Grants Management: Programs at HHS and HUD Collect Administrative Cost Information but Differences in Cost Caps and Definitions Create Challenges
Released: 2014-12-12T00:00:00

Letter

Background

The federal government provides grants to a variety of recipients as a form of financial assistance to accomplish a particular public purpose authorized by law. Grant recipients include for-profit and nonprofit entities; public and private universities; and state, local, and tribal governments. Some grant programs also permit the granting of funds from primary grant recipient to subawardees. While there is substantial variation among grant types, competitively awarded federal grants generally follow a life cycle comprising various stages—pre-award (announcement and application), award, implementation, and closeout—as shown in figure 1.

Grant programs are established through legislation that may specify particular objectives, eligibility requirements, and other conditions, and grant-making agencies may impose additional requirements on recipients. Additionally, grant programs are typically subject to a wide range of accountability requirements under their authorizing or appropriations statutes and implementing regulations. Congress may also impose increased reporting and oversight requirements at the agency or recipient level. Grant-making agencies and their programs are also subject to crosscutting requirements applicable to most assistance programs.

Administrative Costs

Administrative activities such as managing finances and facilities, ensuring quality, and reporting project status are essential to the operation of grant programs. These administrative costs may be charged directly or indirectly to a grant depending on individual program guidelines and whether the grantee has an approved indirect rate agreement. A direct cost is one that can be specifically identified with the individual grant objective and is charged to that specific grant. Direct costs include, for example, a researcher’s salary and equipment. Indirect costs represent a grantee’s general support expenses that cannot be specifically identified with an individual grant project. Indirect costs include, for example, building utilities and administrative staff salaries (see figure 2). To determine the proportion of indirect costs that may be charged to federally funded awards, grantees use a mechanism called the indirect cost rate. The procedure for requesting an indirect cost rate varies based on the type of grantee organization. In the case of higher educational institutions, the rate is established based on a historical fiscal year of cost data from a school and is applied to each of its individual research awards.

As we have previously reported, there is no government-wide definition of what constitutes an administrative cost. Programs have different missions, priorities, services, and clients, and jurisdiction for the programs are spread among numerous congressional committees; therefore federal agencies’ definitions of allowable (or prohibited) administrative costs vary from program to program. We have also previously concluded that funding gaps for grant indirect costs which, depending on the program, may represent a large portion of administrative costs, may compromise the nonprofit sector’s ability to partner with the federal government to provide services and may ultimately risk the viability of the sector. In a 2013 study, the Urban Institute found that limits on administrative costs are concerning for nonprofits because they must find other ways to cover these expenses. This study also stated that trying to minimize overhead costs could lead nonprofits to offer low pay for administrative positions, which could make it difficult to recruit and retain skilled and experienced staff.

Guidance on Cost Principles

OMB is responsible for developing government-wide guidance to ensure that grants are managed properly and that grant funds are spent in accordance with applicable laws and regulations.guidance on administrative requirements, cost principles, and audit requirements for federal awards. Until recently, OMB guidance came in the form of circulars for specific grants management areas to different types of grantees. For example, OMB Circular No. A-21 provided the principles for determining the types of direct and indirect costs that may be claimed and the methods for allocating such costs to federally funded projects at educational institutions. OMB had similar guidance on cost principles for state and local governments, Indian tribal governments, and nonprofit organizations. In December 2013, OMB consolidated its grants management circulars into a single document, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), to streamline its guidance, promote consistency among grantees, and reduce administrative burden on OMB provides nonfederal entities. OMB staff told us that although the new Uniform Guidance is intended to create a framework for the allocation of grant costs, decisions about how these costs are allocated are made at the award level. The new Uniform Guidance is scheduled to go into effect for grantees on December 26, 2014, and officials at both HHS and HUD told us they were evaluating the changes and its effects on their programs and regulations.

Selected Agencies and Programs

To provide examples for this review, we selected six grant programs at two federal grant-making agencies (see table 1). These programs are managed by a variety of subagencies and reflect different program objectives.

Objectives To expand the supply of affordable housing, particularly rental housing, for low and very low income Americans.

To develop viable urban communities by providing decent housing, a suitable living environment, and expanding economic opportunities, principally for persons of low and moderate income.

To link elderly, especially frail and disabled, or disabled nonelderly assisted housing and neighborhood residents to supportive services in the general community.

To promote family economic self-sufficiency and to help children succeed in school and life through affordable, high-quality early care and afterschool programs.

To promote school readiness by enhancing the social and cognitive development of low-income children.

To assist public and private nonprofit institutions and individuals to establish, expand, and improve biomedical research and research training in allergic and immunologic diseases and related areas to assist public, private, and commercial institutions to conduct developmental research.

Agencies Reviewed Have Mechanisms in Place to Collect Data on Federal Grant Administrative Costs, but These Data May Not Reflect Actual Cost of Administration

Although grant-making agencies are not required to track grant administrative cost data specifically, all six of the grant programs we reviewed collect grant administrative cost data in some form. Each of the grant programs we reviewed had mechanisms in place to capture the administrative costs charged to their grant programs, via either a computerized system or paper reporting.collection system varied, as follows: However, each program’s data

HHS’s On-Line Data Collection System used for the CCDF grant and HUD’s Integrated Disbursement & Information System used for both HOME and CDBG are computerized data collection systems available to the grantee and agency that capture grant program budgetary information and actual post-award expenditure reporting.

The Head Start Enterprise System collects grant budget estimates electronically during the program’s grant application process.

Reporting of actual expenses incurred is captured in paper form at the regional office level.

The Multifamily Housing Service Coordinators program uses the Line of Credit Control System to disburse and track payment of grant funds. The system may be accessed through a voice-response system or a computerized system. In addition to these systems, documentation is provided in paper form to the regional office where the grant is managed.

Electronic Research Administration Commons is a web-based interface where National Institutes of Health (NIH) grantees share administrative information about grants. It also collects AITR grantees’ Federal Financial Reports.

Officials for all of the selected programs reported that they use these systems to review their grantees’ costs for appropriateness. Such reviews also help to ensure that the data collected are accurate if they are used for evaluating the programs’ effectiveness. With the exception of the AITR program, which is managed at headquarters, all of the programs we reviewed performed compliance checks on fiscal reporting at the regional office level where the grants are managed. For five of the six programs in our review, officials said their analysis of administrative costs was focused on ensuring compliance with the grants’ administrative cost caps and approved indirect rate agreements. Agency officials also told us that when a grantee’s total federal expenditures exceed an audit threshold, all six programs rely on the single audit process to identify deficiencies in grantee accounting, internal controls, and financial management. Two of the six programs we reviewed—CDBG and CCDF—make their grant administrative cost data available to the public via their websites.

The six programs we reviewed track grant expenses in different ways, which can make it challenging to identify aggregate administrative costs. For some of these programs, administrative costs and program costs may be included in the same line items and program officials told us that separating these costs would be labor intensive. For example, program officials explained that for the AITR program they do not specifically track grant administrative costs. Instead, grant program costs are reported as either direct or indirect costs because recipients are required to use the Federal Financial Report to report on grant expenditures and that report captures indirect costs. NIH officials explained that administrative costs are normally charged as indirect costs but if the administrative services are integral to a major project and the administrative costs can be specifically attributed to the project, they may be charged as direct costs to the grant. Therefore, interpreting indirect costs as administrative costs could miss administrative costs charged as direct costs to the grant.

Further complicating this issue, NIH officials explained that primary grant recipients report their subgrantee’s direct and indirect expenses under the primary recipient’s total costs on the Federal Financial Report. There is no requirement to specifically track grant administrative cost data for a grant’s subgrantee and the current federal financial reporting mechanism for the AITR grant does not facilitate identifying all administrative costs. According to NIH officials, identifying administrative costs reported under the total cost line item would be onerous under the current financial information collection method since this would entail additional auditing at both the primary grantee and subgrantee levels. Additionally, consistent with OMB guidance, indirect cost rates are to be based on historical costs incurred by an institution and applied to all grants received by that institution for a set period. While using such a rate may prove efficient for reporting purposes, these rates are a blunt instrument by which to determine actual administrative costs for any one grant program.

For the grant programs we reviewed, financial reporting systems varied in their ability to aggregate program-wide administrative cost information. HUD’s Integrated Disbursement & Information System—a nationwide database that provides HUD with current information on CDBG and HOME program activities—includes grant administrative cost information. In contrast, the Head Start program does not currently have a system in place that allows it to aggregate grant administrative cost information across grantees. Instead, Head Start grantees report their expenses after they are incurred on a SF-425 paper form retained at the regional office level. HHS officials are planning to collect the SF-425 electronically on the GrantSolutions platform beginning in late 2015 and should be able to display these data electronically in the Head Start Enterprise System. According to HHS officials, the new method of data collection and management should enable Head Start staff to aggregate actual expenditure data—categorized as programmatic or administrative costs— for analysis and reporting at the headquarters level, which would potentially facilitate reporting these costs. This mechanism should facilitate program-wide aggregation of administrative costs and is a necessary first step to obtain an overall understanding of a program’s administrative costs.

Just as the mechanisms to collect information differ across the grant programs we reviewed, there is also variation in guidance and training regarding the reporting of grant administrative costs. The six programs we reviewed provide some form of written guidance or instruction regarding the allocation of administrative and program costs. Head Start provides program-specific resources, written guides, and interactive training modules on its website—the Early Childhood Learning and Knowledge Center. The AITR, CCDF, CDBG, and HOME programs also provide resources and guidance online. Applicable administrative cost definitions for MHSC are not included in the management handbook for the grant program. However, officials explained that a list of allowable administrative costs does exist in the grant’s Notice of Funding Availability. With regard to training, program officials with Head Start, CDBG, HOME, and CCDF told us they provide grantees across the country with training on a wide variety of program-specific and fiscal management issues. For example, HUD officials explained that they offer training on identifying allowable administrative costs and that they plan to provide training in financial management via interactive modules online.

NIH officials told us they provide written guidance and offer special training upon request, but NIH does not provide training to all of its grantees for the AITR grant program. NIH officials said that grantees tend to hire external consultants to assist them with preparing indirect cost rate proposals. MHSC officials said that they do not provide centralized training on administrative costs to grantees, but training is provided by some field offices that determine a need for such training. In addition to written guidance on fiscal information, all six of the programs we reviewed described processes for providing technical support to grantees on request.

Grant recipients of all the programs we reviewed told us that since administrative costs are not always reimbursed by their federal grants they must cover some administrative expenses themselves. The Urban Institute made the same point in a survey of nonprofits that receive government grants. This review found that half of survey respondents said their government grants and contracts expressly excluded or limited reimbursements for their program and organizational administrative costs.

Unreimbursed administrative costs in the programs we reviewed ranged from costs related to the grant managers who oversaw the grant program to costs that covered centralized business services such as accounting or human resources. Functions like these support the administration of the grant but are not directly related to its aims or purposes. We found examples of grantees absorbing part of the costs to administer a grant. An official at a state department of health receiving a CCDF grant explained that she analyzes administrative costs and when her organization approaches its federal cost cap she pays these expenses from the state’s general fund. Another CCDF state grantee told us that he relies on state appropriations to cover the majority of administrative costs, and therefore his organization’s federally reported administrative costs remain well under the cap set by the program. Since state funds were available to cover a portion of the administrative expenses, he explained that the organization did not have to claim from the federal government all the administrative expenses to which they were entitled. To the extent that only administrative costs charged to the grant are reported, these reports may understate the actual administrative costs.

The actual cost to administer a grant may also be affected by whether oversight responsibilities are extended over long periods, as is required by some federal grant programs. If a grantee has oversight responsibilities for an ongoing portfolio of work it may incur greater administrative costs than a grantee with a shorter-term project with defined beginning and end dates. For example, primary grant recipients of the HOME program are required to oversee HOME-funded rental properties for up to 20 years after construction. According to a HOME grantee, as the portfolio of properties grows the HOME oversight requirements cause the grantee’s oversight costs to increase year after year. However, the HOME grant administrative cost cap does not increase to cover these increased oversight costs associated with a grantee’s growing portfolio of properties over time. Because of this, a HOME grantee told us that as these costs increase over time she will need to absorb these costs, covering them with resources from both HOME administrative funds and state funds. In some cases, the grantee has reviewed HOME grant amounts and actual HOME administrative costs and chosen to allocate funds to fewer units and to fewer projects because of the oversight costs that will be incurred over time.

Variations in Administrative Cost Caps and Definitions Hinder Meaningful Comparisons of Grant Administrative Cost Data across Programs

Two challenges to comparing administrative costs across grant programs are the variation in cost caps and differences in administrative cost definitions. These two issues are different, but they intersect. The variation in administrative cost caps—the limit to the amount of the grant that may be charged as administrative costs to the federal government— presents challenges to comparing costs across programs. Of the six grant programs we reviewed, administrative cost caps ranged from 5 percent for CCDF to a 26 percent administrative cost cap for education institutions receiving AITR grants. The Multifamily Housing Service Coordinators grant program has no cap. As a result of this variation, the administrative costs of some programs may appear more expensive than others. For example, CDBG’s 20 percent cost cap could result in higher administrative charges to the grant than the CCDF’s 5 percent cost cap. According to HUD data, CDBG administrative and planning expenses in fiscal year 2012 were approximately 16 percent and, according to HHS data, CCDF administrative expenses in fiscal year 2012 were approximately 3 percent. As we have previously concluded, because there are differences in which activities are defined as administrative costs for financial reporting purposes, a program with high administrative spending is not necessarily less efficient than a program with low Programs with higher administrative cost caps administrative spending.may be assumed—incorrectly—to have higher administrative costs; so it is important to have an understanding of individual caps in place before any cross program comparisons are made.

There is no government-wide definition of what constitutes an administrative cost. Programs have different missions, priorities, services, and clients, and jurisdiction for the programs are often spread among numerous congressional committees; federal agencies’ definitions of allowable (or prohibited) administrative costs vary from program to program. Additionally, the definition of administrative costs varies across different federal grant programs even though many of the same activities are performed. For example, the salary of an enrollment specialist at Head Start, who enrolls children in the program, is considered a program- related cost. However, the salary of similar position as an intake specialist for the Low Income Home Energy Assistance Program, who determines the eligibility and benefit level for participants, may be an administrative cost in some states where the program is administered. When the same expenses are treated differently across programs, this results in different administrative cost totals for similar functions. Regardless of the reasons for variation in definitions of these costs, the existence of differences in definitions limits their comparability. Monitoring programs entails collection and use of program-related operational and financial data, but for information to be effective for decision making, it has to be pertinent to the individual program. OMB staff we spoke with stated that collecting grant administrative cost information government-wide would not identify whether funds for administrative costs are being spent effectively. Specifically, they told us that analysis of administrative costs and the identification of potential administrative cost savings should occur at the program level. They said that when comparing administrative costs across programs it is important to remember that some programs are inherently more expensive to administer than others.

Comparing unlike costs across different programs would lead to erroneous comparisons. However, comparisons of costs may be more appropriate when comparing programs that fulfill similar missions or provide similar services. Additionally, different definitions for administrative costs could present a challenge in situations when multiple grant programs are consolidated into one program.

Concluding Observations

Administrative activities—such as reporting on project status, managing finances, and ensuring quality—are an essential part of the grant process. Selected programs track administrative costs in different ways and not all of the grant programs we reviewed have systems in place that could readily aggregate these costs from their grant recipients. Additionally, the actual cost of administering a given program may be paid by sources other than the federal government and the current collection of grant administrative cost data only reflects the federally reimbursed portion of these costs. Efficient and effective use of federal grant funds has always been important, but attention to the balance between program costs and administrative costs grows as budgets come under increasing pressures and the resources available for achieving federal grants’ goals become further constrained. Although looking at administrative costs may seem like a logical first step when identifying opportunities to reduce expenses in such a budgetary environment, our review identified a number of factors that hinder the comparability of administrative costs across grant programs. Differences in cost caps and definitions are among the most important of these factors and make comparisons across grant programs very challenging, particularly when comparing programs with diverse missions and objectives. Comparing dissimilar costs leads to inappropriate conclusions that may have a perverse impact on federal policy making.

Comparisons of costs may be appropriate when reviewing programs that fulfill similar missions or provide similar service. However, comparisons of administrative costs across grant programs that provide different services should be made with caution. Any comparisons of administrative cost data should consider variation in administrative cost caps and cost definitions.

Agency Comments and Our Evaluation

We provided a draft of this report to the Secretary of the Department of Health and Human Services and the Secretary of the Department of Housing and Urban Development. The Department of Health and Human Services had technical comments, which we incorporated as appropriate. The Department of Housing and Urban Development did not provide comments. We also provided an informational copy to the Director of the Office of Management and Budget.

We are sending this report to interested congressional committees, the Secretary of the Department of Health and Human Services, the Secretary of the Department of Housing and Urban Development, the Director of the Office of Management and Budget, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-6806 or irvings@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report examines (1) the extent to which selected federal agencies and grantees have mechanisms and guidance in place to distinguish between administrative and program costs and to facilitate the availability of these data to Congress and the public; and (2) the extent to which there are challenges that hinder the comparability of grant administrative cost data. To address these objectives, we selected two agencies for our review—the Departments of Health and Human Services (HHS) and Housing and Urban Development (HUD). HHS manages the largest share of federal grant making both in terms of grant obligation amount and the number of grant programs. We included HUD to obtain management Collectively, the perspectives on a different set of programs and issues.selected agencies provide diversity in the number of grant programs and grant obligations and management perspectives on administrative and program costs.

At each selected agency, we identified three programs that provided a combination of the high dollar grant obligation in fiscal year 2012 and different grant types, such as project and formula, as well as grantee type, including state and local government and nonprofit and for-profit entities.and Development Fund; (2) Head Start; and (3) Allergy, Immunology and Transplantation Research. At HUD we selected the following grant programs: (1) HOME Investment Partnerships Program; (2) Community Development Block Grant; and (3) Multifamily Housing Service Coordinators. There were certain programs that met the criterion of high grant obligation at each selected agency but we did not consider them for selection for one or more reasons, including: administrative features of the grant program that made them unique and distinctly atypical of the grants at these agencies or planned consolidation of the program that made the review less relevant.

At HHS we selected the following grant programs: (1) Child Care To determine the extent to which selected federal agencies and grantees have mechanisms and guidance in place to distinguish between administrative and program costs, we reviewed each program’s authorizing statutes and regulations, where applicable, program guidance, and grant documents. We interviewed agency officials responsible for each of the selected grant programs to understand how these programs collect grant administrative cost data, the type of guidance, training, and technical assistance they provide grantees, and their requirements and experiences with determining and reporting administrative costs. To inform our work on government-wide efforts to collect grant administrative cost information, we interviewed staff at the Office of Management and Budget’s (OMB) Office of Federal Financial Management, which oversees the financial management policy of the federal government.

To examine the extent to which there are challenges that hinder the comparability of grant administrative cost data we performed work at the primary recipient level. Based on fiscal year 2012 grant obligation data for selected grant programs to state and local governments from OMB’s Analytical Perspectives, we selected two states—Massachusetts, which receives a relatively high amount of federal grant funds and was in the top quarter of fiscal year 2012 federal grant obligations, and New Hampshire, which receives a relatively low amount of federal grant funds and was in the bottom quarter of fiscal year 2012 federal grant obligations. We then selected primary grant recipients within those states with the highest grant obligation for each selected grant program. We next confirmed USASpending grant obligation amounts with HHS and HUD officials. We subsequently replaced certain primary grant recipients that had met the criteria of highest grant obligation for each selected grant program within the selected states because we determined that USASpending did not fully or correctly identify the grantee. Although the results of our review are not generalizable to other grant programs in other agencies, they are indicative of the wide variation associated with the mechanisms and guidance for tracking grant administrative costs and the utility of these costs for program management.

We conducted a literature review to identify issues raised, including those in our previous reports as well as the Congressional Research Service and the Congressional Budget Office, related to grant administrative costs, grants management, and cost principles. Additionally, we reviewed research reports from research groups and state representative organizations that discuss grant administrative costs from the perspective of grantees. We reviewed relevant HHS and HUD websites and related agency documents to understand grant administrative costs guidance for selected grant programs.

We conducted this performance audit from January 2014 to December 2014 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.

Appendix II: Selected Grant Programs, Administrative Costs Caps, and Administrative Cost Definitions

Administrative cost cap 10%

Types of expenses included in administrative cost caps Includes program planning costs and salaries of participating jurisdiction’s staff who perform activities, including compliance, developing interagency agreements, monitoring of HOME-assisted housing, reporting to HUD, program evaluation, audit resolution, providing public information, and travel costs; third- party audit, legal and accounting services; rental and purchase of equipment, insurance, utilities, office supplies and office space; the costs of administering tenant-based rental assistance programs; and indirect costs.

Includes program planning costs and salaries of staff who perform activities, including providing information to the public, preparing budgets, monitoring and compliance, developing interagency agreements, preparing reports for HUD, audit resolution, program evaluation and supervising employees engaged in the same; travel costs incurred for official business; third-party legal, accounting and audit services; rental or purchase of equipment, insurance, utilities; office supplies and office space; and indirect costs.

No applicable regulatory or statutory definitions.

5% (15% for Indian tribes)

Includes salaries of administrative and implementation agency staff; costs related to planning, developing, and designing the program; public outreach and hearings; preparing the application; monitoring and reporting on program activities; coordinating with federal, state and local officials; official travel; accounting and audit services; rental and purchase of equipment, utilities, and office supplies; and indirect costs.

Includes costs related to overall management, including salaries of the executive director, personnel officer, fiscal officer/bookkeeper, payroll/insurance/property clerk, and janitor for administrative office space, and costs associated with volunteers carrying out administrative functions; fringe benefits, travel, transportation and training; expenses related to bookkeeping and payroll services, audits, and bonding; administrative office insurance, supplies, copy machines, postage, and utilities; and occupying, operating and maintaining space for administrative activities.

Indirect charges that typically include depreciation on buildings and equipment; costs of operating such facilities; salaries of executive officers attributable to administrative functions; salaries of clerical staff; office supplies; and library expenses.

AITR grantees do not have statutory or individual program administrative cost caps. However, OMB Circular No. A-21 (now codified in Title 2 of the Code of Federal Regulations) imposes a 26 percent cap on administrative (but not facilities) expenses for universities. Costs for administration are limited to 26 percent of total direct costs.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Peter Del Toro (Assistant Director), Keith O’Brien (Analyst-in-Charge), Gerard S. Burke, Stanley J. Czerwinski, Catherine Myrick, Carol L. Patey, and George H. Schadler III made key contributions. Also contributing to this report were Thomas M. Beall, Amy R. Bowser, Robert L. Gebhart, Josephine Perez, and Robert Robinson.