EPA administers and oversees grants primarily through the Office of Grants and Debarment, 10 program offices in headquarters, and program offices and grants management offices in EPA’s 10 regional offices. Figure 1 shows EPA’s key offices involved in grants activities for headquarters and the regions. (See app. II for a map of EPA’s regional office locations.) The management of EPA’s grants program is a cooperative effort involving the Office of Administration and Resources Management’s Office of Grants and Debarment, program offices in headquarters, and grants management and program offices in the regions. The Office of Grants and Debarment develops grant policy and guidance. It also carries out certain types of administrative and financial functions for the grants approved by the headquarters program offices, such as awarding grants and overseeing the financial management of these grants. On the programmatic side, headquarters program offices establish and implement national policies for their grant programs, and set funding priorities. They are also responsible for the technical and programmatic oversight of their grants. In the regions, grants management offices carry out certain administrative and financial functions for the grants, such as awarding grants approved by the regional program offices, while the regional program staff provide technical and programmatic oversight of their grantees. As of June 2003, 109 grants specialists in the Office of Grants and Debarment and the regional grants management offices were largely responsible for administrative and financial grant functions. Furthermore, 1,835 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 generally have other primary responsibilities, such as using the scientific and technical expertise for which they were hired. In fiscal year 2002, EPA took 8,070 grant actions totaling about $4.2 billion. These awards were made to six main categories of recipients as shown in figure 2. EPA offers two types of grants—nondiscretionary and discretionary: Nondiscretionary grants support water infrastructure projects, such as the drinking water and clean water state revolving fund programs, and continuing environmental programs, such as the Clean Air Program for monitoring and enforcing Clean Air Act regulations. For these grants, Congress directs awards to one or more classes of prospective recipients who meet specific eligibility criteria; the grants are often awarded on the basis of formulas prescribed by law or agency regulation. In fiscal year 2002, EPA awarded about $3.5 billion in nondiscretionary grants. EPA awarded these grants primarily to states or other governmental entities. 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. In fiscal year 2002, EPA awarded about $719 million in discretionary grants. EPA awarded discretionary grants primarily to nonprofit organizations, universities, and government entities. The grant process has the following four phases: Preaward. EPA reviews the application paperwork and makes an award decision. Award. EPA prepares the grant documents and instructs the grantee on technical requirements, and the grantee signs an agreement to comply with all requirements. Postaward. After awarding the grant, EPA provides technical assistance, oversees the work, and provides payments to the grantee; the grantee completes the work, and the project ends. Closeout of the award. EPA ensures that all technical work and administrative requirements have been completed; EPA prepares closeout documents and notifies the grantee that the grant is completed. EPA’s grantees are subject to the same type of financial management oversight as the recipients of other federal assistance. Specifically, the Single Audit Act requires grantees to have an audit of their financial statements and federal awards or a program specific audit if they spend $300,000 or more in federal awards in a fiscal year. Grantees submit these audits to a central clearinghouse operated by the Bureau of the Census, which then forwards the audit findings to the appropriate agency for any necessary action. However, the act does not cover all grants and all aspects of grants management and, therefore, agencies must take additional steps to ensure that federal funds are spent appropriately. In addition, EPA conducts in-depth reviews to analyze grantees’ compliance with grant regulations and specific grant requirements. Furthermore, to determine how well offices and regions oversee grantees, EPA conducts three types of internal management reviews that address grants management: (1) Management Oversight Reviews, which assess grants management activities in regional offices; (2) Management Effectiveness Reviews, which are self-assessments of grants management activities performed by EPA’s headquarters and regional offices; and (3) Post-Award Validation Reviews, which assess the effectiveness of initiatives EPA has taken to improve oversight efforts. EPA has faced persistent problems in managing its grants. EPA’s Inspector General testified before Congress in 1996 and again in 1999 that EPA did not fulfill its obligation to properly monitor grants. Acknowledging these problems, EPA identified oversight, including grant closeouts, as a material weakness—an accounting and internal control system weakness that the EPA Administrator must report to the President and Congress. EPA’s fiscal year 1999 Federal Managers’ Financial Integrity Act report indicated that this oversight material weakness had been corrected, but the Inspector General testified that the weakness continued. In 2002, the Inspector General again recommended that EPA designate grants management as a material weakness. The Office of Management and Budget (OMB) also recommended in 2002 that EPA designate grants management as a material weakness. In its fiscal year 2002 Annual Report, EPA ultimately decided to maintain this issue as an agency-level weakness, which is a lower level of risk than a material weakness. EPA reached this decision because it believes its ongoing corrective action efforts will help to resolve outstanding grants management challenges. However, in adding EPA’s grants management to our list of EPA’s major management challenges in January 2003, we signaled our concern that EPA has not yet taken sufficient action to ensure that it can manage its grants effectively. We identified four key challenges that EPA continues to face in managing its grants despite efforts to address them. These challenges are (1) selecting the most qualified grant applicants, (2) effectively overseeing grantees, (3) measuring the results of grants, and (4) effectively managing grant staff and resources. In recent years, EPA took a series of actions to address these challenges by, among other things, issuing policies on competition and oversight, conducting training for project officers and nonprofit organizations, and developing a new data system for grants management. However, these actions had mixed results because of the complexity of the problems, weaknesses in design and implementation, and insufficient management attention. EPA has not always ensured that the most qualified applicants receive grant awards. For discretionary grants, the agency requires project officers to evaluate grant applications and recommend funding those that will most effectively contribute to EPA’s program objectives and priorities. But project officers have not always performed all of the steps required to review grant applications. According to a 2003 Inspector General report, project officers did not always, among other things, (1) ensure a link between the project funded and EPA’s mission, (2) assess the probability of success prior to the award, and (3) determine the reasonableness of proposed project costs. As a result, EPA may have lost the opportunity to fund other projects that could have better achieved its mission. The Federal Grant and Cooperative Agreement Act of 1977 encourages agencies to use competition in awarding grants. To encourage competition, EPA issued a grants competition policy in 1995. However, EPA’s policy did not result in meaningful competition throughout the agency, according to EPA officials. Furthermore, EPA’s own internal management reviews and a 2001 Inspector General report found that EPA has not always encouraged competition. Finally, EPA has not always engaged in widespread solicitation when it could be beneficial to do so. Widespread solicitation would provide greater assurance that EPA receives proposals from a variety of eligible and highly qualified applicants who otherwise may not have known about grant opportunities. According to a 2001 EPA Inspector General report, program officials indicated that widespread solicitation was not necessary because “word gets out” to eligible applicants. Applicants often sent their proposals directly to these program officials, who funded them using “uniquely qualified” as the justification for a noncompetitive award. This procedure created the appearance of preferential treatment by not offering the same opportunities to all potential applicants. In addition, the agency provided incomplete or inconsistent public information on its grant programs in the Catalog of Federal Domestic Assistance. Therefore, potential applicants may not have been adequately informed of funding opportunities. EPA has not always effectively overseen grant recipients despite efforts to improve monitoring. To address oversight problems, EPA issued a series of policies starting in 1998. However, these oversight policies have had mixed results in addressing this challenge. EPA’s oversight efforts have not always been proactive or well documented, or ensured compliance with grant requirements and objectives. According to EPA’s 2001 internal management reviews, project officers had minimal contact with grantees, limiting their oversight to reviewing grantees’ progress reports. However, project officers did not proactively ensure the recipient submitted the reports on time or that the reports included the required financial information. According to our analysis of EPA’s 2002 in-depth reviews, 15 percent of the reviews identified a problem with grantees’ submitting complete progress reports on time. Furthermore, EPA’s guidance emphasizes the importance of documenting oversight efforts, in part, because a lack of documentation raises questions about the extent of the monitoring conducted. However, project officers and grants specialists have not always documented their monitoring activities. According to a 2002 EPA internal management review, for example, one grants management office developed a form to make it easier to ensure monitoring activities were completed, but the form was missing from 50 percent of the grant files reviewed. Even when staff used the monitoring form, they did not always complete it.