U.S. Insular Areas: Interior's Management and Oversight of Insular Area Grants
Published: 2010-07-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: U.S. insular areas face serious economic and fiscal challenges and rely on federal funding to support their governments and deliver critical services. The Department of the Interior, through its Office of Insular Affairs (OIA), provides about $70 million in grants annually, including technical assistance grants, to increase insular area self-sufficiency. In the past, GAO and others have raised concerns regarding insular areas' internal control weaknesses, which increase the risk of grant fund mismanagement, fraud, and abuse. In March 2010, GAO reported on insular area grants (GAO-10-347); this testimony summarizes that report and focuses on (1) whether previously reported internal control weaknesses have been addressed and, if not, to what extent they are prevalent among OIA grant projects, including technical assistance grant projects, as of March 2010; and (2) the extent to which OIA has taken action to improve the implementation and management grant projects, as of March 2010. For the March 2010 report, GAO reviewed a random sample of 173 OIA grant project files and interviewed OIA and insular area officials. For this testimony, GAO conducted additional analysis for the 49 technical assistance grant projects included in the sample. GAO's March 2010 report contained three recommendations. Interior agreed with the recommendations. This testimony statement contains no new recommendations.
section_title: What GAO Found
paragraphs: Internal control weaknesses previously reported by GAO and others continue to exist, and about 40 percent of grant projects funded through OIA have these weaknesses, which may increase their susceptibility to mismanagement. These weaknesses can be categorized into three types of activities: grant recipient activities, joint activity between grant recipients and OIA, and OIA's grant management activities. For the 49 technical assistance grant projects in GAO's sample, the most prevalent weaknesses were insufficient reporting and record-keeping discrepancies. Over the past 5 years, OIA has taken steps to improve project implementation and management. Most notably, OIA established incentives for financial management improvements and project completion by tying a portion of each insular area's annual allocation to the insular governments' efforts in these areas--such as their efforts to submit financial and status reports on time. In addition, OIA established expiration dates for grants to encourage expeditious use of the funds. Despite these and other efforts, some insular areas are still not completing their projects in a timely and effective manner, and OIA faces key obstacles in compelling them to do so. Specifically, (1) current OIA grant procedures provide few sanctions for delayed or inefficient projects, and the office is not clear on its authorities to modify its policies; (2) resource constraints impede effective project completion and proactive monitoring and oversight; (3) inconsistent and insufficiently documented project redirection policies do little to discourage insular areas from redirecting grant funds in ways that hinder project completion; and (4) OIA's current data system for tracking grants is limited and lacks specific features that could allow for more efficient grant management.

section_title: Letter
paragraphs: I am pleased to be here today to participate in your hearing to discuss  technical assistance grants to the U.S. insular areas. U.S. insular areas— which include American Samoa, the Commonwealth of the Northern  Mariana Islands (CNMI), Guam, the U.S. Virgin Islands (USVI), and three  Freely Associated States (the Federated States of Micronesia, Palau, and  the Republic of the Marshall Islands)—face serious economic and fiscal  challenges. Consequently, these insular areas, some of which are under  U.S. sovereignty, and some of which are independent nations that have  signed Compacts of Free Association with the United States, rely on  federal funding to support their governments and deliver critical services.  The Department of the Interior, through its Office of Insular Affairs (OIA),  provides approximately $400 million annually in financial assistance to  insular area governments—roughly $70 million of which is awarded  annually as grants to insular areas for capital improvement projects,  operations and maintenance improvement projects, technical assistance,  and other purposes, to increase the self-sufficiency of the insular areas.  For example, technical assistance grants are used to conduct feasibility  studies or train government staff.
Although OIA grants are essential in supporting insular areas’ economies,  we and others—including Interior’s Office of Inspector General—have had  long-standing concerns with insular area governments’ internal control  weaknesses, which increase the risk of fraud, waste, abuse, and  mismanagement. These internal control weaknesses have been  documented in several reports between 2000 and 2009. Internal control is  an integral component of an organization’s management that provides  reasonable assurance that operations are effective and efficient, financial  reporting is reliable, and applicable laws and regulations are complied  with. Internal control also serves as the first line of defense in  safeguarding assets and preventing and detecting errors and fraud. Under  the federal standards for internal control, federal agencies are to employ  internal control activities—the policies, procedures, techniques, and  mechanisms that enforce management’s directives—that are integral to  the accountability for stewardship of government resources and achieving  effective results, and help ensure that actions are taken to address risks.  Examples of such internal control activities include accurate and timely  recording of transactions and events and controls over information  processing. If federal agencies do not use effective internal control  activities, or have weaknesses in their internal controls, they can increase  the risk of potential mismanagement or misuse and waste of grant funds.
My testimony is based on our recent March 2010 report, in which we  reviewed OIA’s grant management and oversight. Based on that report, I  will discuss (1) whether long-standing internal control weaknesses have  been addressed and, if not, to what extent they were prevalent among OIA  grant projects, including technical assistance grant projects, as of March  2010; and (2) the extent to which OIA has taken actions to improve grant  project implementation and management, as of March 2010.
For our March 2010 report, we focused on insular areas that receive  noncompact grants—including American Samoa, the CNMI, Guam, the  USVI, and the Freely Associated States. We reviewed OIA’s policies,  procedures, and other documents as well as best practices in grant  management. We interviewed OIA grant managers and division directors  regarding OIA’s policies and procedures and grant management. In  addition, we also reviewed a random sample of 173 grant project files to  determine whether and the extent to which internal control weaknesses  are still prevalent. We were able to project our sample results to the 1,771  OIA grant projects in the grant management database as of April 27, 2009.  For this testimony, using the data from our random sample of 173 grant  project files, we identified 49 technical assistance grants and conducted  additional analyses.
For the March report, we conducted our audit work from March 2009 to  March 2010, in accordance with generally accepted government auditing  standards. Appendix I of our report contains a detailed description of our  scope and methodology.
subsections: section_title: Background
paragraphs: U.S. insular areas receive hundreds of millions of dollars in federal grants  from a variety of federal agencies, including the Departments of  Agriculture, Education, Health and Human Services, Homeland Security,  the Interior, Labor, and Transportation. The Secretary of the Interior has  administrative responsibility over the insular areas for all matters that do  not fall within the program responsibility of another federal department or  agency. OIA, established in 1995, is responsible for carrying out the  Secretary’s responsibilities for U.S. insular areas. OIA’s mission is to  promote the self-sufficiency of the insular areas by providing financial and  technical assistance, encouraging private sector economic development,  promoting sound financial management practices in the insular  governments, and increasing federal responsiveness to the unique needs of  the island communities.
Much of the assistance that OIA administers to insular areas is in the form  of what it considers mandatory assistance, including compact assistance,  permanent payments to U.S. territories, American Samoa operations  funding, and capital improvement project grants. OIA also administers  discretionary assistance through, for example, technical assistance grants  and operations and maintenance improvement program grants. The  administration and management of OIA grants is guided by OIA’s Financial  Assistance Manual. OIA grants other than compact assistance are subject  to Interior’s Grants Management Common Rule, relevant Office of  Management and Budget (OMB) circulars, and specific terms and  conditions that OIA outlines in each grant agreement, such as semiannual  narrative and financial reporting and grant expiration dates.
Within OIA, two divisions are largely responsible for grant administration  and management—the Technical Assistance Division and the Budget and  Grants Management Division. The Technical Assistance Division, which  administers general technical assistance grants in addition to several other  types of technical assistance, has a director and two grant managers. The  Budget and Grants Management Division, which covers capital  improvement project and operations and maintenance improvement  program grants, has a director and three grant managers. A third OIA  division—the Policy and Liaison Division—also provides some staff for  grant-related tasks, including staff that focus on OIA’s accountability and  audit responsibilities. The majority of OIA’s budget is directed to  compact assistance and permanent fiscal payments (see table 1). About  2 percent of OIA’s budget is dedicated to administrative costs, leaving less  than 16 percent for noncompact grants and technical assistance.
Among the random sample of 173 OIA grant project files that we reviewed  in our March 2010 report, we identified 49 OIA technical assistance grant  projects from a variety of technical assistance grant types (see table 2).
The 49 technical assistance grant projects that we reviewed in our March  2010 report, were geographically dispersed among the insular areas and  the State of Hawaii (see table 3).
section_title: Nearly 40 Percent of OIA Grant Projects Have Internal Control Weaknesses That Could Increase Susceptibility to Mismanagement
paragraphs: On the basis of our review of grant files from a random sample of grant  projects, we determined that the long-standing internal control  weaknesses that we, Interior’s Office of Inspector General, and others,  identified between 2000 and 2009 still exist. We estimated that 39 percent  of the 1,771 grant projects in OIA’s grant management database  demonstrate at least one internal control weakness that may increase the  projects’ susceptibility to mismanagement. Of the 49 technical assistance  grant projects in our sample, 47 grant projects demonstrated one or more  of the internal control weaknesses that we assessed, which is more than  double our estimated 39 percent occurrence rate for OIA grants as a  whole.
The eight internal control weaknesses that we assessed can be grouped  into three categories based on the entity responsible for the activities:  grant recipient activities, OIA grant management activities, or joint  activities between grant recipients and OIA. Table 4 shows (1) how often  we estimated each internal control weakness would occur within the  universe of OIA grants based on our random sample, and (2) specific data  on the 49 technical assistance grants included in our sample. The most  prevalent weaknesses for the 49 technical assistance grant projects were  insufficient reporting and record-keeping discrepancies.
Table 5 shows how many internal control weaknesses were demonstrated  by the 49 technical assistance grant projects in our sample.
For example, one general technical assistance grant project that we  reviewed in detail—the 2005 grant for the USVI Household Income and  Expenditures Survey (HIES) project—had 4 out of 5 applicable internal  control weaknesses. In 2005, OIA awarded a general technical assistance  grant to the Eastern Caribbean Center (ECC) at the University of the  Virgin Islands for the purpose of collecting data to update important  economic and demographic indicators for the territory. Because of  funding constraints, OIA was not able to award the entire amount  requested at that time. In addition, OIA later reduced its financial support  of the project after data collection was underway, thereby reducing the  scope of data collection efforts. The Director of the ECC reported that  OIA’s decision to reduce available funding after data collection had begun  was disastrous to the statistical integrity of the survey.
In reviewing this grant project, we found the following four internal  control weaknesses, (1) failure to submit the required status report in full  and on time, (2) failure to submit the required final reports on time,  (3) expected or actual completion dates that occurred after grant  expiration, and (4) information in OIA’s grant management database that  did not match information in the grant file. These weaknesses and other  problems affected project completion in several ways, including the loss of  additional funding that OIA later awarded. In 2007, OIA granted additional  funds for the HIES project to complete tabulation of the data that had  been collected. However, because so much time had passed since the  initial data collection effort, the Director of the ECC stated that it was not  possible to complete the data collection as originally planned. Due to the  lack of activity with the grant and the fact that no narrative status reports  were submitted, OIA deobligated these additional grant funds in their  entirety in February 2009. The final HIES report also was not completed  until September 2009, more than 4 years after the initial grant was  awarded.
section_title: OIA Has Taken Actions to Improve Grant Project Implementation and Management but Faces Several Obstacles
paragraphs: OIA has taken several important steps to improve grant project  implementation and management but faces several obstacles in its efforts  to compel insular areas to complete their projects in a timely and effective  manner.
subsections: section_title: OIA Has Taken Steps to Improve the Implementation and Management of Grant Projects
paragraphs: Over the past 5 years, OIA has taken the following steps to improve grant  project implementation and management:    Competitive allocation system. In fiscal year 2005, OIA implemented a  new competitive allocation system for the $27.7 million in capital  improvement project grants that it administers to the insular areas. This  system provides incentives for financial management improvements and  project completion by tying a portion of each insular area’s annual  allocation to the insular governments’ efforts in these areas—such as their  efforts to submit financial and status reports on time. Through this system,  OIA scores each insular area against a set of performance-based criteria  and increases allocations to those insular areas with higher scores,  thereby lowering allocations to insular areas with lower scores.
Grant expiration dates. Beginning in 2005, to encourage expeditious use  of funds, OIA established 5-year expiration dates in the terms and  conditions of new capital improvement project grants. Beginning in 2008,  OIA also notified insular area officials of expiration dates for grant  projects that had been ongoing for more than 5 years with no or limited  progress. OIA officials explained that while the expiration dates have not  yet pushed all of the insular areas to complete projects, they have  encouraged some areas to do so. The officials also stated that the  expiration dates have helped OIA grant managers administer and manage  grants—which they believe has improved accountability—and have been  useful for insular area grantees whose agencies have high staff turnover  and were unaware of the status of older grants. Technical assistance  projects have shorter grant terms than capital improvement projects, with  expiration dates within 1 to 2 years; we found that OIA extended the grant  expiration date at least once for 18 of the 49 technical assistance grant  projects in our sample.
Actions to improve insular area grant management continuity. OIA has  also taken steps to help with the continuity of grant administration at the  insular level. For example, in March 2008, OIA awarded a $770,000 grant  for capital improvement project administration in the CNMI, which  provided funding for positions in the local central grant management  office in that insular area. According to the grant manager for CNMI  capital improvement projects, the grant was given to help ensure that the  central grant management office had the staff necessary to help move  implementation of projects forward.
section_title: Several Obstacles to Timely and Effective Project Completion Remain
paragraphs: Despite OIA’s efforts, some insular areas are still not completing their  projects in a timely and effective manner, and OIA faces the following key  obstacles in compelling them to do so:    Lack of sanctions for delayed or inefficient projects. Current OIA grant  procedures provide few sanctions for delayed or inefficient projects. For  example, although OIA established grant expiration dates, they have little  practical effect. In theory, a grant expiration date encourages timely  completion of a project because if a project is not completed on time, the  funds are taken away from the recipient. However, if an insular area’s OIA  grant funds expire, while the funds do not remain immediately available  for the project, the insular area does not lose the funds because OIA treats  its capital improvement project grants as mandatory funding with “no-year  funds,” based on the agency’s interpretation of relevant laws. Thus, after  a grant expires, OIA deobligates the funds and they are returned to the  insular area’s capital improvement project account to be reobligated for  the same or other projects. Recently, OIA has taken steps to identify  possible solutions and actions that could help provide effective sanctions  for insular areas that do not efficiently complete projects and expend  funds. In doing so, OIA has faced uncertainty regarding the authorities it  has to change its current policies and practices, which are guided by many  special agreements, laws, and regulations.
OIA resource constraints. OIA officials report that resource constraints  impede effective project completion and proactive monitoring and  oversight. Although they could not provide us with data, numerous  officials in OIA asserted that heavy workloads are a key challenge in  managing grants. The effects of insufficient resources vary across grant  type but include impacts on the ability to maintain files, adopt a proactive  oversight approach that could aid project completion, conduct more  detailed financial reviews of projects, and conduct site visits to more  projects to better ensure that mismanagement is detected. Importantly,  although grant managers for capital improvement projects noted that the  most effective action they can take to move projects along is to conduct  site visits, they also asserted that their current workloads only afford one  visit per year. Despite their concurrence that additional resources are  needed, OIA division directors confirmed that they have not formally  communicated these needs to decision makers, or higher levels within  Interior, and have not developed a workforce plan or other formal process  that demonstrates a need for additional resources. Moreover, OIA does not  track workload measures, such as the number of grants handled by each  grant manager, to show changes over time that would help justify the need  for additional resources.
Inconsistent and insufficiently documented project redirection policies.  OIA’s current project redirection approval practices do little to discourage  insular areas from redirecting project funds in ways that hinder project  completion. We found that insular areas shift priorities and frequently  redirect grant project funds, which in some cases expedites project  completion and in other cases impedes it. Currently, OIA’s policies for  granting project redirection requests vary across insular areas.  Specifically, in American Samoa, project redirection is limited to changes  within a priority category because the insular area’s grants are issued by  priority areas. In contrast, the other insular areas each receive grants as  one capital improvement grant and are able to redirect money between  projects with widely different purposes. Furthermore, OIA’s policies for  granting project redirection requests are also not well-documented.  Project redirection is a particular concern in instances where a project  starts and federal money is expended but the project is never completed,  leading to the waste of both federal resources and the local governments’  limited technical capacity to implement projects.
Inefficient grant management system. OIA’s current data system for  tracking grants is limited in the data elements it contains, leading to  inconsistencies in the data that some grant managers rely on for  monitoring and oversight activities. Grant managers vary in the degree to  which they rely upon OIA’s database, as well as the priority they place on  keeping information in the database up to date. While grant managers for  all grant types reported relying on the database for information on the  amount of funds drawn down from grants and for responding to requests  for data from outside parties (such as Interior’s Office of Inspector  General and GAO), some told us that they do not find OIA’s database  useful and therefore maintain their own separate spreadsheets to track  some information, including expiration dates, grant status, and receipt  dates for the most recent financial and narrative reports. As reported in  the Domestic Working Group’s Guide to Opportunities for Improving  Grant Accountability, consolidating information systems can enable  agencies to better manage grants. Along these lines, Interior is currently  phasing in a centralized agencywide system—the Financial and Business  Management System—that is scheduled to be implemented in OIA in 2011.
Our March 2010 report contained three recommendations to the Secretary  of the Interior designed to improve the department’s management and  oversight of grants to the insular areas, including one that would directly  impact OIA’s technical assistance grant programs. Specifically, we  recommended that the Secretary of the Interior direct OIA to create a  workforce plan and reflect in its plan the staffing levels necessary to adopt  a proactive monitoring and oversight approach. Such proactive monitoring  and oversight would apply to all of OIA’s grant programs, including the  technical assistance programs. OIA agreed with our report and told us that  it will implement these recommendations.
In conclusion, Madam Chairwoman, OIA has made important strides in  implementing grant reforms, particularly in its efforts to establish  disincentives for insular areas that do not complete grant projects in a  timely and effective manner. However, the unique characteristics and  situations facing insular area governments, and the need to mindfully  balance respect for insular governments’ self-governance and political  processes with the desire to promote efficiency in grant project  implementation, limit as a practical matter some of the actions that OIA  can take to improve the implementation of grant projects. Nonetheless,  OIA has not exhausted all of its available opportunities to better oversee  grants and reduce the potential for mismanagement and we will continue  to monitor its implementation of our recommendations.
Madam Chairwoman, this concludes my prepared statement. I would be  pleased to answer any questions that you or other Members of the  Subcommittee may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact Anu K. Mittal  at (202) 512-3841 or mittala@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Jeffery D. Malcolm and Emil Friberg, Assistant Directors;  Elizabeth Beardsley; Keesha Egebrecht; and Isabella Johnson.
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