Chapter 9
Grants and Agreements
The federal government provides assistance to state and local governments and private nonprofit organizations. This assistance comes in many forms, all of which are designed to support some element of national policy. Grants and cooperative agreements constitute the vast majority of government assistance programs. They are the subject of this chapter.
298. What is a grant?
The Intergovernmental Cooperation Act defines a grant as “money, or property provided instead of money, that is paid or provided by the United States government under a fixed annual or total authorization, to an eligible beneficiary.” The Act defines eligible beneficiaries as including state and local governments as well as certain private nonprofit organizations. Specifically excluded from the definition are loans, shared revenue, and payments under a research and development procurement contract.1 GAO’s budget glossary (see Appendix 2) defines a grant as a “federal assistance award making payment in cash or in kind for a specific purpose.” GAO goes on to say that the term grant is used broadly and may include nongovernmental recipients in addition to state or local governments, while the term grant-in-aid normally refers to a grant to a state or local government.2
Thus, a federal grant is a legally authorized transfer of money, property, or services to another party (the grantee) for a purpose or activity the government has chosen to assist.
299. What is a cooperative agreement, and how does it differ from a grant?
Cooperative agreements are very much like grants in that they transfer something of value to a recipient to accomplish a public purpose. The key difference from a grant is that under cooperative agreements, the federal agency providing the assistance has more direct involvement with the recipient in carrying out the activity.3
300. Are the fiscal law rules substantially different for grants and cooperative agreements?
The rules for grants and cooperative agreements are nearly the same. However, there are considerable differences between the rules for these assistance programs and the rules for procurement contracts. Because much of this book has focused on the use of funds for contractual relationships, the following discussion on grants and cooperative agreements will highlight how assistance programs differ from contracts.
301. Does that mean that a grant or cooperative agreement is not a contract between the government and the grantee?
Not exactly. Grants are viewed by the courts as a type of contract. They contain all the elements of a contract—competent parties, proper subject matter, consideration, and a meeting of the minds. However, the contract analogy has its limits.4
For example, take the issue of consideration. A grant is a form of assistance to a designated class of recipients to meet recognized needs. These needs, by definition, are not needs for goods or services required by the federal government itself. The needs are those of the nonfederal entity that Congress has decided to assist in the public interest.5 An illustration would be if the government awards a grant that provides 50 percent of the cost of a new building, with the grantee to pay the other 50 percent. At a later time, if funds are available, the government is free to modify the grant and increase the government’s share to 75 percent or even 100 percent. The government receives no additional consideration by increasing its share. Such a transaction would not be allowable under a procurement contract, while it is commonplace with grants.
302. Are there other differences between assistance programs and contracts?
There are several. Under contract law, ambiguities in contract language are decided against the government as the drafting party. That is not the case with grants.6
Contract law has a doctrine of “impossibility of performance,” which states that contract terms may not impose a condition that is physically impossible to perform. The impossibility of performance doctrine does not apply to grants.7
Additionally, quantum meruit expenditures to a grantee are not authorized because the government does not receive tangible benefit in the traditional contract sense. The “contract implied in fact” concept also does not apply to grants because a grant is a sovereign act binding the government only to the extent of its express undertakings.8
303. Can you summarize the similarities and difference between assistance programs and contracts?
Grants are a hybrid, with both similarities to and differences from contracts. They can be viewed as contracts with statutory and regulatory terms superimposed upon them.9 Thus, the rights and obligations of the parties cannot be determined solely by looking at the terms of the grant agreement itself. The applicable grant statute, its legislative history, the grantor agency’s regulations, and OMB guidance must all be considered.
However, the awarding of a grant does create certain legal obligations. If a grantee does what it has committed itself to do and incurs allowable costs, the government is obligated to pay those costs. Conversely, the government has a right to expect that the grantee will use the grant funds only for authorized grant purposes, in accordance with the terms and conditions of the grant. The grantor agency has the right to oversee the expenditure of funds by the grantee to ensure the money is used only for authorized purposes, and it is the duty of the grantee to account to the grantor for its use of the funds.10
304. Is there an “umbrella” statute that prescribes how assistance programs are to operate?
Congress enacted the Federal Grant and Cooperative Agreements Act in 1977. It contains criteria for when grants and cooperative agreements are to be used and how they are to be administered.11
305. How does an agency decide whether to use a procurement contract, grant, or cooperative agreement?
The Federal Grant and Cooperative Agreements Act established the following standards:12
Procurement contracts—An agency is to use a procurement contract when the principal purpose of the instrument is to acquire (by purchase, lease, or barter) property or services for the direct benefit or use of the United States government.
Grant agreements—An agency is to use a grant agreement when the principal purpose of the relationship is to transfer a thing of value (money, property, services) to the recipient to carry out a public purpose of support or stimulation authorized by a law of the United States instead of acquiring property or services for the direct benefit of the government, and substantial involvement is not expected between the agency and the recipient when carrying out the activity.
Cooperative agreements—An agency is to use a cooperative agreement when the principal purpose of the relationship is to transfer a thing of value (money, property, services) to the recipient to carry out a public purpose of support or stimulation authorized by a law of the United States instead of acquiring property or services for the direct benefit of the government, and substantial involvement is expected between the agency and the recipient when carrying out the activity.
306. What are examples where “substantial involvement is expected”?
The following might require substantial federal involvement in the performance of the activity (as opposed to an oversight role that is inherent in all grant agreements as well as cooperative agreements).13
Novel or complex undertakings, e.g., some construction, information systems development, and demonstration projects
Collaborative research, planning, or problem solving
Interrelationships among projects in areas such as applied research
Early stages of ongoing programs where standards are being developed or during a period of adjustment until recipient capability has been developed.
307. Apart from the previously mentioned differences between assistance programs and contracts, what are the similarities in the application of basic fiscal law principles to grants and cooperative agreements?
The fundamental principles of appropriations law apply to grants just as they do to any other expenditure. Among the principles that apply to grants are:14
Congress decides what, when, and how much to authorize, and also may impose conditions and restrictions to the use of grant funds (congressional power of the purse).
Grant purposes and conditions must be constitutional.
Grant conditions imposed by federal statute are binding and prevail over any inconsistent state law.
The purpose law (31 U.S.C. 1301(a)) applies to assistance agreements. Grant funds may be obligated and expended only for authorized grant purposes.
Funds must be obligated by the grantor agency within their period of availability. Obligation generally occurs at the time of the award of the grant.
The bona fide needs rule applies to grants and cooperative agreements. However, the principle of severability does not apply to these assistance programs. Thus, the agency must have a bona fide need to award a grant and do so during the agency funds’ period of availability. But the award of the grant satisfies the requirement. The grantee need not perform during the period of availability, and the period of time the grantee has to use the funds is not limited (although the grant statute or the grantor agency may impose time limits on a grantee’s use of funds).
Grant obligations and expenditures are subject to the Antideficiency Act. Agencies may not award grants and incur obligations in advance or in excess of the amount available.
A federal agency is not eligible to receive grant funds from another agency because that would improperly augment the appropriations of the receiving agency.
Agency regulations issued in accordance with grant authorizing legislation carry the force and effect of law.
Grantees are not agents of the United States government, and therefore the government has no liability associated with a contract between a grantee and a third party.
The United States is not liable for torts committed by its grantees.
308. What are some of the differences in how fiscal law rules are applied to assistance agreements?
Grant funds in the hands of a grantee largely lose their character and identity as federal funds. GAO stated:15
It consistently has been held with reference to Federal grant funds that, when such funds are granted to and accepted by the grantee, the expenditure of such funds by the grantee for the purposes and objects for which made is not subject to the various restrictions and limitations imposed by Federal statute or our decisions with respect to the expenditure, by Federal departments and establishments, of appropriated moneys in the absence of a condition of the grant specifically providing to the contrary.
Therefore, except as provided by the grant statute, regulation, or the grant agreement, the expenditure of grant funds by a state government is subject to the laws of that state, rather than federal laws applicable to direct expenditures by federal agencies.
Thus, many of the statutes governing the use of funds by federal agencies do not apply once the grant money is in the hands of the grantee. Among the restrictions that do not apply are:16
Dual compensation restriction for federal employees is not applicable to grantee employees.
Restrictions on payments to retired military officers.
Immunity from payment of state and local taxes. Because the grantee is not a federal agent, it is not immune from property and sales taxes.
Adequacy of appropriations act, which prohibits entering into contracts for amounts in excess of appropriations for that purpose.
Prohibition against purchasing aircraft without specific statutory authority.
Prohibition against paying a nonfederal person’s travel expenses to a meeting.
Requirement for specific authority to establish a revolving fund.
General prohibition against advance payments. However, if the federal government advances grant funds to a state or other entity, any interest earned on the advanced funds belongs to the federal government, not the grantee.
309. Suppose a grantee uses the grant funds for the intended purpose but in the process earns some income (not interest on advances) through the operation of its program, for example, through sales, fees, etc. May the grantee keep those funds?
Except in the case of the sale of real property paid for by the grant, the grantee may retain this sort of program income unless the grant legislation or the grant itself dictates otherwise.17
310. If a grantee is unable to perform and the grant agreement is terminated, may the agency issue a replacement grant using the same fiscal year funds even if those funds have expired?
The rule and the conditions are the same as for replacement contracts.18 If the agency funds have expired at the time a replacement grant is to be issued, those same funds may be used for the replacement grant if:
There is a continuing bona fide need for the grant project.
The replacement grant is for the same purpose and scope.
The replacement grant should be awarded within a reasonable time period.
311. Suppose a grantee is advanced the grant funds and uses them for an unauthorized purpose. Is the grantee indebted to the government for that amount?
If no allowable costs of an equal amount are subsequently incurred, the grantee is required to return the amount of the improper charge to the government. The agency may not waive this requirement to repay.19
NOTES
1. U.S. Government Accountability Office, Principles, Chap. 10, 10-3.
2. Ibid., 10-4.
3. Ibid., 10-5.
4. Ibid., 10-9.
5. Ibid.
6. Ibid., 10-10.
7. Ibid.
8. Ibid.
9. Ibid., 10-11.
10. Ibid., 10-12.
11. Ibid., 10-13.
12. Ibid., 10-14.
13. Ibid., 10-15.
14. Ibid., 10-28–10-58.
15. Ibid., 10-69.
16. Ibid., 10-70–10-77.
17. Ibid., 10-89.
18. Ibid., 10-107.
19. Ibid., 10-115.