The CMIA is critically important to the federal government’s efforts to promote accountability in the use of federal grant funds. Currently administered by Treasury’s Financial Management Service (FMS), the CMIA is the cornerstone of cash management policy for federal grants to the states. Specifically, the CMIA requires the Secretary of the Treasury, along with the states, to establish equitable funds transfer procedures so that federal financial assistance is paid to states in a timely manner and funds are not withdrawn from Treasury earlier than they are needed by the states for grant program purposes. The act requires that states pay interest to the federal government if they draw down funds in advance of need and requires the federal government to pay interest to states if federal program agencies do not make program payments in a timely manner. According to Treasury regulations implementing the CMIA, funding techniques for federal financial assistance to the states should be efficient and minimize the exchange of interest between federal agencies and the states. Various funding techniques can be agreed to between Treasury and the states, including cash advance funding, whereby the federal program agency transfers the actual amount of federal funds to a state prior to the day the state actually pays the funds out of its own account. The limit on such cash advance funding is 3 business days prior to payout. Before the terrorist attacks of September 11, 2001, the Department of Justice (Justice) managed several grants designed to enhance the capability of state and local first responders to handle incidents involving nuclear, biological, and chemical terrorism. Since 1999, these programs have grown dramatically. In March 2003, responsibility for these grant programs shifted to DHS, and they continued to grow. Initially, DHS provided some of these grants directly to local government entities; however, the requirements were changed so that grants were awarded first to states and then passed through to local governments and other subgrantees. Despite increased funding, many local governments—cities in particular—complained that they were not receiving the funds that they expected and could not disburse them as fast as they wanted. In response to complaints about delays in the disbursement of first responder grants, on March 15, 2004, the Secretary of the Department of Homeland Security established the HSAC Task Force on State and Local Homeland Security Funding. The task force’s objective was to examine the homeland security grant funding process and provide recommendations to expedite the flow of homeland security funds to those responsible for preventing and responding to acts of terrorism. The task force recommended, among other things, that Congress exempt certain DHS homeland security grants for fiscal year 2005 from the CMIA in order to allow funds to be provided to state and municipal entities up to 120 days in advance of expenditure. The task force indicated that more flexibility was needed in providing grant funding to first responders because, in some instances, the 3-day time frame for receiving grant funds prior to making payments was insufficient to prevent municipal jurisdictions from having to make payments to vendors in advance of receiving the DHS grant funds. In other cases, the municipal jurisdictions required cash on hand in their municipal treasuries prior to commencing the procurement process. Subsequent to the task force’s recommendations, Congress exempted for fiscal year 2005 certain DHS first responder grant programs from the provision of the CMIA that limits the extent to which grantees can hold federal funds prior to payout by requiring federal agencies and states to minimize the time elapsing between transfer of funds from Treasury and payment by the states. In fiscal year 2006, this exemption was made permanent. Importantly, the CMIA exemption only pertains to the requirement to minimize the time elapsing between transfer of funds from Treasury and payments for program purposes. The CMIA exemption did not exempt certain first responder grant programs from the other provisions of the CMIA which address interest payments and accountability. To implement the CMIA exemption, DHS’s Program Guidelines and Application Kit for the Fiscal Year 2005 Homeland Security Grant Program (HSGP) and guidance for certain other homeland security first responder grants state that grantees and subgrantees will be permitted to draw down funds up to 120 days prior to expenditure or disbursement. For the majority of the grant programs, the guidance requires all federal funding to go to state grantees prior to being passed through to local government and other subgrantees, and requires both grantees and subgrantees to place funds received in an interest-bearing account. The guidance states that both grantees and subgrantees must pay interest on funding advances in accordance with federal regulations. In addition, according to the guidance, state grantees are subject to the interest requirements of the CMIA and its implementing regulations. The guidance states that interest under the CMIA will accrue from the time federal funds are credited to a state account until the time the state pays out the funds to a subgrantee or otherwise for program purposes. In January 2006, DHS’s Preparedness Directorate issued its Financial Management Guide. The guide is intended to be used as a financial policy reference for all fiscal year 2006 and future first responder grants. Consistent with DHS’s fiscal year 2005 guidance for the HSGP and certain other first responder programs, the guide states that grant recipients may elect to draw down funds up to 120 days prior to expenditure or disbursement and that state grantees are subject to the interest requirements of the CMIA. The guide further states that all local units of government must account for interest earned on federal grant funds and remit such interest to appropriate federal agencies. To assess whether the CMIA provision that limits the extent to which grantees can hold federal funds before payout, prior to its exemption for certain DHS first responder grants in fiscal year 2005, had prevented first responders from receiving DHS grant funds when such funds were needed, we interviewed key officials from 13 SAAs. These SAAs involved states from most geographic areas of the country and, when taken together, were awarded about 40 percent of DHS’s first responder grants that were subject to the CMIA exemption in fiscal year 2005. In addition, we interviewed key officials and obtained and analyzed pertinent documents from nine national associations which represent state and local governmental entities including the National Governors Association and the U.S. Conference of Mayors. We also reviewed the key report issued by the HSAC Task Force, A Report from the Task Force on State and Local Homeland Security Funding, and reports issued by DHS’s Inspector General. To identify key fiscal and accountability implications associated with the CMIA exemption for certain DHS first responder grant programs, we reviewed the CMIA and Treasury’s implementing regulations, the CMIA exemption for certain first responder grants, DHS’s program guidance for those grants, and GAO’s prior report covering the implementation of the CMIA. In addition, we interviewed key officials and obtained and analyzed pertinent documents from DHS, Treasury, OMB, and Justice, all of which are responsible to varying degrees for administering or overseeing the implementation of the CMIA or various aspects of DHS’s first responder grant programs. We also reviewed OMB Circular No. A-133, Audits of States, Local Governments, and Non-Profit Organizations, and OMB’s 2005 and 2006 Compliance Supplements, which comprise the current key guidance used by auditors to conduct single audits covering federal grant programs. Our work was performed in accordance with generally accepted government auditing standards from August 2005 through July 2006. In responding to a draft of our report, DHS stated that it would take the recommendations made in the draft report under advisement and would provide a detailed response to appropriate congressional committees and OMB approximately 60 days after release of the report, consistent with the reporting requirements of 31 U.S.C. Part 720. Treasury stated that it agreed with our conclusion that the requirements of the CMIA did not prevent grantees from receiving grant funds when needed. Both Treasury and OMB staff provided technical comments that have been addressed as appropriate in this report. We found no substantial evidence that the CMIA provision that limits the extent to which grantees can hold federal funds before payout, prior to its exemption for certain first responder grants in fiscal year 2005, had prevented first responders from receiving DHS grant funds when such funds were needed. Specifically, the majority of SAAs we contacted did not cite the CMIA as a contributing factor to first responder funding delays, and the National Governors Association, U.S. Conference of Mayors, and other associations we contacted did not provide information that demonstrated that the CMIA prevented local governments and other subgrantees from receiving first responder grant funding when they needed it. In addition, according to a report prepared by the HSAC Task Force, numerous factors, only one of which was related to the CMIA, have been responsible for first responder funding delays. Importantly, as we reported in February 2005, a major challenge in managing first responder grants is balancing two goals: minimizing the time it takes to distribute grant funds to state and local first responders, and ensuring appropriate planning and accountability for the effective use of grant funds. DHS’s approach to striking this balance has been evolving from experience, congressional action, and feedback from states and local governments. In March 2006, DHS reported that the CMIA exemption had been used only to a minimal extent and, according to a DHS official, DHS is meeting with SAAs and local governments to determine the impacts, if any, of the CMIA exemption on first responder grant funding. Of the 13 SAAs we contacted to determine whether the CMIA had prevented first responders from receiving DHS grant funds when such funds were needed, officials from six of these agencies told us that their state agency had experienced delays in getting first responder funds to subgrantees; however, most characterized the delays as not serious. Only one state agency official attributed the delays directly to the CMIA.