Grants Management: Attention Needed to Address Undisbursed Balances in Expired Grant Accounts
Released: 2008-08-29T00:00:00

Letter

Background

The federal government uses grants, along with other policy tools, such as direct services and loans, to achieve national priorities through nonfederal parties, including state and local governments, educational institutions, and nonprofit organizations. The federal government uses grants to implement over 1,200 different programs through over 28 federal departments and agencies. These programs awarded funding to over 60,000 grantees. The Catalog of Federal Domestic Assistance (CFDA) provides descriptions of these grant programs, as well as other domestic assistance programs.

The design and implementation of federal grants varies. For example, grant programs generally use one of three ways to award funding to grantees. Formula grants award funds based on distribution formulas prescribed by legislation or regulation. Project grants generally award funding for specific periods or specific projects, products, or services. As a third method, some grant programs award funds using a hybrid of formula and project-based awarding methods. In addition, federal agencies use a variety of organizational approaches to implement grant programs. Some agencies administer many grants through multiple, decentralized components, while other agencies have small, centralized grant-making offices that administer only a few grant programs.

Federal grants are typically subject to a wide range of requirements derived from a combination of program statutes, agency regulations, and other guidance. They are also subject to many crosscutting requirements that apply to most federal assistance programs, including statutory provisions applicable to recipients of federal funds and administrative requirements such as audit and record keeping and the allowability of costs.

As a general rule, grant programs are governed by detailed legislation as well as implementing regulations issued by the responsible agency. Prior to 1988, each agency issued regulations to govern its grant management, and OMB Circular No. A-102, Grants and Cooperative Agreements With State and Local Governments, also provided some governmentwide guidance for grants to state and local governments. OMB Circular No. A-110, Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations, provided some guidance for grants to other types of grantees like hospitals and other nonprofit institutions. In 1987, a memorandum from the President directed OMB to revise Circular No. A-102 to specify uniform, governmentwide terms and conditions for grants to state and local governments, and directed executive branch departments and agencies to propose and issue common regulations adopting these terms and conditions verbatim, modified where necessary to reflect inconsistent statutory requirements. Pursuant to this direction, the first iteration of what has come to be known as the “common rule” system was published on June 9, 1987.

There are currently a number of OMB circulars on grants, which provide guidance only to federal (grantor) agencies; they do not apply directly to grantees. Therefore, each federal agency has issued largely identical sets of regulations that prescribe requirements that are binding on their grantees. These regulations are referred to as the “common rules.” Each agency’s common rule regulations are codified in the Code of Federal Regulations.

Grant programs also share a common life cycle for administering the grants: announcement of grant opportunity, application, award, postaward, and closeout. During the award stage, the federal awarding agency enters into an agreement with the grantee. The grant agreement stipulates the terms and conditions for the use of grant funds such as the period of time funds are available for the grantee’s use, as noted by a start and end date. In addition, the awarding agency establishes an account in a federal payment system to execute payments to the grantee.

During the postaward stage, the grantee carries out the requirements of the agreement and requests payments, while the awarding agency approves payments and oversees the grantee. The Payment Management System (PMS), operated by HHS, went online in 1984 and, as of 2006, was the largest of the nine civilian federal payment systems. The system, which handled about 70 percent of all federal grant disbursements in 2006, serves nine federal departments, an independent agency, a government corporation, and ONDCP. Appendix I provides a description of PMS and appendix II provides a recent list of department- and agency-level PMS customers. According to HHS, PMS is a full-service centralized grants payment and cash management system. The system is fully automated to receive payment requests, edit them for accuracy and content, transmit the payment to either the Federal Reserve Bank or the U.S. Treasury for deposit into the grantee’s bank account, and record the payment transactions and corresponding disbursements to the appropriate accounts. Federal agencies pay HHS a service fee for maintaining accounts and executing payments through PMS. PMS continues to charge agency customers a servicing fee until an account is closed.

When the grantee has completed all the work associated with a grant agreement or the end date for the grant has arrived, or both, the awarding agency and grantee close out the grant. Closeout procedures ensure that grantees have met all financial requirements, provided their final reports, and returned any unexpended balances. To close out a grant, federal regulations generally require that the awarding agency ensures the grantee has completed all work and grantee settles (liquidates) all obligations 90 days after grant end date; grantee submits all final financial, performance, and other reports within 90 days of grant end date; and grantee requests an extension of the reporting deadline from the awarding agency, if required.

These requirements apply when the awarding agency has specified a funding period for the grant (a start and end date) and has prohibited the grantee from having carryover balances. In this report, we refer to grants that were not closed after their end date as “expired” grants and PMS grant accounts that remained open after the grant’s end date as “expired grant accounts.”

PMS issues a quarterly report to its customers, referred to as the “closeout report,” listing expired grant accounts that remain open, and for each account includes data on the funds made available and the amount of funds disbursed (i.e., “drawn down” or “charged”). GAO recommended HHS develop and distribute this type of report in 1987. HHS lists an account on a quarterly PMS closeout report if the end date for the account was 3 months old and there was no disbursement in the preceding 9 months.

The closeout is an important grant management procedure because it is the final point of accountability for grantees. An undisbursed balance in an expired grant account can be an indication of a potential grant management problem. Grantees that do not expend their funding may not be meeting the program objectives for the intended beneficiaries. These balances may also suggest that awarding agencies or grantees, or both, may not be managing the funding efficiently or effectively. Effective grants management, including the completion of grant closeout, increases the likelihood that awarded grants contribute to agency goals.

An agency or grant program office can track its performance in closing grants and other grant management procedures using a variety of measures. In this report, we use the amount of undisbursed funding to assess one aspect of the performance of the expired grants—their financial status. Other types of measures track other aspects of performance, such as the grants’ service quality and customer satisfaction. The amount of undisbursed funding measures the amount of funds remaining potentially available for deobligation.

Agencies report to the President and Congress regarding their strategic plans and actual program performance, including, among other things, progress on improving grants management and other management initiatives under the auspices of the Government Performance and Results Act of 1993 (GPRA). GPRA is part of a statutory framework that seeks to create a more focused, results-oriented management and decision-making process within both Congress and the executive branch. The act requires federal agencies to develop strategic plans with long-term strategic goals, annual goals linked to achieving the long-term goals, and annual reports on the results achieved. An agency’s annual performance plan contains the annual performance goals and associated measures for its programs, as well as mission-critical management problems identified by the administration, the agency’s financial audit, and other agency assessments. An agency’s annual performance report compares its performance against its goals, summarizes the findings of program evaluations completed during the year, and describes the actions needed to address any unmet goals. OMB is responsible for providing guidelines to agencies on preparing their plans and reports, and for receiving and reviewing agencies’ strategic plans, annual performance plans, and annual performance reports. Currently, most agencies report on their annual performance in their PAR. OMB Circular No. A-11, Preparation, Submission and Execution of the Budget, provides guidelines on the content of the performance accountability portion of the PAR, while Circular No. A-136, Financial Reporting Requirements, provides guidance on the content of the financial accountability portion of the PAR.

Undisbursed Balances in Expired Grant Accounts in PMS Were about $1 Billion during 2006

In our review of the closeout data for expired grants that executed payments through HHS’s PMS, we found the quarterly amount of undisbursed funding reported as remaining in expired grant accounts increased from about $600 million in 2003 to about $1 billion during 2006. These balances typically represented about 1 percent of the total funds made available for all expired grants in PMS during this period. This proportion included expired grant accounts with a zero undisbursed balance (no undisbursed funding) and expired grant accounts with a positive undisbursed balance (undisbursed funds remaining). Once we excluded expired grant accounts with a zero balance from the calculation and narrowed our focus solely to expired grant accounts with undisbursed balances, the proportion of undisbursed funding relative to total funds made available increased substantially. Among this smaller set of expired grant accounts, we found the undisbursed funding ranged between an average of 14 and 26 percent of the total funds made available for these grants. We found that, among PMS customers, numerous federal agencies and grant programs had expired grant accounts containing undisbursed funds.

Expired Grant Accounts with Undisbursed Balances Had Not Spent between an Average of 14 and 26 Percent of Funds Made Available

When we analyzed the quarterly PMS closeout data for 2003 through 2006, we identified two sets of expired grants accounts. One set consisted of expired grant accounts for which all of the funds made available had been disbursed, but still had not been closed. As stated earlier, grant accounts remain open in PMS, and HHS continues to charge service fees to the awarding agencies for maintaining accounts and executing payments, until the awarding agencies indicate to HHS that the account can be closed. Thus, even though all grant funds have been disbursed, these grant accounts are continuing to cost the awarding agency through accumulated PMS service fees. Moreover, the presence of expired grant accounts at the awarding agency suggests more than a minor administrative oversight. It suggests that the final point of accountability for these grants, which includes such important tasks as the submission of financial and performance reports, was not completed.

We identified a second set of accounts that included those expired accounts reported as still having an undisbursed balance. On the basis of our review of expired grant accounts with undisbursed balances, we found that, from March 2003 through March 2005, the quarterly totals of undisbursed funding ranged between an average of 14 and 16 percent of the funding made available for the grants. However, from June 2005 through December 2006, the quarterly balances of undisbursed funding for these expired grants was near $1 billion, ranging between an average of 24 and 26 percent of the funds made available. These results are for grant accounts with specific time limits and do not include grant accounts that do not have specific time limits, such as TANF or Medicaid, because without a specific time limit, the grants, once awarded, do not expire. The PMS closeout data results described in the remainder of this report only pertain to the set of expired grant accounts with undisbursed balances, unless otherwise noted.

Numerous Grant Programs Had Expired Grant Accounts Containing Undisbursed Funds

As stated previously, in 2006 PMS was the largest of the nine federal payment systems, handled about 70 percent of federal grant disbursements, and served nine federal civilian departments, an independent agency, a government corporation, and ONDCP. In analyzing the expired grant accounts with undisbursed balances in the PMS closeout data from 2003 through 2006, we found these accounts were not confined to a few federal awarding agencies, grant programs, or grantees. Instead we found, in 15 of the 16 quarters, at least four of the federal departments using PMS had over 100 expired grant accounts with undisbursed funding. Lastly, we found that over 325 different programs administered the expired grant accounts with undisbursed funding and that thousands of grantees were associated with these grants.

We analyzed the quarterly balances of undisbursed funding over 4 calendar years, from 2003 through 2006, according to four program characteristics: size of the funding originally made available to the grantee; whether program funding was awarded based on a formula or on a project basis; the grantee organization (entity) receiving the grant; and whether the program required the grantee to make a contribution to support the grant activity. We selected these four characteristics because they are fundamental elements of grant design that could be readily analyzed using the information from the PMS and the CFDA data sets.

When we compared the undisbursed balances among the types within each of the four program characteristic categories, we found, for the first three characteristics, certain types of grants consistently had the largest quarterly balances. We found the largest quarterly balances of undisbursed funding to be consistently among expired grant accounts that had neither the smallest nor the largest funding awards, but rather in the mid-range of funding awards—that is, with funding awards from over $100,000 to $100 million. We found accounts with program funding awarded on a project basis had the largest undisbursed balances compared to those awarded on a formula basis. Lastly, we also found accounts with grants awarded to a state organization consistently had the largest undisbursed balances compared to other types of grantees. However, these results cannot be compared to the program characteristics of all closed federal grants or closed grants with payments processed through PMS from 2003 through 2006, due to the burden of collecting comparable data from eight other federal civilian payments systems or for all closed grants in PMS. Without comparative data, we cannot know whether the program characteristics for these expired grant accounts represented a disproportionate share, compared to all closed federal grants or all closed grants in PMS. Appendix I provides further information on our methodology and program characteristics findings.

Grant Closeout Problems Attributed to Several Causes but Can Be Mitigated

In our review of past audit reports, we observed that the reports generally focused on expired grants in specific agencies or grant programs. We also found that, when taken together, they suggested the presence of undisbursed balances in expired grant accounts was a long-standing problem. We and agency Inspectors General (IG) have reported for years that specific grant programs or awarding agencies have had expired grant accounts with undisbursed funding. Moreover, by synthesizing the observations from these reports, we found that these grants shared common grants management problems. In recent years, three federal agencies, the Department of Justice’s (DOJ) Office of Justice Programs (OJP), HHS’s National Institutes of Health (NIH), and the Environmental Protection Agency (EPA), have made concerted efforts to improve their grant closeout processes. In 2006 and 2007, several auditors highlighted grants management problems as mission critical in their agency’s Performance Accountability Report (PAR). In 2006, EPA went further and reported a financial performance measure to track the agency’s progress in closing grants.

Several Grant Management Issues Contribute to Closeout Problems

We have reported that the timely closeout of expired grants was a problem at various agencies over the past three decades. In two recent examples, we reported that the State Department’s (DOS) United States Agency for International Development (a PMS customer) did not routinely follow prescribed closeout processes to identify and recover inappropriate expenditures or undisbursed funds and that EPA (an agency that does not use PMS) closed out only 37 percent of grants in fiscal year 2005 within 180 days after the grant project ended as required by its own policy. IG reports identified a variety of awarding agencies or programs with closeout problems dating back to 2000. Maintaining undisbursed balances in expired grant accounts may prevent the deobligation of funding or expose the funding to improper spending or accounting. For example, the DOJ Office of Inspector General (OIG) reported in 2006 that $172 million in undisbursed funding could have been deobligated and that several million dollars in funding used from expired grant accounts was either unallowable or unsupportable.

Audit reports identified several awarding agencies or programs with closeout problems. They generally attributed the problems to inadequacies in awarding agencies’ grant management processes, including closeouts as a low management priority, inconsistent closeout procedures, poorly timed communications with grantees, or insufficient compliance or enforcement. While we reviewed several audit reports examining closeout problems, this section summarizes examples from an HHS OIG and DOJ OIG report, and a GAO report on EPA—all issued within the last 3 years.

Auditors indicated that grant closeouts were a low priority, at either the grantee organization or federal agency, which contributed to delays in grant closeouts. The audit reports described closeouts as a low priority in the context of staff-related issues. NIH and EPA reported that grantee staff resources were limited, staff were overburdened with other responsibilities, and staff considered grant closeout a low priority. NIH, DOJ, and EPA officials reported similar problems among agency grant staff. Staff turnover, at either the agency or the grantee organization, also led to lapses in the supervision of grants and the transfer of grant-specific information to new staff. Agency staff also reported that delaying grant closeout added to staff workload. For instance, NIH and EPA reported that as time elapsed it became more burdensome for staff to close out an expired account.

Auditors noted that grant offices did not always have consistent grant closeout procedures, such as due dates for closeout completion. For example, we reported that EPA used closeouts to ensure that grant recipients had met all financial requirements and had provided final reports, and that any unexpended balances were returned to the agency. EPA’s policy stated that closeouts should occur within 180 days after the grant’s project end date. However, agency officials did not always comply with this policy—in fiscal year 2005 EPA closed out only 37 percent of the grants within 180 days. In its 2006 report, the DOJ OIG reported that two of the three DOJ grant offices had a deadline for closing out grants, while the third office did not; that each of the three DOJ grant offices conducted the closeouts process differently; and that each office had undefined and undocumented “workarounds” that had evolved over time.

Auditors reported that agency communication with grantees, either the content or the timing of the communication, also delayed grant closeouts. The communication of inconsistent policies and procedures contributed to grantee confusion, especially for grantees who work with multiple federal programs of offices. For instance, DOJ reported OJP grantees, especially those who dealt with multiple offices, were confused by the variation in language, time frames, requirements, and communications. Auditors found the mistiming of the agency closeout reminders, or the lack of such reminders, also contributed to delays in report submissions. For example, NIH reminded its grantees about their closeout reporting a year ahead of time, too far ahead to serve as a timely reminder.

Lastly, auditors also noted awarding agencies were not enforcing their closeout requirements through the application of controls, corrective actions, or penalties. For example, EPA grant officials told GAO they had no realistic options for taking strong action against grantees, usually state governments, for submitting late reports because the states had continuing grants for environmental programs. The HHS OIG found NIH program guidelines provided few specifics about what type of corrective actions were appropriate and when the grant office should apply the actions. The OIG noted that NIH grant offices could impose special award conditions on the grantees, such as additional monitoring or withhold future funding. However, the OIG found that grant officials rarely resorted to withholding future funding from a grantee due to late closeout because agency officials thought this penalty too severe and would slow down future project development.

Three Agencies Took Action to Improve Grant Closeouts

In response to auditors’ concerns, three federal agencies, DOJ’s OJP, HHS’s NIH, and EPA, undertook actions to improve their grant closeout processes. To varying degrees, the agencies’ actions included elevating grant closeouts to a higher agency priority in order to improve monitoring, standardization of procedures, communications with grantees, compliance, or enforcement, or a combination of the above. Auditors reported that when federal grant managers took these actions, agencies generally improved the timeliness of grant closeouts, reduced grant closeout backlogs, or improved their ability to identify and deobligate unspent funds from expired grants, or a combination of the above.

In 2000, DOJ’s OJP initiated a pilot project called “Operation Closeout” to deal with grant closeout backlogs. The agency reported that this initiative accelerated the grant closeout process through revised closeout guidelines and elevated the importance of the closeout function as a required procedure in the administration of grants. Over a period of 6 months, “Operation Closeout” closed 4,136 grants, resulting in over $30 million in deobligated funds. In 2006, the DOJ OIG reported that since 2002 grant closeout was a higher priority within DOJ and that its awarding agencies made improvements in the timeliness of grant closeouts. For example, from 2001 to 2005, OJP reduced its backlog of expired grants from 11,356 to 6,237. The report also indicated that OJP was recommending, among several recommendations, establishing a performance measure to monitor efficiency and compliance with its closeout process. In 2006, the DOJ OIG also reported that OJP updated the grant monitoring requirements in its Grant Manager’s Manual, automated its Grant Adjustment Notice (GAN) process, shortened its timeline for closeouts from 180 days to 120 days, and addressed the backlog of grants overdue for closure. By automating the GAN process, auditors reported that OJP reduced the time to respond to grant adjustment requests by 10 days and planned to notify grantees of decisions regarding grant adjustment requests through the Grants Management System (GMS). OJP required that its grant staff conduct and document all its programmatic monitoring efforts in GMS.

To address its grant closeout problems, NIH undertook several corrective actions in 2002 and 2003. The agency stated that it continued to emphasize to grantees that the submission of final closeout reports was an agency priority and improve agency monitoring. To address its backlog of expired accounts and reduce the burden on monitoring staff, NIH management assigned dedicated staff to resolving the backlog of accounts. Corrective actions included creating a database to track receipt of final reports, which allowed NIH to send individualized reminders to grantees of outstanding reports. Another planned action was to provide technical assistance to grantees through general outreach efforts or through targeted follow-up with individual grantees. NIH also established a workgroup and a reminder system to improve grantee compliance with its closeout guidelines.

Between 1995 and 2005, EPA efforts led to substantial progress in resolving its backlog of expired grants. By 2005, the agency nearly eliminated its backlog of over 23,000 expired grants accumulated between 1999 and 2003. To continue its efforts and to hold program managers more accountable for grants management, EPA developed a corrective action plan. EPA planned to require all managers and supervisors to complete online grants management training; require baseline monitoring for all grants documented in the agency’s Integrated Grants Management System; and integrate grants with financial data and eliminate duplicate data entry. This plan also included incorporating grants management performance measures into the performance standards of project officers, supervisors, and managers with grants management responsibilities.

Agencies’ Performance and Accountability Reports Address Grant Closeouts

In 2006 and 2007, eight agencies highlighted grants management problems as a management challenge or concern in their agency’s PAR to the President and Congress. Moreover, DOJ, HHS, and EPA reported to the President and Congress that timely grant closeout was a long-standing grants management challenge. In the 2006 DOJ and HHS PARs, both the IG and the independent auditor specifically addressed grant closeout problems and agency progress in addressing the problems. In each case, the IG listed grant closeouts as contributing to the department’s difficulties with grants management at several of its agencies. In response, the departments described both agency-level and departmentwide initiatives to address the problems. In HHS’s 2006 PAR, the independent auditors reported the department had more than 64,000 grants, with a remaining balance of $1.6 billion, eligible for closeout, and that 75 percent of these grants had been expired for more than 2 years. In the HHS 2007 Agency Financial Report, the HHS Inspector General continued to cite grant management, and specifically grant closeouts, as a management challenge. In DOJ’s 2006 and 2007 PAR, the independent auditors highlighted the IGs findings and explained that the closeout delays contributed to misstatements in the department’s financial statements. In its 2007 PAR, DOJ cited grant management process improvements by several of its program offices but also stated that grant management and closeout continued to be a major challenge.

In our review of the 2006 EPA PAR, we found that EPA had a financial performance measure—the percentage of eligible grants closed out— specifically to track the agency’s progress in closing grants. The EPA assessed its performance by calculating the percent of grants closed out in the current year that had a “project end date” in the previous year. In 2005, EPA had goal of 90 percent grant closure, and it reported in its 2006 PAR achieving a 95 percent grant closure rate. In 2006, we concluded that, while EPA’s performance measure did not assess compliance since it did not reflect the 180-day closeout standard, the measure was a valuable tool for determining if grants were ultimately closed. As indicated earlier, EPA also planned to incorporate its grant performance measures into performance standards for its grants professionals.

EPA’s 2007 PAR reported that the agency had successfully put into place grant management process improvements to correct long-standing problems identified by GAO and the OIG. EPA is also developing a new Grants Management Plan that will go into effect in 2008 to replace and update the plan established in 2003. Also in 2007, the EPA OIG removed the agency’s use of assistance agreements, including grants, from its list of EPA’s management challenges. The OIG attributed the removal of these agreements from its list of management challenges to the substantial actions EPA had taken to improve its management of these agreements. The OIG noted that EPA planned to evaluate implementation of its new policies and the OIG would continue to monitor the agency’s corrective actions in this management area.

As previously discussed, OMB Circulars No. A-102 and No. A-110 establish standards for consistency and uniformity among federal agencies in the administration of grants through the preaward, postaward, and closeout phases of the grant life cycle, and Circulars No. A-11 and No. A-136 provide agencies with guidance on preparing and submitting their PARs in terms of performance and financial accountability. However, in our review of these circulars as well as selected agency regulations, we found no explicit instruction to agencies to track or report on undisbursed balances remaining in expired grant accounts.

Although not explicitly directed to do so by the OMB circulars, we found that the inclusion of undisbursed balances in expired grant accounts in a department or agency’s GPRA documents—as has been done by DOJ, HHS, and EPA—has the potential to raise the internal and external visibility of the problem. As we reported in 2004, developing strategic plans and reporting on progress toward performance goals can lead to cultural changes within an agency. The focus on results can also stimulate internal problem solving and discussions about performance. Externally, OMB and Congress use GPRA documents, like the PAR, in discussions of agency performance and resource allocation.

Conclusion

The existence of undisbursed grant balances in expired grant accounts may hinder the achievement of program objectives, limit deobligating funding for other uses, and expose the funding to improper spending or accounting. Our analysis showed that, taken together, quarterly undisbursed balances for expired grant accounts in HHS’s Payment Management System—which in 2006 handled about 70 percent of all federal grant disbursements—can be significant. Audit reports from agencies not participating in PMS indicate they also have expired grants with undisbursed balances. Data analysis of grant accounts in other federal payment systems may reveal additional expired grants with undisbursed balances.

In reviewing audit reports for three agencies, we found that grant closeouts processes can improve when given a high priority and the agency addresses the multiple causes in a concerted fashion. The financial status of long-expired grant accounts is one aspect of agency performance that has implications for broader program and agency-level performance. By elevating this issue as a management priority in their annual performance plans and PARs, the three agencies made grant closeouts a priority for improving program and agency-wide performance. However, OMB circulars relating to grants management and performance reporting do not currently instruct federal agencies to track and annually report on undisbursed funding in expired grant accounts. Given the federal government’s constrained fiscal position, the executive branch could minimize undisbursed funding in expired grant accounts if OMB instructed federal awarding agencies to use its federal financial information systems and GPRA’s performance-reporting infrastructure to track and annually report this information.

Recommendations for Executive Action

We recommend that the Director, OMB, instruct all executive departments and independent agencies to take the following two actions: (1) annually track the amount of undisbursed grant funding remaining in expired grant accounts; and (2) report on the status and resolution of the undisbursed funding in their annual performance plan and report in their annual PAR on the amount of undisbursed grant funding in expired grant accounts, why these funds were undisbursed, the actions taken to resolve the undisbursed funding and close the expired grants and related accounts, and outcomes associated with these actions.

Agency Comments and Our Evaluation

We provided a draft of this report to OMB and HHS for review and comment. HHS replied via e-mail and had no substantive comments. OMB responded with written comments, which we have reprinted in appendix III.

OMB said it supported the intent of our recommendations to strengthen grants management by explicitly requiring federal agencies to track and report the amount of undisbursed grant funding remaining in expired grant accounts and that it believes agencies should design processes with strong internal controls to promote effective funds management for all types of obligations. OMB’s comments did not indicate a commitment to implement our recommendations. OMB stated that, during its regular review, it would consider revising its grants management guidance, Circulars A-102, Grants and Cooperative Agreements with State and Local Government, and A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations, to include instructions for agency grant managers to track and report this information. OMB added that it does not favor having agencies report on these balances in their PARs and so would not offer instructions under its performance reporting guidance, Circular A-136, Financial Reporting Requirements.

We agree that OMB should have discretion in instructing departments and agencies on how to track and report undisbursed balances in expired grant accounts. Our draft report recommended OMB instruct agencies to annually track and report in their PARs the amount of undisbursed expired grant balances. As we reported, some federal agencies such as EPA, HHS, and DOJ have already voluntarily included in their annual PARs their actions to track and reduce undisbursed balances in expired grant accounts. We found that such reporting had raised the internal and external visibility of the challenge and that these agencies had improved their performance. Accordingly, we continue to believe that the PARs would be appropriate vehicles to address on a governmentwide basis the issue of undisbursed balances in expired grant accounts. Such reporting may not be necessary for every department or agency, every year. Should it choose, OMB could always attenuate its requirements by setting a threshold as part of its instructions for reporting these balances in the PARs.

We will send copies of this report to the congressional committees with jurisdiction over HHS and its activities, the Secretary of HHS, and the Director of OMB. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at (202) 512- 6806 or czerwinskis@gao.gov. 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 IV.

Appendix I: Objectives, Scope, Methodology, and Additional Information on Program Characteristics

Our objectives were to address the following: (1) to what extent are there undisbursed grant balances in expired grant accounts and do they share any program characteristics?; and (2) do these expired grants share grant management challenges and what actions have federal agencies taken to improve grant closeout and diminish undisbursed balances? In the course of our work, we did not evaluate the implementation of closeout procedures for any specific grant program or awarding agency. The following describes the various procedures we undertook to answer these objectives.

Review of Relevant OMB Circulars and Federal Regulations

We began our study by reviewing the key federal guidelines on grant closeouts: Office of Management and Budget (OMB) Circulars No. A-102, Grants and Cooperative Agreements with State and Local Governments, and No. A-110, Uniform Administrative Requirements for Grants and Other Agreements With Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations. Since the President directed executive branch departments to adopt these OMB circulars in their regulations, we also reviewed applicable regulations for eight executive departments (the Departments of Agriculture , Education (Education), Energy ), Health and Human Services , Housing and Urban Development , Justice , Labor , and State ), the Social Security Administration (SSA), and the Environmental Protection Agency (EPA) to identify any differences in grant closeout guidelines between the OMB circulars and the agency regulations. We selected these agency regulations for review because a recent audit had indicated that either a grantee or program had problems with grant closeouts. To identify federal governmentwide guidance relating to federal agency performance reporting, we reviewed OMB Circular No. A-11, Preparation, Submission and Execution of the Budget and Circular No. A-136, Financial Reporting Requirements.

Collection and Review of Related Audit Reports and PARs

To identify what other auditors found and recommended as strategies to diminish unspent funds in expired grant accounts, we interviewed various grant program experts from GAO and federal Offices of Inspectors General (OIG), as well as experts from the National Grants Management Association (NGMA), and the National Association of State Auditors, Comptrollers and Treasurers (NASACT). We also conducted a Web-based literature search for related audit reports and reviewed over 150 reports issued by GAO and various federal OIGs and independent agencies from 2000 to 2006 to identify some common grants management problems related to closing expired grants. During the 2000 to 2006 period, auditors issued reports to the following departments or independent agencies regarding either a grantee or program with grant management problems relating to closing expired grants: USDA, Education, DOE, HHS, HUD, DOJ, DOL, DOS, SSA, and EPA. We reviewed the 2006 and 2007 Performance and Accountability Reports (PAR) from EPA and the 15 cabinet-level executive departments to determine whether grant management, specifically timely grant closeouts and undisbursed balances from expired grants, were identified as a problem, and strategies agencies were employing to address the problem.

Analysis of Expired Grant Account Data from PMS

To identify the amount of undisbursed funding remaining in expired grants, we collected and analyzed data from HHS’s Payment Management System (PMS) and the U.S. General Services Administration (GSA) Catalog of Federal Domestic Assistance (CFDA). This section describes these two data systems, our collection of selected data from each system, our analysis of the data collected, and the results for the program characteristics analysis.

Description of Payment Management System

PMS is a centralized grants payment and cash management system, operated by HHS’s Program Support Center (PSC) in the Division of Payment Management (DPM). According to DPM, the main purpose of PMS is to serve as the fiscal intermediary between awarding agencies and the recipients of grants and contracts. Its main objectives are to expedite the flow of cash between the federal government and recipients; transmit recipient disbursement data back to the awarding agencies; and manage cash flow advances to grant recipients.

PMS is the largest of the nine civilian federal payment systems and executes payments for nine federal departments, one independent agency, a government corporation and the Office of National Drug Control Policy (ONDCP), which, in 2006, represented about 70 percent of all federal grant disbursements. According to HHS, PMS is a full-service centralized grants payment and cash management system. The system is fully automated to receive payment requests, edit them for accuracy and content, transmit the payment to either the Federal Reserve Bank or the U.S. Treasury for deposit into the grantee’s bank account, and record the payment transactions and corresponding disbursements to the appropriate account(s).

Appendix II lists the current PMS customers. A few statistics help to illustrate the volume of PMS’s payment processing. In 2006, PMS processed over $320 billion in payments to grant recipients. As of June 2007, according to an HHS official, PMS contained over 200,000 open grants. Cumulatively, the grants executing payments through PMS represent a significant amount of funding—open grants in PMS, as of May 2007, represented over $1.3 trillion in total funding. Over the years, PMS has executed payments for tens of thousands of grantees.

The DPM described its role, in operating the PMS, as an intermediary between awarding agencies and grant recipients. DPM personnel operate PMS, making payments to grant recipients, maintaining user/recipient liaison, and reporting disbursement data to awarding agencies. Awarding agencies’ responsibilities include PMS registration of grant recipients (DPM personnel perform this function for cross-serviced agencies), entry of authorization data into PMS, programs and grants monitoring, grant closeout, and reconciliation of their accounting records to the PMS information. Awarding agencies pay HHS a service fee for maintaining accounts and executing payments through PMS. PMS continues to charge agency customers a servicing fee until an account is closed.

Several federal agencies collaborate with HHS in executing grant payments including the U.S. Treasury and Federal Reserve Bank. According to DPM, the U.S. Department of the Treasury is responsible for establishing cash management policies, operating the Government On-Line Accounting Link System and the electronic system for processing of payments, check payments, and certain transactions. The Federal Reserve Bank’s responsibilities include direct deposit payments to payees’/recipients’ bank accounts.

HHS documentation indicated that other public and private organizations also have roles in executing payments, including the grant recipients and their financial institutions. Grantee responsibilities include executing grants, reporting cash disbursements to PMS, and maintaining their own accounting records. The grantee’s financial institutions are responsible for receiving payments for credit to recipient accounts, and maintaining recipient bank accounts.

An independent auditor assessed PMS in 2006. The auditor reported that DPM’s internal controls were suitably designed and tested to provide reasonable assurance that control objectives, including proper payments and remittances, and accurate reporting, were met.

Collection and Reliability Testing of PMS Closeout Data

To identify the status of undisbursed balances in expired grant accounts, we narrowed our focus to grants executing their payments through PMS. The awarding agencies provide the descriptive information for each grant account to PMS. The data set for each grant account contains over 900 unique data fields. One of the required data fields in each PMS account record is the CFDA number for the assistance program that is associated with each account.

Each quarter, PMS distributes to its customers a “closeout” report listing the expired grant accounts that, according to the data system, have not completed all of their closeout procedures. HHS listed an account on a quarterly PMS closeout report if both the latest end date for the account was 3 months old and the latest date of disbursement was 9 months old. PMS does not close a grant account until instructed to do so by the awarding agency. For each grant account, the report includes such information as the identification number, the amount of funding authorized for the grant, the amount charged, and the beginning and end dates for the grant.

We initially requested that HHS provide PMS quarterly closeout reports for the period 2000 through 2006, then narrowed our focus to the 2003 through 2006 period. As part of the data request, we requested that HHS append to the closeout data additional information available in PMS for each grant account: the CFDA numbers and the type of grantee organization. Having the associated CFDA number for each grant account enabled us to link the grant account information in the closeout report with the associated program information as listed in the catalog.

To test the reliability of PMS closeout data, we (1) reviewed existing documentation related to PMS, including the most recent system audit by the independent auditor, (2) interviewed officials responsible for administration of the database on data entry and editing procedures and the production of closeout reports, and (3) conducted electronic testing for obvious errors in completeness and accuracy. We worked closely with HHS officials responsible for the administration of the database and the production of the closeout reports. When we found discrepancies, we brought them to the attention of the agency officials and worked with them to make corrections before the analyses began. For example, our testing revealed that there were accounts in the PMS closeout data sets that: had CFDA numbers that did not match existing CFDA numbers; were for nongrant programs that were not intended to be entered into the grant payment system; and were for grants that did not have a defined expiration date. We excluded these extraneous entries from our analysis. After conducting these assessment steps, we found that the closeout data were sufficiently reliable for the purposes of this report.

Description of Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic Assistance (CFDA) is the single authoritative, governmentwide compendium and source document for descriptions of federal programs that provide assistance or benefits to the American public. According to GSA, the catalog does not include solicited contracts; foreign activities that do not benefit the domestic economy; personnel recruitment programs; benefits or assistance only available for federal employees; new programs that do not have enacted appropriations; or inactive programs with expired authorization or appropriation.

OMB created the catalog pursuant to the Federal Program Information Act to ensure that comprehensive information on federal assistance programs was readily available to the public and interested parties. Later amended in November 1983, revised guidelines transferred the responsibilities of the Federal Program Information Act from OMB to GSA. OMB serves as an intermediary agent between federal agencies and GSA, with oversight responsibility for the necessary collection of program data.

OMB Circular No. A-89 provides the federal guidelines for the collection and dissemination of the program information. GSA is responsible for maintaining and distributing CFDA information. By law, federal agencies submit program data to OMB for review. OMB reviews the information and provides any comments to and obtains updates and clarifications from the agency. OMB then submits each program description to GSA, which incorporates these submissions into the CFDA. According to a GSA official, GSA does not verify the accuracy of the information that the federal agencies provide for the program description. Each federal agency is responsible for assuring, among other things, the adequacy and timeliness of program information submitted to OMB.

The law authorizing CFDA required that GSA establish and maintain a computerized retrieval system capable of identifying all existing federal domestic assistance programs. GSA now maintains the comprehensive database information on all federal domestic assistance programs. Information about these programs is made available to the public through periodic update and annual issuance of the catalog. Until 2006, GSA distributed printed copies of the CFDA for free. GSA’s free CFDA Web site (http://www.cfda.gov) is now the principal means of distributing the catalog. This Web site enables users to download an electronic file of the catalog or search its contents online. CFDA program description contains a wealth of financial and nonfinancial information, including program objectives, type of programs assistance provided, applicant eligibility requirements, and guidance on how to apply for assistance.

Collection and Reliability Testing of CFDA Data

To identify expired grants in PMS and two of the four program characteristics analyzed—funding award method and the contribution requirement—we obtained the October 2006 CFDA as an electronic data file from the GSA. We were able to crosswalk the CFDA program data to the PMS data using the CFDA number. The CFDA number is a five-digit number assigned to each assistance program listed in the catalog. In creating a grant account in PMS, HHS requires the awarding agencies to enter the CFDA number for the assistance program that is funding the grant. At our request, HHS appended the CFDA number to each of the accounts listed in the quarterly PMS closeout data given to GAO. We used information from the catalog to identify those grants that had specific time limits, and thus, that we could consider “expired” once the period of availability had ended. We also used CFDA program information to identify the type of funding award method (project or formula-based), and whether a grantee was required to contribute resources, such as matching funds, to the grant project.

According to a GSA official, GSA does not verify the accuracy of the program description information submitted by the awarding agency for the catalog. To test the reliability of CFDA data, we selected a random sample of 25 CFDA program descriptions and compared selected information from the CFDA program description to the same program information from other federal sources. Specifically, we checked the reliability of six data fields: the CFDA number, awarding agency, program name, funding award method, contribution requirement and the period of availability of the grant. As we found only one discrepancy for one of six data fields, we can be 95 percent confident that fewer than 17.6 percent of cases in the catalog contain discrepancies between the electronic catalog and information available from other federal sources for these fields. We thus determined the selected CFDA data used in our analyses were sufficiently reliable for the purposes of this report.

Expired Grant Accounts Included in and Excluded from Analyses

Prior to conducting the analysis of the 2003 through 2006 expired grants in PMS, we excluded extraneous accounts that appeared in the closeout data. The purpose of these exclusions was to avoid including accounts that might unduly distort the results on undisbursed funds in expired PMS grant accounts.

We included accounts that were associated with grants or cooperative agreements. We excluded accounts if we could not associate them with a grant program. For instance, we found some PMS accounts were for nongrants. We also decided to exclude accounts that lacked a CFDA number, since without this number we could not verify that the account was for a grant or obtain other information used in our analyses.

We included grant accounts that had a time limit for spending the funds made available and a zero or positive undisbursed balance. As described by HHS staff, the purpose of the PMS closeout report is to alert awarding agencies of accounts in PMS that remain open after their posted end date. If a grant does not have a defined end date, such as the Temporary Assistance for Needy Families (TANF), then HHS staff consider the PMS closeout report merely as a reminder to the awarding agency of the open account and that PMS continues to charge fees on this open account. We identified “expired” grants, grants that had defined end dates, by conducting a content analysis of their associated CFDA program descriptions. Through the content analysis we identified 26 grant programs (HHS and non-HHS), and associated PMS grant accounts, where the CFDA program description indicated no time limit on the availability of grant funding, and excluded these grant accounts from our analysis.

We included grant accounts that met the previous criteria and also had a readily identifiable CFDA number. We found well over 100 CFDA numbers listed for grant accounts in PMS that did not have a program description in the October 2006 edition of the CFDA. We searched the 1999 to 2005 editions of the CFDA and the catalog’s historical index to find the program descriptions for these CFDA numbers. We excluded an account if we could not find any information on the CFDA number either in the CFDA or in the CFDA Historical Index, or if the CFDA number and program description had been deleted from the catalog before the 1999 edition of the CFDA. We excluded these grant accounts associated with very old CFDA numbers because pre-1999 catalogs are not readily available, making it unduly burdensome to obtain program information. We also excluded accounts in the 2003 through 2004 PMS closeout data if their associated CFDA numbers (1) were not in the 1999 through 2006 CFDAs, and (2) the accounts associated with the CFDA number did not have a cumulative undisbursed balance of greater than $100,000 for two consecutive quarters. We felt that, where the cumulative amounts of undisbursed funding for the accounts associated with these CFDA numbers were less than 0.1 percent of the quarterly totals and, by 2005, were at or near zero, it was unduly burdensome to collect the CFDA program information that was more than 7 years out of date.

We also excluded expired accounts for several block grants in keeping with the 2006 independent audit of PMS which stated that (1) the funds for these block grants continued to be available to the grantees until the obligation/expenditure period expired, and (2) traditional financial reporting requirements do not apply to these programs. We excluded expired grant accounts associated with the following HHS block grant programs from our analysis based on this audit: Community Mental Health Services Block Grant, Preventive Health and Health Services Block Grant, Substance Abuse and Preventive Treatment Block Grant, Maternal and Child Health Services Block Grant, Social Services Block Grant, Low Income Housing Energy Assistance Block Grant, and Community Services Block Grant.

To summarize, our reported results describe accounts listed in PMS’s quarterly closeout reports from 2003 through 2006, that were grants or cooperative agreements; had a time limit for spending; had a zero or positive undisbursed balance; had a readily identifiable CFDA number; had a program description in the 1999 through 2006 CFDAs; and did not have special financial reporting procedures.

Analysis of the PMS and CFDA Data to Quantify Undisbursed Funding in Expired Grant Accounts and Related Program Characteristics

Having excluded the extraneous accounts, we analyzed the 2003 through 2006 payment closeout data as a complete set of current PMS customers, rather than analyzing specific federal agencies or grant programs. When we analyzed the quarterly PMS closeout data for the 2003 through 2006 period, we identified two sets of expired grants accounts. One set consisted of expired accounts for which all of the funds made available had been disbursed, but still had not been closed. We identified a second set of accounts that included those expired accounts reported with a positive undisbursed balance. Most of our analysis focused on those expired accounts with undisbursed balances. For each quarter we totaled the amount of undisbursed funding in the expired grant accounts, without adjusting the amounts for inflation.

To identify common program characteristics of the expired grants with undisbursed balances, we conducted further analysis by linking data from the PMS closeout reports to selected program information from the CFDA. We identified four program characteristics for analysis: size of the funding award originally made available to the grantee; whether program funding was awarded based on a formula or on a competitive, project-by-project basis; the grantee organization (entity) receiving the grant; and whether the program required the grantee to make a contribution to support the grant activity. We selected these four characteristics because they are fundamental elements of grant design that could be readily analyzed using the information from the PMS and the CFDA data sets. While grant programs have other fundamental design characteristics such as the purpose of the program (e.g., grant funds are to be used for construction or providing services), they could not be as readily analyzed. PMS grant closeout data provided the data on grant funding size and grantee organization. The CFDA data provided information for the funding award method and the contribution requirement.

We began our analyses by sorting the expired grants with undisbursed balances into 13 ranges of funding award size. These ranges were used because the average percentage of funds undisbursed were similar from quarter to quarter and minimally overlapped with the average percent for an adjacent range, reflecting natural breaks in the data analysis. The ranges varied from relatively small grants of under $25,000 to very large grants of up to $1 billion. For each funding range, we identified the quarterly balances of undisbursed funds for each of the 16 quarters from 2003 through 2006.

We next sorted the expired grants with undisbursed balances according to the method used to award the funds to grantees. As described earlier, federal awarding agencies typically award their grant funding using a formula or on a project basis, or by using a hybrid of both methods. Our guideline in sorting by funding award method was that if a program description had more than one allocation method, we sorted the grant according to the first allocation method listed in the CFDA program description. Using this information, we found that of 328 unique grant programs in the 2003 through 2006 PMS closeout data with positive undisbursed balances, 54 were awarded on a formula basis and 274 were awarded on a project basis.

Next, we analyzed the expired grants with undisbursed balances according to the type of grantee organization receiving the grant. For the grant organization characteristic, we collapsed the organization types used in PMS into six types (state, county, city, domestic nonprofit, domestic for- profit, and other).

Lastly, we compared the quarterly undisbursed funding balances for those expired grants that required some form of grantee contribution to those that did not. As described in the CFDA, grant program regulations can require grantees to contribute some form of resources to support grant- related activities, such as requiring the grantee to provide matching funds, share in the costs, or provide in-kind contributions. We sorted grants as having required contribution if the CFDA program description indicated grantees were required to contribute some form of resources to support grant-related activities, such as requiring the grantee to provide matching funds, share in the costs, or provide in-kind contributions.

For each program characteristic, we totaled the undisbursed funding according to the various types within each characteristic category. For example, for the method of funding award characteristic there were two types, project or formula-based. All of the program characteristic results are in comparison to other types of grants in the same characteristic category, such as sizes of grant authorizations or type of funding award method.

Expired Grant Accounts with Largest Undisbursed Balances Share Program Characteristics

When we compared the undisbursed balances among the types within each of the four program characteristic categories, we found certain types of grants consistently had the largest quarterly balances. Among the 13 funding award ranges, we found the largest quarterly balances of undisbursed funds in midsize grants, that had original funding awards ranging from over $100,000 to $100 million (in nominal dollars) for expired grants from 2003 through 2006. We also found that, between the two funding awards methods, grants awarded on a project basis consistently had the largest quarterly balances of undisbursed funding and that, among the six types of grantees, state grantees had the largest quarterly amounts of undisbursed funding, followed distantly by nonprofit organizations. When comparing grants requiring a grantee contribution and those grants that did not have this requirement—the fourth characteristic examined— we found that neither type had consistently larger quarterly amounts of undisbursed funding.

Our analysis has several limitations. First, each analysis of the quarterly undisbursed funding by program characteristic was an independent assessment of the variation in undisbursed funding among expired grant accounts. Consequently, the results for each program characteristic cannot be combined into a general statement about the four characteristics. Second, the results are limited to the expired grant accounts with undisbursed grants balances listed in the PMS closeout report from 2003 through 2006. We were not able to compare these results to all closed federal grants or all closed grants in PMS due to the burden of collecting comparable data for all closed federal grants from the eight other federal civilian payments systems or for all closed grants from PMS. Lastly, we did not interview policy experts or agency grant managers to explore why expired grants with different program characteristics might have larger undisbursed balances.

Appendix II: Federal Agencies Using PMS

Appendix III: Comments from the Office of Management and Budget

Appendix IV: GAO Contact and Staff Acknowledgments

Acknowledgments

In addition to the contact named above, Thomas James, Assistant Director; Patricia Farrell Donahue, Analyst-in-Charge; Carlos Diz; Wesley Dunn; Sharon Hogan; Elizabeth Hosler; Susan Mak; Anna Maria Ortiz; Neill Martin-Rolsky; Minette Richardson; Jay Smale; and William Trancucci made key contributions to this report.