grants
paragraphs: A lack of financial capacity at two of the municipalities we reviewed—Flint  and Stockton—reduced their ability to apply for federal grants that call for  local resource investments or maintenance of effort provisions. Officials in  Flint told us that they struggled to generate local resources needed to  make the city competitive for some federal grants. A manager with Flint’s  Department of Transportation told us that the city wanted to apply for a  Transportation Investment Generating Economic Recovery (TIGER)  grant, which is a competitive grant program administered by DOT that  supports road, rail, transit, and port projects. TIGER grant applications  are evaluated in part by the level of nonfederal financial commitments that  grantees are able to contribute to the proposed project. Because of the  city’s limited budgetary resources, Flint needed to postpone submitting an  application for at least 3 years in order to obtain the local funds to make  the application competitive.
Other federal grant programs require grantees to demonstrate that they  will maintain the level of nonfederal funding for the program that was in  effect prior to receiving the federal grant award. The purpose of this  maintenance of effort requirement is to prevent grantees from substituting  federal dollars for local dollars. Flint and Stockton did not apply for  competitive federal grants with maintenance of effort requirements  because their city governments were unable to ensure that they would  maintain nonfederal funding at current levels. For example, officials in  Stockton told us that the city decided not to reapply for an AFG grant  because it could not afford the maintenance of effort requirements. As  part of the AFG grant terms, a grantee must agree to maintain local  expenditure levels of at least 80 percent of the average expenditures in  the 2 fiscal years prior to the grant award. These officials told us that  certifying that they will maintain expenditure levels was not always  possible for municipalities in fiscal crisis.
section_title: Limited Organizational Capacity, Demonstrated in Outdated Information Technology, Hampered Municipalities’ Ability to Oversee and Report on Federal Grants
paragraphs: In two municipalities we reviewed, a chronic lack of investment in  organizational capacity— specifically in information technology (IT)  systems—challenged the ability of these communities to oversee and  report on grants in an accurate and timely way. In Detroit, the IT systems  that handled grants management were outdated and fragmented, making  it difficult to capture reliable financial information. Senior city officials told  us that they did not know the total amount of grant funds Detroit received  from the federal government because their various IT systems did not  communicate with one another. According to an outside review  commissioned by the city to assess its grant management system, grant  account information appeared in numerous makeshift spreadsheets that  did not necessarily match the city’s central accounting system and  Detroit’s general ledger did not update automatically with grant payroll or  budgeting data. These IT inconsistencies made it impossible for Detroit to  capture reliable financial information. The report also found that basic  accounting practices like proper award setup and closeout, cost  allocation, and reconciliation were overlooked or omitted, leaving Detroit  with mismatched records and grant funds that were subject to  expiration. In Detroit’s 2011 and 2012 single audit reports, external  auditors found IT deficiencies in every federal grant program they  reviewed.general fund had to cover disallowed costs and federal grant de- obligations. In other words, these broken IT systems exacerbated the  fiscal crisis by contributing to inefficiencies and extra costs for the city’s  general fund.
As a result of these and other single audit findings, Detroit’s  Although the grants accounting system in Stockton generally produced  reliable financial information, senior city officials told us that the system  could not generate timely reports to inform local decision making.  Stockton’s 20-year-old accounting system did not generate the automatic  reports that more modern systems are designed to produce. This required  city employees to manually process financial data to produce financial  reports. Because of the time involved, city employees often chose not to  produce the reports, leading to late reporting and outdated numbers. For  example, rather than running comparisons of budgeted spending to actual  spending on a monthly basis, senior Stockton officials told us that city  employees had instead produced these comparisons on a quarterly basis.  Members of the Stockton City Council as well as local auditing groups  told us that the absence of timely financial data made it more difficult for  the city’s leadership to make informed financial decisions.
section_title: Selected Municipalities Have Taken Actions to Address Some of These Challenges and Improve Their Management of Federal Grants
paragraphs: Three municipalities—Flint, Stockton, and Detroit—have consolidated  their grant management processes in an effort to improve citywide  oversight and accountability for federal grant funds. To address  challenges with financial and organizational capacity, Flint and Stockton  instituted a new grant application preapproval process for all city  departments. As part of the new process, whenever a city department  official intends to apply for a federal grant, that department official must  notify city finance officials for approval to apply. The city finance officials  review this notification to identify any potential costs for the city that the  grant may entail. If these officials approve this notification, the department  may apply for the federal grant. Officials from both these cities told us that  this process was intended to notify appropriate city officials of any  matching or maintenance of effort requirements associated with federal  grants. Another benefit that these officials identified was that the  notification process allowed city leadership to be aware of any effects that  the grants may have on the city’s legacy costs, such as retiree health  care.
Detroit has also taken steps to overhaul its grant management system,  including establishing a new citywide Office of Grants Management.  Grant management problems have plagued Detroit for years. In April  2012, Detroit signed a consent agreement with the state of Michigan that   As a first  required the city to restructure its grant management system.step to meet this requirement, officials worked with outside consultants to  assess the current state of the city’s grants management and to identify  potential reforms. Then in June 2014, the Emergency Manager directed  the Chief Financial Officer to establish a central Office of Grants  Management. According to Detroit officials, benefits of a stable,  centralized grants management office include better management,  compliance, accountability and oversight and reporting of grant data. It  also results in better trained staff, and clear and up-to-date grant financial  and performance data. A top priority for this office is to ensure the proper  management and fiscal integrity of grants. Detroit officials told us that  they have begun the process of implementing grant management policies  and procedures to standardize processes across the city and to help build  a culture of compliance and integrity. These policies and procedures  include grant planning, pre-award processes, award acceptance, post- award management, and compliance and monitoring.
Three municipalities in our review—Detroit, Flint, and Camden— collaborated with local nonprofits to apply for federal grants. Officials from  these cities told us that this collaboration helped them address challenges  they faced with human capital capacity. For example, officials in Detroit  worked with the Detroit Public Safety Foundation to identify and apply for  federal grants to help support the Detroit Police and Fire Departments.  This foundation assisted the police department with its 2014 COPS grant  application and the fire department with securing its AFG grants in 2011  and 2013 and its SAFER grants in 2011, 2012, and 2013. Detroit Fire  Department officials told us that without the help of the Public Safety  Foundation, they would have limited capacity to apply for competitive  federal grants.
Similarly, the city of Flint partnered with the Flint Area Reinvestment  Office and the Charles Stewart Mott Foundation to identify and apply for  federal grants. The Flint Area Reinvestment Office is a local nonprofit  organization with the mission to “inform, organize, and facilitate local  partner collaboration on strategic opportunities that attract federal and  state resources.” The Charles Stewart Mott Foundation—which began in  Flint in 1926—supports a variety of projects through its Flint Area  Program, such as economic development, job training, and emergency  services projects. A senior Flint official told us that one of the valuable  contributions these local nonprofits made was to coordinate grant  applications in the area to help ensure that multiple organizations were  not applying for the same grant. These two organizations helped the city  apply for a COPS grant, which it received in 2013.
In addition to taking steps that directly improve federal grant  management—such as consolidating grant management processes and  working with local nonprofits to apply for federal grants—some  municipalities also recognized the need for making improvements to  systemic financial and organization problems to set a proper foundation  for sound grant management. Two of the municipalities in our review— Flint and Stockton—established committees to recommend changes in  city governance necessary to improve long-term fiscal health and stability.  These municipalities recognized that their fiscal issues were the result of  long-term, systemic policies and structures. Therefore, they created  committees to recommend changes to improve their long-term financial  capacity. Flint officials said that systemic changes were needed to protect  the fiscal future of the city. In response, Flint’s Emergency Manager  appointed members to a Blue Ribbon Committee on Governance Reform.  The committee explored the structures, policies, and practices that  contributed to Flint’s financial difficulties. It also proposed changes  designed to help the city avoid returning to those difficulties in the future.  In June 2014, the committee issued a number of recommendations to  Flint’s Emergency Manager including that he embrace the use of multi- year budgeting, strategic planning, and long-term financial forecasts. In  November 2014, Flint citizens voted to adopt four of six Blue Ribbon  Committee recommendations. Stockton City Council members created a  similar group, the Charter Review Advisory Committee, to advise the  council on potential changes to the city charter, including administrative  issues, election rules, term limits, and civil service reforms.
section_title: Most Grant Programs Assessed Risk to Identify and Respond to Deficiencies
paragraphs: Effective grant oversight procedures help ensure that waste, fraud, and  abuse are minimized and that program funds are being spent  appropriately. Such procedures include identifying the nature and extent  of grant recipients’ risks and managing those risks; having skilled staff to  oversee recipients to ensure they are using sound financial practices and  meeting program objectives and requirements; and using and sharing  information about grant recipients. Our past work has shown that to  ensure that grant funds are used for intended purposes, federal agencies  need effective processes for: (1) monitoring the financial management of  grants; (2) ensuring results through performance monitoring; (3) using  audits to provide valuable information about recipients; and (4) monitoring  subrecipients as a critical element of grant success. We reviewed  implementation of these monitoring procedures for each of the eight  selected grant programs in Detroit, Flint, Camden, and Stockton in fiscal  years 2009 through 2013. It is important to note that agencies use these  monitoring procedures for all grantees, not just those in fiscal crisis.
subsections: section_title: All Eight Grant Programs Consistently Used or Had Recently Implemented a Risk-based Approach to Monitoring and Oversight
paragraphs: Four of the programs—CDBG, HOME, JAG, and COPS—consistently  assessed risk during this period when determining the amount and type of  oversight they would provide their grantees. See figure 2 for an overview  of the risk assessments and monitoring actions taken for our selected  grant programs in Detroit, Flint, Camden, and Stockton in fiscal years  2009 to 2013. These programs considered a variety of risk factors. For  example, to assess risk for JAG grants in 2013, program officials used a  grant assessment tool that included 29 risk indicators, such as the size of  the grant award, timeliness of progress reports, and whether there had  been an inspector general audit for the grantee in the previous 2 years. If  a grantee scored higher than a certain threshold on these indicators, the  grantee would likely be considered a high priority for in-depth monitoring  activities, such as enhanced desk reviews or site visits. Two of these four  programs—CDBG and HOME—considered risk factors that would likely  be impacted by a municipality experiencing fiscal crisis, such as  measures of employee loss, turnover, or extended vacancies of key staff.
The four other grant programs—Federal Transit Formula, Highway  Planning and Construction, AFG, and SAFER—have taken steps toward  incorporating more risk assessments into grant monitoring processes. In  2014, FTA began formally using a new list of risk factors to determine  whether to conduct enhanced oversight of a Federal Transit Formula  grantee. This included whether the grantee had a state financial oversight  control board or similar mechanism, which some state agencies require  as a result of being in fiscal crisis. Of the eight programs we reviewed, the  Federal Transit Formula program was the only one to have a risk factor  directly linked to municipal fiscal distress. Prior to this change, FTA  conducted routine monitoring reviews of its approximately 600 Federal  Transit Formula grantees at least once every 3 years—or about 200  grantees per year. According to FTA officials, the new risk factors allow  FTA to better target these reviews based on grantee risk and need.
In 2014, FHWA also made improvements to its processes for identifying  risk for its locally-administered Highway Planning and Construction grant  projects. By law state departments of transportation are the direct  recipients of Highway Planning and Construction Grant funds and have  the primary role to oversee grant funds that are administered by  subrecipients, such as municipalities. However, FHWA is responsible for  monitoring the state departments of transportation to ensure that states  are accountable for implementing federal requirements and conducting  adequate oversight of federal funds. In August 2014, FHWA published an  order that established a uniform methodology for assessing risk in the  stewardship and oversight of locally-administered Highway Planning and  Construction grant funds by state departments of transportation. For  example, the order provides a guide for FHWA officials to use to assess  the extent to which state departments of transportation have acceptable  review and oversight plans detailing state oversight activities for locally- administered projects. FHWA developed this order to help provide  reasonable assurance that Highway Planning and Construction grant  projects comply with key federal requirements.
In carrying out its oversight of AFG and SAFER grants, FEMA conducted  both financial and programmatic monitoring. Financial monitoring  primarily focuses on statutory and regulatory compliance of financial  matters, while programmatic monitoring focuses on grant progress,  targeting issues that may impact achievement of the grant’s goals. Prior  to fiscal year 2013, a FEMA official told us that the reasons that AFG or  SAFER grantees were chosen for in-depth programmatic monitoring were  unclear, as those choices were often left to the discretion of regional  program officials. These officials explained that, in fiscal year 2013, the  agency conducted a baseline risk review of all new grantees to help  inform the selection of grants for programmatic monitoring. For financial  monitoring, prior to 2013 FEMA applied risk factors to a sample of grants  to inform in-depth monitoring decisions. In response to a recommendation  from the DHS Inspector General, in 2014 program officials said that they  incorporated a set of three financial questions into the programmatic  baseline risk review discussed above.
section_title: Some Selected Municipalities Did Not Implement the Required Federal Corrective Actions to Resolve Deficiencies, Resulting in Continued Grant Management Problems
paragraphs: When program officials found deficiencies through monitoring, they  typically required corrective actions from the grantee; however, selected  municipalities did not always take corrective actions to address these  deficiencies. This contributed to continued grant management problems,  resulting in a potential financial risk. However, the actual impact of these  problems on proper use of federal funds is unclear.
Further, the municipalities appeared to face these difficulties even when  officials from different federal programs took different enforcement  approaches. For example, in administering and monitoring Federal  Transit Formula Grants in fiscal year 2012, FTA contractors found that the  Detroit Department of Transportation had increased the amount of some  of its contracts by more than $100,000 without including proper  documentation to support the changes to the contract. In response, FTA  required that Detroit provide evidence of adequate documentation to  support future change orders to contracts. As stated in its monitoring  reports, FTA has required numerous corrective actions from Detroit  during our review period (fiscal years 2009 through 2013). Between 2009  and 2013 FTA found over 60 deficiencies with Detroit’s Federal Transit  Formula Grants. According to FTA officials, Detroit would submit  corrective action plans to address such deficiencies, but would not follow  through on the plans. To enforce corrective actions, FTA officials told us  that they could choose to withhold funds from Detroit. However, these  officials said that they were hesitant to withhold funds because, while  doing so may lead to changes in behavior of local officials, it would also  deprive the city’s residents of the benefit of services provided by the  funds. Instead, in April 2013 FTA placed Detroit on restricted draw down  status. While in this status, FTA officials told us that all requests by the  city of Detroit for payments under their Federal Transit Formula Grant are  first to be reviewed by FTA officials to ensure that the costs are eligible  for reimbursement and that city officials have included the necessary  documentation.
HUD officials also found chronic monitoring deficiencies in Detroit, but  they took a different enforcement approach. Between 2009 and 2013,  HUD’s grant monitoring reports identified 29 deficiencies in Detroit’s  CDBG and HOME grant programs. In general, deficiencies were found in  the following areas, among others: poor procurement practices,  inadequate calculation of administrative and indirect costs to the grants,  poor financial reporting, and lack of key documentation. In a December  2012 letter to the city of Detroit, HUD designated the city as a “high risk  grantee” and imposed special grant conditions requiring Detroit to provide  written procedures for how it would maintain compliance with the  regulations governing its grant funds. As a result of these conditions  HUD withheld its fiscal year 2012 formula funds—including CDBG and  HOME grants—until Detroit had provided the agency with sufficient  documentation to satisfy HUD officials that the city could properly manage  the funds. HUD officials told us that the agency released these funds  gradually in fiscal year 2013 as Detroit demonstrated that it satisfied the  requirements set forth in the grant conditions. HUD had a similar  experience with continued monitoring deficiencies with the city of Flint.
For example, in its 2011 monitoring report on Flint’s HOME grant  program, HUD stated that it had not received responses from Flint on how  the city planned to address the agency’s 2010 monitoring findings,  despite the fact that Flint officials had repeatedly promised to provide  them. As a result, HUD officials told us that they withheld Flint’s fiscal  year 2011 HOME funds, and—similar to the experience in Detroit—only  released those funds in 2014 after Flint had addressed its monitoring  deficiencies.
section_title: Federal Actions Assisted Municipalities in Fiscal Crisis, but Efforts to Share Lessons Learned Are Limited
subsections: section_title: The White House Working Group on Detroit and Selected Agencies Improved Collaboration with Municipalities
paragraphs: Both the White House Working Group on Detroit and individual federal  agencies took steps to improve collaboration with, and assistance to,  municipalities experiencing fiscal crisis. The White House Working Group  on Detroit was composed of staff from multiple federal agencies, including  OMB, Treasury, HUD, and DOT, and was led by a coordinator who acted  as a liaison between the Working Group and the city of Detroit. According  to federal officials, the idea and structure of the White House Working  Group on Detroit drew heavily from one of the White House’s place-based   In July 2011,  assistance initiatives: Strong Cities, Strong Communities.the White House launched the Strong Cities, Strong Communities (SC2)  pilot, which deployed teams of federal employees from a range of  different agencies to work alongside mayors and their staffs in cities— including Detroit. As part of this effort, the administration established a  White House Council on Strong Cities, Strong Communities. This council  is co-chaired by the Secretary of Housing and Urban Development and  the Assistant to the President for Domestic Policy. Among the goals for  the SC2 initiative is to improve relationships between local and federal  agencies and coordination across federal programs needed to spark  economic growth in distressed areas. Officials told us that the White  House Working Group on Detroit was modeled to be an enhanced  version of the SC2 initiative.
According to the working group’s coordinator, one objective of the White  House Working Group on Detroit was to facilitate information sharing  between federal agencies and Detroit officials to help the city solve its  fiscal crisis. It sought to accomplish this objective by meeting with senior  city leaders to discuss their priorities and then connecting these officials  with available resources or expertise needed to respond to city problems.  For example, Detroit officials identified the city’s outdated IT systems as  one of the top hurdles to its fiscal recovery. In response, the White House  Office of Science and Technology Policy and the National Economic  Council convened a group of top IT leaders in municipal government.  These experts, dubbed the Tech Team, met with Detroit officials,  assessed the city’s IT systems, and developed a set of recommendations  with the purpose of streamlining government processes, saving money,  and improving city services. Detroit city officials told us that they were  following through on the Tech Team’s recommendations. For example,  the Tech Team recommended that Detroit establish a cabinet-level  position within city government charged with leveraging technology and  innovation to improve the delivery of government services. In February  2014, Detroit hired a Chief Information Officer to lead IT improvements in  the city. As a first step, the Chief Information Officer stated that Detroit is  working on another of the Tech Team’s recommendations—evaluating  citywide IT infrastructure—by completing a comprehensive analysis of the  current IT systems in the city, providing new computers and issuing  requests for proposals for new records management systems for the  police and fire departments.
Justice’s Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF)  collaborated with two of our selected municipalities to help leverage  limited local, state, and federal public safety resources. ATF collaborated  with the Stockton Police Department to reduce firearms and gang crime.Historically, Stockton has experienced high crime rates. Officials there  explained that much of Stockton’s crime was drug and gang related as  the city is located at the intersection of two major drug corridors. As a  result of severe budget cuts and layoffs since 2009, Stockton Police  Department officials told us that they have been unable to respond to  nonviolent crimes. Instead, officials said that Stockton has focused its  limited capacity on its most violent crimes.
Despite these efforts, the city experienced a surge in violent crimes in  2012, with a record 71 homicides. Stockton officials told us that they  reached out to ATF to provide technical assistance to the city’s gang  crime task force in 2012. ATF responded by collaborating with Stockton  on a special operation to: (1) target and remove violent criminals who  illegally trafficked and possessed firearms; and (2) dismantle criminal  organizations working in Stockton. According to ATF and Stockton  officials, experienced undercover ATF agents from throughout the country  were deployed alongside local ATF agents and Stockton police officers to  conduct covert investigations of some of the most violent criminals in  Stockton and surrounding areas. An ATF report found that as a result of  this partnership, 44 defendants were charged with a variety of federal  firearms, narcotics, and robbery offenses and 11 more were charged with  various state offenses. The operation also resulted in the seizure of 84  firearms and nearly 60 pounds of illegal drugs.
section_title: White House Working Group on Detroit and Selected Agencies Took Steps to Provide Flexibilities on Grant Requirements
paragraphs: The White House Working Group and selected agencies provided  flexibilities on some grant requirements to assist municipalities in fiscal  crisis. Generally, federal grant programs have rules and requirements  regarding how grantees may spend funds. These conditions may be  outlined in the legislation that established the grant program or through  additional requirements established by the grant-making agency. Federal  agencies can provide flexibilities on such grant requirements in certain  circumstances.
For example, members of the White House Working Group on Detroit  from both OMB and Treasury used such flexibilities to allow Detroit to  leverage previously allocated grant funds to address urban blight in the  city. A 2013 survey of Detroit’s properties found that approximately  85,000 structures and vacant lots either met the definition of blighted  property or showed indications of future blight, and roughly 40,000 of  those structures needed immediate removal. A senior OMB official told  us that one of his tasks as a member of the White House Working Group  was to identify all existing federal funds that were already set aside for  Detroit. In June 2013, as part of this effort, staff at OMB and Treasury  identified unused resources from the Hardest Hit Fund that had been   Although the  given to Michigan to distribute throughout the state.Hardest Hit Fund was typically used to prevent foreclosures, these  officials determined that it was possible within the legal limits of the grant  requirements to redirect $100 million of Michigan’s Hardest Hit Funds to  Detroit and to other Michigan cities for use in the demolition of blighted  properties. In addition, OMB officials identified CDBG and HOME grant  funds that had been previously allocated to the city but were in danger of  expiring. Working together with staff from HUD and the city of Detroit,  these officials told us they were able to quickly formulate plans that met  grant requirements, thereby enabling the city to use the grant funds  before they expired.
In another example of federal agencies providing flexibility, the COPS  Office worked closely with city officials in Camden to help legally transfer  its grant funds during the city-county police consolidation. In May 2013,  Camden dissolved its city police department and created a new Metro  Division for the city of Camden within the existing Camden County Police  Department. Camden officials told us that without dissolving the city  police department, Camden would have been unable to continue to afford  the salary and benefit costs of its police force. When Camden officials  started working on the plan to consolidate the city and county police  departments, officials reached out to the COPS Office to discuss what  would happen with the city’s active COPS grant. Camden officials told us  that the COPS Office was very helpful in providing options and flexibilities  for Camden to continue to use the COPS grant. For example, the COPS  Office provided Camden with several options and worked with the city to  find a way to maintain its status as primary grantee but to transfer grant  funds to the new county police force. The COPS Office worked with  Camden officials in the police and finance departments to ensure that the  transfer and transition occurred in a manner that met grant requirements.  As a result, COPS officials told us that Camden remained in compliance  with grant regulations while maintaining access to grant funds that  supported community police in the newly consolidated force.
section_title: Agencies Provided Direct Technical Assistance and Training
paragraphs: Federal agencies provided a variety of technical assistance and training  to help the municipalities in fiscal crisis included in our review to  overcome knowledge gaps and human capital capacity challenges. For  example, HUD provided in-depth technical assistance to help Flint and  Detroit administer its grant programs. In 2010, HUD changed the way that  it structures and delivers technical assistance. This approach, called  OneCPD, was a departure from the manner in which technical assistance  was previously delivered specific to a single program and often not  coordinated with other technical assistance being offered. According to  HUD, OneCPD was intended to provide nationwide, comprehensive,  needs-based and cross-program technical assistance.us that grantees or HUD field offices may request technical assistance  from the agency, which will then assign a technical assistance provider to  the grantee. HUD’s technical assistance provider developed technical  assistance plans for Flint and Detroit to improve their grant management  capabilities. As outlined in its technical assistance plan for Flint, this  provider conducted an assessment to determine and prioritize Flint’s  needs and to address capacity gaps. Subsequently, the technical  assistance provider worked with Flint to develop a comprehensive work  plan to address both past and future demands; develop more organized  and complete policies and procedures; and design processes for self- auditing, monitoring, and compliance.
FTA assigned a senior member of its regional office in Chicago to assist  Detroit during its fiscal crisis. According to FTA officials, the Regional  Counsel served as an advisor and liaison to Detroit’s Department of  Transportation since September 2013. For example, an FTA official told  us that the Regional Counsel met in person with officials in Detroit’s  Department of Transportation at least once per month and participated in  multiple teleconferences throughout the month to assist city officials with  administering the Federal Transit Formula Grant program. Both FTA and  Detroit officials said that the FTA Regional Counsel assisted the city by  providing technical assistance on a variety of grant management issues.  For example, the Regional Counsel provided input and advice on Detroit’s  draft fleet management plan for its city bus service. The Regional  Counsel also worked with Detroit officials to provide needed training. For  example, an FTA official told us that in April 2014 the Regional Counsel  organized a training course on FTA procurement requirements. The  Regional Counsel has worked to identify other discretionary federal grant  programs available for Detroit’s transit system. For example, an FTA  official told us that the Regional Counsel connected Detroit officials with  federal officials in DHS’ Transportation Security Administration (TSA) to  learn about grants at TSA that support security programs for transit  agencies. Detroit officials told us that the FTA Regional Counsel has been  helpful with providing a direct line of communication between the city and  FTA.
Similarly, FEMA conducted an onsite technical assistance visit to Detroit  in March 2014 to provide expertise and guidance on its SAFER grants  after program officials noticed that the city was slow to spend its  numerous open SAFER grants totaling approximately $55 million. The  city was using SAFER to fund nearly 300 fire department positions. Once  in Detroit, FEMA officials discovered that turnover among city staff  managing the grants contributed to a lack of knowledge about how to  submit payment requests. In addition, because SAFER involves payroll,  using these grant funds relies on Detroit’s payroll system, financial  accounting system, and grants system, all of which face challenges.  Detroit was working to improve these systems, but a FEMA official  explained that these broken systems and staff turnover meant that Detroit  had not made a payment request in 6 months. These infrequent payment  requests added to the complication of tracking down payroll information  for these 300 individuals. According to FEMA officials, during its technical  assistance visit, FEMA worked with Detroit officials on how to set staffing  maintenance levels (e.g., how many firefighters to maintain on the payroll)  to stay in compliance with the grant. Further, FEMA officials told us that  they found that Detroit was including too much information in their  payment requests, which also contributed to processing delays. These  officials stated that they worked with Detroit on how to provide enough  information to be compliant without further overburdening the payment  request process.
section_title: Documentation and Sharing of Lessons Learned and Good Practices Is Limited
paragraphs: Documentation and sharing of lessons learned from the efforts to assist  Detroit has been limited. Senior officials at OMB and HUD told us that  they knew of no formal plans to document and share such information,  but that they saw value in doing so. In fact, these officials told us that  there have been instances of this happening informally and they believed  it would be a good idea to capture lessons learned more formally to help  institutionalize improvements to the administration’s broader place-based  initiatives as well as any future efforts to help municipalities in fiscal crisis.  Local officials were also interested in lessons learned. In both Stockton  and Flint, city officials wanted to learn about what was working in Detroit  and in other cities dealing with a fiscal crisis. Stockton officials told us that  they understood that, given Detroit’s size and the amount of public  attention it had received, its situation warranted a level of direct response  from the federal government that smaller cities probably could not expect.  However, these officials believed that their city and other municipalities  could still benefit from some of the approaches and advice offered to  Detroit.
The informal structure of the White House Working Group may be one  reason that lessons learned have not been formally documented and  shared. Officials involved with the working group told us that the  composition of the group was driven by the needs of the city of Detroit.  When Detroit faced difficulties with blight, the working group assembled  agency officials from Treasury, HUD, OMB, and the Environmental  Protection Agency to advise city officials about how available grant funds  could be used for blight remediation. When the city faced difficulties with  street lighting, the working group assembled officials from the Department  of Energy to provide technical assistance and advice. After addressing  such needs in Detroit, these federal officials typically returned to their  usual responsibilities at their respective agencies. In such an  environment, and especially in the absence of a clear articulation of the  need to identify and preserve promising practices, it is unlikely that staff  would take the time to systematically document good practices or lessons  learned that could then be shared with other interested agencies or  municipalities. Our prior work has shown that collaboration among federal  and local grant participants, particularly with regard to information  sharing, is important for effective grant management. In the absence of  a formal structure to capture lessons learned, OMB—in its leadership role  in agency management of programs and resources to achieve  administration policy—would be well positioned to direct such an effort.  OMB officials told us that the administration plans to continue its  commitment to assist Detroit, in part by creating an executive director  position within OMB charged with leading the administration’s efforts.
See White House Memorandum to Heads of Executive Departments and Agencies, M- 09-28 (Aug. 11, 2009) for more on the White House’s broader place-based initiatives.   Place-based initiatives aim to coordinate and leverage federal resources in a specific  locality. about economic turnaround efforts. This site, called the National  Resource Network, provides a resource library, technical assistance  library, and opportunities for selected municipalities in economic or fiscal  distress to request assistance from the network. A senior official with the  SC2 Initiative told us that the National Resource Network is intended to  be the platform for federal agencies to share lessons learned and best  practices with municipalities in economic and fiscal distress. Given that  Detroit is one of the cities that has taken part in the SC2 pilot, its National  Resource Network website might be a natural fit to share lessons learned  from the efforts of the White House Working Group on Detroit.
Officials indicated that they were not aware of plans for a formal  evaluation of the efforts of the White House Working Group, including an  effort to document and share good practices. Although the informal  operation of the White House Working Group helped connect Detroit with  resources and expertise it needed to help address its fiscal crisis, if  federal officials do not assign formal responsibility for documenting  lessons from Detroit’s experience in a timely manner, opportunities to  leverage that knowledge may be lost. Moreover, such efforts need not be  resource intensive, given that the infrastructure to share the information  already exists.
section_title: Conclusions
paragraphs: Cities facing serious financial crisis or in Chapter 9 bankruptcy provide a  special challenge to the federal government and its grant-making  agencies. On one hand, the losses of human capital, financial, and  organizational capacity that can accompany such serious financial  distress present municipalities with significant challenges to their ability to  effectively obtain and manage federal grants. In light of this challenge,  and the responsibility that federal grant-making agencies have to the  American taxpayer to ensure that grant funds are spent efficiently and  appropriately, all the agencies we reviewed used—or had recently  incorporated—risk assessments when conducting their grant monitoring  and oversight activities. Although not specifically fashioned for cities in  fiscal crisis, such risk assessments consider a variety of factors that are  likely to be impacted by a municipality in such a situation.
On the other hand, cities facing financial crisis are examples of  organizations that particularly need the assistance and support the  federal government and federal grants can provide. In response to the  Detroit bankruptcy, both the White House Working Group and individual  agencies have taken actions such as improving collaboration, providing  grant flexibilities, and offering direct assistance and training. Detroit’s  emergence from the Chapter 9 process and the new and sometimes  innovative relationships it has developed with its federal partners are a  promising start. However, the federal government has not developed a  mechanism for documenting lessons from Detroit’s experience, and if  these lessons are not captured in a timely manner, experiences from  officials who have first-hand knowledge may be lost.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Director of the Office of Management and  Budget direct, as appropriate, federal agencies involved with the White  House Working Group on Detroit, to collect good practices and lessons  learned from their efforts to assist Detroit during its fiscal crisis and share  them with other federal agencies and local governments. Toward this  end, OMB may want to consider making use of existing knowledge and  capacity associated with the Strong Cities, Strong Communities Initiative  and its National Resource Network.
section_title: Agency and Third Party Comments and Our Evaluation
paragraphs: We provided a draft of this report to Assistant Attorney General for  Administration, the Secretaries of the Departments of Homeland Security,  Housing and Urban Development, Transportation, Treasury, and the  Director of the OMB. Both the Department of Housing and Urban  Development and the Office of Management and Budget generally  agreed with the report; however, OMB staff neither agreed nor disagreed  with our recommendation. The Departments of Housing and Urban  Development and Justice provided technical comments, which we  incorporated as appropriate. The Departments of Homeland Security,  Transportation, and Treasury did not have any comments on the draft  report. We also provided drafts of the examples included in this report to  cognizant officials from the cities of Detroit, Flint, Camden, and Stockton  to verify their accuracy and completeness, and incorporated changes as  appropriate.
We are sending copies of this report to the heads of the Departments of  Homeland Security, Housing and Urban Development, Justice,  Transportation, Treasury, and OMB as well as interested congressional  committees and other interested parties, including the state and local  officials we contacted for this review. This report will also be available at  no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact J.  Christopher Mihm at (202) 512-6806 or mihmj@gao.gov or Robert  Cramer at (202) 512-7227 or cramerr@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of our report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report (1) identifies challenges that selected municipalities in fiscal  crisis have experienced when managing federal grants and steps those  municipalities took to address the challenges; (2) reviews the internal  controls, monitoring, and oversight processes that federal agencies used  to oversee selected grant programs to several municipalities in fiscal  crisis; and (3) examines actions the White House Working Group on  Detroit and selected federal agencies took to assist selected  municipalities in fiscal crisis.
To conduct this work, we focused on four municipalities in fiscal crisis as  case examples: Detroit, Michigan; Flint, Michigan; Camden, New Jersey;  and Stockton, California. We selected these municipalities based on a  number of factors. First, we applied two threshold fiscal crisis criteria,  which included either filing for Chapter 9 municipal bankruptcy or being  declared in fiscal crisis by their state government. Once these criteria  were met, we selected the municipalities with relatively high levels of  federal investment in terms of population and federal grant obligations.  We considered those municipalities with populations over 50,000, using  2010 Census data to estimate the population figures. We also narrowed  the pool of municipalities to those with federal grant obligation amounts of  at least $5 million between fiscal years 2011 and 2013. To obtain this  obligation data, we used grant obligation figures from USASpending.gov.  Once we applied these criteria, we then selected a group of municipalities  that would provide variety in terms of the state intervention type and  geographic location. States use different types of interventions to assist  municipalities in fiscal crisis. Some states intervene with an emergency  fiscal manager, a state oversight board, or a state agency, while other  states provide no interventions. Our selection provided two municipalities  with emergency fiscal managers (Detroit and Flint), one municipality with  oversight from a state agency (Camden), and one municipality with no  state intervention (Stockton). Finally, we considered geographic diversity  when selecting the municipalities and our final selection includes  municipalities on the east coast, west coast, and in the Midwest. Based  on the grants that our four municipalities received, we selected eight grant  programs for our review. Grant selection was also based on the following  criteria: (1) dollar amount; (2) grant type (e.g., direct or pass-through);  and (3) incidence across multiple municipalities. Findings from these  cases are not generalizable to all municipalities in fiscal crisis. See  appendix II for a list of the selected grants in our review and the grant  award amounts for our selected cities between 2009 and 2013. We chose  the period of fiscal years 2009 through 2013 because it included the latest  5 years with available monitoring data at the time of our review.
To identify challenges that selected municipalities in fiscal crisis have  experienced when managing federal grants and the steps those  municipalities took to address those challenges, we primarily relied on  interviews with local, state, and federal officials. We conducted site visits  to the four selected municipalities and interviewed elected leadership and  departmental staff in charge of managing the selected grants. In the case  of the one pass through grant included in our sample, we interviewed  state officials responsible for overseeing the distribution of that grant to  our selected cities. We also interviewed federal headquarters and  regional staff where applicable who oversee the selected grants and  researchers and professional organizations that were knowledgeable  about municipal fiscal crises and challenges that municipalities faced. In  these interviews, we asked local, state, federal, and nongovernmental  officials to describe the challenges that the selected municipalities in  fiscal crisis faced regarding federal grants management. We reviewed  and analyzed our interviews with federal, state, and local officials to  identify grant management challenges. To illustrate the reduced capacity  of the selected cities, we used full-time equivalent (FTE) data from  published Comprehensive Annual Financial Reports for Detroit, Flint, and  Stockton as well as state municipal aid applications for Camden. To  determine that these data were sufficiently reliable for the purposes of this  report, we checked for consistency across published financial reports for  the selected cities. We also verified these numbers with cognizant city  officials.
To review the internal controls, monitoring, and oversight processes that  federal agencies used to oversee the selected grants made to our four  case example municipalities, we examined grant laws, regulations, and  oversight policies for fiscal years 2009 to 2013 for our eight selected grant  programs. We compared the monitoring policies for the eight grant  programs with the implementation documentation for those policies in the  four selected agencies. For example, if an agency policy stated that  grants would receive risk scores that would help determine the  appropriate level of monitoring, we checked for documentation of the risk  scores and subsequent monitoring actions such as site visits or desk  reviews. Examples of oversight implementation documentation that we  reviewed for our selected grant programs included grant risk assessment  worksheets, monitoring reports, sanction letters, and monitoring follow up  documents. We also reviewed monitoring findings of single audits and  office of inspector general audit reports. We interviewed cognizant local,  state, and federal officials about these monitoring policies and actions.
To examine the actions the White House Working Group on Detroit and  selected federal agencies took to assist selected municipalities in fiscal  crisis, we interviewed local, state, and federal officials involved with grant  management for the four selected municipalities and eight selected grant  programs. We conducted site visits to the four selected municipalities and  interviewed elected leadership and departmental staff in charge of  managing the selected grants. In the case of the one pass-through grant  included in our sample, we interviewed state officials responsible for  overseeing the distribution of that grant to our selected cities. In these  interviews, we asked officials to describe the actions that the White  House Working Group and selected federal agencies took to assist them  during their fiscal crisis. We asked officials to describe the actions that  were helpful and the actions that could be improved. We also interviewed  federal headquarters and regional staff who oversee the selected grants  to obtain their perspectives about the actions they took to assist these  selected municipalities. To obtain a government-wide perspective we  interviewed members of the White House Working Group on Detroit,  described by agency officials as an interagency collaborative effort to help  coordinate the federal response to Detroit’s fiscal crisis, as well as  officials at the Office of Management and Budget and at the Department  of the Treasury’s Office of State and Local Finance. We reviewed our  interviews with federal, state, and local officials to identify actions taken  by federal agencies that assisted municipalities in fiscal crisis. We used  criteria from our prior work to inform the usefulness of these actions,  including our work on effective federal collaboration, implementing  interagency collaborative mechanisms, and state and local grant  management.
We conducted this performance audit from February 2014 to March 2015,  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Overview of Selected Grant Programs
paragraphs: Appendix II: Overview of Selected Grant  Programs Agency and administering  component  Department of Housing and Urban  Development, Community Planning  and Development (CPD)
Department of Housing and Urban  Development, CPD  Department of Transportation,  Federal Transit Administration  (FTA)
Department of Transportation,  Federal Highway Administration  (FHWA)
Department of Justice, Office of  Justice Programs (OJP)
Department of Justice, COPS  Office  Department of Homeland Security,  Federal Emergency Management  Administration (FEMA)
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
paragraphs: J. Christopher Mihm at (202) 512-6806 or mihmj@gao.gov   Robert J. Cramer at (202) 512-7227 or cramerr@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to contacts named above, Peter Del Toro (Assistant Director);  Rebecca Rose O’Connor (Analyst-in-Charge); and Benjamin L. Sponholtz  made major contributions to this report. Additionally, Joy Booth; Amy  Bowser; Shane Close; Steve Cohen; Cathy Colwell; Beryl H. Davis; Kim  McGatlin; and Rebecca Shea made key contributions to this report.