EPA administers and oversees grants primarily through the Office of Grants and Debarment in the Office of Administration and Resources Management, 10 program offices in headquarters, and program offices and grants management offices in EPA’s 10 regional offices. Figure 1 shows the key EPA offices involved in grants activities for headquarters and regions, and figure 2 shows the states covered by the 10 regional offices. The Office of Grants and Debarment develops national grant policy and guidance. This office also carries out certain types of administrative and financial functions for the grants approved by program offices, such as awarding headquarter grants and overseeing the financial management of program office and regional grants. On the programmatic side, national program managers are responsible for establishing and implementing national policies for their grant programs, for setting funding priorities, and for identifying specific environmental results from grant programs. They are also responsible for technical and programmatic oversight of headquarter grants. Regional grants management offices provide administrative management for regional grants, while regional program offices provide technical and programmatic oversight. Both headquarters and regional program offices conduct grant competitions. EPA has designated officials—referred to as senior resource officials—who are typically deputy assistant administrators in program offices and assistant regional administrators. These senior resource officials are in charge of strengthening agencywide fiscal resource management while also ensuring compliance with laws and regulations and are responsible for effective grants management within their units. As of September 30, 2005, 119 grant specialists in the Office of Grants and Debarment, and the regional grants management offices, were largely responsible for administrative and financial grant functions. Furthermore, 2,064 project officers were actively managing grants in headquarters and regional program offices. These project officers are responsible for the technical and programmatic management of grants. Unlike grant specialists, however, project officers also have nongrant responsibilities, such as using the scientific and technical expertise for which they were hired. In fiscal year 2005, EPA took 6,728 grant actions involving funds totaling about $4 billion. These awards were made to six main categories of recipients, as shown in figure 3. EPA offers three types of grants—discretionary, nondiscretionary, and continuing environmental grants: Discretionary grants fund a variety of activities, such as environmental research and training. EPA has the discretion to independently determine the recipients and funding levels for these grants. EPA has awarded these grants primarily to state and local governments, nonprofit organizations, universities, and Native American tribes. In fiscal year 2005, EPA awarded about $644 million in discretionary grants. Nondiscretionary grants are awarded primarily to state and local governments and support water infrastructure projects, such as the drinking water and clean water state revolving fund programs. For these grants, Congress directs awards to one or more classes of prospective recipients who meet specific eligibility criteria, or the grants are often awarded on the basis of formulas prescribed by law or agency regulation. In fiscal year 2005, EPA awarded about $2.4 billion in nondiscretionary grants. Continuing environmental program grants contain both nondiscretionary (formula) and discretionary features. These grants are nondiscretionary in the sense that (1) they are awarded noncompetitively to the same government units to support ongoing state, tribal, and local programs that do not change substantially over time, and (2) allotments of funds are initially made on the basis of factors contained in statute, regulation, or agency guidance. These grants are also discretionary in the sense that allotments are not entitlements, and EPA exercises judgment in determining what the final award amount should be. In fiscal year 2005, EPA awarded about $1 billion in grants for continuing environmental programs. In this report, we focused on two EPA programs under the Clean Water Act: Wetland Program Development Grants (Wetland grants) Wetlands are areas where water covers the soil, or is present either at or near the surface of the soil throughout the year or for various portions of the year, including during the growing season. Wetlands, such as bogs, swamps, and marshes, support a number of valuable functions—controlling floods, improving water quality, and providing wildlife habitat, among other things. The wetland grants provide applicants with an opportunity to carry out projects to develop and refine comprehensive wetland programs. The authority for the program is under section 104(b) (3) of the Clean Water Act. Grant funding must be used to improve the wetlands program by conducting or promoting the acceleration of research and studies relating to the causes, effects, and other aspects of water pollution. Wetland grants provide states, tribes, local governments, interstate agencies, intertribal consortia, nonprofits, and nongovernmental organizations an opportunity to carry out wetland projects and programs. Wetland grants are discretionary grants. Nonpoint Source Management Program (Nonpoint source grants). Nonpoint source pollution is pollution that does not have a well-defined source but instead originates from a number of sources, such as acid mine drainage, agricultural runoff, and roads and highways. Under section 319(h) of the Clean Water Act, EPA makes grants to states, territories, and Indian tribes to support a wide variety of activities, including technical and financial assistance, education, training, technology transfer, demonstration projects, and monitoring. Nonpoint source grants are continuing environmental program grants. Grants from these two programs can be incorporated into the National Environmental Performance Partnership System, which was established in response to state needs for greater flexibility in using and managing their continuing grant funds. Under this system, states may enter Performance Partnership Agreements with EPA and into Performance Partnership Grants. The agreements set out jointly developed priorities and protection strategies, including innovative solutions for addressing water, air, and waste problems. The partnership grants allow states to combine continuing environmental program grant funds to implement those solutions. States can also enter into Performance Partnership Grants without a Performance Partnership Agreement. Under traditional continuing environmental program grants, states received funds to implement particular waste, air, water or other program—such funding can only be spent on activities that fall within the statutory and regulatory parameters of that program. Under Performance Partnership Grants, states can combine up to 21 separate grant programs into one award, and move funds from one media, such as air, to another. Both the wetland and nonpoint source grants are under the auspices of EPA’s Office of Water in headquarters, but grants under these programs are carried out by water program staff in regional offices. Moreover, in its national guidance, the Office of Water states that it is committed to accomplishing the goals that the Office of Grants and Debarment has identified in its Grants Management Plan. To do this, for example, the Office of Water provided regions with information on revised competition and environmental results policies. EPA has strengthened its award process by, among other things, (1) expanding the use of competition to select the most qualified applicants and (2) issuing new policies and guidance to improve the awarding of grants. However, EPA’s internal reviews of program and regional offices have found weaknesses in documenting the review of grantees’ cost proposals. We also found this weakness in one of the three regions we visited. This documentation weakness may hinder EPA’s ability to ensure the reasonableness of its grantees’ expenditure of federal funds. Because of the continuing problems with documenting cost reviews, EPA is reexamining its cost review policy for grants. To promote widespread competition for grants, in September 2002, EPA issued a policy that for the first time required competition for many discretionary grants. Before 2002, even though EPA had a competition policy, it did not compete grants extensively or provide widespread notification of upcoming grant opportunities. EPA’s 2002 policy was designed to promote competition in awarding grants to the “maximum extent practicable” and to ensure that the competitive process was “fair and open.” This policy represented a major cultural shift for EPA managers and staff, requiring EPA staff to take a more planned, rigorous approach to awarding grants. Specifically, the policy was binding on managers and staff throughout the agency; required EPA staff to determine evaluation criteria for grant solicitations and publish a grant announcement at least 60 days before the application deadline; and created the position of a senior-level competition advocate for grants. The advocate oversees the policy’s implementation and compliance and evaluates its effectiveness. According to EPA’s Inspector General, the 2002 policy was a “positive step” toward promoting competition, and competitions under the policy were generally fair and open. Specifically, for the 38 grants that the Inspector General reviewed, EPA had (1) published an announcement soliciting proposals, (2) written procedures to ensure an objective and unbiased process for reviewing and evaluating applications, and (3) selected recipients according to reviewers’ recommendations. In 2004, EPA’s grants competition advocate reviewed the policy, as required, and reported, among other things, that steps should be taken to improve justifications for not competing certain grants by (1) increasing review and approval requirements for exceptions to competition and (2) clarifying the language in the policy to ensure appropriate use of exceptions. The advocate also found that the threshold for requiring competition for grants of $75,000 or more in the 2002 policy was too high. In response, EPA issued a revised competition policy, effective January 2005. It enhanced competition by, among other things, increasing review and approval requirements for justifying exceptions and clarifying the language to ensure appropriate use of these justifications; reducing the threshold for competition from $75,000 to $15,000; and strengthening requirements for documenting the competition process and results. In addition, EPA added (1) conflict-of-interest provisions to increase awareness of situations that could arise for applicants, reviewers, and others involved in competition matters; and (2) dispute procedures.