Homeland Security First Responder Grants: Cash Management Improvement Act Exemption and Cash Advance Funding Require Additional DHS Oversight
Published: 2006-12-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: A key provision of the Cash Management Improvement Act (CMIA) of 1990 (P.L. 101-453), as amended, requires the federal government and the states to minimize the time between transfer of federal funds and payments made by states for federal grant program purposes. Concerns were expressed by representatives of local government subgrantees that more flexibility was needed in the receipt of federal funding for first responders. Congress exempted certain first responder grants from this CMIA provision in the Department of Homeland Security's (DHS) fiscal years 2005 and 2006 appropriations acts. Under the exemption, grantees can receive cash advance funding and hold such funds for extended periods of time prior to payment. GAO was asked to (1) assess whether this CMIA provision, prior to its exemption in fiscal year 2005, had prevented DHS grant recipients from receiving first responder grant funds when such funds were needed; and (2) identify any key fiscal and accountability implications of the exemption.
section_title: What GAO Found
paragraphs: GAO found no substantial evidence that the CMIA provision that limits the extent to which grantees can hold federal funds before making program payments, prior to its exemption for certain first responder grants in fiscal year 2005, prevented first responders from receiving DHS grant funds when such funds were needed. The vast majority of the officials of State Administrative Agencies (SAA) and national associations contacted neither cited the CMIA as a contributing factor to funding delays nor provided information that demonstrated that the CMIA prevented state grantees or local government and other subgrantees from receiving first responder grant funding when such funding was needed. Rather, the officials generally attributed delays in first responder operations to factors other than the CMIA, such as vendor delays in delivering goods and services and problems related to a lack of human resources to deal with the large influx of grant awards after the September 11, 2001, attacks. The information GAO obtained from these officials was consistent with the findings of DHS's Homeland Security Advisory Council's Task Force on State and Local Homeland Security Funding, which found that numerous factors other than the CMIA contributed to funding delays for first responders. According to DHS, as of March 2006, state grantees and local government subgrantees had used the CMIA exemption and DHS's corresponding 120-day cash advance funding provision, which DHS established to implement the CMIA exemption, only to a minimal extent. DHS's Office of Grant Operations is working with SAAs and local government entities to determine the extent to which the CMIA exemption may be used and the impact extensive use could have on DHS. According to a DHS official, extensive use of the CMIA exemption and DHS's 120-day cash advance funding provision could create management oversight difficulties for DHS. Concerns about oversight difficulties are warranted, as DHS currently lacks the policies and procedures to track and report on specific cases of cash advance funding. Such advances are not subject to Treasury's oversight through its administration of the CMIA program. While states' single audits are a tool for oversight, such audits are not designed to replace program management's oversight responsibilities, and GAO found that they may not cover all first responder grants because of the relatively small size of the grants. Importantly, case-by-case cash advance funding can be allowed by Treasury regulations implementing the CMIA and other applicable regulations. Such funding could enable DHS to focus its oversight efforts on grantees and subgrantees that have a demonstrated need for such funding. However, regardless of whether cash advance funding is available under the CMIA exemption and DHS's corresponding 120-day cash advance funding provision, or on a case-by-case basis, proper oversight is critical to ensure that interest due the federal government resulting from cash advance funding is accurately recorded and promptly paid.

section_title: Letter
paragraphs: In the years immediately following the attacks of September 11, 2001, the  federal government emphasized quickly disbursing federal grant funds to  “first responders” at the state and local levels to enhance their ability to  quickly address threats to our national security. Initially, certain grants for  first responders were made directly to local government entities,  bypassing the states’ traditional pass-through role, which includes certain  oversight functions designed to promote accountability in grants  management. However, more recently, the Department of Homeland  Security (DHS) has awarded first responder grants to states to help  improve coordination among states, local governmental entities, and  nonprofit entities in planning, managing, and accounting for limited first  responder grant funding.
The Cash Management Improvement Act (CMIA) of 1990 (P.L. 101-453), as  amended, is intended to ensure greater efficiency, effectiveness, and  equity in the exchange of funds between the federal government and the  states. The CMIA requires, among other things, that federal agencies and  the states minimize the time that elapses between transfers of funds to the  states and payments for federal grant program purposes. In addition, the  CMIA requires that the federal government pay interest to the states when  it fails to disburse federal funds to them in a timely manner, and that the  states pay interest to the federal government when they fail to timely  spend federal funds.
Concerns were expressed by certain representatives of local governments  that additional actions needed to be taken to provide more flexibility in  making grant funds available to first responders. In fiscal years 2005 and  2006, Congress exempted certain DHS grant programs from the CMIA  requirement to minimize the time elapsing between transfers of funds by  the federal government and payments by the states. Thus, the CMIA  exemption allows state grantees to draw down and hold federal grant  funds for extended periods of time prior to payout for first responder  purposes. Importantly, such grantees are not exempt from the interest  and accountability requirements of the CMIA.
In view of the actions that have been taken by the federal government to  provide federal funding for first responders when such funding is needed,  you noted that there may be trade-offs between rapid disbursements of  federal grant funds and ensuring that such funds are spent in a manner  that is accountable and effective. Recognizing that we had previously  reported on such trade-offs and improvements needed for management of  first responder grant programs and had ongoing work on streamlining  overall federal grant management, you asked us to review the CMIA  exemption for certain DHS first responder grants. Based on discussions  with committee staff, we agreed to (1) assess whether the CMIA provision  that limits the extent to which grantees can hold federal funds before  payout, prior to its exemption for certain first responder grants in fiscal  year 2005, prevented first responders from receiving DHS grant funds  when such funds were needed; and (2) identify any key fiscal and  accountability implications of the exemption of certain first responder  grant programs from this CMIA provision.
subsections: section_title: Background
paragraphs: The CMIA is critically important to the federal government’s efforts to  promote accountability in the use of federal grant funds. Currently  administered by Treasury’s Financial Management Service (FMS), the  CMIA is the cornerstone of cash management policy for federal grants to  the states. Specifically, the CMIA requires the Secretary of the Treasury,  along with the states, to establish equitable funds transfer procedures so  that federal financial assistance is paid to states in a timely manner and  funds are not withdrawn from Treasury earlier than they are needed by the  states for grant program purposes. The act requires that states pay interest  to the federal government if they draw down funds in advance of need and  requires the federal government to pay interest to states if federal program  agencies do not make program payments in a timely manner.
According to Treasury regulations implementing the CMIA, funding  techniques for federal financial assistance to the states should be efficient  and minimize the exchange of interest between federal agencies and the  states. Various funding techniques can be agreed to between Treasury and  the states, including cash advance funding, whereby the federal program  agency transfers the actual amount of federal funds to a state prior to the   day the state actually pays the funds out of its own account. The limit on  such cash advance funding is 3 business days prior to payout.
Before the terrorist attacks of September 11, 2001, the Department of  Justice (Justice) managed several grants designed to enhance the  capability of state and local first responders to handle incidents involving  nuclear, biological, and chemical terrorism. Since 1999, these programs  have grown dramatically. In March 2003, responsibility for these grant  programs shifted to DHS, and they continued to grow. Initially, DHS  provided some of these grants directly to local government entities;  however, the requirements were changed so that grants were awarded first  to states and then passed through to local governments and other  subgrantees. Despite increased funding, many local governments—cities  in particular—complained that they were not receiving the funds that they  expected and could not disburse them as fast as they wanted.
In response to complaints about delays in the disbursement of first  responder grants, on March 15, 2004, the Secretary of the Department of  Homeland Security established the HSAC Task Force on State and Local  Homeland Security Funding. The task force’s objective was to examine the  homeland security grant funding process and provide recommendations to  expedite the flow of homeland security funds to those responsible for  preventing and responding to acts of terrorism. The task force  recommended, among other things, that Congress exempt certain DHS  homeland security grants for fiscal year 2005 from the CMIA in order to  allow funds to be provided to state and municipal entities up to 120 days in  advance of expenditure. The task force indicated that more flexibility was  needed in providing grant funding to first responders because, in some  instances, the 3-day time frame for receiving grant funds prior to making  payments was insufficient to prevent municipal jurisdictions from having  to make payments to vendors in advance of receiving the DHS grant funds.  In other cases, the municipal jurisdictions required cash on hand in their  municipal treasuries prior to commencing the procurement process.
Subsequent to the task force’s recommendations, Congress exempted for  fiscal year 2005 certain DHS first responder grant programs from the  provision of the CMIA that limits the extent to which grantees can hold  federal funds prior to payout by requiring federal agencies and states to  minimize the time elapsing between transfer of funds from Treasury and  payment by the states. In fiscal year 2006, this exemption was made  permanent. Importantly, the CMIA exemption only pertains to the  requirement to minimize the time elapsing between transfer of funds from  Treasury and payments for program purposes. The CMIA exemption did  not exempt certain first responder grant programs from the other  provisions of the CMIA which address interest payments and  accountability.
To implement the CMIA exemption, DHS’s Program Guidelines and  Application Kit for the Fiscal Year 2005 Homeland Security Grant  Program (HSGP) and guidance for certain other homeland security first  responder grants state that grantees and subgrantees will be permitted to  draw down funds up to 120 days prior to expenditure or disbursement.  For the majority of the grant programs, the guidance requires all federal  funding to go to state grantees prior to being passed through to local  government and other subgrantees, and requires both grantees and  subgrantees to place funds received in an interest-bearing account. The  guidance states that both grantees and subgrantees must pay interest on  funding advances in accordance with federal regulations. In addition,  according to the guidance, state grantees are subject to the interest  requirements of the CMIA and its implementing regulations. The guidance  states that interest under the CMIA will accrue from the time federal funds  are credited to a state account until the time the state pays out the funds  to a subgrantee or otherwise for program purposes.
In January 2006, DHS’s Preparedness Directorate issued its Financial  Management Guide. The guide is intended to be used as a financial  policy reference for all fiscal year 2006 and future first responder grants.  Consistent with DHS’s fiscal year 2005 guidance for the HSGP and certain  other first responder programs, the guide states that grant recipients may  elect to draw down funds up to 120 days prior to expenditure or  disbursement and that state grantees are subject to the interest  requirements of the CMIA. The guide further states that all local units of  government must account for interest earned on federal grant funds and  remit such interest to appropriate federal agencies.
section_title: Scope and Methodology
paragraphs: To assess whether the CMIA provision that limits the extent to which  grantees can hold federal funds before payout, prior to its exemption for  certain DHS first responder grants in fiscal year 2005, had prevented first  responders from receiving DHS grant funds when such funds were needed,  we interviewed key officials from 13 SAAs. These SAAs involved states  from most geographic areas of the country and, when taken together, were  awarded about 40 percent of DHS’s first responder grants that were  subject to the CMIA exemption in fiscal year 2005. In addition, we  interviewed key officials and obtained and analyzed pertinent documents  from nine national associations which represent state and local  governmental entities including the National Governors Association and  the U.S. Conference of Mayors. We also reviewed the key report issued  by the HSAC Task Force, A Report from the Task Force on State and  Local Homeland Security Funding, and reports issued by DHS’s Inspector  General.
To identify key fiscal and accountability implications associated with the  CMIA exemption for certain DHS first responder grant programs, we  reviewed the CMIA and Treasury’s implementing regulations, the CMIA  exemption for certain first responder grants, DHS’s program guidance for  those grants, and GAO’s prior report covering the implementation of the  CMIA. In addition, we interviewed key officials and obtained and analyzed  pertinent documents from DHS, Treasury, OMB, and Justice, all of which  are responsible to varying degrees for administering or overseeing the  implementation of the CMIA or various aspects of DHS’s first responder  grant programs. We also reviewed OMB Circular No. A-133, Audits of  States, Local Governments, and Non-Profit Organizations, and OMB’s  2005 and 2006 Compliance Supplements, which comprise the current key  guidance used by auditors to conduct single audits covering federal grant  programs. Our work was performed in accordance with generally  accepted government auditing standards from August 2005 through July  2006.
In responding to a draft of our report, DHS stated that it would take the  recommendations made in the draft report under advisement and would  provide a detailed response to appropriate congressional committees and  OMB approximately 60 days after release of the report, consistent with the  reporting requirements of 31 U.S.C. Part 720. Treasury stated that it agreed  with our conclusion that the requirements of the CMIA did not prevent  grantees from receiving grant funds when needed. Both Treasury and OMB  staff provided technical comments that have been addressed as  appropriate in this report.
section_title: We Found No Substantial Evidence That the CMIA Prevented First Responders from Receiving DHS Grant Funds When Such Funds Were Needed
paragraphs: We found no substantial evidence that the CMIA provision that limits the  extent to which grantees can hold federal funds before payout, prior to its  exemption for certain first responder grants in fiscal year 2005, had  prevented first responders from receiving DHS grant funds when such  funds were needed. Specifically, the majority of SAAs we contacted did  not cite the CMIA as a contributing factor to first responder funding  delays, and the National Governors Association, U.S. Conference of  Mayors, and other associations we contacted did not provide information  that demonstrated that the CMIA prevented local governments and other  subgrantees from receiving first responder grant funding when they  needed it. In addition, according to a report prepared by the HSAC Task  Force, numerous factors, only one of which was related to the CMIA, have  been responsible for first responder funding delays.
Importantly, as we reported in February 2005, a major challenge in  managing first responder grants is balancing two goals: minimizing the  time it takes to distribute grant funds to state and local first responders,  and ensuring appropriate planning and accountability for the effective use  of grant funds.  DHS’s approach to striking this balance has been evolving  from experience, congressional action, and feedback from states and local  governments. In March 2006, DHS reported that the CMIA exemption had  been used only to a minimal extent and, according to a DHS official, DHS  is meeting with SAAs and local governments to determine the impacts, if  any, of the CMIA exemption on first responder grant funding.
subsections: section_title: Most SAAs Contacted Did Not Cite the CMIA as a Delaying Factor
paragraphs: Of the 13 SAAs we contacted to determine whether the CMIA had  prevented first responders from receiving DHS grant funds when such  funds were needed, officials from six of these agencies told us that their  state agency had experienced delays in getting first responder funds to  subgrantees; however, most characterized the delays as not serious. Only  one state agency official attributed the delays directly to the CMIA.  According to that official, under the funding technique for the CMIA that  was agreed to between the state and Treasury for fiscal year 2004, the  state was to be reimbursed by the federal government for eligible grant- related expenditures. However, certain smaller subgrantees, such as  volunteer fire departments, did not have the financial resources to  purchase specialized equipment with their own funds and then wait for  reimbursement from the state. The official stated that, contrary to the  agreement with Treasury, the state began advancing federal funds to the  subgrantees to enable them to purchase the equipment.
Generally, however, the SAA officials were more apt to tie delays in  operations related to first responders to factors other than the CMIA. For  example, officials of six of the SAAs noted that delays in the use of the  funds have been due directly to certain local governments not having the  manpower to deal with the large influx of grant funding that was  experienced in the wake of the terrorist attacks. In addition, officials of six  of the SAAs stated that state and local requirements related to purchase  authorizations caused delays in getting goods and services delivered to  first responders in a timely manner, and officials of six of the SAAs cited  vendor problems as causing such delays.
section_title: National Associations Contacted Did Not Provide Evidence Supporting a Need for the CMIA Exemption
paragraphs: None of the officials from the nine national associations representing state  and local governments we contacted provided information that  demonstrated that the CMIA prevented first responders from receiving  DHS grant funds when such funds were needed. For example, an official  from the National Governors Association stated that the association did  not take a position on whether the CMIA impacted funding for first  responders. Rather, he stated that funding delays are often caused by local  procurement procedures and acquisition approval requirements of local  government subgrantees. The official cited one case where a local  government could not spend first responder funds for a major purchase  until the city council voted and approved the purchase. He emphasized  that such local approval requirements and processes can take several  months. The official also stated that funding delays have resulted from  local government subgrantees being unaware of DHS’s requirement that all  equipment be included on DHS’s approved equipment listings prior to  acquisition.
In addition, according to an official from the U.S. Conference of Mayors,  which was a leading proponent of the CMIA exemption for first responder  grants, delays in first responder grant funding have resulted primarily from  the many, sometimes conflicting, state and local requirements that local  government subgrantees have to meet to receive grant funds. The official  stated that the conference supported an exemption from the CMIA for first  responder grants and that this support was driven primarily by an  expectation that relaxing the requirements for funds transfers between the  federal government and the states would lead to overall improvements in  addressing local first responder needs. However, the official said that the  conference does not have evidence that the requirements of the CMIA  have created specific funding delays for first responders, or that the CMIA  exemption has improved grant funding for first responders.
section_title: HSAC Task Force Reports That Numerous Factors Have Contributed to First Responder Funding Delays
paragraphs: In June 2004, the HSAC Task Force issued its report on state and local  homeland security funding. According to the report, there is no single  issue or level of government that has been responsible for delays in first  responder funding. The report stated that the reimbursement requirement  of the CMIA is problematic for many, particularly cash-strapped  municipalities; however, the report does not address how the CMIA  exemption will mitigate such problems at this level as the CMIA applies  only to funds transfers to the states.
Moreover, the report discusses numerous factors other than the CMIA that  contribute significantly to funding delays. Specifically, according to the  report, the need for state, county, municipal, and tribal entities to rapidly  procure and deploy homeland security-related equipment can conflict with  state and municipal buying regulations that encourage a deliberate process  of acquisition of budgeted necessities at the lowest possible price.  Furthermore, many state and local governments lack the purchasing  power to obtain the goods and services in a timely fashion. In addition, the  report stated that the lack of national standards guiding the distribution,  tracking, and oversight of homeland security-related grant funds  contributed to delays in disbursement. The report also emphasized that  state and local governments are often overwhelmed and understaffed to  deal with the complex grant system and have not put the necessary  infrastructure in place to deal with the increased workload associated  with first responder grant funding. Finally, the report cited unavoidable  equipment backlogs and vendor delays as causing delays in first responder  grant funding.
section_title: DHS Working to Determine Impact of the CMIA Exemption
paragraphs: In February 2005, we reported that DHS’s approach to striking a balance  between, on one hand, minimizing the time it takes to distribute grant  funds to state and local first responders, and on the other hand, ensuring  that appropriate planning and accountability for the effective use of grant  funds has been evolving from experience, congressional action, and  feedback from states and local governments. We emphasized that, as DHS  continues to administer its first responder grant programs, it will be  important DHS to listen and respond fully to the concerns of states, local  governments, and other interested parties to ensure that there is adequate  collaboration and guidance for moving forward. In March 2006, DHS  reported that grantees and subgrantees have used the CMIA exemption  and DHS’s 120-day cash advance funding provision only to a minimal  extent. According to a DHS official, DHS’s new OGO, which began  operations in October 2005, is in the process of meeting with SAAs and  local governments to discuss the CMIA exemption and cash advance  funding. OGO has conducted several regional financial management  training conferences with SAAs and local representatives and has attended  other similar forums that bring these same stakeholders together. In  addition, OGO’s Monitoring Program Plan for fiscal year 2006 includes at  least 20 states and territories, and OGO plans to include the remaining  states and territories in the near future.
According to the DHS official, through its discussions and monitoring  efforts, OGO intends to determine whether the CMIA exemption actually  poses a problem or conversely creates an opportunity for first responders  in their ability to obtain and use grant funds when needed. In addition,  OGO is seeking to identify the significant issues behind the drawdown and  disbursement, or lack of such, of DHS grant funds. These issues may  involve legislative, procurement, programmatic, timeliness, and  jurisdictional concerns. Finally, OGO is attempting to assess the impact  the CMIA exemption could have on DHS if states were to use it  extensively. According to the official, if grantees and subgrantees began  using the CMIA exemption and DHS’s 120-day cash advance funding  provision, it would present oversight difficulties for DHS.
section_title: Proper Oversight of Cash Advance Funding and Related Interest Liabilities Is Critical for Accountability
paragraphs: DHS’s OGO’s concern about the potential use of the CMIA exemption and  DHS’s 120-day cash advance funding provision and the oversight  difficulties extensive use of these provisions could entail is warranted.  Specifically, the large number of state grantees and local government and  other subgrantees that are eligible for cash advance funding resulting from  the CMIA exemption and DHS’s 120-day cash advance funding provision,  combined with the differing interest requirements for states, local  governments, and nonprofit organizations, could create potential oversight  challenges for DHS. Currently, DHS does not have policies and procedures  to meet the oversight challenges of tracking cash advance funding and  associated interest liabilities for first responder grants. Moreover,  Treasury, in its administration of the CMIA, does not receive information  pertaining to specific advances for such grants. While state single audits  can be an important oversight tool for cash advance funding, they are not  designed to replace program management’s oversight responsibilities.  Further, those audits may not cover all first responder grants because of  the grants’ relatively small dollar amounts, and single audit guidance does  not include all grants for which DHS’s 120-day cash advance funding  applies.
In addition, it is important to emphasize that cash advance funding, which  is available on a case-by-case basis for first responder grants independent  of the CMIA exemption and DHS’s 120-day cash advance funding  provision, would allow DHS to focus its oversight efforts on specific  grantees and subgrantees that can demonstrate a need for such funding.  Regardless of whether cash advance funding for first responder grants is  made available under the CMIA exemption and DHS’s 120-day cash  advance funding provision or on a case-by-case basis, it is critical for DHS  to provide proper oversight of cash advance funding to help ensure that  associated interest liabilities due to the federal government are accurately  recorded by grantees and subgrantees and promptly paid.
subsections: section_title: Large Number of Grantees and Subgrantees and Differing Interest Requirements Create Oversight Challenges
paragraphs: DHS is faced with potential oversight challenges regarding cash advance  funding for homeland security first responder grants resulting from the  large number of state grantees and local government and other  subgrantees and the fact that interest liabilities and payment  responsibilities vary for states, local governments, and nonprofit  organizations. Specifically, according to DHS, for fiscal years 2005 and  2006, the initial years for which the CMIA exemption and DHS’s 120-day  cash advance funding provision have been in effect, DHS has awarded in  total about $5.5 billion of first responder grants to the 50 states, the  District of Columbia, and 5 U.S. territories. Further, DHS required a  minimum of 80 percent of certain grants to be passed through by the states  to numerous city, county, local government, and other subgrantees. For  example, for fiscal year 2005, at least 80 percent of the funding for UASI  grants was allocated to 50 urban areas, and 124 distinct jurisdictions  were  to receive at least 80 percent of the funding for MMRS grants. According to  DHS’s guidance, 120-day cash advance funding for homeland security first  responder grants was available to all eligible state grantees and local  government and other subgrantees.
Further, interest liabilities associated with cash advance funding depend  upon the size of the grant as well as whether the recipient is a state, local  government, or nonprofit organization. Specifically, state interest  liabilities and payment responsibilities are governed by Treasury’s  implementing regulations for the CMIA. Under these regulations, interest  liabilities for relatively large grants that meet the requirements for being  classified as major programs are typically settled as part of Treasury’s  annual interest exchange with the states and U.S. territories using the  interest rate set forth in the regulations. The interest liabilities and  payment responsibilities of local government and nonprofit organizations  are governed by regulations covering these entities. In general, local  government and nonprofit entities are required to make periodic interest  payments to HHS’ Division of Payment Management Services.
section_title: DHS Lacks Policies and Procedures to Meet Oversight Challenges
paragraphs: According to DHS officials, policies and procedures do not exist to track  and report on specific cases of cash advance funding to state grantees  including associated interest liabilities. Moreover, the officials stated that  DHS would not be able to readily determine the extent to which state  grantees advance funds to local government and other subgrantees and  the interest liabilities that should accrue to the subgrantees as a result of  such advances.
According to DHS’s Financial Management Guide, the state grantee is  responsible for all aspects of preparedness grant funding, including cash  management, accounting, and financial recordkeeping by the subgrantee.  DHS officials emphasized that DHS relies on the states for management  and oversight of grant funds, recognizing that the states rely, in part, on  the single audits of grantees and subgrantees to help ensure proper  accountability over cash advance funding including associated interest  liabilities.
section_title: Treasury Does Not Receive Information on Specific Cases of Cash Advance Funding and Related Interest Liabilities
paragraphs: Treasury’s FMS manages the CMIA program; however, its roles and  responsibilities in this capacity do not include obtaining information  regarding specific funding advances for homeland security first responder  grants made to states or the related state interest liabilities. Under  Treasury’s implementing regulations for the CMIA, states and FMS must  enter into Treasury-State Agreements (TSA) that outline, by major  program, the funding technique, including cash advance funding if  applicable, the states will use to draw down funds from the federal  government. Each year, the states and U.S. territories submit reports to  FMS indicating the cumulative interest liabilities calculated for major  grant programs covered under their respective TSAs. Based on input from  the federal agencies and the states and territories, FMS makes a final  determination on each of the state and territory interest liability claims  and then calculates net interest liabilities using the interest rate defined in  Treasury’s implementing regulations and conducts the annual interest  exchange with the states and territories.
According to Treasury officials, the vast majority of homeland security  first responder grants were not included in the TSAs for fiscal years 2005  and 2006. Generally, to be included in the TSA, a grant program should be  considered a major program by meeting the dollar thresholds which are  set forth in Treasury regulations. Importantly, for grants not included in  the TSAs, FMS does not receive any information about the grant, including  whether states received cash advance funding for the grant or whether  states incurred any associated interest liabilities. Moreover, according to  Treasury officials, FMS has no oversight responsibilities of cash advances  and associated interest liabilities involving local government and other  subgrantees, regardless of whether the specific grants are major or  nonmajor. The officials emphasized that FMS relies, primarily, on state  single audits to provide oversight for CMIA-related activities, including  interest liabilities associated with cash advance funding.
section_title: Single Audits Are a Limited Tool for Oversight of First Responder Grants
paragraphs: In our January 1996 report on the implementation of the CMIA, we  concluded that FMS’s plans to emphasize the use of results of single audits  as a means of overseeing state activities and enforcing the CMIA  requirements should improve the act’s effectiveness and help alleviate any  concerns about administrative burden. Similarly, single audits, if  performed adequately, can be a tool to enhance DHS’s oversight of first  responder grant funding including cash advance funding and associated  interest liabilities. However, such audits are not designed to replace  program management’s oversight responsibilities and may not cover all  first responder grants due to the grants’ relatively small dollar amounts.
For single audits, auditors use OMB’s Circular No. A-133 Compliance  Supplement, which provides an invaluable tool to both federal agencies  and the auditors in establishing the important provisions of federal grant  programs. The supplement enables federal agencies to effectively  communicate items that they believe are important to understanding the  legislative intent, as well as promoting successful program management.  As such, the supplement requires constant review and update.
DHS is responsible for working with OMB to ensure that audit guidance  contained in the supplement that is applicable to its programs is complete  and updated. For fiscal year 2005, the supplement included guidance  covering DHS’s 120-day cash advance funding provision; however, the only  programs cited were SHSP and LETPP, even though the CMIA exemption  and the 120-day cash advance funding provision applied to numerous  other homeland security first responder grants. OMB’s most recent  compliance supplement, dated March 2006, expanded the guidance for the  120-day cash advance funding provision to include HSGP grants awarded  for fiscal years 2005 and 2006. However, the supplement still does not  include all of the programs for which the CMIA exemption and the 120-day  cash advance funding provision apply. Specifically, the supplement does  not include, among others, the Port Security Program, the Rail and Transit  Security Program, the Intercity Bus Security Program, or the Trucking  Security Program.
According to an OMB representative, certain first responder grant  programs were not included in the compliance supplements because they  were not, at the time, considered major programs. However, DHS officials  stated that DHS recognizes the importance of alerting auditors to the  CMIA exemption and the 120-day cash advance funding provision for all of  its first responder grants. As such, these officials stated that DHS intends  to notify OMB that the 120-day cash advance funding provision used to  implement the CMIA exemption applies to all grant programs administered  by DHS’s Office of Grants and Training so that such information can be  included in OMB’s 2007 Compliance Supplement.
It is important to note that even with comprehensive guidance for  auditors, single audits are at best only a tool for program management  oversight of grant funding. Such audits are not intended to replace  program management’s overall responsibility for establishing and  maintaining internal control to achieve the objectives of effective and  efficient grant operations, reliable grant reporting, and compliance with  applicable laws and regulations. Further, single audits may not always  cover all homeland security first responder grants received by the audited  entity, as only the larger and inherently riskier programs are typically  subject to review as part of the overall audit.
section_title: Cash Advance Funding Can Be Allowed on a Case- by-Case Basis for Certain First Responder Grants
paragraphs: Treasury’s regulations implementing the CMIA are intended to provide  Treasury and states flexibility and latitude in funding grant programs.  Specifically, according to Treasury, the CMIA requires states to time their  drawdown of federal funds in a way that minimizes the time between  receipt of the funds and payments for federal program purposes. For cash  advance funding, this is defined by regulation as not more than 3 business  days prior to the date of disbursement of the funds. However, according to  Treasury officials, if it can be demonstrated that there is a program need  for funds more than 3 days, or even 120 days, in advance of payment, a  funding arrangement that allows for such cash advance funding would not  be inconsistent with the CMIA and its implementing regulations. In other  words, the CMIA does not prohibit such flexibility to be provided on a  program by program, or case-by-case, basis.
Moreover, cash advance funding arrangements made by a state can be  extended to the state’s subgrantees. Specifically, under the Uniform  Administrative Requirements for Grants and Cooperative Agreements to  State and Local Governments, grantees must monitor cash drawdowns by  their subgrantees to assure that they conform substantially to the same  standards of timing and amount as apply to advances to the grantees. As  such, cash advance funding arrangements made by the states for specific  programs that have a demonstrated need for cash advance funding in  excess of the 3-day rule, can apply to local government subgrantees on an  as-needed, or case-by-case, basis as determined by the state. Therefore,  under Treasury regulations implementing the CMIA and other applicable  regulations, cash advance funding for homeland security first responder  grants can be allowed on a case-by-case basis independent of the CMIA  exemption and DHS’s 120-day cash advance funding provision.
section_title: Conclusions
paragraphs: We found no substantial evidence that the CMIA funds transfer  requirements, prior to the exemption for certain first responder grants in  fiscal year 2005, prevented first responders from receiving DHS grant  funds when such funds were needed. However, DHS’s current efforts to  monitor state grantees should help to identify problems, if any, associated  with the CMIA and the CMIA exemption, as well as other issues that  impact grant administration and first responders’ ability to receive and use  DHS grant funds when needed. Going forward, these efforts should also  enable DHS to determine the extent to which cash advance funding for  first responder grants will likely be needed. This is important because DHS  lacks the policies and procedures necessary to provide adequate oversight  of cash advance funding, regardless of whether the cash advance funding  is made widely available under the CMIA exemption and DHS’s  corresponding 120-day cash advance funding provision, or on a case-by- case basis as allowed under Treasury regulations implementing the CMIA.  Such oversight is critical to ensure that interest due to the federal  government associated with cash advance funding is accurately recorded  and promptly paid.
section_title: Recommendations for Executive Action
paragraphs: We make seven recommendations to improve oversight of cash advance  funding and associated interest liabilities for homeland security first  responder grants. Specifically, we recommend that the Secretary of the  Department of Homeland Security direct the Executive Director of the  Office of Grants and Training to complete ongoing monitoring efforts  involving state grantees that receive DHS first responder grant funding and  use information obtained from such monitoring to  identify the significant issues that have resulted in delays in the drawdown  and disbursement of DHS grant funds;    determine the impact of the CMIA exemption on first responders in their  ability to obtain and use grant funds to meet program needs;    assess the impact the CMIA exemption and DHS’s 120-day cash advance  funding provision could have on DHS’s ability to provide adequate  oversight if state grantees and local government subgrantees were to use  them extensively;    determine whether case-by-case cash advance funding provides a  reasonable alternative to the CMIA exemption and DHS’s 120-day cash  advance funding provision; and    based on the results of the monitoring efforts, take appropriate actions,  which could include making either legislative or operational  recommendations, to improve first responders’ ability to receive and use  DHS grant funds when needed and DHS’s oversight of such funds.
In addition, we recommend that the Secretary of the Department of  Homeland Security direct the Executive Director of the Office of Grants  and Training to    develop policies and procedures to handle requests for cash advance  funding, including the ability for DHS to track specific cases of cash  advance funding to state grantees and the related interest liabilities; and    develop policies and procedures to work with the SAA for any state that  requests and receives cash advance funding to ensure that adequate  policies and procedures are in place at the state grantee level to provide  proper oversight of advances made to subgrantees, including the accurate  recording of interest accruals on the advances and prompt payment of  such interest to the federal government.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DHS, Treasury, and OMB for  comment. DHS stated that it would take our recommendations under  advisement. DHS also noted that it will provide a detailed response to  appropriate congressional committees and OMB in accordance with  applicable reporting requirements.
Treasury provided technical comments that have been addressed as  appropriate in this report.  In providing such comments, Treasury stated  that it agreed with our conclusion that the requirements of the CMIA did  not prevent grantees from receiving grant funds when needed and noted  that it believes the CMIA statute and regulations provide inherent  flexibility to ensure that the program purposes are served while  minimizing the time between the transfer of federal funds and the  disbursement of funds by the state for federal grant program purposes. In  addition, OMB staff provided a technical comment that has been  addressed as appropriate in this report.
We are sending copies of this report to other interested congressional  committees, the Secretary of the Department of Homeland Security, the  Secretary of the Department of the Treasury, the Director of the Office of  Management and Budget, and the Attorney General. Copies will be made  available to others upon request. This report will also be available at no  charge on GAO’s Web site at http://www.gao.gov.
Please contact Stanley J. Czerwinski at (202) 512-6806 or  czerwinskis@gao.gov, or Gary T. Engel at (202) 512-3406 or  engelg@gao.gov, if you have any questions. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors to this report are listed in appendix I.
section_title: Appendix I: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: Faisal Amin, Jeffrey W. Dawson, Carlos E. Diz, Richard H. Donaldson,  Ernie Hazera, Kenneth R. Rupar, and Linda K. Sanders made key  contributions to this report.