Prior to CMIA, the timing of federal funds transfers to states was governed by the Intergovernmental Cooperation Act, Public Law 90-577. That law allowed a state to retain for its own purposes any interest earned on federal funds transferred to it “pending its disbursement for program purposes.” The House Committee on Government Operations, when considering the CMIA legislation in 1990, noted that the Intergovernmental Cooperation Act had been “the source of continuing friction between the states and the Federal Government.” The House Committee stated that under the Intergovernmental Cooperation Act, “the States need not account to the Federal Government for interest earned on Federal funds disbursed to the states prior to payment of program beneficiaries.” Several years earlier, in 1988, when the Senate Committee on Governmental Affairs had looked into this matter, it found that as a result, “some administering departments at the state level were drawing down Federal funds too far in advance of need, costing the Federal Government foregone interest.” Both committees pointed out, however, that whenever the federal government complained that states profited unduly from early drawdowns, states would recite “numerous instances where they lose interest opportunities because the Federal Government is slow to reimburse them for moneys the states advance to fund Federal programs.” At the request of the Senate Committee, a Joint State/Federal Cash Management Reform Task Force, comprised of financial management representatives from six states and six federal agencies, including OMB and Treasury, was formed in 1983 to seek fair and equitable solutions to the aforementioned problems relating to the transfer of funds between the federal government and the states. Its work contributed to passage of CMIA in October 1990. The House Committee expected that CMIA would “provide a fair and equitable resolution to those differences.” It would do so, according to the committee, by establishing “equitable cash transfer procedures, procedures whereby neither the Federal nor state governments profit or suffer financially due to such transfers.” CMIA, as enacted in 1990, requires the federal government to schedule transfers of funds to states “so as to minimize the time elapsing between transfer of funds from the United States Treasury and the issuance or redemption of checks, warrants, or payments by other means by a state,” and expects states to “minimize the time elapsing between transfer of funds from the United States Treasury and the issuance or redemption of checks, warrants, or payments by other means for program purposes.” To accomplish this goal, CMIA directed the Secretary of the Treasury to negotiate agreements with the individual states to specify procedures for carrying out transfers of funds with that state. It authorized the Secretary to issue regulations establishing such procedures for states with which the Secretary has been unable to reach agreement. The Senate Governmental Affairs Committee explained when considering a 1992 amendment to CMIA that the act is “meant to provide a self-enforcing incentive for both state and Federal agencies to time the transfer of Federal funds as closely as possible to their actual disbursement for program purposes, so that neither... will lose the time value of their funds.” The “self-enforcing incentive” that the Senate Committee refers to is the act’s interest liability provision. States are required to pay interest to the United States on federal funds transferred to the state from the time those funds are deposited to the state’s account until the time the state uses the funds to redeem checks or warrants or make payments by other means for program purposes. If a state advances its own funds for program purposes prior to a transfer of federal funds, the state is entitled to interest from the United States from the time the state’s own funds are paid out to redeem checks or warrants, or make payments by other means, until the federal funds are deposited to the state’s bank account. CMIA requires each state to calculate any interest liabilities of the state and federal government and calls for an annual exchange of the net interest owed by either party. Other key requirements of the act and/or Treasuryrules and regulations are as follows: The Department of the Treasury must establish rules and regulations for implementing CMIA. States and FMS may enter into Treasury-State Agreements (TSAs) that outline, by program, the funding technique and the clearance patternstates will use to draw down funds from the federal government. If any state and FMS do not enter into such an agreement, FMS will designate the funding technique and the interest calculation method to be used by that state. States may claim reimbursement from Treasury annually for allowable direct costs relating to development and maintenance of clearance patterns and the calculation of interest. States must prepare and submit to FMS an annual report that summarizes by program the results of the interest calculation from drawdowns and may include any claims for reimbursement of allowable direct costs. The federal program agencies are required to (1) schedule transfers of funds to the states so as to minimize the time elapsing between the disbursement of federal funds from the U.S. Treasury and the issuance and redemption of checks, warrants, or payments by other means by a state and (2) upon Treasury’s request, review annual reports submitted by the states for reasonableness and accuracy. During fiscal year 1994 (which, for the majority of states, included 9 months of the states’ first fiscal year under CMIA), the federal government obligated over a reported $150 billion in federal funds to the states for programs covered under the act. (See table 1.) These programs were funded by the Departments of Health and Human Services (HHS), Labor, Education, Agriculture, Transportation and the Social Security Administration. We did not independently verify the amounts in table 1. Our objective was to report, as required under the act, on CMIA’s implementation. Specifically, we determined whether as required under the act, the Department of the Treasury developed rules and regulations for implementing the act; the Treasury-State Agreements (TSAs) were negotiated in accordance with CMIA provisions and Treasury rules and regulations; the states we visited followed the funding techniques and clearance patterns approved by FMS in requesting and transferring funds; for the states we visited, interest was assessed to the federal government and states, in accordance with CMIA and Treasury rules and regulations; claims submitted by the states we visited for reimbursement of allowable direct costs incurred in implementing CMIA were prepared in accordance with Treasury regulations; the states submitted all required annual reports to FMS; and the federal program agencies (1) scheduled transfers of funds to the states so as to minimize the time elapsing between the disbursement of federal funds from the U.S. Treasury and the issuance and redemption of checks, warrants, or payments by other means by a state and (2) upon Treasury’s request, reviewed annual reports submitted by the states for reasonableness and accuracy. To accomplish these objectives, we (1) performed walkthroughs of how funds flow from the federal government to the states and how the states distribute the funds for program purposes, (2) interviewed state officials, (3) tested transactions, (4) interviewed state auditors, and (5) reviewed Single Audit Act reports. The Single Audit Act of 1984 requires each state or local government that receives $100,000 or more in federal financial assistance in any given year to have an annual comprehensive single audit of its financial operations, including tests to determine whether the entity complied with laws and regulations that may have a material effect on its financial statements or its major programs, as defined in the Single Audit Act. The Office of Management and Budget (OMB) publishes guidance to assist auditors in planning audits under the Single Audit Act of 1984. We also reviewed Treasury’s regulations, implementation plans, and procedures for reviewing TSAs and annual reports. In addition, we sent a questionnaire to all states to obtain their views on CMIA implementation and summarized the results of the 54 completed and returned questionnaires. To determine if the federal program agencies and the states were properly implementing CMIA, we also documented systems used to process selected transactions of eight major programs (National School Lunch, Unemployment Insurance, Chapter 1-Local Education, Family Support Payments to States, Social Services Block Grant, Medical Assistance, Highway Planning and Construction, and Supplemental Security Income). These programs were selected on the basis of federal funding levels and the amount of interest liabilities incurred during the first year of CMIA implementation. It was not part of our scope to assess the adequacy of the accounting systems states and federal program agencies used to carry out their CMIA requirements. The period covered by the audit was the states’ 1994 fiscal year, which, for almost all of the states, was the period from July 1, 1993 through June 30, 1994. The first required annual reports were due by December 31, 1994, and the first interest exchange between the states and the federal government occurred on or about March 1, 1995. The 12 states selected for detailed audit work were chosen primarily because they received relatively large amounts of federal funds, incurred comparatively large federal or state interest liabilities, and, in some cases, were denied interest and direct costs reimbursement claims submitted to FMS. We included states that reported interest liabilities to or from the federal government (California, Colorado, Florida, Indiana, Maryland, New York, Ohio, Pennsylvania, Texas, and Tennessee) and states that reported no state or federal interest liabilities (District of Columbia and Georgia). We also visited the Departments of Health and Human Services, Labor, Education, Agriculture, Transportation and the Social Security Administration because they process requests for funds for the programs we selected for audit and review federal interest liabilities relating to these programs. We conducted our audit between April and September 1995 at 12 states, 6 federal program agencies, and FMS. We performed our work in accordance with generally accepted government auditing standards.