Federal and State Actions to Address Municipal Fiscal Crises

Congress has provided assistance to municipalities in fiscal crisis by  using a variety of approaches on a case-by-case basis. Edward Byrne Memorial Justice Assistance Grant Program (JAG)  administered by the Department of Justice (Justice). Reductions in Human Capital Capacity Affected the Ability of Municipalities to Manage Federal Grants, but the Impact Varied

All four municipalities experienced reductions in their human capital  capacity due to fiscal crisis, but the effect of those reductions on the  management of selected grants varied. According to Detroit officials, it was  difficult for the staff that remained to carry out all of the department’s  grant compliance and oversight responsibilities. A lack  of employees with the skills to process procurement requests and  administer grants caused some grant funds from FTA to remain unspent  in accounts. Decreased Financial Capacity Reduced Some Municipalities’ Ability to Obtain Federal Grants

A lack of financial capacity at two of the municipalities we reviewed—Flint  and Stockton—reduced their ability to apply for federal grants that call for  local resource investments or maintenance of effort provisions. Flint and Stockton did not apply for  competitive federal grants with maintenance of effort requirements  because their city governments were unable to ensure that they would  maintain nonfederal funding at current levels. Limited Organizational Capacity, Demonstrated in Outdated Information Technology, Hampered Municipalities’ Ability to Oversee and Report on Federal Grants

In two municipalities we reviewed, a chronic lack of investment in  organizational capacity— specifically in information technology (IT)  systems—challenged the ability of these communities to oversee and  report on grants in an accurate and timely way. In Detroit’s 2011 and 2012 single audit reports, external  auditors found IT deficiencies in every federal grant program they  reviewed.general fund had to cover disallowed costs and federal grant de- obligations. In addition to taking steps that directly improve federal grant  management—such as consolidating grant management processes and  working with local nonprofits to apply for federal grants—some  municipalities also recognized the need for making improvements to  systemic financial and organization problems to set a proper foundation  for sound grant management. It is important to note that agencies use these  monitoring procedures for all grantees, not just those in fiscal crisis. All Eight Grant Programs Consistently Used or Had Recently Implemented a Risk-based Approach to Monitoring and Oversight

Four of the programs—CDBG, HOME, JAG, and COPS—consistently  assessed risk during this period when determining the amount and type of  oversight they would provide their grantees. These programs considered a variety of risk factors. Some Selected Municipalities Did Not Implement the Required Federal Corrective Actions to Resolve Deficiencies, Resulting in Continued Grant Management Problems

When program officials found deficiencies through monitoring, they  typically required corrective actions from the grantee; however, selected  municipalities did not always take corrective actions to address these  deficiencies. Federal Actions Assisted Municipalities in Fiscal Crisis, but Efforts to Share Lessons Learned Are Limited

		The White House Working Group on Detroit and Selected Agencies Improved Collaboration with Municipalities

Both the White House Working Group on Detroit and individual federal  agencies took steps to improve collaboration with, and assistance to,  municipalities experiencing fiscal crisis. For  example, HUD provided in-depth technical assistance to help Flint and  Detroit administer its grant programs. Recommendation for Executive Action

We recommend that the Director of the Office of Management and  Budget direct, as appropriate, federal agencies involved with the White  House Working Group on Detroit, to collect good practices and lessons  learned from their efforts to assist Detroit during its fiscal crisis and share  them with other federal agencies and local governments. We are sending copies of this report to the heads of the Departments of  Homeland Security, Housing and Urban Development, Justice,  Transportation, Treasury, and OMB as well as interested congressional  committees and other interested parties, including the state and local  officials we contacted for this review. Appendix I: Objectives, Scope, and Methodology

This report (1) identifies challenges that selected municipalities in fiscal  crisis have experienced when managing federal grants and steps those  municipalities took to address the challenges; (2) reviews the internal  controls, monitoring, and oversight processes that federal agencies used  to oversee selected grant programs to several municipalities in fiscal  crisis; and (3) examines actions the White House Working Group on  Detroit and selected federal agencies took to assist selected  municipalities in fiscal crisis. To conduct this work, we focused on four municipalities in fiscal crisis as  case examples: Detroit, Michigan; Flint, Michigan; Camden, New Jersey;  and Stockton, California. To examine the actions the White House Working Group on Detroit and  selected federal agencies took to assist selected municipalities in fiscal  crisis, we interviewed local, state, and federal officials involved with grant  management for the four selected municipalities and eight selected grant  programs.
Why GAO Did This Study

Similar to the federal and state sectors, local governments are facing long-term fiscal pressures. In cases of fiscal crisis, municipalities may be required to make significant cuts to personnel that may impact their oversight of federal grants. GAO was asked to review the oversight of federal grants received by municipalities in fiscal crisis. This report (1) identifies challenges that selected municipalities in fiscal crisis experienced when managing federal grants and steps taken by those municipalities; (2) reviews the monitoring processes that federal agencies used to oversee selected grants to selected municipalities; and (3) examines actions the White House Working Group on Detroit and selected federal agencies took to assist municipalities in fiscal crisis.
For this review, GAO conducted site visits to four municipalities in fiscal crisis: Detroit, Michigan; Flint, Michigan; Camden, New Jersey; and Stockton, California. GAO focused on eight grant programs administered by DHS, HUD, Justice, and DOT. The basis for selecting these grant programs included dollar amount and grant type. GAO reviewed grant oversight policies and actions for fiscal years 2009-2013 and interviewed local, state, and federal officials, including those at Treasury and OMB.

What GAO Found

Grant management challenges experienced by municipalities in fiscal crisis. The diminished capacity of selected municipalities in fiscal crisis hindered their ability to manage federal grants in several ways. First, reductions in human capital capacity through the loss of staff greatly reduced the ability of some cities to carry out grant compliance and oversight responsibilities. Second, the loss of human capital capacity also led to grant management skills gaps. For example, in Detroit, Michigan, loss and turnover of staff with the skills to properly draw down funds caused some grant funds to remain unspent. Third, decreased financial capacity reduced some municipalities' ability to obtain federal grants. For example, both Flint, Michigan, and Stockton, California, did not apply for competitive federal grants with maintenance of effort requirements because their city governments were unable to ensure that they would maintain non-federal funding at current levels. Fourth, outdated information technology (IT) systems hampered municipalities' ability to oversee and report on federal grants. For example, Detroit's 2011 and 2012 single audits identified IT deficiencies in every federal grant program reviewed, which led to the city having to pay back some federal grant funds. In response to these challenges, the four municipalities GAO reviewed have taken a number of actions to improve their management of federal grants including centralizing their grant management processes and partnering with local nonprofits to apply for grants.
Federal grant monitoring and oversight processes. The eight grant programs GAO reviewed used, or had recently implemented, a risk-based approach to grant monitoring and oversight. These approaches applied to all grantees not just those in fiscal crisis. The grant programs administered by the Department of Housing and Urban Development (HUD) and the Department of Justice (Justice) consistently assessed grantees against a variety of risk factors to help program officials determine the need for more in-depth monitoring actions such as onsite monitoring visits. When program officials at HUD, Justice, the Department of Transportation (DOT), and the Department of Homeland Security (DHS) found deficiencies through monitoring actions, they required corrective actions from their grantees. However, in some cases, local grantees did not implement these corrective actions, resulting in continued grant management problems. In such cases, federal program officials took actions such as increasing the level of financial oversight or withholding grant funds until the grantee improved its grant management processes.
Actions taken to assist municipalities in fiscal crisis. The White House Working Group on Detroit—an interagency group assembled by the White House to assist Detroit—as well as selected agencies took a variety of actions to aid municipalities in fiscal crisis. These actions included improving collaboration between selected municipalities and federal agencies, providing flexibilities to help grantees meet grant requirements, and offering direct technical assistance. However, neither individual agencies nor the Office of Management and Budget (OMB), which was involved in the working group and has an interagency leadership role in achieving administration policy, have formal plans to document and share lessons learned from the efforts to assist Detroit with other federal agencies and local governments.

What GAO Recommends

GAO recommends that OMB direct federal agencies involved in the White House Working Group on Detroit to document and share lessons learned from federal efforts to assist Detroit. OMB neither agreed nor disagreed with this recommendation.