Grants Management: Improving the Timeliness of Grant Closeouts by Federal Agencies and Other Grants Management Challenges
Published: 2012-07-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As the federal government confronts long-term fiscal challenges, it is critical to improve the efficiency of federal grants processes, such as grant closeout procedures that allow for the return of unspent balances to the Treasury. In 2008, GAO reported that about $1 billion in undisbursed funding remained in expired grant accounts in the largest civilian payment system for grantsPMS. For this statement, GAO provides information from its April 2012 report updating its 2008 analysis. GAO also describes federal grant spending over the last three decades and discusses other grant management challenges identified in its past work and that of others.
This testimony addresses (1) the amount of undisbursed funding remaining in expired grant accounts; (2) actions OMB and agencies have taken to track undisbursed balances; (3) GAO recommendations to improve grant closeout; (4) recent and historical funding levels for federal grants; and (5) GAOs ongoing and future work on grants management issues.
section_title: What GAO Found
paragraphs: Closeout is an important final point of grants accountability. It helps to ensure that grantees have met all financial and reporting requirements. It also allows federal agencies to identify and redirect unused funds to other projects and priorities as authorized or to return unspent balances to the Department of the Treasury (Treasury). At the end of fiscal year 2011, GAO identified more than $794 million in funding remaining in expired grant accounts (accounts that were more than 3 months past the grant end date and had no activity for 9 months or more) in the Payment Management System (PMS). GAO found that undisbursed balances remained in some grant accounts several years past their expiration date: $110.9 million in undisbursed funding remained unspent more than 5 years past the grant end date, including $9.5 million that remained unspent for 10 years or more. Nevertheless, the more than $794 million in undisbursed balances remaining in PMS represents an improvement in closing out expired grant accounts with undisbursed balances in PMS compared to the approximately $1 billion GAO found in 2008. This improvement is notable given that the overall amount of grant disbursements through PMS increased by about 23 percent from 2006 to 2011.
When agencies made concerted efforts to address timely grant closeout, they and their inspectors general and auditors reported that they were able to improve the timeliness of grant closeouts and decrease the amount of undisbursed funding in expired grant accounts. GAO found that raising the visibility of the problem within federal agencies can also lead to improvements in grant closeouts. However, GAOs review of agencies annual performance reports for fiscal years 2009 to 2011 found that systematic, agencywide information on undisbursed balances in grant accounts eligible for closeout is still largely lacking.
The challenge presented by undisbursed balances in expired grant accounts is just one of a number of grants management challenges identified in past GAO work. Addressing these challenges is critical to increasing the efficient and effective use of federal grant funds, which represent a significant component of overall federal spending. According to the Office of Management and Budget (OMB), federal outlays for grants to state and local governments, including Medicaid, increased from $91 billion in fiscal year 1980 (about $221 billion in 2011 constant dollars) to more than $606 billion in fiscal year 2011, accounting for approximately 17 percent of total federal outlays. During this 30-year period there has been a shift in grant spending, increasing the percentage of grant funding of Medicaid while decreasing the percentage of funding of non-Medicaid-related grant programs.
GAO work on grants over the last decade has identified a range of issues related to the management of grant programs, including the streamlining of grants management processes, the measurement of grant performance, grant lessons learned from implementing the American Recovery and Reinvestment Act of 2009, and internal control weaknesses. GAO will be looking at each of these grants management issue areas in future work for this Subcommittee.
section_title: What GAO Recommends
paragraphs: For grant closeout, GAOs April 2012 report recommended OMB revise future guidance to better target undisbursed balances and instruct agencies to take action to close out grants that are past their end date or have no undisbursed balances remaining. OMB staff said they generally agreed with and will consider the recommendations.

section_title: Letter
paragraphs: I appreciate the opportunity to discuss with you today the findings from  our recent report for you on the timeliness of grant closeout by federal  agencies, as well as some of the new and ongoing work we are doing for  this Subcommittee on other key grants management challenges.  Closeout is an important final point of grants accountability that helps to  ensure that grantees have met all financial and reporting requirements. It  also allows federal agencies to identify and redirect unused funds to other  projects and priorities as authorized, or to return unspent balances to the  Department of the Treasury (Treasury). (See appendix I for an illustration  of how and when federal agencies may redirect unused funds.) In a 2008  report to this Subcommittee, we found that timely grant closeout was a  long-standing issue at federal agencies and that roughly $1 billion in  undisbursed funding remained in the largest civilian payment system for  grants. Assessing grants management practices, such as ensuring that  agencies follow proper closeout procedures, is critical to increasing the  efficient and effective use of federal grant funds, which represent a  significant component of federal spending. In fiscal year 2011, federal  grants outlays to state and local governments, including Medicaid,  accounted for approximately 17 percent of total federal outlays.  Challenges involving grants management have been a repeated theme in  our work over the last decade, and at your request, I will also briefly  discuss some of the work we are doing for this Subcommittee on this  important area.
My testimony today is drawn from our recent report to you on the  timeliness of grant closeout as well as federal grants funding data from  the Office of Management and Budget (OMB). It will address (1) the  amount of undisbursed funding remaining in expired grant accounts; (2)  actions OMB and agencies have taken to track undisbursed balances in  grants eligible for closeout; (3) GAO recommendations on how to improve  grant closeout from our recent report; (4) recent and historical funding  levels for federal grants; and (5) our ongoing and future work on grants  management challenges.
To conduct our work on grant closeout, we analyzed data from the  quarterly closeout reports provided to users of the Payment Management  System (PMS), the largest civilian payment system for grants, which is  administered by the Department of Health and Human Services’ (HHS)  Program Support Center (PSC). PMS closeout reports list all grant  accounts that remain open more than 3 months past the grant end date  and for which there has been no disbursement in the preceding 9 months.  We analyzed data from “dormant account reports” provided to users of a  second payment system, the Automated Standard Application for  Payments (ASAP) system, which reports accounts for federal grants that  remain inactive for 2 years or more. We also conducted a web-based  search for audit reports we have issued and those issued by federal  inspectors general. We interviewed agency officials, including officials  from OMB, and reviewed OMB circulars and other guidance related to  grants management and performance reporting. We reviewed  performance reports for the 24 agencies required to issue audited  financial statements under the Chief Financial Officers Act of 1990 (CFO  Act) for information reported on undisbursed balances in grants eligible  for closeout. More detailed information on our scope and methodology for  the grants closeout work can found in our published report. To determine  the level of federal grants funding and its changes over the last three  decades, we used OMB data for fiscal years 1980–2011. For a more  accurate comparison of grant spending from year-to-year, we converted  each fiscal year’s outlays to constant 2011 dollars.
We conducted our performance audit on grant closeout from May 2011 to  April 2012 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. In addition, we are  providing information on grants funding levels for the past three decades.
subsections: section_title: Undisbursed Balances in Expired Grant Accounts Have Declined but More Action Is Needed
paragraphs: We found that as of September 30, 2011, more than $794 million in  undisbursed balances remained in PMS in 10,548 expired grant  accounts. These are accounts that were more than 3 months past the  grant end date, had no activity for 9 months or more, and therefore should  be considered for grant closeout. This is an improvement from 2008,  when we reported that at the end of calendar year 2006, roughly $1 billion  in undisbursed funding remained in expired PMS grant accounts. These  expired grant accounts do not include accounts associated with grant  programs for which the duration of the grant is not limited to a specific  time period, such as payments to states for the Medical Assistance  Program, known as Medicaid, and Temporary Assistance for Needy  Families. This improvement is notable given that the overall amount of  grant disbursements through PMS increased by about 23 percent from  2006 to 2011. However, more work needs to be done to further improve  the timeliness of grant closeout and reduce undisbursed balances. We  have highlighted three areas in need of particular attention.
First, we found that undisbursed balances remained in grant accounts  several years past their expiration date. We found that 991 expired grant  accounts containing a total of $110.9 million in undisbursed funding were  more than 5 years past the grant end date at the end of fiscal year 2011.  Of these, 115 expired grant accounts containing roughly $9.5 million in  undisbursed funding remained open more than 10 years past the grant  end date. Federal regulations generally require that grantees retain  financial records and other documents pertinent to a grant for a period of  3 years from the date of submission of the final report. Over time, the risk  increases that grantees will not have retained the financial documents  and other grant information that federal agencies need to properly  reconcile financial information and make the necessary adjustments to  grant award amounts and amounts of federal funds paid to recipients.  This could potentially result in the payment of unnecessary and  unallowable costs.
Second, we found that a small percentage of grant accounts (a little more  than 1 percent) with undisbursed balances of $1 million or more  accounted for more than a third of the total undisbursed funds in expired  grant accounts. Overall, 123 accounts from eight different federal  agencies had more than $1 million in undisbursed balances at the end of  fiscal year 2011 for a combined total of roughly $316 million in  undisbursed balances. Accounts with undisbursed balances remaining  after the grant end date can indicate a potential grant management  problem. Data showing that some grantees have not expended large  amounts of funding, such as $1 million or more, by the specified grant  end date raise concern that the grantees may not have fully met the  program objectives for the intended beneficiaries within the agreed-upon  time frames.
Third, we found more than 28,000 expired grant accounts in PMS with no  undisbursed balances remaining that had not been closed out as of the  end of fiscal year 2011. According to data provided by PSC, PMS users  were charged a total of roughly $173,000 per month to maintain the more  than 28,000 expired grant accounts with zero-dollar balances listed on the  year-end closeout report. This would represent roughly $2 million in fees  if agencies were billed for these accounts for the entire year. While the  fees are small relative to the size of the original grant awards, they can  accumulate over time. If the grant has otherwise been administratively  and financially closed out, then agencies are paying fees to maintain  grant accounts that are no longer needed. However, the presence of  expired grant accounts with no undisbursed funds remaining raises  concerns that administrative and financial closeout—the final point of  accountability for these grants, which includes such important tasks as  the submission of financial and performance reports—may not have been  completed.
In addition to data from PMS, we also reviewed data from the ASAP  system and found that as of September 30, 2011, $126.2 million in  undisbursed balances remained in 1,094 dormant grant accounts.  Agencies can use the information in these reports to help identify  accounts in need of attention and unspent funds available for  deobligation. For example, agencies may want to focus attention on  accounts where there has been no activity for a prolonged period. We  found roughly $11 million in 179 accounts that had been inactive for 5  years or more.
section_title: Raising the Visibility of Grant Closeout Can Lead to Improvements
paragraphs: We have found that when agencies made concerted efforts to address  timely grant closeout, they, their inspectors general, and auditors reported  that they were able to improve the timeliness of grant closeouts and  decrease the amount of undisbursed funding in expired grant accounts.  Agencies’ approaches generally focused on elevating timely grant  closeouts to a higher agency management priority and on improving  overall closeout processing. For example, in response to past audit  reports, HHS officials reported increasing monitoring of grant closeout.  Since fiscal year 2006, the HHS independent auditor had routinely  reported on concerns with management controls over grant closeout,  including a backlog of HHS grant accounts in PMS that were already  beyond what the auditor considered a reasonable time frame for  closeout. In fiscal year 2011, the independent auditor noted significant  improvements in the closeout of grants in PMS. While we found that  roughly three-fourths of all undisbursed balances in expired PMS grant  accounts were from grants issued by HHS, we also found that the total  undisbursed balances in these accounts represented the lowest  percentage (2.7 percent) for any federal department included on the   In comments on our draft report,  September 30, 2011, closeout report.HHS reported that it had identified $116 million in undisbursed balances  in PMS available for deobligation through a special initiative begun in  2011 and is updating existing department policies and procedures to  improve the grant closeout process going forward.
In 2008, we recommended that OMB instruct all executive departments  and independent agencies to annually track the amount of undisbursed  balances in expired grant accounts and report on the status and  resolution of the undisbursed funding in their annual performance reports.  At the time, OMB supported the intent of our recommendations, but its  comments did not indicate a commitment to implement our  recommendations. Starting in 2010, OMB has issued guidance to track  and report on undisbursed balances in expired grant accounts to only  certain federal departments and entities covered by the Commerce,  Justice, Science, and Related Agencies Appropriations Act, as required  by law. However, in its instructions, OMB equated “expired grant  accounts” with expired appropriation accounts. Based on this definition,  OMB’s guidance included grant accounts that were still available for  disbursement and was not limited only to those grant accounts eligible for  closeout. In our review of CFO Act agencies’ annual performance reports  for fiscal years 2009 to 2011, we found that systematic, agencywide  information on undisbursed balances in grant accounts eligible for  closeout was largely lacking.
section_title: GAO Recommends that OMB Issue Governmentwide Guidance to Track and Report on Undisbursed Balances in Grants Eligible for Closeout
paragraphs: In our 2012 grant closeout report, we reiterate our recommendation that  OMB instruct all executive departments and independent agencies to  report on the status and resolution of the undisbursed funding in grants  that have reached the grant end date in their annual performance reports,  the actions taken to resolve the undisbursed funding, and the outcomes  associated with these actions. In addition, we recommend that the  Director of OMB take the following three actions:
Revise the definition of “undisbursed balances in expired grant  accounts” in future guidance issued to agencies to focus on  undisbursed balances obligated to grant agreements that have  reached the grant end date and are eligible for closeout.
Instruct agencies with undisbursed balances still obligated to grants  several years past their grant end date to develop and implement  strategies to quickly and efficiently take action to close out these  grants and return unspent funds to the Treasury when appropriate.
Instruct agencies with expired grant accounts in federal payment  systems with no undisbursed balances remaining to develop and  implement procedures to annually identify and close out these  accounts to ensure that all closeout requirements have been met and  to minimize any potential fees for accounts with no balances.
OMB staff said that they generally agreed with the recommendations and  will consider them as they review and streamline grant policy guidance.
OMB did not provide specific actions or time frames with which it would  address the issues that we have raised. We will continue to monitor  OMB’s action on our recommendations.
The challenge presented by undisbursed balances in expired grant  accounts is just one of a number of grants management challenges we  have identified in our past work. Grants continue to be an important tool  used by the federal government to achieve national objectives. As the  federal government confronts long-term and growing fiscal challenges, its  ability to maintain the flow of intergovernmental revenue, such as through  grant programs, could be constrained. To make the best use of federal  grant funds, it is critical to address grants management challenges that  could impact the efficiency and effectiveness of federal grants processes.  Accordingly, the Subcommittee has requested that we examine a number  of areas involving these issues in future work. However, before I discuss  these I would like to put them in a broader context by briefly describing  the level of recent federal grant spending and how it has changed over  the last three decades.
section_title: While Grants Have Consistently Been a Significant Component of Federal Spending, the Focus of Grants Outlays Has Shifted In the Last 30 Years
paragraphs: Grants have been, and continue to be, an important tool used by the  federal government to provide program funding to state and local  governments. According to OMB, federal outlays for grants to state and  local governments increased from $91 billion in fiscal year 1980 (about  $221 billion in 2011 constant dollars) to over $606 billion in fiscal year  2011. Although many federal departments and agencies award grants,  HHS, which administers the Medicaid program, is by far the largest grant- making agency, with grants outlays of almost $348 billion in fiscal year  2011, or about 57 percent of the total federal grants outlays that year.  Even when Medicaid’s outlays of $275 billion are excluded, HHS remains  the largest federal grant-making department.federal outlays for grants to state and local governments over the period  from fiscal years 1980 to 2011, in constant dollars, and the increasing  amount of this total that went to Medicaid over time.
section_title: Ongoing and Future Work Targets Key Grants Management Issues
paragraphs: Given the federal government’s use of grants to achieve national  objectives and respond to emerging trends, this Subcommittee has  recently requested that we conduct a number of grant-related reviews in  support of its oversight efforts. Today, I would like to briefly highlight four  areas where our previous work and that of the inspectors general and  others have identified challenges, and where we are beginning the work  you requested related to the management of grant programs. Specifically,  they are the streamlining of grants management processes; the  measurement of grant performance; grant lessons learned from  implementing the American Recovery and Reinvestment Act of 2009  (Recovery Act); and internal control weaknesses in grants management  processes.
For more than a decade, the federal government has undertaken several  initiatives aimed at streamlining governmentwide grants management.
Over the years, Congress has expressed concern over the  inconsistencies and weaknesses we and the inspectors general have  found in grants management and oversight. In response to your request  we plan to examine the progress OMB and federal grant governance  bodies have made toward streamlining grants management. We also  expect to assess what further actions should be taken to simplify  processes, reduce unnecessary burdens, and improve the governance of  streamlining initiatives. We plan to report our results next year.
We also expect to evaluate the extent to which there are governmentwide  requirements for measuring and reporting grant performance and the  extent to which federal agencies measure grant performance to report  progress toward their goals, as well as offer assistance to grantees on  collecting data and reporting grant performance. As with our streamlining  work, the specifics of this grant performance reporting work are currently  under development, and we anticipate a 2013 report. In our past work we  have reported that effective performance accountability provisions are of  fundamental importance in assuring the proper and effective use of  federal funds to achieve program goals.
Under the Recovery Act, grants have played an important role in  distributing federal funds in light of the most serious economic crisis since  the Great Depression. As of June 2012, Treasury had paid out more than  $250 billion in Recovery Act funds to state and local governments, much  of it through grants. Given the significant investment made in the  Recovery Act, and the considerable challenges facing our nation moving  forward, this Subcommittee recognized the importance of collecting,  analyzing, and sharing grant lessons and insights gained as a result of  this process. Building on our previous reviews, we will examine lessons  from the implementation of the Recovery Act—including specific  examples of practices and approaches that worked as well as challenges  encountered by federal, state, and local agencies. Among the potential  issues to consider are the efforts to facilitate coordination and  collaboration among federal, state, local, and nongovernmental partners  and actions taken to enhance the organizational and administrative  capacity of federal partners. Once again, we anticipate reporting to the  Subcommittee next year.
Finally, in numerous reviews over the years, we have identified  weaknesses in federal agencies’ processes for managing and overseeing  grant programs. Among the issues we are planning to address in future  work is how federal agencies can improve internal control over grants  monitoring. We will also examine what improvements, if any, are needed  in federal agencies’ internal controls to help ensure the primary grantees  are providing adequate oversight of subgrantees.
section_title: Concluding Observations
paragraphs: The improvements made in the timeliness of grant closeouts since our  2008 report demonstrate that congressional oversight can lead agencies  to focus attention on a specific grant challenge, and result in real  progress. However, our recent update of our earlier analysis of  undisbursed balances also shows that more still needs to be done to  close out grants; agencies would use their resources most effectively by  focusing initially on older accounts with larger undisbursed balances. As  our review of past grant work suggests, there are numerous other issues  where congressional attention could also likely pay dividends. This is all  the more relevant because federal grant programs remain important tools  to achieve national objectives and continue to be a significant component  of federal spending. We look forward to continuing to support this  Subcommittee’s efforts to examine the design and implementation of  federal grants and participating in its active oversight agenda.
Chairman Carper, Ranking Member Brown, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you or other members of the  Subcommittee may have.
section_title: Contacts and Acknowledgments
paragraphs: If you or your staff have any questions about this testimony, please  contact me at (202) 512-6806 or czerwinskis@gao.gov, or Beryl H. Davis,  Director, at (202) 512-2623 or davisbh@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. GAO staff who made key contributions to  this testimony are Phyllis L. Anderson, Assistant Director; Peter Del Toro,  Assistant Director; Thomas M. James, Assistant Director; Kimberly A.  McGatlin, Assistant Director; Laura M. Bednar, Maria C. Belaval, Anthony  M. Bova, Amy R. Bowser, Virginia A. Chanley, Melissa L. King, Thomas  J. McCabe, Diane N. Morris, and Omari A. Norman. Additional  contributions were made by Andrew Y. Ching, Travis P. Hill, Jason S.  Kirwan, Jennifer K. Leone, Cynthia M. Saunders, Albert C. Sim, and  Michael Springer.
section_title: Appendix I: Deobligating Undisbursed Balances in Expired Grant Accounts
paragraphs: While there can be substantial variation among grant programs, figure 1  illustrates how closing out grants could allow an agency to redirect  resources toward other projects and activities or return unspent funds to  Treasury.