The grant agreement  stipulates the terms and conditions for the use of grant funds such as the  period of time funds are available for the grantee’s use, as noted by a start  and end date. The Payment Management  System (PMS), operated by HHS, went online in 1984 and, as of 2006, was  the largest of the nine civilian federal payment systems. Closeout procedures ensure that  grantees have met all financial requirements, provided their final reports,  and returned any unexpended balances. In this report, we refer to grants  that were not closed after their end date as “expired” grants and PMS grant  accounts that remained open after the grant’s end date as “expired grant  accounts.”
PMS issues a quarterly report to its customers, referred to as the “closeout  report,” listing expired grant accounts that remain open, and for each  account includes data on the funds made available and the amount of  funds disbursed (i.e., “drawn down” or “charged”). Undisbursed Balances in Expired Grant Accounts in PMS Were about $1 Billion during 2006

In our review of the closeout data for expired grants that executed  payments through HHS’s PMS, we found the quarterly amount of  undisbursed funding reported as remaining in expired grant accounts  increased from about $600 million in 2003 to about $1 billion during 2006. These balances typically represented about 1 percent of the total funds  made available for all expired grants in PMS during this period. Lastly, we found that over 325 different programs administered the  expired grant accounts with undisbursed funding and that thousands of  grantees were associated with these grants. We also  found that, when taken together, they suggested the presence of  undisbursed balances in expired grant accounts was a long-standing  problem. In recent years, three federal  agencies, the Department of Justice’s (DOJ) Office of Justice Programs  (OJP), HHS’s National Institutes of Health (NIH), and the Environmental  Protection Agency (EPA), have made concerted efforts to improve their  grant closeout processes. They generally attributed the problems to inadequacies  in awarding agencies’ grant management processes, including closeouts as  a low management priority, inconsistent closeout procedures, poorly  timed communications with grantees, or insufficient compliance or  enforcement. By elevating this issue as a management priority in their annual  performance plans and PARs, the three agencies made grant closeouts a  priority for improving program and agency-wide performance. However,  OMB circulars relating to grants management and performance reporting  do not currently instruct federal agencies to track and annually report on  undisbursed funding in expired grant accounts. Recommendations for Executive Action

We recommend that the Director, OMB, instruct all executive departments  and independent agencies to take the following two actions: (1) annually  track the amount of undisbursed grant funding remaining in expired grant  accounts; and (2) report on the status and resolution of the undisbursed  funding in their annual performance plan and report in their annual PAR  on  the amount of undisbursed grant funding in expired grant accounts,    why these funds were undisbursed,  the actions taken to resolve the undisbursed funding and close the expired  grants and related accounts, and    outcomes associated with these actions. Appendix I: Objectives, Scope, Methodology, and Additional Information on Program Characteristics

Our objectives were to address the following: (1) to what extent are there  undisbursed grant balances in expired grant accounts and do they share  any program characteristics? ; and (2) do these expired grants share grant  management challenges and what actions have federal agencies taken to  improve grant closeout and diminish undisbursed balances? Review of Relevant OMB Circulars and Federal Regulations

We began our study by reviewing the key federal guidelines on grant  closeouts: Office of Management and Budget (OMB) Circulars No. PMS is the largest of the nine civilian federal payment systems and  executes payments for nine federal departments, one independent agency,  a government corporation and the Office of National Drug Control Policy  (ONDCP), which, in 2006, represented about 70 percent of all federal grant  disbursements. Most of our analysis focused on those  expired accounts with undisbursed balances. We were not able to compare these results  to all closed federal grants or all closed grants in PMS due to the burden of  collecting comparable data for all closed federal grants from the eight  other federal civilian payments systems or for all closed grants from PMS.
Why GAO Did This Study

In 2006, the subcommittee concluded there was a need for increased accountability and transparency for unspent funds in federal programs and agencies, and requested GAO review the status of balances not drawn down by grantees by the time the grants' period of availability had ended. GAO was asked to answer these questions: (1) to what extent are there undisbursed grant balances in expired grant accounts and do they share any program characteristics?; and (2) do these expired grants share grant management challenges and how have federal agencies improved grant closeout and diminished undisbursed balances? To do this, GAO analyzed grant balance data from the largest federal grant payment system; reviewed grant management problems and corrective actions from more than 150 audit reports; and reviewed guidance from the Office of Management and Budget (OMB) and the Code of Federal Regulations.

What GAO Found

During calendar year 2006, about $1 billion in undisbursed funding remained in expired grant accounts in the largest civilian payment system for grants--the Payment Management System (PMS). PMS is administered by the Department of Health and Human Services and makes payments for about 70 percent of grants and for 12 federal entities. Undisbursed funding is funding the federal government has obligated through a grant agreement, but which the grantee has not entirely spent. Among all of the expired grant accounts in PMS that remained open, these undisbursed funds typically represented about 1 percent of the total funds originally made available for these grants--meaning grantees had spent most of their available funds. However, when expired grant accounts with no funds remaining were excluded and the focus was narrowed to just expired grant accounts with undisbursed balances, GAO found the amount of undisbursed funding represented, on average, about 26 percent of the original funding made available. The expired but still open grant accounts were associated with thousands of grantees and over 325 different federal programs. GAO also found that expired grant accounts with the largest undisbursed balances in PMS for calendar years 2003 through 2006 shared a few common program characteristics. However, the results could not be compared to program characteristics for all closed federal grants or all closed grants using PMS, during this period, due to the burden of collecting comparable data for all closed federal grants from eight other federal civilian payments systems or for all closed grants from PMS. Past audits of federal agencies by GAO and Inspectors General and annual performance reports by at least 8 federal agencies in 2006 and 2007 suggested that grant management challenges including grant closeouts and undisbursed balances are a long-standing problem. Closeout procedures ensure grantees have met all financial requirements, provided final reports, and that unused funds are deobligated. The audits generally attributed the problems to inadequacies in awarding agencies' grant management processes, including closeouts as a low management priority, inconsistent closeout procedures, poorly timed communications with grantees, or insufficient compliance or enforcement. However, when federal agencies, such as the Departments of Health and Human Services and Justice, and the Environmental Protection Agency, took corrective actions, there were improvements in grant closeouts and resolution of undisbursed funding. The actions taken by these three agencies generally focused on making grant closeouts a higher agency management priority, as noted in their recent performance reports, and on improving overall closeout processing. Using federal payment systems to track undisbursed funding in expired grant accounts and including the status of grant closeouts in annual performance reports could raise the visibility of the problem both within the agency and governmentwide, and lead to improvements in grant closeouts and minimize undisbursed balances. OMB circulars do not currently require federal agencies to track and report on undisbursed funding in expired grant accounts.